Investing in small- and mid-cap stocks is riskier and more volatile than investing in large-cap stocks. The intrinsic value of the stocks in which the Fund invests may never be recognized by the broader market. Ariel Fund often invests a significant portion of its assets in companies within the financial services and consumer discretionary sectors, and its performance may suffer if these sectors underperform the overall stock market.
Performance data quoted represents past performance. Past performance does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains, and represents returns of the Investor Class shares. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the period ended September 30, 2015, the average annual total returns of Ariel Fund (Investor Class) for the 1-, 5- and 10 -year periods were -3.40%, +11.59% and +5.65%, respectively. The Fund’s Investor Class shares had an annual expense ratio of 1.03% for the year ended September 30, 2014. Performance data current to the most recent month-end for Ariel Fund may be obtained by visiting our website, arielinvestments.com.
Equities had a difficult quarter across regions, market cap ranges and styles. The U.S. large-cap S&P 500 Index fell -6.44%, the U.S. small-cap Russell 2000 Index dropped -11.92%, while the international, developed large-cap MSCI EAFE Index slid -10.23%. There was significant narrative fuel for the fire: worries that a slowing Chinese economy would spur a global economic slowdown; hand-wringing over the timing of the U.S. Federal Reserve’s likely interest rate increases; and fretting over falling commodity prices. As a result, many types of stocks have “corrected,” a term that tends to inspire fear and worry despite the potential upside corrections create.
This quarter, Ariel Fund fell -14.62%, trailing the Russell 2500 Value Index’s -9.58% slide, as well as the -10.73% return of the Russell 2000 Value Index.
Some of our holdings held up relatively well in the very difficult quarter. Cruise line Royal Caribbean Cruises Ltd. (RCL, Financial) returned +13.66% after topping earnings estimates. Analysts had expected the company to earn $0.73 per share, but it actually earned $0.84. Counterintuitively, falling oil prices did not propel the beat; instead, bookings in the Caribbean and China were stronger than expected. Moreover, the company lifted its guidance for the full year. We think most investors have been too pessimistic regarding Royal’s prospects and remain so. Jam, peanut butter and coffee king J.M. Smucker Co. (SJM, Financial) rose +5.88% after topping quarterly expectations. Its adjusted EPS of $1.32 was significantly better than analysts’ comparable $1.23 estimate. The coffee segment grew nicely due to the introduction of Dunkin’ Donuts K-Cups. Additionally, Smucker’s acquisition of Big Heart Pet Brands is already going well. The gradual transformation of the business over the past few years has been impressive, and we expect more fundamental improvement.
Other holdings underperformed in the falling market. Helicopter services specialist Bristow Group Inc. (BRS, Financial) descended -50.45% amid a turbulent environment. As you know, oil prices have plummeted, causing Bristow’s customers to swiftly downshift—especially in the North Sea. Earnings were therefore only $0.56 per share, well below the $0.91 estimate; management also lowered guidance for the year. While these are not long-term issues in our view, the stock is likely to be volatile over the short term. We continue to believe in the company’s business model, management team and long-term position. Industrial sand specialist U.S. Silica Holdings, Inc. (SLCA, Financial) fell -51.67% in sympathy with a beleaguered competitor. Specifically, Emerge Energy Services LP (EMES, Financial), which operates within a constrictive MLP structure (where it must distribute most of its profits), has sharply slashed its distribution guidance this year. The market simplistically applied Emerge’s woes to U.S. Silica, whose standard equity structure gives it far greater maneuverability. At the current price, Silica trades at a deep discount to our estimate of its intrinsic value.
During the quarter, we initiated one position and eliminated one position in Ariel Fund. In early September, diversified media company Media General Inc. (MEG, Financial) launched an acquisition of Meredith Corp. (MDP, Financial), a holding in various Ariel portfolios. We purchased shares of Media General after its stock dropped considerably in reaction to the proposed deal, thereby becoming a bargain in our eyes. We sold our shares of Idex Corp. (IEX, Financial) to pursue more compelling opportunities.
We do not share the pessimistic view that has sidelined many investors. Again, a stock market correction typically means equities are cheaper. Given our previously-expressed concern that stock prices were becoming a bit stretched, we do not mind seeing the market’s aggregate valuation level drop. Moreover, given the volatility and resulting price dislocations, our view is that more bargains are at hand. We encourage long-term investors to remain rational, avoid panic, and stick to a sensible asset allocation strategy.
This commentary candidly discusses a number of individual companies. These opinions are current as of the date of this commentary but are subject to change. The information provided in this commentary does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security.
As of 09/30/15, Royal Caribbean Cruises Ltd. constituted 3.6% of Ariel Fund; J.M. Smucker Co. 4.3%; Bristow Group Inc. 2.7%; U.S. Silica Holdings, Inc. 2.0%; Emerge Energy Services LP 0.0%; Media General Inc. 1.6%; Meredith Corp. 2.7%; and Idex Corp. 0.0%. Portfolio holdings are subject to change. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of Ariel Fund.
The Russell 2500™ Value Index measures the performance of the small to mid-cap value segment of the U.S. equity universe. It includes those Russell 2500 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000® Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes’ trademarks, service marks and copyrights. The S&P 500® Index is the most widely accepted barometer of large cap U.S. equities. It includes 500 leading companies. MSCI EAFE® Index is an unmanaged, market-weighted index of companies in developed markets, excluding the U.S. and Canada. The MSCI EAFE Index net returns reflect the reinvestment of income and other earnings, including the dividends net of the maximum withholding tax applicable to non-resident institutional investors that do not benefit from double taxation treaties. MSCI uses the maximum tax rate applicable to institutional investors, as determined by the companies’ country of incorporation. Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used to create indices or financial products. This report is not approved or produced by MSCI.
Investors should consider carefully the investment objectives, risks, and charges and expenses before investing. For a current prospectus or summary prospectus which contains this and other information about the funds offered by Ariel Investment Trust, call us at 800-292-7435 or visit our website, arielinvestments.com. Please read the prospectus or summary prospectus carefully before investing. Distributed by Ariel Distributors LLC, a wholly owned subsidiary of Ariel Investments LLC.
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