Investments in foreign securities may underperform and may be more volatile than comparable U.S. stocks because of the risks involving foreign economies and markets, foreign political systems, foreign regulatory standards, and foreign currencies and taxes. The use of currency derivatives and exchange-traded funds (ETFs) may increase investment losses and expenses, and create more volatility. Investments in emerging and developing markets present additional risks, such as difficulties in selling on a timely basis and at an acceptable price. The intrinsic value of the stocks in which the Fund invests may never be recognized by the broader 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 International Fund (Investor Class) for the 1-year and since- inception periods were -1.79% and +7.10%, respectively. Ariel International Fund has an inception date of December 30, 2011, and does not have performance for the 5- and 10 -year periods. As of September 30, 2014, Ariel International Fund’s Investor Class had an annual net expense ratio of 1.29% and an annual gross expense ratio of 4.24%. Effective February 1, 2014, Ariel Investments, LLC, the Adviser, has contractually agreed to waive fees or reimburse expenses (the "Expense Cap") in order to limit Ariel International Fund's total annual operating expenses to 1.25% of net assets for the Investor Class through the end of the fiscal year ending September 30, 2016. Performance data current to the most recent month-end for Ariel International Fund may be obtained by visiting our website, arielinvestments.com.
Quarter Ended September 30, 2015
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 International Fund fell -6.10%, ahead of the MSCI EAFE Index’s -10.23% slide, as well as the MSCI ACWI ex-US Index’s -12.17% return.
Some of our holdings held up relatively well in the very difficult quarter. Capital markets exchange Deutsche Boerse AG rose +3.93% after announcing several acquisitions, including index providers Stoxx AG and Indexium AG as well as currency market 360T. The company and stock also benefitted from market volatility in August, as shown by volume strength in its derivatives business. We continue to hold the shares. Discount airline Ryanair Holdings plc (RYAAY, Financial) jumped +9.74% after the company raised its profit guidance by 25% for the year, well ahead of prior guidance and analysts’ estimates. The company cited strong summer traffic and fare pricing as driving improved fundamentals. We have been paring back our position on strength.
Other holdings underperformed in the falling market. Semiconductor maker Dialog Semiconductor plc (XTER:DLG, Financial) slid -26.10% after announcing it will buy Atmel Corp. for roughly $4.6 billion in stock and cash. The market disliked the deal, which it considered to be too large. We disagree: the logic makes sense to us, because it would diversify Dialog’s reliance on the mobile phone industry. We continue to hold the shares. Internet search firm Baidu, Inc. (BIDU, Financial) fell -30.98% after reporting weaker-than-expected second quarter earnings and guiding third quarter sales below analysts’ consensus. Baidu is improving its search engine capabilities by investing in mobile and more locally-focused services such as movie tickets, home delivery and car services. We have been adding to our position.
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.
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. The MSCI ACWI (All Country World Index) ex-US Index is an unmanaged, market-weighted index of global developed and emerging markets, excluding the United States. The MSCI ACWI ex-US 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 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 summary prospectus or full 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 summary prospectus or full prospectus carefully before investing. Distributed by Ariel Distributors LLC, a wholly owned subsidiary of Ariel Investments LLC.
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, Deutsche Boerse AG constituted 5.0% of Ariel International Fund; Ryanair Holdings plc ADR 1.1%; Dialog Semiconductor plc 3.4%; Baidu, Inc. ADR 2.6%; Atmel 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 International Fund.
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