John Rogers' 1st Quarter 2016 Ariel Fund Commentary

A review of the economy and stock holdings

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Apr 21, 2016
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The first quarter of 2016 was flat in some places and down slightly in others, but we doubt most investors remember it that way. The carnage in January was harsh, and daily volatility has been high, so many likely think of it as a rough three months. Yet the last half of the quarter largely recouped the losses from the first half. Among the three broad indexes tracking our asset classes, one was up a small amount and the other two were down. U.S. large caps were up a small amount. On the other hand, domestic small caps slipped a bit and foreign stocks were down. When U.S. large caps are up while U.S. small caps and foreign stocks retreat, we generally think it says more about sentiment than economics. That is, U.S. large caps are seen as providing stability whereas small caps and foreign stocks are seen as more risky. The discrepancy between domestic value and growth indexes says the same. That is, growth indexes from the large-, mid-, and small- cap universe ranged from less than +1% up to down nearly -5%, while the value counterparts were up more than +1% to +4%. For more than a year investor sentiment has gone up and down without a strong trend.

This quarter, Ariel Fund fell -0.32%, behind the Russell 2500 Value Index’s +3.33% gain, as well as the +1.70% rise of the Russell 2000 Value Index.

Some of our holdings had strong returns for the quarter. Identification solutions specialist Brady Corp. (BRC, Financial) surged +17.87% after a very strong earnings report. The company posted earnings per share of $ 0.30, well above the $0.23 consensus. Revenues were up slightly before currency effects, with operating margins improving a great deal. Moreover, management increased earnings guidance by roughly 10%. The company continues to focus on its growing circle of competence, a strategy we applaud. In addition, toymaker Mattel, Inc. (MAT, Financial) jumped +25.27% on news of its merger discussions with Hasbro, Inc. (HAS, Financial). Nothing has happened to date, and nothing may happen. We find the news encouraging because it shows strategic flexibility. We think the company will thrive with or without a merger, and that it can continue to adapt as the digital entertainment world grows.

Other holdings slid in the short term. Real estate expert JLL (JLL, Financial) drifted -26.61% after a soft earnings report. The company reported adjusted earnings per share of $4.53, below the consensus estimate of $4.78. Currency had the biggest negative impact, although revenues were soft even though they were up year-over-year. Management delivered a steady outlook and said leasing volumes are improving. We are quite content to own this powerhouse through the ups and downs of the business cycle. Also, helicopter operator Bristow Group Inc. (BRS, Financial) fell -26.60% on two pieces of news: a helicopter crash and a dividend cut. Helicopter crashes are quite rare and very unfortunate, but they do occur. Turning to the dividend cut, some saw it as cause for worry, but we thought it represented prudent balance sheet management. Wall Street fears that oil companies will not only cut exploration but also production—which would hurt Bristow. While exploration cuts are realistic possibilities; we think production cuts are quite unlikely. The stock’s volatility has created buying opportunities.

In the first quarter of the year, we added two positions and eliminated three positions in Ariel Fund. A current holding in Ariel Appreciation Fund, we purchased premier trust bank, Northern Trust Corp. (NTRS, Financial) as its market capitalization fell within the range of our small/mid fund. We also bought shares of educational services provider DeVry Education Group Inc. (DV, Financial). Investor concerns surrounding weak demand and government regulation at DeVry University has cast a cloud over the entire company. We think it obscures the combined value of the growing health care and international schools, a cash-rich balance sheet and the option-like value of the business and technology schools. We are confident this cloud will eventually pass and the company’s true value will shine through. We sold our shares of long-term holding and saw chain manufacturer Blount Intl, Inc. (BLT, Financial) after it agreed to be acquired by American Securities and P2 Capital Partners at $10 per share. In addition, we eliminated our positions in Media General Inc. (MEG, Financial) and Newell Rubbermaid Inc. (NWL, Financial) in order to pursue more compelling opportunities.

Given the relatively small changes in the market and economy, our outlook remains stable—as it has been for more than two years. We think the U.S. economy is sound, and more sound than many seem to think. In our view, domestic stocks are fairly priced with pockets of opportunity where pessimism is high. An obviously shaky China casts a huge shadow over the global economy. That said, we think international valuations are attractive and thus ideal for bottom-up stock pickers like ourselves— although the press and general public see the recent volatility as a significant negative. Sharp moves tend to mean big shifts in valuation, and on the downside that can create opportunities.

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 3/31/16, Brady Corp. constituted 3.7% of Ariel Fund; Mattel, Inc. 2.5%; Hasbro, Inc. 0.0%; JLL 3.2%; Bristow Group Inc. 2.5%; Northern Trust Corp. 2.3%; DeVry Education Group Inc. 1.5%; Blount Intl, Inc. 0.0%; Media General Inc. 0.0%; and Newell Rubbermaid Inc. 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. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes’ trademarks, service marks and copyrights. Index returns reflect the reinvestment of income and other earnings. Indexes are unmanaged, and investors cannot invest directly in an index.

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.

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 March 31, 2016, the average annual total returns of Ariel Fund (Investor Class) for the 1- , 5 - and 10-year periods were -10.38%, +8.53% and +5.75%, respectively. The Fund’s Investor Class shares had an annual expense ratio of 1.02% for the year ended September 30, 2015. Performance data current to the most recent month-end for Ariel Fund may be obtained by visiting our website, arielinvestments.com.