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Holly LaFon
Holly LaFon
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John Rogers' Ariel Funds Monthly Commentary for September

Discussion of the month

October 12, 2017 | About:

Domestically, Ariel hunts for value primarily amongst the small- and mid-cap universes. We also scour the globe for companies of all sizes for our international and global portfolios.

After a sluggish August, equities bounced back in September with small - and mid-cap U.S. stocks faring best during the month. The surprise announcement of a deal between the President and Democrats helped Congress avoid yet another contentious debate over the debt ceiling and the potential impact of a government shutdown. The markets reacted positively to the news, renewing expectations for fiscal stimulus before year end. Tax reform took center stage as the White House hinted that a more detailed framework for reform would be released before the end of the month. The news revived the so-called “Trump Trade” we experienced earlier in the year, which drove U.S. banks, industrial companies and small-cap stocks higher. Also boosting equities was the Federal Reserve’s announcement that it would begin reducing its security holdings and normalizing its balance sheet in October, as well as its plan to continue to raise rates at its December meeting.

During the month, the bankruptcy filing of one of the best-known toy retailers in the United States, Toys”R”Us caught our attention and sent shockwaves throughout the toy market. Indeed, shares of toy manufacturers like Mattel, Inc. (NASDAQ:MAT) and Hasbro, Inc. (NASDAQ:HAS) fell on the news. Given our meaningful Mattel position in our U.S. portfolios, some clients have asked how the bankruptcy could affect the company. It is our opinion that the bankruptcy of Toys”R”Us will have little long-term impact on Mattel. Likewise, we have strong conviction that the company’s global reach and proven consistency makes it the licensee of choice for brand owners seeking a toy-manufacturing partner. Toys“R”Us represents approximately 11% of Mattel’s total sales. In the short -term, the impact should be reflected in fourth quarter sales for Mattel, but those numbers will probably result from softness across the board, not from Toys“R”Us specifically. That said, Toys”R”Us’s woes are unlikely to have much effect on the toy industry’s long -term growth. The company’s Chapter 11 bankruptcy filing reflects the continued structural pressure the retail industry faces with brick-and-mortar stores. Its timing suggests a subdued holiday sales outlook. We have seen similar large retailer restructuring/bankruptcies in the past (Sears, FAO Schwarz, KB Toys), which had little impact on the overall toy industry as demand simply moved to other channels. Ultimately, we may see Amazon.com, Inc. (NASDAQ:AMZN) becoming a larger customer for MAT. It is worth noting, unlike FAO and KB, Toys“R”Us will continue to operate and maintain inventory for the holiday season. Brands like Mattel and Hasbro should remain top priorities as they begin the restructuring process.

This commentary candidly discusses a number of individual companies. Only one security mentioned, Mattel, Inc. was held in Ariel’s portfolios at the time the commentary was published. Specifically, as of September 30, 2017, Mattel, Inc. constituted 2.8% of Ariel Fund and 2.3% of Ariel Appreciation Fund. 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 or Ariel Appreciation Fund.

The opinions expressed are current as of the date of this commentary but are subject to change. The details offered in this commentary do 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.


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