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Holly LaFon
Holly LaFon
Articles (9279)  | Author's Website |

John Rogers' Ariel Investments May Commentary

Discussion of the month

June 12, 2018 | About:

Uncertainties and risks around aggressive U.S. trade policy have many of our clients asking about the positioning of Ariel’s portfolios. While important to current market sentiment and conversation, we view such concerns as short- term noise within the context of our long term investment horizon. Furthermore, and more specific to our efforts, the recent tariff announcement does not have much of an impact on our traditional and deep value portfolios on a micro level. Before diving in further, we thought it would be helpful to share an excerpt of Warren Buffett (Trades, Portfolio)’s sage advice from the year 1994 that not only had a major impact on us at the time but continues to contribute to our investment philosophy today:

“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%. But, surprise – none of these blockbuster events made even the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of a fundamentalist.”

– Berkshire Hathaway Annual Report 1994

These important words remind us there will always be something in the news that will heighten concerns and impact an investor’s short term perspective. With all the noise around tariffs and a potential global trade war as a backdrop, U.S. companies that make steel and aluminum have seen share prices increase considerably. Meanwhile, U.S. industrial firms that use these commodities in the products they sell have been hard hit by investors who, with a “shoot first, ask questions later” mentality, have paid little interest to the investment merits of the individual businesses. As value managers and natural contrarians, we view the recent cloud around the industrial sector as a wonderful opportunity.

A key tenet of our investment philosophy has always been to invest in companies that can produce a consistent stream of earnings on a fairly predictable basis. To achieve this goal, it is crucial that a company is well managed, financially strong and performs a service or manufactures a product that dominates a market niche and is superior to its competitors. As a result, we have always been partial to industrial names that offer a high quality product supported by a well- promoted brand, whose strength provides the company the ability to pass through, maintain and enhance pricing and market share over time. For example, Stanley Black and Decker, Inc. (NYSE:SWK), Illinois Tool Works Inc. (NYSE:ITW) and Kennametal Inc. (NYSE:KMT) are current holdings with strong franchises that offer products so valuable to its consumers that they are willing to pay a premium for them. Our belief in the value of these brands enables us to maintain our conviction on these positions amidst the turbulence and gives us confidence to be opportunistic and take advantage of recent price dislocations.

So while the implementation of tariffs present a “wall of worry,” we at Ariel find solace in Warren Buffett (Trades, Portfolio)’s guidance and continue to choose reason over fear. We believe investors who stick to their knitting and consistently own differentiated businesses, with

unique fundamental strengths at sound valuations will be rewarded over the long term, despite whatever swings in sentiment occur along the way.

The opinions expressed 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 3/31/18, Stanley Black and Decker, Inc. constituted 3.2% of Ariel Appreciation Fund and 2.2% of Ariel Focus Fund; Illinois Tool Works Inc. constituted 2.6% of Ariel Appreciation Fund; and Kennametal Inc. constituted 3.2% of Ariel Fund and 3.1% 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 the Funds.

Past performance does not guarantee future results. Investing in small and mid-cap stocks is more risky and more volatile than investing in large-cap stocks. The intrinsic value of the stocks in which the Funds invest may never be recognized by the broader market. Ariel Fund and Ariel Appreciation Fund are often concentrated in fewer sectors than their benchmarks, and their performance may suffer if these sectors underperform the overall stock market. Ariel Focus Fund is a non-diversified fund and therefore may be subject to greater volatility than a more diversified investment.

About the author:

Holly LaFon
I'm a financial journalist with a master of science in journalism from Medill at Northwestern University.

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