The Virtues of Patience

Why did you opt to follow this style? Rogers: As the first African-American-owned investment firm, we’ve [always been] a little bit more concerned about civil rights and, similarly, social divisions. Also, in the 1980s, South African issues were very important, so we felt that encouraging our companies to divest from South Africa made sense. That’s how we got pulled into this socially responsible movement.

Tell me about your screening process. Who builds the screens? Fidler: It is done in two levels. First, we decide if the company is in an area we [want to avoid]. The second is a bit more on the environmental side, but that decision is outsourced to Trillium Asset Management Corp., an SRI firm in Boston. Trillium uses a very comprehensive and sophisticated screen. Every company goes through our own four-week [analysis] process, we submit our list of stocks to Trillium, and wait for their approval.

Your call you research approach “exhaustive before purchase” and monitored closely afterwards. What does that include? Fidler: Our process is fairly lengthy; it’s four weeks from start to finish. Our analysts are assigned an idea and then have three weeks to talk to company management, read SEC filings, public documents, federal reports, and so on. They also develop an independent verification [of the facts in those documents]. That includes talking to current and former customers, competitors, employees, and board members to get an independent view of the company–to see if it validates our investment thesis. We read Wall Street research to see what the sentiment is, but we certainly don’t follow the Street’s recommendations. The analyst presents the findings to the research team, questions are fielded, and then direction is given on how to tighten the analysis. Finally, once the additional information is gathered, a final vote is done. It is a fairly intense process.

In terms of ongoing maintenance, once a stock is in the portfolio it is not forgotten. Reports are written on every name in the portfolio a minimum of twice annually. We read vast amounts of trade journals–whether it be Pest Control Weekly, Supermarket News, or Adweek Magazine–and constantly try to differentiate our sources of information. It is a very focused process on the company and not simply on the stock.

You avoid startup ventures and highly cyclical or speculative companies. Have the accounting scandals and corporate investigations altered this approach at all? Fidler: Our investment philosophy is based on being comfortable with the management teams in place. To that end, a critical part of our philosophy is understanding the motivation, background, and ability of the managers running our companies. They are stewards of our and our shareholders’ capital, and that’s critical to a sound investment. In terms of what has happened with companies like Enron: it has created some opportunities. I think we saw a situation that was almost a witch hunt. There were things going on in some companies that you wouldn’t exactly call technically sound, but then again there were probably companies that were unfairly tarnished. So it is our job to independently understand the companies, and get to know the management.

What do you think is responsible for the increased popularity of SRI investing? Rogers: Many major corporations are having their ethics questioned, and the idea of good corporate governance, concern for others, and fairness to your employees and your shareholders, I think, fits in with the socially responsible movement.

For the 10-year period ended August 30, you outperformed both the S&P 500 index and your mid-cap value peer group (according to Standard&Poor’s). What’s your approach? Fidler: The first is our commitment to contrarian independent thought–the basic premise this firm was founded on. In traditional value we strive to look where others aren’t and to avoid getting caught up in the [short-run] emotions of the markets. Second, we maintain a long-term view. We are business analysts, not stock analysts, and what we look at is the kind of business a franchise will have for five to seven years. We tend to discount any short-term movements and quarterly earnings and avoid extrapolating any short-term developments. To us, something that is a big deal in the short run is only important to the investment if it affects the firm’s stability. The third is concentration. We run a concentrated portfolio of about 35 names allowing us to focus on our best ideas. There is no point in owning the 36th or 37th best investment. We have an expected holding period of about four to five years, and about a 20% turnover rate. That means we only have to come up with six or eight buy, sell, or invest decisions per year, and can throw a lot of resources into every company.

Just this week you took over primary management responsibilities from Eric McKissack (who managed from 1989). Do you anticipate any investment style changes? Rogers: We don’t see any major changes now that he’s gone. We’re all part of one organization that has a strong perspective on investing. We have high standards for the companies we look for and all of those core values [remain] in place.

Tim Fidler has co-managed the fund since 1999. How are the management responsibilities divided between you? Fidler: My role as assistant portfolio manager is managing the analyst pool. Given that we do have a strong process and a discipline in place, I am the discipline cop, if you will, to make sure the analysts are executing our strategy.

At the end of June you held stock in Black & Decker, Equifax, and a few technology companies. At first glance, these do not appear to be SRI firms. How do you determine the mix of the fund? Fidler: We are pure bottom-up stock pickers. We don’t have any requirement to include a particular industry and we don’t manage to a benchmark. It is purely going out and looking for solid, high-quality businesses that are trading at bargain prices. We have a very strong bias toward consistent and predictable industries. The only industries we will stay away from are basic materials, energy, and commodities.

Ariel Appreciation is one of only a few SRI funds with more than $1 billion in assets; do you anticipate closing the fund at any asset level? Fidler: No, our feeling is that we have the capacity to run a multiple of the [current] assets under management.