When it comes to his funds, John W. Rogers, Jr., founder and chairman of Ariel Capital Management, Inc. in Chicago, doesn’t take any chances. “We are in the process of hiring a private investigation organization to work with us,” he says. “It’s something we’ve been talking about, and all the [recent] corporate scandals pushed us over the edge.”
As one of the largest mid-cap value funds that maintains a socially responsible investing style (it currently holds more than $1 billion in assets), Ariel Appreciation Fund (CAAPX)”buys businesses and not pieces of paper,” says Timothy Fidler, VP and assistant portfolio manager for Ariel. “We’re classic traditional value investors.”
And when the Ariel Appreciation managers say traditional value, they mean old-fashioned values.
To that end, CAAPX’s screening process includes the social ethics of a company, environmental awareness, and management techniques. “We don’t invest in tobacco or in companies that manufacture handguns,” Fidler says, arguing that those companies won’t grow very much and carry haunting litigation possibilities. “Our social screens keep us away from the black-hole types of risk that can endanger the future of the company.”
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Being a socially responsible organization is a top priority when running a socially responsible fund, explains Rogers. Ariel is involved in a number of nonprofit organizations, including the Illinois Council Against Handgun Violence, The Urban League of Chicago, the Library Board, and the Field Museum. Six years ago it opened the Ariel Community Academy, a small public school in Chicago with a savings and investment curriculum.
For the 10-year period ended August 30, 2002, CAAPX outperformed both the S&P 500 and its peer group with an average annualized total return of 13.5%, versus 10.4% for the S&P 500 Composite Index, and 11.7% for the average mid-cap value fund. However, like most of its peers, CAAPX has struggled of late, with a 12-month annualized return of -0.73% through October 2002, versus a 16.23% return in 2001.
Being ahead of the game is something Rogers has experienced for nearly his entire life. Two years after graduating from Princeton–where as captain of the basketball team he read more Fortunes than playbooks–he started the first African-American-owned investment firm in 1982. His was also the first African-American company to run a publicly traded mutual fund in 1986. He is now responsible for Ariel’s small- and mid-cap institutional portfolios, Ariel Fund, and Ariel Appreciation. So what does he have to say about all of his firsts? “Patience is everything.”
We spoke with Rogers and Fidler just two days after Rogers regained primary management responsibilities of CAAPX (the previous manager resigned in September), focusing on Ariel Appreciation’s screening process, how passing a basketball inspired the managers’ investment philosophy, and on how these managers define “socially responsible.”
You founded this fund in 1989 and follow a “patience strategy.” What does this mean, and what was your reason behind creating the fund? Rogers: The markets had always been a hobby of mine, and it became a serious obsession when I got to college. That’s what drove me to the brokerage business. I spent two and a half years working for a large regional investment firm in Chicago, and then got the idea for Ariel. I started the firm to do both small-cap value and mid-cap value. So when we closed our small-cap value product, I felt we had a lot of expertise and understanding of the mid-cap space, and as a result created CAAPX. In regard to the patience strategy, I often joke that I played for the most patient basketball team in the country [at Princeton]. We used to pass the ball around and around until we were sure we had a shot we could make. I got the theme of “patience leads to success” drilled into me as a young person. Once I started to read more in the investment world, I gravitated toward John Templeton, Warren Buffett, and other great value managers with long-term market perspectives. I had a natural tendency toward long-term investing and that’s why we’ve followed the theme “slow and steady wins the race” for almost 20 years.
Your fund also carries a socially responsible investing label, but many people interpret it differently. What is your definition of SRI? Rogers: The most important thing is to be a socially responsible organization. We think we have the most diverse mutual fund company in the industry [considering] our workforce and our board of directors. We’re really proud of that. Secondly, in our mission statement we talk a lot about community service.
When it comes to company screens, we look at company values–meaning we don’t invest in companies like tobacco or handgun manufacturers–and we look for environmental awareness. We want to make sure our companies take those things very seriously. Finally, we push companies hard to make sure they understand that to be successful, they have to recruit and retain a diverse group of individuals. We believe following those principles does not limit the companies we invest in, but actually enhances returns.