It may seem only natural that Chicago-based Ariel Investments’ flagship $2.3 billion Ariel Fund attracts more attention than the firm’s other products. After all, it invests in small- to mid-cap companies and Ariel Investments made its reputation by investing in that space. It is also Ariel’s longest running fund and it ranks in the ninth percentile of all mutual funds in existence since its inception in November 1986.
Yet Ariel’s close-knit team of investment professionals believes their other products, notably Ariel Appreciation Fund and Ariel Focus Fund, also have much to offer advisors in building diversified portfolios for their clients. These funds invest in mid- and large-cap companies, respectively, and are managed in the same focused manner as the more high profile Ariel Fund–one that is grounded in independent thinking and analysis aimed at uncovering great companies at bargain prices whose true value will be realized over time. This investment approach embodies the core idea upon which Ariel Investments was founded in 1983, and although the firm has grown significantly since then, both in terms of personnel and AUM, it remains true to its original philosophy, applying one idea to all of its products.
“The same basic human behavioral drivers of fear and greed that create our investment opportunities affect all stocks, small and large,” says John Rogers, Ariel’s founder, chairman, CEO and CIO. “We believe strongly that our approach is universal and effective across the cap range that our performance history supports.”
A Focused Approach
That performance history is certainly impressive: As of the one year ended April 30, 2010, the $1.6 billion Ariel Appreciation Fund (CAAPX) returned 66.64%, beating the Russell Midcap Value Index’s return of 54.39%. The $60 million Ariel Focus Fund returned 42.64% for the same time period, compared to a return of 42.28% for the Russell 1000 Value Index.
All three funds have also managed to remain leaders in their market segments and to stay the course through various economic cycles. Ariel Fund is nearly a quarter of a century old, while the Ariel Appreciation Fund has been around for over 20 years. The Ariel Focus Fund (ARFFX) celebrated its fifth anniversary on June 30, 2010.
“It’s rare to have that kind of longevity and continuity and to be able to go through all kinds of cycles,” Rogers says.
Through its 27-year history, Ariel Investments has been able to develop a real “circle of competence,” says Timothy Fidler, senior VP at Ariel and member of the firm’s investment committee. “We’ve been able to really get to know companies in terms of the businesses we are looking for, and we have been able to bring our industry expertise to suit that.”
Both Rogers and Fidler attribute the bulk of the Ariel Funds’ success to their consistently focused nature, which is the same in the small-, mid-, and large-cap spaces.
“We try typically to own 40 or fewer stocks and we concentrate on stocks we know and understand because we feel this leads to better performance,” Rogers says.
But the stocks the team picks are usually not mass-market favorites. In fact, they are often quite the opposite.
“We like to buy wonderful ideas and great businesses–but when they are out of favor,” Rogers says. “It may be uncomfortable to do this, but we try and think individually and not let group thinking drive us.”
Gold Among the Market Dross
It is not always easy to go against the grain, particularly when markets are in tumult. But the Ariel team has always stuck to this approach, even in 2009, during the very worst of the market downturn. At that time, the cheapest stocks were the ones in such downtrodden sectors as media, real estate, and retail, areas that were the most reviled by the market at large, Fidler says. Naturally, people feared the worst for companies in those sectors and stayed far away from them, but Ariel still believed that there were a few businesses in those sectors with tremendous franchises and great future potential that were being unfairly penalized by broader financial market and macroeconomic dynamics, and so the firm’s mission in the first quarter of 2009 was to find those companies. The investment management team scoured balance sheets to descry those players that would survive the downturn and then go on to prosper in an economic rebound, and in so doing, they hit upon names like real estate company C.B. Richard Ellis; global auction house Sotheby’s; and luxury retailer Nordstrom. In the media sector, the value discoveries included Gannett and CBS.