John W. Rogers Jr.’s socially responsible Ariel Fund beat or nearly met its benchmarks using Warren Buffett’s “moats” concept, according to Ariel Investments’ semiannual report released at the end of the first quarter.
Results for Ariel Fund, Ariel Appreciation Fund, Ariel Focus Fund, and the newest entry in the firm’s stable, the Ariel Discovery Fund, did not always meet their benchmarks. But returns were uniformly positive.
As of March 31, the value of an investment in the Ariel Fund, the oldest of the four at 25 years, beat or nearly met its benchmarks, providing average annual returns of 25.63% over the last year, compared with 22.67% for the Russell 2500 Value Index, 26.12% for the Russell 2500 Index, and 15.65% for the S&P 500. Rogers (left, and click here for video) is Ariel Fund’s lead portfolio manager, and John P. Miller is portfolio manager.
Rogers, who is also chairman and CEO of Ariel, and Mellody Hobson, president, wrote in a letter to shareholders about the concept of “moats” as being vital in the evaluation of companies considered for the fund:
When we attempt to analyze the long-term prospects of any business, the strength of the moat takes center stage and weighs heavily on our assessment and outlook. As Warren Buffett once told Fortune magazine, “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”
The letter goes on to discuss the fund’s holdings of both Fair Isaac (FICO) and Zimmer Holdings, a medical device company that is a new addition to the fund.
Ariel Appreciation Fund did not fare as well as Ariel Fund, but made a respectable showing under Rogers, Timothy Fidler and Matthew F. Sauer. Average annual returns for the past year were 19.41% compared with the Russell Midcap Value Index at 22.26%, the Russell Midcap Index at 24.27%, and the S&P 500 at 15.65%. Its Q1 returns were 7.01% compared with 7.42% (Russell Midcap Value Index), 7.63% (Russell Midcap Index), and 5.92% (S&P 500).
The Ariel Focus Fund underperformed both its benchmarks and the market overall, coming in with returns for the year at 10.17% compared with 15.15% for the Russell 1000 Value Index and 15.65% for the S&P 500, and for Q1 at 4.51% compared with 6.46% for the Russell 1000 Value Index and 5.92% for the S&P 500. Hurt by holdings AFLAC (uncertainty over health care reform)and Carnival Corp. (high energy costs resulting in a lowered outlook), the fund’s outlook is still bullish, according to fund co-managers Charles K. Bobrinskoy and Timothy Fidler, who point to the potential of cloud computing as a strong asset of holding Microsoft.
The baby of the family, the Ariel Discovery Fund, was launched on the day of the Great Chicago Blizzard of 2011, according to lead portfolio manager David M. Maley in his commentary. For the two months since inception, says Maley, the fund gained 3.30% compared with the Russell 2000 Value Index at 6.54% and the S&P 500’s 3.47%.
This benchmark-lagging performance, says Maley, was largely due to the large cash position in the fund’s first few weeks as purchases were made in a strong market. For the month of March (the fund, he adds, was 70% invested by March 1) it gained 3.20%, compared with only 1.39% for the Russell 2000 Value Index and a scant 0.04% for the S&P 500.
Maley goes on to discuss what he says is currently the fund’s favorite deep value stock: Force Protection Inc. (FRPT), which builds and maintains Mine Resistant Ambush Protected vehicles. The company does not just that, he says, but provides survivability solutions that promise dependable, predictable ongoing revenue streams against an undervalued stock price.
Read ‘Ariel Investments: African-Americans Lag in Retirement Planning, Accumulation’ at AdvisorOne.