Mellody Hobson has led what seems like a storybook life: Though she grew up poor and financially insecure, she graduated from Princeton, achieved enormous professional success in financial services — rare indeed for an African American woman — and six years ago wed George Lucas, the multi-billionaire creator of “Star Wars,” with whom she has a daughter.
But now the real fun begins: Last month Hobson was promoted to Co-CEO of Ariel Investments and charged with the task of taking the large black-managed firm to the next level. She started there as a college intern, rising to become president in 2000.
In an interview with ThinkAdvisor, Hobson discusses some plans and reveals how a deeply financially unstable childhood informed her career choice.
Concurrent with Hobson’s promotion to co-CEO, Ariel founder-chair and now Co-CEO John Rogers has sold 14% of his shares to her, making Hobson the largest shareholder in the active-management firm. The promotion and increased ownership points to Hobson, 50, and Rogers, 61, as equals as Ariel prepares for its future.
But no revolutionary changes yet: Rogers remains responsible for portfolio management. Hobson will continue to run the business day to day.
Rogers founded Chicago-based Ariel, the nation’s first African-American-managed investment firm, 36 years ago. With a long-term patient investing strategy in mostly in small- and mid-cap companies at bargain prices, it manages about $13 billion in assets. The flagship Ariel Fund boasts an annualized return of 11.04% since its 1986 inception versus the S&P 500’s 10.40%.
International and global offerings and Ariel’s large-cap value funds are managed out of New York City offices.
In the interview, Chicago-born Hobson, a board director at JPMorgan Chase and the vice chair of Starbucks Corp., discusses the five key reasons African Americans are underinvested in financial markets and what Ariel is doing to try to change that.
ThinkAdvisor recently interviewed Hobson, speaking by phone from Chicago. On a personal note, she allowed that not even super-affluence — her net worth is $10 million, according to Celebrity Net Worth; that of Lucas is $6.2 billion, Forbes says — can totally banish feelings of financial insecurity that plagued her as a child, even if they now show up only in bad dreams.
Here are excerpts from our interview:
THINKADVISOR: With your elevation to co-CEO, John Rogers sold you 14% of his stock in Ariel. He’s never before sold his stock, and these are the only shares he ever plans to sell, he says. What’s the significance of this move?
MELLODY HOBSON: It makes me the largest shareholder and evens out our ownership by putting him at 34% and me at 39%. We’re deliberately signaling that we’re peers. I started as an intern here 28 years ago. I was a pipsqueak [laughs]. We’re trying to let people know that John and I are true equals in how the firm is run and also that we’re looking to and preparing for the future. I’m 11 years younger than John.
Is there a formal succession plan?
We’ve always had one. John wants to [stay] for quite a long time. I’m not in a hurry, by any stretch of the imagination, to have him not be here. We’re just signaling that we’re on the case. Most investment management firms don’t deal with succession planning very well. We want to be ahead of the curve.
Does your promotion to co-CEO mean a shift in how Ariel will be run?
Not at all. John continues to be the person responsible for the investment returns, and I continue to be the person responsible for the other areas of the firm. That’s unchanged.
But John wrote that you’ll be taking the firm to “the next level.” To what is he alluding?
It’s been a challenging time for investment management firms because the conversation has moved to passive from active. When the pendulum swings too far one way or the other, there’s big opportunity. Now that the pendulum has swung to passive as far as it has, there are stocks that sell at tremendous value. If you’re going to be active, you need to be truly active and not be a benchmark hugger or a closet investor. We’re neither.
How will your taking the firm to the next level manifest?
A lot of things have happened in the last decade or so in this digital age that have forced us all to rethink our client service model. For Ariel, that means some retooling in terms of what clients expect from us, how custom we need to be. It means some different kinds of leaders that we have to add. We’re looking at a service model of a co-client servicing executive for our institutional clients so there’s more than one person on an account. There’s a whole bunch of things on the table, but they’re all evolutionary, not revolutionary — yet they’re very important.
Please talk about Ariel’s being long-term patient investors.
Our logo is a turtle — we’ve actively patient. We’re always looking for opportunities. We can exploit short-term thinking — which has become shorter and shorter — for the benefit of our clients and investors. We’re always researching stocks, waiting for the opportunity to own [those we pick]. In today’s world, when a stock is abandoned, there’s some really great opportunity.
When I interviewed John Rogers for Research Magazine 21 years ago, he stressed that “African Americans [were] underinvested in financial markets.” Has the situation improved since then?
It’s improved, but we’re still underinvested versus our white counterparts. We’ve seen the numbers go up, largely driven by 401(k) plans and auto-enrollment in them. But inside the plans, we’re underweight equities significantly. We’re putting less money away every month. So we still have a long way to go.
Most people would probably say the reason is that African Americans, on average, don’t make as much money as Caucasians; therefore, they don’t have investable assets.
We pioneered research [“401(k) Plans in Living Color” — a 2014 study] around the differences between the races when it comes to investing. We looked across all income levels. At every level, African Americans were underinvested in the stock market vs. our white counterparts.
Why is that?
We found five key reasons: Two-thirds of us say we don’t invest because we don’t know enough. So knowledge plays a big part. Trust is another part. We wonder: Is our money going to be taken away? And we have issues around misinformation; for example, we think we have to pay a lot of money to open an account and that there’ll be penalties for withdrawing money. Yes, that does exist for a retirement account but not for a general investment account.
What are the other two reasons?
There’s an issue of exposure: We tend not to grow up in homes where the stock market is discussed. The fifth is that we tend to be more conservative overall: A lot of us are making money for the first time, and the idea of risking it in something we don’t know about isn’t comfortable.
So what’s Ariel doing to encourage blacks to invest in the market?
We have a huge emphasis on financial literacy. Our Ariel Community Academy is 22 years old. It’s a small [public] school on Chicago’s South Side that’s [98%] African American. We publish a very robust financial curriculum that any school can ask for, which we’ll send them.
What specifically are you doing to educate the students about investing?
We give every first grade class $20,000 to invest. When they get to 8th grade, they give $20,000 back to the first grade class that’s coming in to make the program self-perpetuating. And they make a philanthropic class gift of half the profits. They split their portion of the profits. For every student that puts their money into a 529 plan, we match another $500.
Some argue that account minimums are prohibitive to African Americans who don’t have much money. Thoughts?
The barriers to entry have come down. In the late 1990s, John and I made the rounds of the wirehouses on Wall Street saying that their minimums needed to come down and that they needed to focus on minority investors. The minimums [at the firms] then were $5,000. But that’s totally changed now.
In what way?
There are so many places [to invest]: You can buy funds from the major fund companies and just put in a dollar. You can save your change in certain accounts. JPMorgan [for example] has amazing investment products that are accessible to everyday people with very small amounts of money.
Is it true, as I’ve read, that Ariel emulates Warren Buffett’s investment style?
Yes, except we do it in small- and mid-cap on the domestic equity side, whereas he’s buying the big companies. We focus on long-term patient value investing. We revere Warren Buffett. We’re disciples of Warren Buffett. Our big conference room is called The Warren Buffett Room. Our investment team goes to his annual meeting every year. I’ve gone to them. The greatest investor of all time is living today. Why wouldn’t you soak up every kernel of knowledge that he gives out?
You grew up in a household where lack of money was a major issue. How come you wanted to work in financial services?
As a child, I sought financial security. I was desperate to understand money. I became an intern at Ariel between my sophomore and junior years at Princeton, and I was an intern at T. Rowe Price between my junior and senior years. Those experiences with the stock market were life-changing. Once I got exposed to the language and the power of compounding, I knew that this was where I would build my career.
But why did you choose to intern at financial firms? You could have easily picked some other field.
Because I was desperate to understand money. I always had an interest in [knowing] how I could live a better, more stable life as an adult. That started when I was a child. My mother said I used to say: “I can’t wait till I’m big.” It was my way of telling her that I would get this [financial situation] under control because it wasn’t under control when I was growing up.
Do you feel financially secure now?
Yes, but not [because of] the amount of money I have. It’s that I know how money works. Even if it would all go away, I know what to do. First of all, I know how to work: I have hustle! But the bigger issue is that I understand how money can work for you and against you — and that is a great, great gift. I don’t ever want to be in the situation I was in as a child. But if I were, I know I could make smart decisions.
I don’t think you’ll be in that situation again!
I don’t think so either. But that doesn’t mean my point of view has changed. What you experienced as a child [can] stay with you in an irrational way. My recurring nightmare dream is of being evicted. That’s a narrative in my head because it was a big deal when I was a child. We were evicted many times.
Has that difficult background helped you at all in your work?
It gives me a tremendous amount of empathy with people who are struggling. I know how detrimental [money worries are] to your health and psyche. And I know the mental freedom that comes from not having that as one of your worries.
Hence, your strong interest in financial literacy?
Yes. I want to help people because [financial knowledge] made such a difference in my life. Financial literacy isn’t just about how you pay for things or having a secure retirement. The mental weight of those issues [having little money] can be debilitating. You shouldn’t be in high school worrying if you’re going to get kicked out of your [home] because you can’t pay your bill — and I did.
But you had the intelligence and grit to overcome that early emotional turmoil.
It ended up giving me a tremendous amount of focus because I knew I wanted a better life. I used it as a focus. I hope I can give other people the tools, at least, to do that. Unfortunately, in America, we don’t learn about investing in school. In high school today, the fact that [they give] wood shop and auto but no classes in investing is a travesty. Who’s whittling or cleaning their carburetors?
You and your husband George Lucas certainly have different fields of work and expertise.
Yes, but that’s what makes it fun and interesting.
You two have just returned from traveling out of the country for five weeks. Where did you go?
I was in China for two weeks. My daughter, who’s 6, went to camp in China every day from 9:30 to 4:30. That [idea] was pretty aggressive on my part. It will either be the best thing I’ve ever done, or I’ve scarred her for life! But she was a champ. She did a great job.
Did she learn any Chinese?
She already knew Chinese.
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