Investing in small- and mid-cap stocks is riskier and more volatile than investing in large-cap stocks. The intrinsic value of the stocks in which the Fund invests may never be recognized by the broader market. Ariel Fund often invests a significant portion of its assets in companies within the financial services and consumer discretionary sectors, and its performance may suffer if these sectors underperform the overall stock market.
Performance data quoted represents past performance. Past performance does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains, and represents returns of the Investor Class shares. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the period ended December 31, 2015, the average annual total returns of Ariel Fund (Investor Class) for the 1-, 5- and 10-year periods were -4.10%, +10.43% and +6.62%, respectively. The Fund’s Investor Class shares had an annual expense ratio of 1.03% for the year ended September 30, 2014 and an annual expense ratio of 1.02% for the year ended September 30, 2015. Performance data current to the most recent month-end for Ariel Fund may be obtained by visiting our website, arielinvestments.com.
Quarter Ended December 31, 2015
The fourth quarter of 2015 was a positive end to a mixed year for equities. The three flagship indexes tracking our asset classes all rose nicely. Specifically, the large-cap S&P 500 Index rose +7.04%, the small-cap Russell 2000 Index gained +3.59%, and the large-cap, developed-market MSCI EAFE Index advanced +4.71%. These quarterly results continued an intriguing pattern for the year: domestic small caps and international large caps tracked each other more closely than either one of them paralleled domestic large caps. A large/small split or a domestic/foreign divide would make sense, but the pattern from 2015 is a bit confusing from an economic, fundamental basis. That said, in equities returns can stem from sentiment or understandings of risk and growth rather than fundamentals: the theme of “risk on” versus “risk off” sometimes tells the story. From that angle, the performance pattern does follow. It seems investors were moderately optimistic in the first half of the year, fairly fearful in the third quarter, but hopeful in the final three months.
This quarter, Ariel Fund jumped +7.74% and finished ahead of the Russell 2500 Value Index’s +2.78% gain, as well as the +2.88% rise of the Russell 2000 Value Index.
Some of our holdings posted solid gains for the quarter. Chainsaw chain-maker Blount Intl, Inc. (BLT, Financial) leapt +76.12% on news of its upcoming acquisition. On December 10th it entered a definitive agreement to be acquired by American Securities LLC and P2 Capital Partners, LLC for $ 10 cash per share—an 86% premium to its closing price the day before. While we think the company may be worth even more than its sale price, we view the buyout as a very efficient way to quickly capture much of its value. In fact, we wrote extensively about this stock in our third quarter letter as one of the most undervalued industrial stocks in the portfolio. Advertising concern Interpublic Group of Cos., Inc. (IPG, Financial) advanced +22.32% after a strong quarterly earnings report. Based on revenues and margin that were better than the prior year, the company earned $0.27 per share—ahead of the $0.25 per share expectation. We still think advertising is expanding in ways that drive Interpublic Group’s success, while the crowed is pessimistic about ads in general and established advertising firms in specific.
Other holdings fell amidst the volatility the past three months. Cutting tool and tooling systems maker Kennametal Inc. (KMT, Financial) returned -22.33% as end demand has been weaker than previously expected. That cyclical issue has crimped cash flows, making it rather challenging for new CEO Don Nolan to fully execute his plan to improve efficiency via modernization.
Long term we think the future is fairly clear; it simply will take longer than we (and the company) previously expected. Auctioneer Sotheby’s (BID, Financial) sold off -19.17% as it became clearer the art cycle is late in its growth phase. Management is acknowledging that buyers’ discernment on quality is increasing: good lots that once sold at high prices have not reached estimated prices recently. Unfortunately, the market also viewed the company’s auction of A. Alfred Taubman, the owner of Sotheby’s before it went public in 1988, unfavorably.
In the last quarter of the year, we acquired two new securities in Ariel Fund. We gained a new position in integrated sports, entertainment and media business company The Madison Square Garden Co (MSG, Financial) as it completed its spin-off from MSG Networks Inc (MSGN), the company that was formerly known as Madison Square Garden Co. We already held shares of the former Madison Square Garden, whose main business focuses on media as a regional sports network. The new Madison Square Garden’s business focuses on sports and entertainment with various sports teams and theaters as some of the brands under its belt. We also purchased shares of Zebra Technologies Corp. (ZBRA, Financial), the leading global supplier of thermal printing solutions. A current holding in our small cap separate account portfolio (and also an Ariel Fund holding more than a decade ago), we added this bar-code maker to the Fund because we view Zebra as an industry leader with a strong management team, positioned to benefit from global demand for asset tracking solutions.
Although it may not bring immediate emotional (or financial) rewards, a flat or softly down year in a long, rising market can be a good thing. So long as there is economic growth, as there was in 2015—such a pause means stocks are cheaper at year-end than they were at the beginning. So, we enter 2016 with the same basic view we held entering 2015 as well as 2014. That is, we are confident and optimistic about U.S. fundamental growth and slightly cautious about the valuation of domestic stocks. Overseas, we think there is a more fundamental risk—especially in China—but we see international stocks broadly as less expensive. Taken altogether, that means we see a “stock-picker’s market” where choosing individual securities within a set of stocks has greater potential to contribute more strongly to returns than the choice of one set of stocks over another.
Of course we always embrace the philosophy of long-term investing and strongly prefer it to any attempt to time the market or seek out turning points, bottoms, tops, and so forth.
This commentary candidly discusses a number of individual companies. These opinions are current as of the date of this commentary but are subject to change. The information provided in this commentary does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security.
As of 12/31/15, Blount Intl, Inc. constituted 1.4% of Ariel Fund; Interpublic Group of Cos., Inc. 4.0%; Kennametal Inc. 3.0%; Sotheby’s 0.9%; The Madison Square Garden Co 1.5%; MSG Networks Inc 1.8%; and Zebra Technologies Corp. 1.4%. Portfolio holdings are subject to change. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of Ariel Fund.
The Russell 2500™ Value Index measures the performance of the small to mid-cap value segment of the U.S. equity universe. It includes those Russell 2500 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000® Value Index measures the performance of the small- cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes’ trademarks, service marks and copyrights. The S&P 500® Index is the most widely accepted barometer of large cap U.S. equities. It includes 500 leading companies. MSCI EAFE® Index is an unmanaged, market-weighted index of companies in developed markets, excluding the U.S. and Canada. The MSCI EAFE Index net returns reflect the reinvestment of income and other earnings, including the dividends net of the maximum withholding tax applicable to non-resident institutional investors that do not benefit from double taxation treaties. MSCI uses the maximum tax rate applicable to institutional investors, as determined by the companies’ country of incorporation. Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used to create indices or financial products. This report is not approved or produced by MSCI.
Investors should consider carefully the investment objectives, risks, and charges and expenses before investing. For a current prospectus or summary prospectus which contains this and other information about the funds offered by Ariel Investment Trust, call us at 800-292-7435 or visit our website, arielinvestments.com. Please read the prospectus or summary prospectus carefully before investing. Distributed by Ariel Distributors LLC, a wholly owned subsidiary of Ariel Investments LLC.
