From John Rogers Ariel Investments Q3 letter to shareholders.
Investing in small and mid-cap stocks is more risky and more volatile than investing in large cap stocks. 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 September 30, 2013, the average annual total returns of Ariel Fund (Investor Class) for the one-, five- and ten-year periods were +33.28%, +13.07% and +7.94%, respectively. Ariel Fund’s Investor Class shares had an annual expense ratio of 1.06% for the year ended September 30, 2012. Performance data current to the most recent month-end for Ariel Fund may be obtained by visiting our web site, arielinvestments.com.Inc. 0.0%; Sothebys (NYSE:BID) 1.8%; Jones Lang LaSalle Inc (NYSE:JLL) 3.5%; Nordstrom, Inc. (NYSE:JWN) 0.7% and U.S. Silica Holdings Inc (NYSE:SLCA) 1.6%. 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 smallcap 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. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes’ trademarks, service marks and copyrights.
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 web site, 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.
A few of our holdings struggled in the third quarter. Real estate specialist Jones Lang LaSalle Inc (NYSE:JLL) fell -4.21% due to an earnings miss. Revenues came in near expectations, at $989 million—an increase of 7% year-over-year—versus the consensus of $995 million. Management suggested the bulk of the earnings miss came from higher-than-expected expenses. Adding to the Wall Street discontent was a lower forecast for the Americas in investment sales activity: growth of 10% to 15% rather than 15% to 20%. We see all these as minor, short-term issues and think the long-term picture is bright. People will always buy and sell corporate real estate, and the trend toward outsourcing real estate management is straightforward and rational. We plan to remain patient. Also, premier department store Nordstrom, Inc. (NYSE:JWN) returned -5.74% due to slow sales and a scaled-back outlook. Its EPS of $0.93 actually exceeded the $0.88 consensus earnings expectation. Still, management noted the “softer than anticipated” sales trends and lowered its EPS guidance from the $3.65 to the $3.80 range to between $3.60 to $3.70. We strongly agree with management that the phenomenon is cyclical and short-term rather than a long-term issue. The company continues to stand out for its great brand, phenomenal customer service, energetic growth in its Nordstrom Rack stores, and so forth. Long-term we think most department stores are positioned to struggle, but Nordstrom is poised to thrive.
During the quarter, we initiated a position in U.S. Silica Holdings Inc (NYSE:SLCA), a supplier of industrial-grade sand to the oil and gas markets. Silica (the technical name for this sand) is critical in the process of hydraulic fracturing, and in our view, mastering the logistics and transportation of this commodity constitutes a durable competitive advantage. We believe the market is underestimating the likely pace of growth in U.S. Silica’s revenue and earnings over the next several years (as demand continues to meaningfully increase), as well as the attractive cash flow characteristics of the company’s business. We did not eliminate any positions from Ariel Fund this quarter. At this point, we consider ourselves cautiously optimistic. While equities in the developed world are not especially expensive, the widespread bargain basement prices from 2009 and even the summer of 2011 are no longer around. Warren Buffett himself has said so. Moreover, we have seen some signs of peak markets. On the September 23, 2013 cover of Time magazine was the Wall Street Bull sporting a party hat and surrounded by confetti—celebrating five years since the 2008 crash. A recent Barron’s cover story from September 2, 2013 showed a smiling bull with the headline “The Bull’s in Charge.” Current television ads showcase couples discussing their financial plans; in many cases they do not fear falling markets but worry about missing out on gains. When it becomes conventional wisdom that a bull market is well-established and the crowd moves from nervous to hopeful, it can counter intuitively be a sign the rally is closer to the end than the beginning. Ultimately, however, as independent thinkers, we must focus on two things. First, we look primarily at fundamental business results, as well as future potential profits, not at sentiment gauges. Second, we are bottom-up investors who focus on individual businesses rather than examine entire economies. When you couple those two perspectives, we remain positive: looking at the limited set of businesses held in our portfolios, we like their stable foundations, as well as their future prospects, especially during the recovery but even if a slowdown occurs.
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 9/30/13, Interpublic Group of Companies Inc (NYSE:IPG) comprised 3.7% of Ariel Fund; Omnicom Group Inc. (NYSE:OMC) 0.0%; Sotheby’s 1.8%; Jones Lang LaSalle Inc (NYSE:JLL) 3.5%; Nordstrom, Inc. (NYSE:JWN) 0.7% and U.S. Silica Holdings Inc (NYSE:SLCA) 1.6%. 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.
John Rogers Comments On U.S. Silica Holdings Inc.
During the quarter, we initiated a position in U.S. Silica Holdings Inc (NYSE:SLCA), a supplier of industrial-grade sand to the oil and gas markets. Silica (the technical name for this sand) is critical in the process of hydraulic fracturing, and in our view, mastering the logistics and transportation of this commodity constitutes a durable competitive advantage.