Ariel Appreciation Fund commentary for the first quarter ended March 31, 2016.

Investing in 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 Appreciation 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 March 31, 2016, the average annual total returns of Ariel Appreciation Fund (Investor Class) for the 1-, 5- and 10-year periods were -9.14%, +9.15% and +7.48%, respectively. The Fund’s Investor Class shares had an annual expense ratio of 1.12% for the year ended September 30, 2015. Performance data current to the most recent month-end for Ariel Appreciation Fund may be obtained by visiting our website,

Ariel Appreciation Fund Commentary

In spring 2015 we delved deep into the decisions that drove Ariel Fund’s strong six-year performance streak; this year we will examine Ariel Appreciation Fund. This analysis leans upon K. J. Martijn Cremers’ Patient Capital Outperformance: The Investment Skill of High Active Share Managers Who Trade Infrequently, which explains how being highly active and holding stocks long term often produces outperformance. As a firm, we wholeheartedly believe independent thinking and patience drive strong performance, and Cremers has put data to those principles.

We will start at the endpoint—with results. In the current era, which dates back to the end of the Great Financial Crisis on March 9, 2009 (the market bottom), Ariel Appreciation Fund has had remarkable performance. Its returns have been outstanding for the seven-plus years since that date, plus you can break the period (essentially) in half and see that the Fund excelled in both halves. Specifically, of the 297 funds in Morningstar’s Mid-Cap Blend Category dating back to the market bottom, Ariel Appreciation Fund’s +23.96% annualized return ranks 10th—putting it in the top 3% of the category as of April 30, 20161. And from March 9, 2009 through December 31, 2012, it gained an annualized +33.22%, which ranked 18th, putting it in the top 6% of the category. It has done similarly well in the second half of the overall period, gaining +14.11% per year between January 1, 2013 and April 30, 2016—a top 8% ranking, as the 25th highest returning fund in its cohort.

As we noted last year, long holding periods do not equate to “buy and hold,” acquiring shares in a stock and letting them ride until liquidation years later. So while Cremers’ work does show that many professional investors trade too much, we think being sensitive and reactive to valuation is important. To quote our commentary last year: “Turnover can be too high or too low, with the optimal amount being somewhere in the middle.” Below are two key measures of portfolio turnover for each calendar year during that streak:

Ariel Appreciation Fund

Asset turnover assesses changes in dollars: total buys or sells in dollars (whichever was lower), divided by average assets in the portfolio. It describes how much you trade, regardless of what you trade. Name turnover measures stocks added to the portfolio and omitted from it, regardless of dollar amounts. As above, asset turnover for Ariel Appreciation Fund is, on average, about triple the name turnover for the portfolio in the period examined. That means we trade the stocks in our portfolio actively, often our best- and worst-performing stocks.

Below we show those stocks that most contributed to, and detracted from, performance along with a summary of our activity over the two halves of the 2009-2016 period.

Ariel Appreciation Fund

Ariel Appreciation Fund

Stocks we no longer own are in grey. As you can see, we liquidated two top stocks and four bottom stocks, suggesting we often eliminate ideas that are not working and hold onto those that are. Indeed, because International Game Technology was acquired, we only actively decided to sell Janus Capital Group Inc. That said, the table makes clear we do not simply “let winners run” without trimming positions: we sold down six of the top-ten returning stocks by 60% or more, trimmed another by about 10%, and bought more of the final stock between 2009 and today. It’s also interesting that of the worst performers, we owned none in 2009 and only owned two in 2012. In other words, these poor performers are contrarian picks that have yet to turn around. Of the stocks we sold, one was a spin-off—Gannett Co. Inc., and a few of them were not in the portfolio very long at all; we realized they were mistakes and sold.

Taken altogether one cannot simply think independently, buy good values, and watch them work. We think good active management often means paring back on holdings that have performed very well, which many find difficult to do. On the flip side, one must also differentiate between falling stocks that need more time to work and those that are mistakes. We strive to distinguish the two by looking at values rather than trailing returns and by holding onto stocks that seem to have bright futures and attractive current prices.

As of 3/31/16, CBS Corp. constituted 2.7% of Ariel Appreciation Fund; TEGNA, Inc. 1.2%; CBRE Group, Inc. 0.7%; JLL 1.8%; AFLAC Inc. 4.4%; Janus Capital Group Inc. 0.0%; Interpublic Group of Cos., Inc. 3.7%; International Game Technology 0.0%; Tiffany & Co. 1.0%; Franklin Resources, Inc. 2.8%; Bristow Group Inc. 2.6%; Chesapeake Energy Corp. 0.0%; DeVry Education Group Inc. 0.0%; Kennametal Inc. 4.1%; Contango Oil & Gas Co. 0.4%; National Oilwell Varco 1.8%; Coach, Inc. 0.0%; The Madison Square Garden Co. 0.3%; Gannett Co., Inc. 0.0%; and Willis Towers Watson plc 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 Appreciation Fund.