John Rogers Breaks Down His Firm’s Market-Beating Returns

Ariel Investments’ flagship fund has been the top performer in its class over the past 10 years. Founder and CIO John Rogers breaks down its success.

John Rogers Ariel Funds

John Rogers Breaks Down His Firm’s Market-Beating Returns

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Transcript

John, your fund has really outperformed peers over the last decade and I wanted to see if you could distill that success down to one specific strategy your behavior that you guys do better than anyone else.

I think it is really really important that we are long term investors so we are always looking out over the horizon you know and making sure that we're not getting caught up for the short term short term noise short term emotions of the market better be able to say hey three to five years from now what will these companies look like. So during that financial crisis we were able to look out over the horizon take a long term perspective and try not to let all the fear stymie us during that tough tough time.

So I wanted to see what your best call might be over the last 10 years is there any sector color specific allocation that you made that you think really contributes your success more than other things.

There are a couple of sectors that we worked on but the one that really comes to mind is the real estate services companies Jones Lang LaSalle JLL and CB Richard. CB Richard Ellis CBRE. They are both real estate services companies known for leasing they have businesses that do the capital markets business. They have outsourcing Real Estate Services. They really are a worldwide companies in terms of real estate servicing and those stocks got crushed during the financial crisis. The CBA or got under five dollars a share. You've got to be extraordinarily cheap. Everyone hated it and now it's bumping up toward 50 dollars a share. So that was a sector that was really great for us. Another one was the leisure oriented companies companies that like Royal Caribbean that do a wonderful job of creating cruises for American consumers primarily but they're also global they're all over the world. You know that stock got under ten dollars and now is well over 100 dollars. People were very fearful during the crisis when cruise again. But in both cases we looked out over that horizon and through that long term perspective we believe that real estate will be here forever and that people would love being able to get away on a cruise down the road.

Is there anything in particular that you that you think you'd do differently that kind of sets you apart. I know that you're at your traditional value investors but I mean the value is not done so well over the last decade but you have what wrinkle Have you added to sort of the Value Investing playbook that's allowed you to continue to succeed where others have failed.

I think on the one hand the things that we do that we have worked well for us since the fall of Warren Buffett's playbook we always says you know you want to be greedy when others are fearful. And so during the financial crisis when there was Maximum Pessimism we were buying our favorite names. Same thing happened this last December. Stocks got crushed as we moved up toward Christmas. We were in there buying our favorite stocks like Mattel and U.S. Silica right before Christmas Day and those stocks were up now over 50 percent just through this period through the end of February and early March. So being able to truly buy when there's that kind of fear in the marketplace it's something that distinguishes us from our peers. And then finally we worked hard to improve our debt analysis. We think often of value and value oriented firms and we learned that during the financial crisis we didn't spend enough time doing our own independent work or making sure that our balance sheets merge balance sheet to reach seemingly strong. And that's something that I think we've worked really hard on improving and helped our performance this last 10 years.

So does that help you avoid these so-called value traps where the company is cheap just because it's not that great of a company. Maybe it's out of debt. I mean is that sort of allow you to avoid that minefield somewhat and pick the cream of the crop.

Well I think it helps us that if we make a mistake if you have not if you don't have an over levered balance sheet you can live through mistakes and you can build the business for the long run. If you don't have the right type of balance sheet when things get tough that business can go away you can have a permanent loss of capital which are trying to really protect our customers from. And we think that waiting to make sure we have the bullet proof balance sheet has helped to protect capital for us during the ups and downs inevitable in the market and the volatility that's gotten greater and greater than I've ever seen in my career. There's so much volatility.

You mentioned the big up tick in volatility in recent months. Is there anything strategy wise that you're doing to sort of take advantage of that or to avoid the downside of that.

What we're trying to make sure that we try to make volatility our friend and when we see stocks that are gapping down on maybe there's no fundamental change in the long term economic outlook of that business that creates an opportunity. And I think that's the important thing. So volatility should be something that helps you and the other hand when stocks spike higher and maybe get overpriced that can be an to press to trim take some profits and move into cheaper companies. So Volatility doesn't scare us and we think in this environment where everyone's been in this flight to safety. Know more and more investment communities have gotten more and more conservative so they're moving money to the safe parts of the marketplace. That means the stocks are left out or can be truly orphaned and be really cheap. So we are trying to find those cheap orphans in this type of environment.

So you mentioned that you're looking more at company credit profiles is there anything else that you're doing on a stock selection basis to sort of insulate yourself from the next downturn. Any other types of strategies that you're using to take.



About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver