Nothing spurs investors to abandon a fund faster than poor performance. Over the years, countless funds have fallen victim to the death spiral of lagging returns and declining assets. Fortunately for Ariel Capital, its two big-name funds seem to have shaken off their performance slumber, and they now hope to stop their outflow of assets.
Performance slump
Last year, the Ariel Fund (ARGFX) and the Ariel Appreciation Fund (CAAPX) collectively lost about $1.8 billion in assets, although those outflows have slowed to roughly $550 million in the first five months of 2007. Both funds invest in mid-cap equities, although the Appreciation Fund invests in slightly larger stocks, giving it more of a mid-to-large tilt.
Both funds fared poorly in 2005 and 2006, trailing the benchmark Russell Mid-Cap Index by wide margins:
|
Fund |
2005 Return |
2006 Return |
|---|---|---|
|
Ariel Fund |
0.92% |
10.35% |
|
Ariel Appreciation Fund |
2.92% |
10.94% |
|
Russell Mid-Cap Index |
12.65% |
15.26% |
Some of this trailing performance owes to the market's failure to reward high-quality, stable companies in this time frame. Since the two Ariel funds tend to hold those types of stocks, their returns lagged those of the overall market. The funds also suffered from being underweighted with energy and materials stocks, which have done particularly well lately.
So far in 2007, performance for both funds has turned a corner. Year to date through June, the Ariel Fund is up 12.1%, while the larger Ariel Appreciation Fund is up 9.9%, in line with the 9.9% return of the Russell Mid-Cap Index. Six months is hardly enough time to reach any solid conclusions, but investors need to see at least some uptick in performance before they'll feel secure enough to stop pulling their money from these funds.
A closer look
The Ariel Fund has been run by John Rogers, chairman and CIO of Ariel Capital Management, since 1988. He is assisted by newer co-manager John Miller, who came on board late last year. Rogers also runs the Ariel Appreciation Fund, but only since 2002. His co-manager there is Matthew Sauer, who also joined the fund in late 2006.
Both funds employ a value-conscious approach to finding stocks with good growth potential. Rogers prefers companies with solid business models that lead their respective industries. At times, management has found itself at odds with the broader market. This isn't necessarily bad -- investment managers should be applauded for remaining true to their investment processes, even if it makes them contrarians.
Both Ariel Fund and Ariel Appreciation tend to be more concentrated than many funds, each currently holding 35 different equity positions. Right now, top holdings in the Ariel Fund include stocks like Hewitt Associates
The Ariel Fund has roughly 82% of its portfolio assets allocated to mid-cap stocks, with the remainder in small-cap companies. Ariel Appreciation holds 44% of its portfolio in large-cap stocks and the remaining 56% in mid-cap firms. The Ariel Fund has held large amounts of cash at various times in its history; if you own this fund, watch to make sure cash holdings are not creeping up. All in all, both of these funds are decent options for a mid-cap blend fund. However, thanks to its focus on mid-to-large stocks, Ariel Appreciation may have more room to run in the future, should large-cap stocks stage their long-awaited comeback.
Ariel's future
These two Ariel funds need another year or so of favorable performance to stem the asset outflows currently plaguing them. Achieving that should put them well on the road to recovery. Both funds' long-term performance track record looks good, giving this Fool every reason to believe that their recent slump will soon give way to a streak of brighter performance, and eventually herald the return of positive inflows.
Further tempestuous Foolishness:
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Fool contributor Amanda Kish lives in Rochester, N.Y., and does not own shares of any of the companies or funds mentioned herein. Accenture is an Inside Value recommendation. The Fool's disclosure policy knows which way the wind is blowing.
