At The Motley Fool, we understand that it often pays to zig when Wall Street zags, but that doesn't mean that we don't pay attention to what leading fund managers are buying and selling. And hedge funds, which are rarely in lockstep with the broader market, can be a particularly valuable source of insight.

Every quarter, fund managers overseeing more than $100 million must disclose their quarter-end holdings publicly by filing Securities and Exchange Commission Form 13-F. The form lists all U.S.-traded securities the manager held at the end of the quarter. Although the form doesn't disclose the manager's short positions or the manager's intraquarter trades, it can shine a bright light on his or her "long" stock bets. To help us make use of 13-F data, we turned to Motley Fool partner AlphaClone, a research and investment-management firm that tracks hedge fund public disclosures and develops investment strategies based on them.

Q4 2010 update
John Rogers founded Ariel Capital Management, LLC in 1983. The firm invests in value-priced small and medium-sized companies. The fund purchases companies whose prospects include high barriers to entry, sustainable competitive advantages, and predictable fundamentals that allow for double digit cash earnings growth. The total market value of Ariel Capital Management’s disclosed equity holdings as of Dec. 31, 2010 -- the latest quarter for which data is available -- was $5.32 billion across 113 holdings. Here's a snapshot of the portfolio's industry allocations.

The fund's 10 largest positions (shares held) and associated changes as of Dec. 31 were:

  1. Gannett (NYSE: GCI) -- increased 7.8%.
  2. CBS (NYSE: CBS) -- reduced 1.7%.
  3. Lazard (NYSE: LAZ) -- reduced 3.8%.
  4. DeVry (NYSE: DV) -- increased 55.3%.
  5. Jones Lang Lasalle (NYSE: JLL) -- reduced 3.7%.
  6. Janus Capital Group (NYSE: JNS) -- reduced 14.7%.
  7. Mohawk Industries (NYSE: MHK) -- reduced 1.2%.
  8. Bio-Rad Laboratories (NYSE: BIO) -- reduced 1.1%.
  9. Interpublic Group (NYSE: IPG) -- reduced 21.5%.
  10. International Game Technology (NYSE: IGT) -- increased 3.4%.

During the quarter, in addition to the top holdings, the fund increased its position in Force Protection and Washington Post, among others. Among the stocks that Ariel reduced its exposure to were Sotheby's and Private Bancorp. Also, the fund sold out of four stocks entirely: Covidien, Disney, Gulf Island Fabrication, and MB Financial.

Following Ariel Capital
Is it worth paying attention to Ariel's moves? According to AlphaClone's back-test simulation, anyone who invested in Ariel Capital Management’s 10 largest holdings at the time they were disclosed publicly each quarter would have returned 517.3% since 2000, versus 15.2% for the S&P 500 (including dividends) as of March 30. Here’s a chart showing AlphaClone’s back-test model:

The strategy above buys/sells its holdings each quarter, five trading days after the SEC's filing window for Form 13-F closes.

Selected Q4 2010 commentary
Ariel Capital Management has more than 45% of its assets in the services sector, with financials and technology comprising another 16.0% and 11.8% of the portfolio, respectively. Here’s where the firm is winning and losing currently and making new bets:

Current winner
Gannett was a big winner to close out 2010, rising more than 23% in the fourth quarter of the last year. The stock comprises 4.1% of the total portfolio, a good chunk given that there are 113 total holdings. Gannett is an international media company operating in three segments: publishing, digital, and broadcasting. The company has a market capitalization of $3.7 billion and a two-star (out of five stars) rating at Motley Fool CAPS.

Current loser
Jones Lang Lasalle didn't do so well, dropping more than 2% in the fourth quarter of 2010, although it has since rebounded sharply. Jones Lang is a global real estate services company with a market capitalization of $4.5 billion and $2.9 billion in revenues in the fiscal year ended Dec. 31. The stock is trading at a TTM price-to-earnings ratio of 30. The company has a four-star rating in Motley Fool CAPS.

New bets
The largest new addition, Beckman Coulter, comprises 1.2% of the total portfolio. The company is a manufacturer and marketer of biomedical testing instrument systems, tests, and supplies for complex laboratory processes. Beckman Coulter has believers among the Motley Fool CAPS community -- it has the highest rating of five stars.

During the quarter, the fund also started new positions in Landec, Imation, Gaiam, Market Leader, and Astro-Med.

So there you have it, the blow by blow of Ariel Capital Management’s latest moves. Tell us what you think in the comments below. 

Company data provide by AlphaClone LLC, a San Francisco-based research and investment management firm that tracks hedge fund public disclosures. For more information on the firm's investment approach, click here to visit AlphaClone.


Backtesting is the process of evaluating a core strategy by applying it to historical data. Backtested performance results are provided for purposes of illustrating historical performance had a core strategy been available during the relevant period. Backtested performance results are hypothetical and have inherent limitations. AlphaClone makes no representation that any core strategy will achieve performance similar to any backtested performance results. Actual results could differ materially from backtested performance and future results could differ materially from backtested performance. Past performance is no indication or guarantee of future results.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.