Staying In The Race
The question now is how Ariel Fund's patient style of investing will hold up as the revival of growth stocks that began earlier in the year puts more wind in the sails of growth funds. As of June 30, Ariel was up more than 11% in 2003, less than one percentage point below the performance of the S&P 500 Index.
Rogers is concerned about the quick pace of the market recovery that has helped propel growth stocks, and about new-found market optimism among some professionals. "The sentiment indicators, newsletter writers and even individuals are very bullish," he says. "As a contrarian, it concerns me when there is such strong consensus in the marketplace. And price-earnings ratios are still high relative to their historical levels."
In some respects, Rogers has reason to hope for a gradual recovery rather than a sudden surge. In its 17-year history, Ariel Fund has usually shone brightest compared with other equity funds in bearish or murky markets. "Ariel isn't the kind of company that will shoot the lights out when the market is booming," admits Rogers, who usually shuns the kind of high technology companies that surge ahead in bull markets.
Still, he believes some companies in sectors such as consumer discretionary and services, which accounts for 40% of fund assets, and financial services, which accounts for 16% of assets, will thrive regardless of market conditions. Despite an economy that is taking its time to perk up, Rogers believes consumers will be willing to dig into their wallets. "Consumer confidence is rebuilding now that the war with Iraq is over," he says. "And the tax cut will put more money in consumer pockets."
Discussions with company managers reinforce that optimistic view. "We're starting to hear people tell us that the worst is behind us, and that they are picking up the pace of capital reinvestment," he says. "Low interest rates also make it easier for CEOs to expand their businesses."
Having a company with a steady, all-weather business doesn't hurt, either. Rogers describes one such company, DeVry Inc., as "an old favorite that earns the distinction of being one of the best performing stocks in our 20-year history." One of the largest publicly traded companies in the education market, DeVry specializes in technical training. Rogers believes the company will be able to capitalize on both the burgeoning college-ready population as well as the growing acceptance of online higher education.
Another favorite holding, Matthews International, also has a steady clientele as the leading maker of bronze memorial products such as urns and cemetery plaques, mausoleums, and monuments. It is the second-largest casket maker in the United States, behind Hillenbrand Industries. Over the long term, says Rogers, Matthews International will benefit from the "inevitable demographics" of the baby boom population. The death care industry's high barriers to entry, low costs and predictable revenues add to the stock's appeal. Rogers began purchasing the stock in May 2000, at $12 a share. As of mid-June, the price had about doubled, bringing the stock closer to Rogers' intrinsic value estimate of $30 a share.
Despite increasing government regulation, a long bear market and investor redemptions, Ariel Fund owns several publicly traded mutual fund companies in the financial services component of its portfolio. He believes shares of companies such as Waddell & Reed Financial, Janus Capital Group, T. Rowe Price Group and Franklin Resources offer compelling values. Rogers estimates the private market value of Janus Capital Group at $24 a share, still well above its recent $17 a share trading range. He likes the group's consistent cash flow and strong balance sheets, and believes its fundamentals are poised to improve with the fortunes of the stock market.