John W. Rogers Jr. has an eclectic and impressive resume. As a philanthropist, he gives millions of dollars to causes supporting education, youth initiatives and racial equity.

The firm he founded in 1983, Chicago-based Ariel Investments, was a pioneer in incorporating what would later become known as environmental, social and governance (ESG) criteria into its investment process.

His family is also notable. His father, John Rogers Sr., was a Tuskegee airman and Chicago circuit court judge. His mother, Jewel Lafontant, was the first African-American woman to graduate from the University of Chicago Law School. She later went on to become deputy solicitor general during the administration of President George H.W. Bush.

In the investment world, the 62-year-old Rogers is known for his patient, value-driven style of investing. Portfolio turnover in the Ariel Fund, which he has managed since its inception in 1986, typically clocks in at 20% to 30%. Holdings in the concentrated portfolio of 25 to 45 small and mid-cap holdings are purchased at a discount to the firm’s estimate of private market value and held until they approach that value or a better opportunity comes along. While they typically remain in the portfolio for three to five years, a few stick around even longer.

Through the last 37 years, Rogers’s firm has adhered doggedly to its small- and mid-cap value roots, even at times when the strategy was out of favor. Today, with $11.4 billion under management, Ariel still promotes the virtues of patient investing for its mutual funds and separate accounts, and of using the market’s short-term focus to uncover mispriced companies whose true value will be realized over time.

The strategy has rewarded the firm’s mutual fund and separate account investors over the long haul. The Ariel Fund’s annualized return has handily beaten the Russell 2500 Value Index, and the fund has landed in the top 34th percentile of Lipper’s mid-cap value funds since inception and ranked 15 out of 95 funds over 10 years. Its comparative performance has been especially notable in volatile bear markets such as the one during the early 2000s, when the fund’s preference for reasonably priced names in a broad swath of sectors helped it avoid the fallout from the late 1990s tech bubble.

With 40 years of industry experience under his belt, Rogers has a lot to say about a variety of topics. Recently, Financial Advisor caught up with him to talk about where he thinks the market is headed, when value investing might finally overtake growth, his long career, and minority representation in the financial advisory community.

Selloff Buys
The March 2020 selloff provided an opportunity for the Ariel Fund to initiate positions in several stocks such as global dental supplier Envista Holdings Corporation, which was recently spun out of global science and technology conglomerate Danaher Corporation. The company maintains a market leadership position in an industry with favorable growth dynamics, and continues to benefit from pre-spinoff research and development investments and the upcoming launch of several new products in high-growth segments.

During the first quarter, the fund also staked a claim in Vail Resorts, a high-quality business with a clear competitive advantage and superior scale in a niche market managed by a team that has demonstrated smart capital allocation decisions that maximize strong recurring cash flows. “We believe the headwinds the travel and leisure industry are currently experiencing will soften and think the company’s robust balance sheet will weather the storm,” Rogers says.

Second quarter additions to the portfolio included the Madison Square Garden Entertainment Corporation. The company, which owns scarce and well positioned venue assets in New York City and Las Vegas, was spun out from Madison Square Garden Company on April 17.

“Given current restrictions on large gatherings, we entered the name at a meaningful discount to our estimate of private market value,” says Rogers. “With $1.4 billion in cash and investments, we believe the company has enough liquidity to withstand the current cash burn until event attendance normalizes. At that point, we think the company is positioned to see a more rapid return to higher usage than its peers.”

In the Ariel Appreciation Fund, a pure mid-cap offering, Rogers scooped up shares of former large caps that had fallen into mid-cap territory during the selloff. New additions to the portfolio over the period included the Goldman Sachs Group, drugstore super chain Walgreens Boots Alliance, and Charles Schwab & Co. “These are blue chips that got hit hard because of the pandemic but are great companies over the long run,” he says.

Growth Versus Value
In recent years Ariel has faced a double headwind as investors have turned toward both growth stocks and large companies. Over the three years ended June 30, the value component of the Russell 2500 Index, a barometer for small- and mid-cap stocks, was down an annualized 2.6%, while the index as a whole had increased 4.08%. Meanwhile the S&P 500, whose performance is largely driven by mega-cap growth stock names, was up an annualized 10.73%.

Rogers says the dominance of large company growth stocks reminds him of the seemingly endless appetite for technology stocks in the late 1990s. “Back then, people saw nothing but upside, and the stocks could do no wrong,” he says. “But when the bubble burst, the shift to value was dramatic.”

The rise of telecommuting, the popularity of index investing and other factors continue to propel well-known giant growth stocks. But these companies also face rising challenges such as increased competition, antitrust legislation and nosebleed valuations. In a prolonged market drawdown, the extraordinary bargains in the small and mid-cap value space may begin looking more attractive. Private equity investors, who like smaller companies with strong cash flow that they can buy cheaply, could also provide support for a shift toward small and mid-cap value.

What Being A Financial Advisor Taught Him
Rogers spent the first two years of his career as a stockbroker for William Blair, an institutional investment and private wealth management firm based in Chicago, before launching his own firm at age 24. His experience as a broker helped him recognize how emotions can cloud investment judgement.

“Many of my clients focused on the short term and got swept up in the emotions of the moment that led to behavioral biases,” he says. “My response was to talk about successful contrarians such as Warren Buffett, and about the value of taking a long-term view.” He also learned a lot about finding inefficiencies in the small- and mid-cap space, which was Blair’s specialty at the time.

Minority Representation Among Financial Advisors
In 2019, the CFP Board revealed that only 3.8% of CFP licensees were Black or Latino, even though they make up about 30% of the U.S. population. Rogers cites what he thinks are several reasons for the low minority representation. Many clients of wealth advisors are former classmates, friends of the family, or others within someone’s personal network, and most African-Americans don’t have the benefit of a well-heeled circle. Unconscious bias in potential clients, who may have trouble envisioning someone of color handling their investments, is also a contributing factor.

There is also income inequality, which hits minorities the hardest. “The racial wealth gap in this country has widened over the last 70 years, even for college-educated blacks,” he says. “Many African-American communities have minimal exposure to the financial markets because they haven’t been able to accumulate wealth.” It would help, he says, if large corporations that offer financial advisory services to their senior executives as perquisites use advisory firms with ample minority representation.

Mistakes And Investment Lessons Learned
Rogers says some of his portfolios lagged in expected performance in 2008 and 2009 because they held newspaper stocks. “At the time, we believed newspaper companies would recover from the challenges of the internet,” he says. “But they didn’t.” He admits the firm underestimated the drop in revenues due to classified advertising declines, as well as the drag of debt burdens on these companies from their acquisitions.

He also says Ariel relied too heavily on credit ratings, which may not always provide a clear picture of a company’s financial health. Consequently, Ariel started doing more of its own balance sheet and debt research instead of using Moody’s or Standard & Poor’s. “We use the rating agencies as more of a sanity check than a primary research tool,” he says. “This allows us to build in a better margin of safety in our analysis.”

Emerging From The Pandemic
Rogers believes U.S. stocks will overcome the obstacles created by Covid-19. The Federal Reserve has taken actions such as cutting rates to zero, committing to the purchase of investment-grade and high-yield corporate bonds, and other measures that suggest the central bank will do whatever it takes to support markets and the economy. Legislative initiatives have also been encouraging.

“We expect a solid recovery for equities and earnings as early as the fourth quarter of 2020 or first quarter of 2021,” Rogers says. “Meanwhile, we stand ready to take advantage of any pullbacks in the market on negative news.”