Yahoo Finance John Rogers' Ariel Appreciation Fund 4th Quarter Commentary
- By Holly LaFon
Quarter Ended December 31, 2016
Entering the fourth quarter of 2016, it appeared domestic stocks would have a solid year and international equities a lackluster, yet positive one. After a divergent quarter, we had a great year in the U.S. and a flat year abroad. For 2016, the large-cap S&P 500 Index gained +11.96%, the small-cap Russell 2000 Index leapt +21.31%, while the developed-market MSCI EAFE Index eked out a +1.00% gain. As many know, the big surge after the surprising U.S. Presidential Election became known as the "Trump Bump." The disparity between large-caps' single digit fourth quarter gains and small-caps' big run stems from the President-Elect's plan to slash corporate taxes. Perhaps more importantly, however, the gains suggest optimism the economic expansion will continue. Globally, pessimism has held sway for some time. Since a July 3, 2014 peak, the MSCI EAFE Index is down - 9.23% cumulatively through December 31, 2016. This index is clearly in a bear market: down for two and a half years and at one point off -22.15% cumulatively. This quarter, Ariel Appreciation Fund rose +3.86%, trailing the Russell Midcap Value Index's +5.52% rise but outgaining the +3.21% return of the Russell Midcap Index.
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Some holdings in the portfolio advanced considerably. Helicopter transportation company Bristow Group Inc. (BRS) ascended +46.83% after recently secured financing put Wall Street at ease. The Street had worried the company would become financially distressed like a top competitor given the oil industry's woes. Instead, Bristow arranged $300 million in debt, secured by a portion of its own helicopter fleet. In addition, oil rose during the year and the quarter, giving the stock a mild boost as well. We think its shares are undervalued given the company's significant assets and depressed earnings. In addition, wealth management firm Northern Trust Corp. (NTRS) surged +31.58% on broad news that boosted many financial companies. Donald Trump's unexpected win is good news for banks, asset managers, and investment banks. And, as anticipated, in mid-December the Federal Reserve raised its federal funds target rate 25 basis points to the 0.50% to 0.75% range, which helps boost bank profits on deposits. The Northern Trust is performing well, but its recent rise was due to external events.
Other holdings underperformed. Orthopedic specialist Zimmer Biomet Holdings, Inc. (ZBH) fell -20.44% after cutting guidance and admitting internal supply issues. Earnings were in-line, but revenue was negatively impacted by inventory for some high-end products. The company subsequently cut full-year earnings guidance from $8.00 per share to $ 7.95 per share. We view the supply problem as a short-term issue and believe the long-term future is bright for this best-in-class brand. Also, scientific research supplier Thermo Fisher Scientific Inc. (TMO) dropped -11.20% despite an earnings beat. The company reported earnings per share of $2.03 in late October, well ahead of the $1.97 consensus estimate; it also closed its acquisition of electron microscope maker FEI Company. Health care stocks were generally weak in November and December as investors rotated away from defensive stocks toward more aggressive ones. In our view, the company remains on the right track.
In the last quarter of the year, we added one new position in Ariel Appreciation Fund We purchased Keysight Technologies, Inc. (KEYS), a leading test and measurement business for electronics. The company's long history dates back to its formation as the measurement business of Hewlett-Packard (HPE), which has resulted in deeply rooted relationships, leading market share, and a seat at the table during the development of new technologies. Recently spun-off from Agilent Technologies, Inc. (NYSE:A), investors are discarding the shares due to a perceived lack of near-term growth prospects. We see this as an attractive long-term opportunity to own a niche market leader with excellent free cash flow generation. We think it is well-positioned to benefit from several longer-term tailwinds, including 5G wireless testing and growing demand for modular solutions, software-based testing and recurring services. We did not exit any positions during the quarter.
For the fourth year running, we enter a new year with largely the same view of domestic equities. The U.S. economy continues to make progress, and while growth is not as fast as some want, we remain content given our "slow and steady" philosophy. Full employment, modest inflation and low interest rates provide a good environment for growth but are unlikely to drive an overheated economy. And yet, we will be the first to admit, valuations are toward the higher end of normal, with the S&P 500 Index trading at more than 17.5x forward earnings. As a result, the international markets appear more intriguing given widespread concerns over rising international tension, Brexit, sovereign debt, and so forth. The MSCI EAFE Index trades cheaper than its U.S. counterpart, at just 15x forward earnings. Against this backdrop, we believe 2017 will be good for savvy active managers given reasonable growth but modestly elevated valuations.
This commentary candidly discusses a number of individual companies. These opinions are current as of the date of this commentary but are subject to change. The information provided in this commentary does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security.
As of 12/31/16, Bristow Group Inc. constituted 2.9% of Ariel Appreciation Fund; Northern Trust Corp. 4.3%; Zimmer Biomet Holdings, Inc. 4.1%; Thermo Fisher Scientific Inc. 2.6%; Keysight Technologies, Inc. 1.7%; Hewlett-Packard 0.0%; and Agilent Technologies, Inc. 0.0%. Portfolio holdings are subject to change. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of Ariel Appreciation Fund.
Investing in mid-cap stocks is riskier and more volatile than investing in large-cap stocks. The intrinsic value of the stocks in which the Fund invests may never be recognized by the broader market. Ariel Appreciation Fund often invests a significant portion of its assets in companies within the financial services and consumer discretionary sectors and its performance may suffer if these sectors underperform the overall stock market.
Performance data quoted represents past performance. Past performance does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains, and represents returns of the Investor Class shares. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the period ended December 31, 2016, the average annual total returns of Ariel Appreciation Fund (Investor Class) for the 1-, 5- and 10-year periods were +12.67%, +14.80% and +7.72%, respectively. For the years ended September 30, 2016 and September 30, 2015, the Fund's Investor Class shares had an annual expense ratio of 1.12%. Performance data current to the most recent month-end for Ariel Appreciation Fund may be obtained by visiting our website, arielinvestments.com.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 9 Warning Signs with BRS. Click here to check it out.
The intrinsic value of BRS
