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The Patient Investor

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The Patient Investor The patient investor QUARTERLY REPORT: 06/30/21 Ariel Fund Ariel Appreciation Fund Ariel Focus Fund Ariel International Fund Ariel Global Fund Slow and steady wins the race. Ariel Investment Trust c/o U.S. Bank Global Fund Services P.O. Box 701 Milwaukee, WI 53201-0701 800.292.7435 • arielinvestments.com • linkedin.com/company/ariel-investments • instagram.com/arielinvestments • twitter.com/arielinvests Table of contents Shareholder letters Ariel Fund & Ariel Appreciation Fund 3 Ariel Focus Fund 9 Ariel International Fund & Ariel Global Fund 14 Company spotlights 20 Quarterly report Schedules of investments 23 Notes to the schedules of investments 33 Board of trustees 36 Officers 37 Important disclosures 38 Information about the Funds’ indexes and 39 the GICS sector classification standards 2 SLOW AND STEADY WINS THE RACE Ariel Fund & Ariel Appreciation Fund John W. Rogers, Jr. Mellody Hobson Chairman and Co-CEO and Co-CEO President Average annual total returns as of 06/30/21 Since 2Q21 YTD 1-year 3-year 5-year 10-year inception* Ariel Fund 5.52% 26.10% 73.45% 13.16% 15.40% 11.97% 11.57% Russell 2500TM Value Index 5.00 22.68 63.23 10.60 12.29 10.93 11.25 Russell 2500TM Index 5.44 16.97 57.79 15.24 16.35 12.86 11.32 S&P 500® Index 8.55 15.25 40.79 18.67 17.65 14.84 11.07 * The inception date for Ariel Fund is 11/06/86. Average annual total returns as of 06/30/21 Since 2Q21 YTD 1-year 3-year 5-year 10-year inception* Ariel Appreciation Fund 4.75% 21.14% 58.19% 11.49% 12.26% 10.62% 10.79% Russell Midcap® Value Index 5.66 19.45 53.06 11.86 11.79 11.75 11.48 Russell Midcap® Index 7.50 16.25 49.80 16.45 15.62 13.24 11.82 S&P 500® Index 8.55 15.25 40.79 18.67 17.65 14.84 10.56 * The inception date for Ariel Appreciation Fund is 12/01/89. 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. Any extraordinary performance shown for short-term periods may not be sustainable and is not representative of the performance over longer periods. Performance data current to the most recent month-end for Ariel Fund and Ariel Appreciation Fund may be obtained by visiting our website, arielinvestments.com. ARIELINVESTMENTS.COM 3 DEAR FELLOW SHAREHOLDER: On the heels of such a forceful rally, it is fair to say smaller companies needed a breather. As The Journal astutely For the three months ending June 30, 2021, Ariel Fund remarked, “…after the steep ascent by small-caps since gained +5.52%, beating the Russell 2500 Index’s +5.00% last Fall, it made sense that investors paused to consider.”2 gain as well as the Russell 2500 Value Index’s +5.44% rise. And one might ask, consider what? Our answer and the The broad market, as measured by the S&P 500 jumped only real answer: value. Last year, in the wake of a global +8.55%. Here, our Financial stocks helped overcome pandemic, value abounded. In our June 30, 2020 quarter- softness amongst our Industrial names. Meanwhile, Ariel end letter we wrote, “This crisis will end. The question is Appreciation Fund earned +4.75% versus +5.66% for the not ‘if’ but ‘when.’” At the time, we advised long-term, Russell Midcap Value Index and +7.50% for the Russell patient investors to take advantage of massive dislocations Midcap Index. Financials also helped returns but our Real during a period of maximum pessimism. We knew those Estate and Industrial holdings underperformed. kinds of once—or maybe twice—in-a-lifetime THE EMPIRE STRIKES BACK opportunities are fleeting because markets are efficient. Twelve months later, a look back clearly shows pessimism We have all heard ad nauseam about value versus growth, yields value and optimism is pricey. As such, with reflation versus deflation, reopening versus restrictions and enthusiasm proliferating these days, there is less value to be we have discussed some of our views on these issues in had. Still, “less” does not mean “none.” As someone once recent letters. Our thinking has not changed but as the wisely said, “It is a market of stocks, not a stock market.” post-pandemic boom has endured, an underappreciated For the discerning investor, there is a big difference. aspect of the market that is central to our focus is the correlation between stock performance and size. In a THE VALUE GAP turnabout from recent market leadership, large cap issues Against the backdrop of a world awash in liquidity, funded re-claimed the throne, handily outpacing their mid and by an unprecedented level of government stimulus, small-cap brethren. Big, economically sensitive issues were everyone is jumping on the investing bandwagon. For Ariel, buoyed by the Federal Reserve’s decision to hold rates low this suggests a time to be more cautious. To this point, a while debating the probability of “transitory” versus the recent Barron’s article reported, “…retail activity accounts possibility of enduring inflation. This performance shift was for 24% of equity volume [this year], up from 15% in a marked reversal from the robust smaller company rally 2019.”3 And yet, amidst this market euphoria, the valuation that started as the economy began to recover last year. differences between large and smaller cap companies As The Wall Street Journal noted, “…[S]ince the end of remain compelling. In fact, we posit that big company September…when promising Covid-19 trials inspired outperformance during the second quarter has helped confidence that the economic future was bright,” the serve up more small and mid-cap opportunities. The Wall Russell 2000 Index soared +54.41% compared to Street Journal perfectly summed up our view when they +29.25% for the large companies comprising the S&P wrote, “Believers in a further advance for small caps point 500.1 The Russell 2000 Value Index performed even to how the group’s valuations compare with those of better—surging +68.96%. Since small caps and value large-cap stocks.”4 stocks are typically the frontrunners coming out of recessions and had been the performance underdogs for The numbers tell the story. As of the most recent quarter most of the last decade, we were not surprised by this end, the S&P 500 trades at 21.3 times next year’s earnings relative strength. versus 14.2 times for the Russell 2000 Value Index; 15.3 times 1 Langley, Karen. “Small-Caps to Ride Earnings Wave.” The Wall Street Journal. July 8, 2021. 2 Langley, Karen. “Small-Caps to Ride Earnings Wave.” The Wall Street Journal. July 8, 2021. 3 Salzman, Avi. “The Market’s Meme Generation.” Barron’s. July 19, 2021. 4 Langley, Karen. “Small-Caps to Ride Earnings Wave.” The Wall Street Journal. July 8, 2021. 4 SLOW AND STEADY WINS THE RACE for the Russell 2500 Value Index; and 17.1 times for the To many, Madison Square Garden Entertainment is a Russell Midcap Value Index. If this dichotomy were not hodge-podge of properties and businesses that do not already compelling, all three of these value indices trade at appear to fit together easily. While the company is famous a discount to their “core” counterparts. Meanwhile, our for the iconic arena that serves as home to the New York small cap portfolios trade at 15.4 times next year’s earnings Knicks and Rangers as well as a popular concert venue—it which represents nearly a 28% discount to the S&P 500. also owns a host of entertainment properties including The Our small/mid cap portfolios are even cheaper, trading at Chicago Theatre, Rockettes and TAO. Next up is the highly 13.9 times next year’s earnings—a nearly 35% discount to anticipated and often questioned Sphere which is expected the broad market. Similarly, our mid cap portfolios trade at to provide a one-of-a-kind Las Vegas entertainment 14.3 times next year’s earnings—almost a 34% discount to experience. Given the hype surrounding the scale and the large cap index. Should the market continue to rally, expense of this new venue, we recently made a trek to our undervalued upstarts are poised to do well. Should the Nevada to see the construction site first-hand. Having market come undone, our less expensive holdings should toured the location and reviewed detailed plans for it, we have less far to fall—providing downside protection to can personally attest to the uncontemplated value at hand. buffer any blows. And even though we do not manage When the company announced a merger with its one-time our value strategies to any specific beta target, our sibling company, Madison Square Garden Network betas have been in steady decline—suggesting that our (MSGN), Wall Street revolted. The stock dropped -20% portfolios would experience less volatility in a choppy on the announcement and another -13% in the subsequent investment environment. days. Since we once owned Madison Square Garden Network as a stand-alone company in our portfolios, we “Even in a frothy market, those who already knew the business and were not alarmed in having are willing to roll up their sleeves the two brands come together again.
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