Ariel to broaden target markets

CHICAGO — Executives at Ariel Capital Management LLC are strategizing for what could be an inflection point for the Chicago-based money manager, one in which the minority-owned firm significantly increases its focus on the retail and defined contribution marketplaces.

After weeks of discussions and research, executives for Ariel gathered Jan. 5 to discuss the direction for the firm's growth, and both the retail and defined contribution markets appear to be the areas the firm's officials have identified as the most considerable opportunities.

"You need to play to your strengths," said Mellody Hobson, president of Ariel. "We've already been in these markets, but we need to hit them harder than we ever have before."

Ms. Hobson said this strategy could lead the firm to issue new institutional share classes of its existing mutual funds, which would allow Ariel's funds to be offered on more defined contribution platforms. Currently, of Ariel's $16.3 billion in assets under management, roughly $7 billion is in its three mutual fund strategies.

Ms. Hobson also said Ariel could choose to expand its managed accounts offerings, which currently make up $679 million, or 4%, of its total assets under management.

The new push would ultimately outfit Ariel to further target defined contribution plans, an area Ms. Hobson said might prove to be the most appropriate long-term market for the firm.

"If you preach patience in investing as much as we do, you will want to focus on those parts of the market that also value patience in the same regard," said Ms. Hobson. "The defined contribution mindset is long-term. Investors tend to stick with the funds they choose over long periods of time and patience is really embraced."

In the defined benefit world, Ms. Hobson said, assets tend to be less "sticky," an issue Ariel has recently encountered following performance woes in some of its strategies. Ariel was terminated during 2006 by several large public defined benefit plans for underperformance, including the Illinois Teachers' Retirement System, Springfield, and the Illinois State Board of Investment, Chicago, as previously reported in Pensions & Investments. Ariel managed small-cap to midcap value equities for the two systems, totaling almost $400 million.

But last month, Ariel also received some good news from the Illinois State Board of Investment, which had also moved to terminate the firm from managing a smidcap value portfolio in its 457 deferred compensation plan in November, citing performance issues. The board elected to rescind the termination, noting that some of its investors "take comfort in the long relationship" the $2.6 billion 457 plan had with Ariel, according to a motion from the board last month. Also, the board added, some of its investors enjoy having the option of investing with a minority-owned local firm.

"In up markets like the last few years, Ariel's performance may lag, but it doesn't seem to me that there's anything out of bounds or anything wrong with what they are doing," said Todd Trubey, an analyst who covers Ariel for Morningstar Inc. in Chicago. "They are sticking to their guns and that may be appreciated more by retail or DC investors and less by the DB market."

Mr. Trubey said the firm's flagship Ariel Fund provides investors with excellent protection in down markets and volatile markets but might not keep up with rapidly rising markets.

The fund returned 2.16% during the year ended Sept. 30, 2006, while the Standard & Poor's 500 stock index was up roughly 8.7%. But during the 2000-2002 down market, the Ariel Fund posted a total return of 36.4%, compared with the S&P 500's decline of 47.4%.

"Their story is, slow and steady wins the race," said Mr. Trubey. "And sometimes they have to tell that story more than others; in 2002 they didn't have to tell that story very much."

Ms. Hobson, who is also the chairman of the Ariel Mutual Fund board of trustees, added that with the defined benefit world undergoing a "sea change," the pool of assets available to money managers will gradually diminish and Ariel should be more focused on opportunities that are viable both today as well as 20 to 30 years from now.

But while the firm might choose to focus a more significant part of its efforts on the retail and defined contribution markets, it will not de-emphasize other parts of its existing business, including the defined benefit pension market. "This is not an either/or situation," said Ms. Hobson. "It's an ‘and.' "