Ariel rebuilds, using its motto that slow and steady will win

Improved performance is bringing in new assets to key strategies at Ariel Investments LLC, as executives at the value equity firm attempt to put even further behind them the dark days that started nine years ago.

But while assets are up to $6 billion as of March 31, almost double the low point of $3.3 billion in March 2009, that's still far below the peak of $21.4 billion at the end of 2004.

“It's going to take us a long time to get that big again,” said John W. Rogers Jr., chairman, CEO and chief investment officer of the Chicago money management firm that turns 30 this year.

In part that's because Ariel's plan to rebuild itself includes slower growth. Mr. Rogers said Ariel has set more conservative limits about the size of strategies. Smaller strategies, he said, will enable the firm to keep a closer eye on delivering maximum results for investors.

“We are going to be careful not to grow too fast,” he said.

The firm's microcap value strategy will be the first to close, he said.

Mr. Rogers was one of the first African-Americans in the U.S. to run a money management firm. In recent years the firm has gained notoriety not just for its money management capabilities, but also for Mr. Rogers' ties to President Barack Obama. Ariel President Mellody Hobson also has become a celebrity of sorts because she is engaged to film director George Lucas.

Mr. Rogers advocates a value buy-and-hold philosophy that worked particularly well in 2002 through 2004, when Ariel's assets reached their high point. But the firm's largest institutional strategy — small-cap value — lagged its benchmark in 2005 and 2006. Assets in the strategy stood at $5.8 billion at the end of 2004 but by the end of 2006 had declined by almost $2 billion through a combination of underperformance and outflows.

The slide in assets continued through 2007, and then the big hit happened in 2008. The small-cap value strategy returned -45.07% that year, more than 1,600 basis points below its benchmark, the Russell 2000 Value index, according to eVestment LLC, Marietta, Ga.

At the end of 2008, less than $1 billion was invested in the strategy.

Other Ariel strategies and mutual funds suffered similar performance issues. And in just one year, 2008, Ariel's assets under management fell more than two-thirds, to $4.3 billion.

“It was a hard time,” said Mr. Rogers, noting the money management industry is cyclical. “Back in 2002, 2003, 2004, we were knocking the cover off, we were at the top of the charts,” he added.

He said new research procedures put into place since the financial crisis give each company Ariel buys a proprietary debt rating. Companies whose ratings are too low and might be unable to withstand another financial collapse are sold, he said.

“It was arguably the worst financial crisis since the Great Depression,” said Mr. Rogers of 2008. “It was a very unique time. In case another unique downturn comes, we will perform better.”

Recent performance for Ariel already has improved. One-year results for the small-cap strategy as of March 31 show a gain of 20.27%, compared with the Russell 2000 Value index at 18.09%. On a three-year basis, Ariel is also outperforming the benchmark, with an annualized 13.9% vs. the benchmark's 12.12%, according to eVestment data.

Ariel's microcap strategy has become a star. Ariel launched the strategy when portfolio manager David Maley joined Ariel as a senior vice president in April 2009. Mr. Maley previously had managed the strategy at Maple Hill Capital Management.

The strategy, which had only $137 million as of Dec. 31, gained $382 million during the quarter, ending March with $505 million. It will be closed before it hits the $600 million mark.

For the 12 months through March 31, Ariel's microcap value strategy returned 24.61%, vs. 19.14% for its benchmark, the Russell Microcap Value index, according to eVestment data.

Ariel's microcap value strategy ranked first in a universe of 46 for the year ended March 31, according to eVestment.

But Ariel might have a hard time convincing institutional investors to sign on to some of its larger strategies, said one investment consultant who asked not to be identified. The consultant noted that value stocks have been highly volatile, and high-quality value companies with constant cash flows have not performed well.

“There is not a lot of demand for their skills in a market where people are still frightened that there could be another collapse,” the consultant said. “Their specific stock selection system works well when markets perform normally.”

Russel Kinnel, director of fund research at Morningstar Inc. in Chicago, agreed, but acknowledged Ariel is a solid manager.

Mr. Kinnel also said Ariel had a setback when it lost a key portfolio manager in March 2012. Matt Sauer, who was one of three managers on the $1.6 billion Ariel Appreciation mutual fund investing in small and midcap stocks, left to join Lateef Investment Management.

Ariel spokeswoman Merrillyn Kosier said the fund remains in good hands, with Mr. Rogers as a co-portfolio manager.

The Ariel Appreciation fund has underperformed its benchmark, the Russell Midcap Value index, for the one- and three-year periods ended March 31, although it outperformed on a five-year basis.

Ariel was strictly a domestic equity firm until July 2011, when executives hired Rupal J. Bhansali as senior vice president and CIO of international equities. Ms. Bhansali had worked for MacKay Shields LLC as portfolio manager of the $450 million Mainstay International Equity Fund.

Ms. Hobson said it had been a long-term goal for Ariel to expand to international equities, but the firm needed to find the right portfolio manager.

So far, the two mutual funds and three institutional strategies managed by Ms. Bhansali and her New York-based investment team of eight have not gathered significant assets and are underperforming their benchmarks.

The biggest is the 15-month-old Ariel Global Equity Fund. The mutual fund had $13.7 million as of March 31. For the 12 months ended that date, the fund returned 8.36%, underperforming the benchmark MSCI All Country World index's 11.19%.

The three institutional strategies offered as separate accounts had a combined $5.7 million in assets as of Dec. 31.

Mr. Rogers said the firm is committed to Ms. Bhansali and expects the strategies to prosper over the long term.

The Illinois State Board of Investment, Chicago, which oversees $12.4 billion in defined benefit assets, has twice been an Ariel client. The board hired Ariel in 2001 to manage a $174 million small-cap value strategy, terminating the firm for performance issues in 2008.

The board hired Ariel again in December 2012 to manage $20 million in Mr. Manley's value microcap strategy.

William Atwood, executive director of the board, said the strategy has done well. “They've shown themselves over the years that they are a very capable institutional firm,” Mr. Atwood said.

But Mr. Atwood said the past investment in the Ariel small-cap value approach had big shifts in performance. “They have a fairly concentrated portfolio” of 30 to 40 stocks. “If a few companies do badly, they can spike the portfolio downward, but if they do well, they can spike upward. They have fairly high volatility.”

Mr. Rogers said he is confident the firm's new research process will limit downside risk, and that he doesn't believe in owning a “Noah's Ark” of stocks: “We don't need to hold two of everything.”