Talking With John Rogers: Slow and SteadyVW Staff
The Ariel fund is No. 3 in the Morningstar mid-cap blend category over five years, with average annual returns of 24%. During the crisis, John Rogers stayed the course and bought more firms he liked, such as Gannett (GCI) and real-estate outfit Jones Lang LaSalle (JLL), as they fell further.
The fund tends to hold stocks for years, with about a fifth of its holdings a decade old and nearly half, five years old. U.S. Silica Holdings (SLCA), which makes gravel and sand used in hydraulic fracturing, or fracking, is a newer investment. While John Rogers is not typically a fan of commodity-heavy businesses, U.S. Silica’s commodity is in short supply, and the company is a master at moving it quickly and efficiently, creating the competitive edge that Ariel favors.
Given the market’s strong run off the lows hit in 2009, some value managers are wary. But John Rogers says that investors’ risk aversion and over diversification has left some sectors neglected. “So many people are fighting the last war that there still are bargains,” he contends. Alternative-investment firm KKR (KKR), which the fund bought during the market’s 2011 tumble, is one such example. As pensions and endowments stray from a traditional mix of 60% stocks and 40% bonds and embrace alternatives like private equity, KKR should benefit. “The sector is really cheap and misunderstood,” John Rogers says. “KKR has an extraordinary brand in private equity.”
The economy may be in better shape than people believe, he adds. “As we talk to management teams, we think this recovery is in the fourth inning and people will be surprised by how strong it will be,” John Rogers says. Because of the strength of his holdings’ underlying businesses, John Rogers thinks some could enter mergers, divestitures, or privatization deals, which could create more upside. Health-care companies Hospira (HSP) and Charles River Laboratories International (CRL) are potential beneficiaries.
But with 56% of its assets in cyclical sectors and people wavering on the economy, the fund sits near the bottom of its category this year, down 2.4%. Given its concentration, with just 42 stocks and no cash, the fund can be volatile. International Game Technology (IGT) has been one of the biggest drags this year, as the sluggish economy and bad weather hurt the slot-machine maker, which also has lost market share. John Rogers says a profit warning caught him by surprise, but he still thinks IGT will benefit over the long run from its size, regulatory experience, and the global growth in gaming.