John Rogers, founder of Ariel Investments.
Photograph by Kevin Serna
The past decade hasn’t been kind to value managers, and their ranks have thinned. But John Rogers Jr., co-chief executive of Ariel Investments, has stayed the course. And his patience and contrarian style of investing are starting to pay dividends once again.
Rogers founded Ariel in 1983; it was the first minority-owned mutual fund company, and is still only one of a few. The $15 billion firm has long been a value-oriented shop with an eye toward companies that have strong management and are good corporate citizens—a successful strategy for decades. Over the past year, the $2.5 billion Ariel fund (ticker: ARGFX), which Rogers lead manages, has returned 36%, beating 94% of its mid-cap value peers.
The markets are underestimating the strength of a postpandemic recovery, Rogers says, and that bodes well for areas that have been largely ignored in recent years, including smaller companies and those in cyclical businesses such as financials and industrials.
Rogers has had a busy year—scooping up bargains in the midst of the crisis and fielding calls from chief executives looking for advice on how to create a more diverse team. Barron’s caught up with Rogers to hear why value is finally primed for a comeback, what he has been buying, and tips for executives trying to turn diversity talk into action. Edited excerpts of our conversation follow.
Barron’s: It has been a rough decade for value stocks—the Russell 100 Growth index has beaten its value counterpart by an average of six percentage points a year. Is it time to retire the “value versus growth” framework?
Rogers: No. It’s a totally different mentality between the two mind-sets. To be a value manager, you have to truly be a contrarian and be comfortable buying things people hate. That’s such a different persona than that of someone who loves buying something that has gone up yesterday and [has] all the “obvious” reasons why it’s going to go up forever.
We did a conference call with value managers including Bill Miller and Mario Gabelli. It’s interesting that we are all of a certain age. There’s not a new generation around, which is another sign that people have given up on this sector. That’s where the opportunity comes.
We’ve been waiting for a comeback for a while. Value has outperformed so far this year.
Fingers crossed, we are at a tipping point. It has been a wonderful reawakening for value [recently]. The signs have been there for a while, and valuations are too far apart. Investment committees are so committed to growth stocks. People come in with consultants who say, “Value is dead. This is a new world. It’s really different this time.” That’s always a sign that we are getting to the top.
A lot of value managers have closed up shop and left the business, and some are finding excuses to own growth stocks. That’s usually a sign of the bottom. The catalyst is happening now: As interest rates go higher and inflation starts to come back, the value of future earnings of growth stocks won’t be valued as richly. A higher-interest-rate environment is going to be a great tailwind for value investors.
The Federal Reserve doesn’t seem to be in a rush to raise rates. Could this take a while?
It’s going to surprise people and happen sooner than people think. The economy is coming back so strong. There’s so much pent-up demand. We’ll get this huge stimulus plan from President Joe Biden, and it’s going to put a lot of pressure on commodity prices and wages.
Will this recovery look different than in the past?
No. Traditional cyclical stocks haven’t had their day in the sun since the 2008-09 global financial crisis. This is finally going to be the period where these forgotten and undervalued cyclicals are going to surprise people on how strong they are. They have done a great job of cost-cutting; their balance sheets are strong and cash flows are strong, and they are set up for a real significant recovery.
What’s an example?
One longtime favorite is Kennametal [KMT], the primary leader when it comes to metal-cutting tools and machinery. It has constantly had to lower expectations and push out [hopes for] the recovery, with several false starts. It’s going to be a prime beneficiary of an infrastructure bill as we redo roads. They have done a lot of cost-cutting and rationalizing the footprint. They had too many plants around the world and an inefficient structure. As this recovery comes, more cash will drop to the bottom line. A lot [of these companies] are underestimated, but also neglected. They aren’t sexy and haven’t shown tangible evidence of the new recovery that we see coming.
[We’ll] be awash in vaccines once the Johnson & Johnson vaccine is out there. We do a lot of behavioral finance work, and there is this recency effect—where people get swept up in the here-and-now and can’t look two-to-three months out.Who will be a beneficiary?
Sports will be back bigger than ever. One of our two favorites is Madison Square Garden Entertainment [MSGE], which owns Madison Square Garden, the land around it, air rights above it, and the Chicago Theater. Everyone thinks there’s no future. The stock price is not much more than the cash on the balance sheet. I won’t be surprised if concerts are back at the Garden this summer and the Knicks are in the playoffs, and [Madison Square Garden] will surprise.
What’s the other favorite?
Lazard [LAZ]. The [initial public offering] business is booming. The SPAC [special purpose acquisition company] business is booming. Mergers and acquisitions are booming. I have friends who are investment bankers who say they haven’t been as busy as they are now. An economic recovery is coming, and these relatively low rates makes it easier to do transactions. Lazard has bounced back from lows in the spring, but it hasn’t participated in the recovery like the rest of the market. It trades at 10.4 times 2021 earnings, selling at a 30% discount. They have a big global brand, but with all of the indexing, there is a fear that asset managers are doomed to low-to-little growth.
Who has come out stronger from the pandemic?
We love media stocks; they have recovered strongly. People were absorbing all of the content that companies like ViacomCBS created—and MSG Networks [MSGN] has a regional sports network that has the rights to broadcast the Knicks and Rangers. Ratings are substantially better than people expected. Meredith (MDP) is also roaring back. It owns People magazine and local TV stations where local news is still viable content and available on all the streaming services.
Another is Mattel [MAT]. Not only are Barbie and Hot Wheels doing great, but Uno is doing extraordinarily well. There is still a lot [to improve]—Fisher-Price hasn’t fully recovered. American Girl is very valuable. Mattel will be able to use its [intellectual property] in ways people don’t believe. It has a lot of famous brands, and also a lot in the background that can be movies someday and have toy tie-ins.
Are you concerned about debt?
Because [media companies] did so well during the pandemic, and news companies did well with election dollars spent, they have been able to pay down debt. Six months ago, these looked like risky industries that were old-fashioned and overlevered.
What are you seeing in terms of buybacks and dividends?
In the past couple weeks, we have seen several companies, like Affiliated Managers Group [AMG], announce significant buybacks. Six months ago, they had suspended them because of Covid. Now, it’s starting to come back, and it’s a strong signal of the confidence that’s building in this recovery.
What companies did you pick up in the throes of the crisis?
Envista Holdings [NVST], a dental-product manufacturer, was the one we were waiting the longest to add. Vail Resorts [MTN] is a great brand with a real moat that’s hard to replicate. Another new position is BOK Financial [BOKF], a regional bank with branches throughout Texas and neighboring states. It has a great culture, and longtime chairman George Kaiser has built an extraordinary brand. It has rigorous lending standards and is often misunderstood [as being] dependent on the rise or fall of oil prices, but it’s much more diversified.
You have been vocal on race and wealth-gap issues. What is the CEO’s role in creating change?
There has been a sea change in Corporate America; it’s nothing like I’ve seen in the 38 years since I started Ariel. Literally every day, I’m getting calls from CEOs asking how we built such a diverse team at Ariel. They realize that to be competitive in the 21st century, they need a management team that looks more like America.
Companies also need to do a better job working with minority-owned businesses, especially in professional services [where they spend much more money] like law, financial, and technology. CEOs always want to talk about supplier diversity, but the economy has moved beyond that.
Is there a good example?
Exelon [EXC] is doing everything well; follow the playbook there. It keeps track of all its spending, so there’s transparency. It holds all professional service partners accountable for the diversity of their teams.
You also need diverse leaders at the top who are well respected within their community, so when they get in the boardroom they can lead like John Lewis talked about: When they see something not right, they feel the moral obligation to make good trouble. Also, make sure they have the time and freedom to be out at events and a visible leader in the community.
Thanks, John.
Write to Reshma Kapadia at [email protected]
