The flagship $2.1 billion Ariel fund (ticker: ARGFX), which Rogers lead-manages, focuses on small and midsize companies… Rogers’ willingness to stand alone cost him some investors during the financial crisis; the Ariel fund lost 48% in 2008, and investors pulled out a net $2.8 billion in 2007 and 2008. Those who withdrew assets missed the fund’s sharp recovery: Ariel returned 63% in 2009, beating the S&P 500 by 37 percentage points, and 95% of its peers. The Ariel fund is No. 3 in the Morningstar mid-cap blend category over five years, with average annual returns of 24%.
This no-load fund currently has a 1.03% expense ratio and used to charge a maximum 4.75% sales load until mid-1994. The fund beat its benchmarks, the S&P 500® (primary), Russell 2500™ Value and Russell 2000® Value indices, over the past one-year and five-year periods to March 31. However, it failed to do so in the trailing three- and ten-year periods. Since inception in November 1986, the fund failed to return more than the Russell 2500™ Value Index. Morningstar’s calculations indicate that the fund’s Sharpe ratio was higher than that of its primary benchmark only in the 15-year period. Consequently, the firm presently awards the fund only two stars.
Let’s take a closer look at the fund’s performance using the Alpholio™ methodology. The following chart demonstrates the cumulative RealAlpha™ of the Ariel Fund since early 2005:
The fund’s cumulative RealAlpha™ significantly declined in this period. The resulting annualized discounted figures were a negative 3.4% and 4.3% for the regular and lag RealAlpha™, respectively. At over 24.6%, the annualized volatility of this fairly concentrated fund (it currently holds only 42 positions and no cash) was quite high, especially when compared to about 21% of its reference ETF portfolio. This is further corroborated by the fund’s RealBeta™ of about 1.26.
The following chart shows ETF weights in the fund’s reference portfolio in the same analysis period:
The fund’s top equivalent positions were in the Vanguard Consumer Discretionary ETF (VCR; average weight of 29.9%), iShares Morningstar Small-Cap Value ETF (JKL; 24.2%), iShares Morningstar Small-Cap ETF (JKJ; 20.5%), iShares Global Financials ETF (IXG; 9.7%), iShares North American Tech-Multimedia Networking ETF (IGN; 4.1%), and Vanguard REIT ETF (VNQ; 3.6%). The Other component of the above chart represents a collective weight of four other ETFs with smaller average weights.
Based on the above analysis, it is clear that not only did the Ariel Fund significantly underperform on a truly risk-adjusted basis, but it could also be effectively replaced by a small collection of ETFs. This substitute ETF portfolio had a much better return and substantially smaller volatility than the fund.
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