Should I Invest with Ariel Investments?

One of the many things predominately Black communities suffer from is a severe lack of jobs and investment. Both of those things are primarily derived from businesses, and the more Black people can support Black owned businesses the more likely those businesses will grow and invest in jobs and infrastructure in the communities they serve.

Ariel Investments is an example of this. Arial Investments is the largest, if not the only, Black owned investment firm in the United States. It is based in Chicago and headed by John Rogers and Mellody Hobson. Mr. Rogers and Ms. Hobson are involved in a number of initiatives to improve African American’s financial knowledge including producing the annual Black Investor Survey, contributing to articles to Black Enterprise, on air segments to the Tom Joyner Morning Show and supporting and investing program at Chicago Public Schools.

I don’t think investment firms like Fidelity, Vanguard, T. Rowe Price, etc. are as intimately involved with supporting the Black community as Ariel. Yet, I have all money my money invested in firms like these and none with Ariel. I have to admit that is really backwards.

Before I go give all my money Ariel there s still one major concern: investment returns. Money is not white or black, “money be green” as the late great D’angelo Barksdale would say. Just as I’m not inclined to park my money in high cost, poor performing mutual funds at Fidelity, Vanguard, Schwab, USAA, etc. the same must be said for Ariel. Their mutual fund options must be just as competitive for me to consider them as an option.

“Money be green.” – D’angelo Barksdale

Ariel Focus Fund

I’m going to examine two mutual funds in my analysis, the first being the Ariel Focus Fund (ARFFX). According to Yahoo! Finance and Morningstar this mutual fund falls in the Large Cap Value category. This is different from how Ariel describes the fund on their website, they declare the fund invests in “undervalued companies across all market capitalizations.” No disrespect to them, but I’m going to go with Yahoo! and Morningstar’s classifcation so I can more easily make some comparisons.

I’m going to compare Ariel’s Focus Fund to Vanguard’s US Value Fund (VULVX) and TIAA-Cref’s Large Cap Value Fund (TCLCX), both of which are in the large cap value category:

Both the Vanguard and TIAA-Cref funds have lower expense ratios, higher Morningstar rating and are much, much larger in total assets. Things are not looking good for Ariel, but the main factor still remains: historical performance.

Ariel’s ARFFX beats the other two funds twice as many times by having the highest returns six out of the 12 years examined, the other two funds have the highest returns for only 3 years each.  ARFFX has one outlier year in 2015 (-25% return) which really drags down the overall average performance when compared against the other two funds. Discounting 2015 ARFFX is the winner in in the above comparison, producing returns on par with or better than its competitors.

Although I don’t like it’s higher fees and low Morningstar rating I would still invest my money with ARFFX. What I have to research now is if there is place for a Large Cap Value fund in my portfolio. I currently have Large Cap Blend funds and I need to analyze is it better to have individual Large Cap Value and Growth funds as opposed to a Blend fund – and if so what economic environments does one typically outperform another.

Ariel Discovery Fund

According to Yahoo! Finance and Morningstar the Ariel Discovery Fund (ARDFX) is categorized as a Small Cap Blend (combination of value and growth) fund. Lets compare this fund against Fidelity’s Small Cap Enhanced Index Fund (FCPEX) and Fidelity’s Small Cap Stock Fund (FSLCX).

Arial is a loser here again with higher fees and only an one star rating from Morningstar. Let’s examine the table of annual returns below to see if the story gets any better:

Between the two Fidelity funds, FCPEX is a far better option than FSLCX when it comes to historical performance, Morningstar rating and expenses. Now with FSLCX out the way, let’s compare Ariel’s ARDFX to FCPEX. Ariel’s fund has fees which are almost twice as high and an abysmal 1 star rating vs. Fidelity’s admirable 4 star Morningstar rating. Its hard for me to compare the annual performances because Ariel’s fund only has a 5 year lifespan.

Typically I wouldn’t invest in a fund with such a short track record, I need a lot of history so I can see how it performed in both bull and bear markets. I’m alarmed by the back-to-back 12% drop in 2014 and 31% drop in 2015. That’s equivalent to a 40+% drop in value over 2 years – you’ll need a 66% gain just to get back to even! Examining the two Fidelity funds one could surmise that 2014 and 2015 were tough years for small cap stocks, but Ariel’s fund did not weather the storm very well at all. This performance along with the relatively high fees, short history and low rating would keep out of this fund.

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