Q&A
% THE DOW JONES BUSINESS AND FINANCIAL WEEKLY
What Ariels John Rogers
Is Buying Now
The value investor has trounced his benchmark and won Warren Buffetts annual poker tournament.
By JOHN KIMELMAN
John Rogers Jr., the founder and
chairman of Chicago-based Ariel In-
vestments, is an unapologetic stock-
picker at a time when index funds con-
tinue to take share from his kind.
I worry that our industry hasnt
done an effective job of defending it-
self and showing the value that is added
by active management, Rogers said
during a recent interview with Barrons.
com.
Luckily for Rogers, his performance
numbers at Ariel have helped keep pas-
sively managed Leviathans like Van-
guard and BlackRock at bay.
The Ariel Fund (ticker: ARGFX), the
flagship $2.3 billion value portfolio that
Rogers himself oversees, has generated
a 35% return over the past 12 months,
beating Morningstars mid-cap-blend
benchmark by roughly seven percent-
age points. The fund has also bested its
benchmark by almost three percentage
points annually over the past three and
five years. It charges annual expenses
of 1.02%.
Rogers, 58, is also noteworthy for
his accomplishments outside of invest-
ing. A Barrons Profile of Rogers in 2014
pointed out that as an undergraduate at
Princeton University, he won $8,325 as
a contestant on Wheel of Fortune and
$10,000 playing the New Jersey state
lottery.
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An avid poker player, Rogers won
the top prize at Warren Buffetts Net-
Jets Poker Invitational in Las Vegas in
November 2015, beating out Buffett and
176 other competitors.
As a varsity basketball player at
Princeton, the six-foot-tall Rogers
played guard for legendary coach Pete
Carril, who he says kept him around
because of his overall hustle.
In later years, Rogers would engage
in regular pickup games with fellow
Chicagoan Barack Obama before and
during Obamas years in the White
House.
If not for his fragile hips, Rogers
would still be playing the game. These
days, he has to settle for rooting on the
Chicago Bulls, the WNBAs Chicago
Sky, and, of course, the Princeton Ti- Managers Bio
gers.
Name: John W. Rogers Jr.
Many stock jockeys are reluctant to Age: 58
talk about what theyve been buying Title: Founder, chairman, and chief in-
lately, preferring to simply tout stocks vestment officer of Ariel Investments
that theyve held for a while. But Rog- Education: Princeton University, A.B.,
ers was generous with both his time and economics
his latest picks. He was also willing to Hobbies: Playing poker; rooting for his
provide the names of three fund manag- favorite basketball teams: the Chicago
ers he admires the most. Bulls, the WNBAs Chicago Sky, and the
Princeton Tigers
Barrons.com: I know about some
Rogers: Jones Lang LaSalle (ticker:
of your biggest legacy holdings
based on the last reporting period. JLL) is one stock that weve been add-
But I think our readers want to ing to [in December and early January],
know what youve been buying though weve owned it for a long time.
lately. [Editors note: The Chicago-based com-
(over p lease)
Fund Facts
(as of Feb. 27, 2017)
Ariel Fund (ARGFX)
Assets: $2.4 billion
Expense Ratio: 1.02%
Front Load: None
Portfolio
Turnover: 20%
Yield: 0.26%
Source: Morningstar
Top 10 Holdings
(as of Dec. 31, 2016)
Zebra Technologies (ZBRA)
Lazard (LAZ)
KKR & Co. (KKR)
CBRE Group (CBG)
Kennametal (KMT)
MSG Networks (MSGN)
Tegna (TGNA)
Bio-Rad Laboratories (BIO)
Jones Lang LaSalle (JLL)
Royal Caribbean Cruises (RCL)
Source: Morningstar
pany provides commercial-real-estate
and investment-management services
worldwide.] This is one of the two big
real-estate services companies in the
world, with CBRE Group [CBG] being
the other one. They are leaders when
it comes to the outsourcing, when a big
company wants to outsource the real
estate management to an outsider. JLL
is the prime beneficiary of that phenom-
enon. They are also a huge name in the
institutional money management of real
estate assets.
Why is this your kind of business to
own?
Well, one, it has great recurring reve-
nue. People are always going to need
to lease properties, they are going to
buy and sell real estate, and they need
people to manage their real estate.
These are businesses that fit that War-
ren Buffett model. They are going to
be around 20 years from now doing the
same thing. There is a moat around the
business. This really is a large duopoly.
There are only two companies that can
do this for big, giant worldwide com-
panies.
Theyve also done a great job of di-
versifying around the world geographi-
cally. Theyve also been doing more and
more of the outsourcing in the real es-
tate investment-management business,
so youve got both product diversifica-
tion as well. That should mitigate the
volatility in earnings that we saw in the
last downturn, and the market hasnt
gotten that yet. The final thing is that
the stock is still very, very cheap. It is
selling, in our view, at 10 times next
years earnings and about a 35% dis-
count to what we think the company is
worth if it were ever sold.
Ive also have a brand-new idea
and we dont have a lot of new ideas,
since our portfolio turnover is just 20%
a year. Its a company called Keysight
Technologies (KEYS), which was spun
off from Agilent Technologies (A) in
2014. Its a leading provider of elec-
tronic design and test solutions in com-
munications in the electronics industry.
Why do you like this business?
They have a great niche in this sector.
They are leaders in the making of test
and measurement equipment. It was
starved for capital when they were part
of Agilent. It didnt have a chance to
truly beef itself up with the appropriate
innovation and capital improvements to
keep the business as world-class as it
needed to be. Now that they are now a
stand-alone public company, they have
the ability to focus on how to go to mar-
ket with the best products, have the
best innovation, and make the appropri-
ate investments in their infrastructure.
Keysight has a long history going
back to being a division of Hewlett
Packard even before Agilent. Its got
great customers throughout the world,
great technology, and for a technology
company, it is really, really cheap. Its
about 15 times next years earnings and
a 20% discount to its private-market
value.
KKR & Co. (KKR), the New York-
based private-equity firm, is a
large holding of yours. Its per-
formed very well lately. Why do
you like it?
I was visiting with management re-
cently, and even with all the challenges
that hedge funds are facing, am more
convinced than ever that private equity
adds value. Its hard to make a case that
it is not worth the added fee that you
pay for private equity, and as you know,
really good private-equity firms like
KKR not only provide excellent perfor-
mance, but part of the way they do that
is by working with management teams
to make the right capital-allocation de-
cisions. Private equity is an extremely
good asset class, and KKR is a leader
in that area.
Id like to pull the lens back from
individual stocks and talk about
the debate that never ends: ac-
tive versus passive management.
In recent years, the rise of index
shops like BlackRock and Vanguard
and performance troubles for
active management have tra-
ditional mutual funds on the run.
How does this trend affect Ariel,
regardless of how well you might
do against benchmarks?
This is not a new phenomenon, but this
is probably, in my view, the biggest on-
slaught that I have seen, and I worry
that our industry hasnt done an effec-
tive job of defending itself and showing
the value that is added by active man-
agement.
Ive read that you consider A Ran-
dom Walk Down Wall Street by
Princeton professor Burton Malkiel
to be a highly influential book in
your life. It popularized the belief
that stock markets are fairly effi-
cient, particularly in the large-cap
space where the information flow
is greater, and that investors are
perhaps best served by low-cost
index investing.
I actually got to know Prof. Malkiel
while at Princeton, and I love that book.
Part of the reason I started this com-
pany is to focus on smaller and midsize
companies that are undervalued.
Would you go as far as telling an
investor that for their large-cap
investing needs, just buy an index
fund and leave the active manage-
ment for smaller-cap stocks?
I think that in general that makes sense,
but I would add one point: There is also
research from the academic world that
shows concentrated portfolios do well.
You want to not only be in smaller-cap
companies, but I think you also want to
be in concentrated portfolios. Warren
Buffett often talks about the value of
concentrated portfolios, that investing
shouldnt be like Noahs Ark where you
own two of everything. You want to in-
vest in what you know and in those sec-
tors and industries that you understand
well.
But Buffett also made headlines a
few years ago for writing in a Berk-
shire shareholder letter that, when
he dies, he would recommend his
heirs get their stock exposure from
a Vanguard Standard & Poors 500
index fund. Would you give similar
advice to your heirs?
No, I believe in active management. I
would suggest that they put money with
three money managers that Ive learned
to believe in. They are Mario Gabelli,
of Gamco Investors ; Tom Russo, of
Gardner Russo & Gardner; and Eddie
Brown, of Brown Capital Management.
I know youre a bottom-up stock
picker, but has the election of
Donald Trump to the presidency,
BARRON'S ONLINE: JWR Favorite Stocks (EPRINT) 3/17 (EXP 9/28/2017) AI-514
along with continued GOP control
of Congress, altered the way you
invest?
It has altered our research and portfo-
lio-management meetings only in that
we are spending an enormous amount
of time now trying to figure out which
companies will be most impacted by the
changes in the tax code in particular
and the changes in the regulatory en-
vironment. We have to explore deeply
how these profound changes will impact
every company in our portfolio and ev-
ery sector we have chosen to invest in.
Judging from the big rally since
the election, investors seem com-
fortable with the new administra-
tion. Are you worried that Trump
will take actions that might desta-
bilize the markets and economy?
I look at it differently than your ques-
tion implies. I think the markets over
the past eight years have had a remark-
able recovery since the Obama adminis-
tration took over. Unemployment rates
are low, and growth has started to build.
Obama set the stage for the remarkable
recovery that I think is going to con-
tinue. I think President Trump will just
build on what President Obama has al-
ready created and will just continue the
recovery. Also, as Warren Buffett often
says, this country always finds a way to
overcome its obstacles and get back on
the growth track.
I just hope that [President Trumps]
approach to international affairs doesnt
get us into some type of major disrup-
tion. I worry about him not being so
experienced in world affairs.
Thanks.