Staying cool

When John Rogers Jr. founded Ariel Capital Management Inc. in 1983, he was 24 years old, had little investment experience and only one other employee, and needed to convince people to trust him with their life savings. It was not an easy sell.

But Rogers, who today has 73 employees and manages $14 billion in assets, swayed investors by branding his firm philosophy as patient, slow and steady. He even sported a tortoise as the corporate logo, and named his newsletter “The Patient Investor.”

“It was really hard to gain credibility without a track record and being youthful,” Rogers says. “What ultimately overcame that was people could see the passion strategy we had for our investment strategy and philosophy.”

The bulk of Ariel’s business is in its no-load mutual funds, which are made up of only small or mid-cap companies. Smaller companies have been Ariel’s focus from the beginning, Rogers says, even when such investing wasn’t popular with the big firms.

Rogers spoke with Smart Business about the state of mutual fund investing and how his firm emerged unscathed after the Internet bubble burst.

How has mutual fund investing changed in the last 10 years?

All of us in senior management are spending more time thinking about compliance issues and legal issues than ever before. What we’ve done at Ariel is to delegate that to Mellody Hobson, our president, who really oversees all the operations, legal, financial part of the shop, and that frees me up to be chief investment officer.

It means you have to structure your organization to make sure you have enough lawyers and compliance officials to make sure you stay on top of all the changing rules and regulations.

Which regulation has impacted Ariel most directly?

The one that concerns us the most is you have to be very careful what you write in your quarterly letters to shareholders. Under some of these interpretations, you always have to worry that someone could come back and sue you based upon something they read in one of your publications.

We come from the perspective that we’ve always wanted to communicate clearly and openly and transparently with our shareholders, and that’s why we write a quarterly letter even though we don’t have to. You can do it twice a year; we’ve always chosen to write it four times a year.

It’s a little investment thing where we’re spending a lot of time now thinking, do we have to ratchet back some of the creativity in our written work because of this new environment?

Why have you chosen to focus only on small and mid-cap companies?

When I started the firm almost 21 years ago, I had a strong belief that small and mid-sized companies could grow faster than larger companies because they’re smaller, more nimble; they’ll be able to grow more consistently. And at the same time, hopefully, you could do original, creative research on smaller and mid-sized companies and buy them while they’re inefficiently priced, before all the big organizations found out about them.

You’ve positioned Ariel as a “slow and steady” investment firm, but these smaller companies are usually associated with higher turnover. How did this philosophy evolve?

We’ve had the turtle logo and the patient investor theme from the very beginning, since 1983. I was 24 when I started the company, and I felt the need to assure potential investors that I wasn’t a gunslinger or risky investor, but I was gong to be a more prudent, patient, disciplined type of investor. So I got the idea to name our newsletter “The Patient Investor” and stuck with that theme ever since.

Our turnover is very small. Our typical turnover is about 20 percent a year, which implies we own the average company for about five years. You’re right, especially when we started the company, there were not a lot of value, long-term investors in small caps.

We were fairly unique back then. There’s more competition now than ever, but still most smaller cap investors are more aggressive investors.

What were some of the challenges you faced in those early days?

Being young was clearly a major challenge. I even looked younger than I was.

I didn’t have a track record. I had never done money management before, so you’re trying to convince people to trust you with their savings. It was really hard to gain credibility without a track record and being youthful.

What ultimately overcame that was people could see the passion strategy we had for our investment strategy and philosophy. They could hear the discipline and the focus we had when we explained our strategy, and slowly but surely, we started to build a track record. Those first few ideas we talked about really turned out well.

What is the biggest misconception consumers have about investing?

The biggest misconception, clearly, is past performance has a lot to do with future performance. It’s the strangest thing, but it’s a clear misconception. You see it all the time both in mutual funds and individual investments.

If you look back to the bubble years a couple years ago, everyone bought the hot funds that had been up 100 percent the year before. Of course that was the worst place to invest. They bought the hot stocks from the Internet because they had gone up and up, and of course those stocks collapsed rapidly.

The exact opposite happened a year ago. Everyone was down in the dumps and saying the market was never going to come back and people weren’t going to get back in the market and you shouldn’t invest in technology. And what’s happened? The market has boomed the last 13, 14 months, and technology stocks have led the rally.

What was your attitude during the Internet bubble?

We couldn’t figure it out. We’d never seen anything like this; it doesn’t make sense. Our view was, we’re going to stick to our core beliefs, we’re not going to get swept up in this euphoria and fall into that trap. That was something that was hard to do, but it was important that we did it.

People would ridicule you for being too conservative, buying the boring, dull stocks and missing out on the hot computer concepts or the latest PDA or Internet concept. I remember reading one article right at the height of that period talking about all the money people in Silicon Valley were making and all the new issues that were occurring. You just saw that people were totally obsessed with how to get rich quick, no longer thinking about how you build great company.

Ultimately, businesses succeed and thrive and grow when they’re adding value for their customers.

How to reach:
Ariel Capital Management Inc., (312) 726-0140 or