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This Fund Wins the Race Slow and Steady

07/06/2011 11:30 am EST

Focus: FUNDS

Janet Brown

President, FundX Investment Group

Sometimes it pays to find good, solid investments and stick with them, like this mutual fund, reflects Janet Brown of NoLoad Fund*X.

When we buy a fund, we’re never sure how long it will remain highly ranked. Some funds only continue to outperform for a few months, while other funds, like Ariel (ARGFX), keep holding on like wallpaper and become longtime positions.

Ariel started to rise in our rankings when the market rebounded off its bottom in March 2009. With remarkable persistence, Ariel has gained over 80% since we purchased it in May 2009. That’s almost double the 47% gain of the S&P 500.

We also switched into several other funds shortly after the market bottom, but none have had quite the staying power of Ariel. (Oakmark International (OAKIX) and Rydex S&P 500 Equal Weight (RSP) were bought at the same time as ARGFX, and both lasted over a year in the model portfolio.)

One of the reasons we diversify across more than just a few top-ranked funds is to increase the probability of latching on to a long-term winner like ARGFX.

Small-cap to mid-cap funds like Ariel have been among the top performers of the market during much of the market’s rebound. Ariel is somewhat unique, though, in that it is also socially conscious, screening out companies that sell tobacco and handguns, and considering each company’s environmental policies as a component of its investment process.

The fund tends to be among the more volatile funds in Class 3, doing very well in up markets and poorly in down markets. This may appear to fly in the face of its motto, “Slow and Steady Wins the Race,” but from Ariel’s perspective, this motto applies to the manager’s long-term orientation as a value-oriented stock picker.

The managers certainly have a point of view. They take the portfolio where they see value with potential for growth, and their industry weightings can veer away widely from those of their benchmark indexes.

For some time, they have entirely avoided energy and utilities—to their disadvantage—and have overweighted their exposure to consumer discretionary and consumer staples to their great benefit.

Given the exceptional performance of this fund in our portfolios, we were surprised that Morningstar only gives ARGFX two stars. Perhaps Morningstar got caught up in the fund’s poor performance in 2008, and therefore discounted the fund’s terrific rebound.

If that’s the case, the fund could garner more stars later this year. Of course, by that time we may have moved on.

Since May 2009, Ariel’s rank has fluctuated, but never sank into the sells. During April and May ARGFX slipped in performance relative to the overall market, and its rankings slipped as well.

More recently, it’s had a nice rebound since mid-June, and it is still a Hold in our ranks. We wouldn’t buy this fund at this point, but it’s doing well enough for us to continue to own it.

No fund maintains its leadership forever. That said, Ariel has been a gem and we are happy to maintain our position so long as it maintains leading performance.

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