We all know the tortoise beat the hare. Still, it's human nature to bet on the rabbit anyway. Burned investors who backed the bunny during the past few years should get acquainted with savvy value investor John Rogers and his outstanding ( ARGFX) Ariel fund. The firm's trademark is a turtle, its motto is "Slow and Steady Wins the Race," and its
Web site includes a link to Aesop's "Tortoise and the Hare" fable. Rogers, at the helm since the fund's 1986 inception, has racked up stellar performance: Its 10-year average annual return of 12.23% ranks in the top 17% among its peers, and the fund's three- and five-year rankings are good for the top 18% of all small-cap value funds, according to Morningstar. In today's 10 Questions, Rogers discusses where he finds bargains these days. In a bit of a surprise, the tortoise of investing sees a bargain in the highest-profile hare of the 1990s: Janus. What else is Rogers betting on? Read on. 1. Ariel's Web's site proudly displays a turtle icon with the motto, "Slow and Steady Wins the Race." How do you put that philosophy to work at your fund? We're long-term investors. We try to buy a company for the long term. We look for well-managed companies that have dynamic leadership, have demonstrated the ability to attract and retain good people, provide quality products for its customers. We also pay close attention for a strong balance sheet. We want to make sure they're in the right industry -- one that can allow a company to grow 12%-15% a year consistently. Finally, we want to make sure we buy the stock at the right value. We are looking for companies with low price-to-earnings multiples and a low price relative to their intrinsic value of the business. 2. How do you assess a management team? What are the hallmarks of a stellar executive suite? Well, it's hard to find. You want managements that communicate effectively. Where you can understand and get excited about their vision.
Berkshire Hathaway's ( BRKA) Warren Buffett is the classic. He writes so wonderfully in his annual reports, and he communicates so wonderfully at the annual meetings. He's the gold standard. How a leader communicates the vision of the company tells you a lot of about his integrity, honesty and ability to get things done. Beyond reading and listening, we meet with them face to face. We also check references, talk to industry experts, Wall Street analysts and customers and competitors. 3. Unlike most other funds, the Ariel fund had one of its worst years in 1999 -- declining 5.8% -- and has been a much stronger performer subsequently. How difficult was it to go against the conventional wisdom in that topsy-turvy year, and what investing lessons did you learn from the process? Did you get a great deal of pressure from shareholders to jump into tech and the like? We did get a fair amount of pressure from shareholders, as well as friends in the industry, family, some employees who worked at the firm at the time. But I think it proved our basic thesis: The most successful investors are the ones that are the most disciplined, who stick to their beliefs through thick and thin. And that basic theme was reinforced over the past three years. The other important lesson: You can't let other people shape your opinion. You have to think independently. That's critical to successful investing. 4. The top holding in your fund is one that typically turns up in mutual funds run by Buffett adherents -- Markel (MKL). Would you tell me a bit about the stock and why you like it as much as you do? Do you think it still has a good deal of upside potential? Markel is a property-casualty insurer. We like that business a lot, and Markel is very good at it. They've had a long history of success. They had a bit of a misstep when they bought Nova, which didn't work out so well. But they're cleaning it up and getting things back on track. I like the way they communicate their vision to shareholders. They epitomize a Buffett-style of management. I visited with one of the senior managers when I was in Omaha around the time of the Berkshire meeting. Whenever you're around Merkel's management, you can see how hard they work and how well they understand the business and investing their capital We've held them for about two or three years. We do still think it's cheap, it's still selling at a significant discount to what we think is the private market value of the company -- roughly 20% discount at this time. The stock traded Friday at $246.34.
5. What do you anticipate for the market, and the market for small-caps specifically, over the next year or so? And do you take any macroeconomic factors into account in your stock-picking process? We really don't have a strong macro overview. We're bottoms-up stock pickers. That said, there's a case to be made that over a three-year period, the economy will come back eventually. It will come back stronger than anticipated. I think you will see P/E multiples will expand. The neglected part of the market, which is represented by small-caps, will come out of this very strong. What I think will be a catalyst is seeing a lot of small-caps going private or a lot of them being acquired. That will be a catalyst, but it's going to take a little while. 6. Speaking of small-cap buyouts, what do you make of some of the recent moves by deep-value hunters into the distressed telecom area, such as Leucadia National (LUK) offering to buy WilTel (WTEL)? Do you see any value there, or are you shying away? We have just a little exposure with Andrew Corp. ( ANDW) in Chicago. I think it's an area worth exploring so long as you have an understanding of the industry. That's what's key: Stay within your circle of competence. 7. What does look good to you in the small-cap arena? We spend a lot of time in the financial-services area. We like the mutual fund companies and money managers -- that's an area where we've spent a lot of time researching. In particular, the two relatively new names in the portfolio are Waddell & Reed ( WDR) and Janus ( JNS). Both are well-known brands in the fund industry, which has been out of favor because of the dismal results of the past few years. This creates a real opportunity. As an investor, how do you factor in the high-profile departures within the ranks of Janus in recent months? It's part of the process of the company's efforts to right itself. I look more at the chief executive, making sure that the company has the right kind of leadership. That's of the utmost importance. Portfolio managers come and go. The company really seems to be building a strong brand and a strong infrastructure. 8. A few small food companies in the fund: Smucker and McCormick. What drew you to these stocks? J.M. Smucker ( SJM) and McCormick ( MCC) are classic Ariel companies. They have great, strong brands. They are No. 1 in their fields. They have true barriers to entry. They have pricing power. They have excellent management and a strong corporate culture that's been instilled over a long time. And they have a high degree of stability and consistency that we like to see. 9. Do you think they might be on the list of smaller companies that could get acquired, or at least approached? That's an excellent point. I think at some point they might. But you still have family ownership. The Smucker family is still involved; and the family has been major shareholders in McCormick. I think with family owners, they are a little slow to come around to strategic transactions. But that doesn't mean it can't ever happen. 10. Which companies among the 39 stocks in your portfolio enable you to sleep easy at night? We talked about two: Smucker and McCormick. I'd say a third would be Lee Enterprises ( LEE), which is the No. 2 holding in the fund. Lee is a great newspaper company in the Midwest. That's one of our favorite sectors.