The Distinguished Speaker Series Advisory Group welcomed John Rodgers, CFA, at the University Club of Chicago on February 21, 2023, in a special event to celebrate Black History Month and John’s lifelong contributions to the investment profession. John is the Chairman and Co-CEO of Ariel Investments, which he founded in 1983. At Ariel, John brought his focus on patient, value investing within small- and medium-sized companies. Today, it is a global, diversified asset management firm with 124 teammates in offices across Chicago, New York, San Francisco, and Sydney. The firm’s flagship fund—Ariel Fund—has one of the longest track records in the industry, and John is the longest-tenured portfolio manager in the mid-cap value category.
The lunch presentation was formatted as an interview, moderated by Arthur Olunwa, CFA, Head of U.S. Portfolio Management at Aflac Global Investments. The following presents a synopsis of the questions and answers that formed this lively and informative discussion.
Value investing was challenging in 2022, but has performed great in 2023, how long do you think it will continue with an aggressive Fed?
Value has been tough, and many of us managing in this space can be characterized as “dinosaurs” as we have not seen a new generation coming into the value space. Being a contrarian, makes this an opportunity – we can make a difference for our clients. Ultimately this is just the beginning of a run that will last a few years.
Do you think whether we have a hard or soft landing, there will be more opportunities for value?
Value tends to be over exposed to traditional manufacturing, not booming sectors. So we want to find good, old-fashioned companies to invest in. A good example of this is Housing, which is currently getting crushed, but even with a recession, there will be a recovery.
What sectors do you like right now?
Right now we like companies that have everything to do with the home, companies like Leslie’s Pools, Residio which is the home security business spun out of Honeywell, ADT and Generac. We also like companies in the leisure space, such as cruise lines or MSG Entertainment.
Is there a maximum weight for any of these positions?
We run a concentrated portfolio but we like to run the portfolio in a way that allows us to sleep at night. I find it hard to sleep when we have more than 6% in any one stock or more than 10% in any one sector.
Chicago has been a portal for wealth in the African American community can you share some of the history you’ve seen?
John grew up in Hyde Park and got to know some of the giants of black-owned business. The history of many black businesses in Chicago centered around publishing, consumer products and banking. These businesses created generational wealth and supporting efforts to effect change in politics and the broader community.
What happened? How did this change?
The broad shift to service businesses which are big wealth creators, but supplier diversity efforts generally don’t create wealth. Many companies and organizations focus on diversity centered around businesses like construction or janitorial services which are low margin businesses that have much greater difficulty generating wealth. The University of Chicago recently introduced a shift in focus away from “supplier diversity” to “business diversity” where the focus is expanded to include the professional services, such as law firms, accounting firms, which are much bigger wealth creators. Now the challenge is to expand this to all anchor institutions, such as universities, museums, etc. to open all of their spending to diverse businesses.
Since George Floyd we saw a ramp up in this area, but do you think the opportunity is closing?
The Civic Committee is starting to look at this, in cooperation with McKinsey and others, to look at how money is spent in Chicago. Approximately $80 billion is spent in higher-margin services businesses, while $25 billion is spent in lower-margin areas such as construction. The goal is to shift more of the services toward diverse business providers. McDonalds and Exelon have been very supportive of these efforts.
You serve on a number of Boards for very large companies, why is it important to have minorities on Board of Directors?
It’s important to have different perspectives, this is just common sense. Baseball became a much better with Hank Aaron and our own Ernie Banks, the same is true for basketball and other sports where more diversity added to the quality of the game. Boards and companies must expand their search for talent, it’s a no brainer.
Ariel recently started a private equity firm called “Project Black” can you tell us about it?
Project black is a PE firm focused on building large-scale minority-owned businesses. McDonald’s is great example as five of the top-20 minority owned businesses in Chicago started as McDonald’s suppliers, creating multi-generational wealth as they identified managers and created opportunities for them. On of the lessons is that access to customers is just as important as access to capital.
Income inequality has become a big issue, is there anything the Federal or state government can do to address this?
There is a gap, and it’s getting worse. Since the early 1990s, black-owned wealth has decreased by approximately10%, while white-owned wealth has increased by 90%. We believe that government can use its power to push anchor institutions to do the right things. As an example, when John served as the President of the Chicago Park District, there were eight museums that were located on park district land received the benefit of this arrangement without accountability for how they spent their resources. He pushed to use more minority-owned law firms, investment banks, etc. Ariel has established the Black Corporate Directors Conference featuring the “Conscience of the Conference” that brings together many of the key players from the Civil Rights movement, including those who marched with Dr. King. This reminds us of our responsibility to continue the fight, and as Congressman Lewis noted, to “make good trouble.”
The formal interview questions were concluded and the audience was asked for the next few questions.
Financials have been a big piece of value investing, what do you currently think about the banks?
We tend to focus on the fee-generating part of financial services, such as private equity, CBRE or JLL.
Looking at the universe of value, do you need to take a top-down view first?
Macro is really second, as Ariel takes a bottom-up approach but we still need a macro perspective. Sometimes we make a big macro call, like on inflation not being transitory, but this is very rare. We were right and it helped us early, but where we were wrong was on cyclicals that were already cheap got crushed by inflation and recession pressures. Another area we look at is big, sweeping changes in the economy, often driven by technology. Examples such as the decline of newspapers, retailers being displaced by Amazon, the shift from cable to streaming services – sometimes these calls are hard to make because the stocks get so cheap, with good reason.
Amazon, e-commerce, how is Ariel incorporating other big trends like ESG and climate change?
We have always been a socially responsible in our investment choices, but as ESG was evolving, truly long-term investors were working with companies to make their efforts stronger. Customers, employees and investors are all moving this way. We view this as a “win, win, win” for companies and we have a full team looking at ESG, incorporating it in all of our research.
What are you most proud of in your career and what advice would you give to some of the younger members of the audience?
I am proud of the quality of the team we have built at Ariel and we have many alumni who have moved off to make a difference in the world. As for advice to someone starting out, if you have the opportunity, work in an endowment office early in your career to gain a long-term perspective. Read, read and love it! There is great importance to always turning one more page, to always learn more about the companies you invest in, to know them better than your peers.
What do you think your legacy will be?
The team and the impact they have had on the world, and you can do it with diverse teammates.
The event concluded, thanking John Rogers for his time and willingness to share his insights and inspirational wisdom with the audience.