The fruits of discipline: John W. Rogers Jr. and Ariel Capital Management have harvested huge returns through a `slow and steady' approach to asset management. (B.E. Financial Company Of The Year).

Every weekday, from his offices on the 29th floor of the AON building in Chicago, John W. Rogers Jr., chairman and CEO of Ariel Capital Management Inc./Ariel Mutual Funds, carefully plans and executes his "slow and steady" revolution. He and his asset management firm have been bucking investment trends on Wall Street for 19 years, managing the Ariel family of mutual funds through an unwavering commitment to the disciplined principles of value investing. They buy strong companies with solid management that have fallen out of favor and hold them until their stock prices climb to the true value.

This philosophy has meant that he has had to endure dry spells when his firm was out of sync with an investment community that didn't value his approach to stock picking. That is, until now.

During one of the most difficult economic environments in more than a decade, the wisdom of Rogers' patient approach to investing is bearing fruit. Lipper, the Denver-based mutual fund research firm, recently rated the flagship Ariel Fund (ARGFX), which Rogers manages, the No. 1 small-cap value fund in the country based on performance over the past 15 years. Morningstar, the Chicago-based mutual fund research firm, recently gave Ariel's mutual funds its top five-star rating for performance.

These funds have performed so well that had you invested in the Ariel Fund or the Ariel Appreciation Fund (CAAPX), which invests in mid-cap stocks, you wouldn't have felt the effects of the tech wreck and dotcom bomb, the recent recession and bear market, or the market volatility caused by Sept. 11. Lipper Research Analyst Jim Shirley says that as of April 11, 2002, the one-year return on the Ariel Fund was 25.09%, with a three-year average return of 17.62%. The Ariel Appreciation Fund had a one-year return of 25.53%, with a three-year average return of 12.90% for the same period. Those are stellar returns during a period when most mutual funds have been unable to harvest any positive returns.

Moreover, business is booming. The firm's assets under management grew a bounteous 51.38%, from $5.165 billion in 2000 to $7.819 billion in 2001, making it the No. 1 company on the BE ASSET MANAGERS list. And the firm has already reached the $10 billion mark for 2002. Because of its phenomenal growth and emerging leadership in the investment community, Ariel has been named the 2002 BE Financial Company of the Year.

ROGERS' SLOW AND STEADY STYLE

For years, the money management firm has managed equity and fixed-income investments for institutional and individual clients. In fact, roughly 75% of the firm's managed assets have come from the pension funds of government agencies, foundations, public entities, and major corporations like Raytheon and Coca-Cola.

Ariel is driven by Rogers' style of management. His strategic vision, competitiveness, and passion for precision have taken root in all operations of the firm. He has built the enterprise slowly, handpicking many employees himself while crafting a team culture that breeds loyalty, productivity, and performance. Leaning heavily on the leadership of Vice Chairman and Co-Chief Investment Officer Eric McKissack, and President Mellody Hobson, Rogers has guided the firm to initiate new-employee training measures and increase its visibility as an industry leader. Maintains Rogers: "I feel like we're hitting on all cylinders."

But now, with a bright--and favorable--spotlight turned on the firm, Rogers has some rather ambitious plans: to become a big fish in a big pond. "We want to build a national brand around Ariel Mutual Funds, where individual investors will think about Ariel first when it comes to investment choices such as IRA rollovers, money they put aside for their kids' college tuition, or their first home," he says. "We want people to have confidence that our brand will give them a high-quality product and good performance."

Investors seem to be getting the message. Take the Appreciation Fund. Since 2000, it has doubled assets to roughly $1.3 billion. McKissack, who manages the fund, says Ariel's overall increase in assets is due to investors' willingness to shift money from one investment to another to maximize returns, as well as the media exposure about the fund's stellar performance. Another big factor, he says, has been their relationships with "financial supermarkets" like Charles Schwab and Fidelity Mutual Funds. "Rather than us going out and selling individually, some of the money comes in directly through [Schwab and Fidelity]," explains McKissack. "When people go into their programs and pick funds that they want to invest in, they pick us."

CAREFUL CULTIVATION OVER TIME

Putting together a firm that can take on the mutual fund giants and win isn't easy. It has taken a significant amount of time and substantial effort to plant the right seeds. Rogers, McKissack, and Hobson share the major responsibilities of running the company. The triumvirate collaborates on long-term strategic initiatives and internal operations, as well as collectively promotes Ariel's public face. Their marching orders are carried out by an experienced management team, most with eight years of experience or more at the firm. For instance, Ariel's Vice President and Head Trader Cheryl A. Carrie has served eight years; Vice President and Chief Information Officer Roger P. Schmitt has been with the firm nine years.

Hobson, 33, the extrovert of the bunch, oversees the firm's messaging and marketing, which she refers to as "the look and feel of Ariel." It was her idea to push the symbol of the tortoise from Aesop's fables and his mantra, "Slow and steady wins the race," as a key part of Ariel's branding. Working closely with Ariel's marketing team, the Princeton graduate aims to build the Ariel brand by using a far-flung arsenal: investor education seminars, print advertising, and the highly regarded Ariel Mutual Funds/Charles Schwab & Co. Inc. Black Investor Survey, which tracks the investment patterns of African Americans and their white counterparts. Hobson, who regularly extols the virtues of long-term investing as a financial commentator on Good Morning America, says: "We want to build an institution that will outlive us and have a dramatic and meaningful impact on our community and investors."

As the caretakers of Ariel's investment products, Rogers, 43, and McKissack 48, have worked hard to remain pure value investors, even in times when their style has been out of favor. Jim Shirley, a research analyst for Lipper, says Ariel's exceptional research has allowed them to display a "proven ability to pick good stocks for their mutual funds." He also points out that the Ariel funds have some of the lowest turnover rates in the industry, a true indicator of the firm's commitment to patient investing.

The firm has also earned kudos for having a fund management team that has weathered various market cycles. Rogers' years of professional experience rank him among the most seasoned African American fund managers in the country. McKissack, a University of California at Berkeley M.B.A., with a B.S. in management and architecture from the Massachusetts Institute of Technology (MIT), brings another 20 years of investment experience to the table. (He also has a chartered financial analyst, or CFA, designation.) "It's important as an investor to pick a mutual fund managed by someone who has had bull and bear market experience," Shirley says.

The combination of portfolio management experience, stock picking brilliance, and focus on investment style has this small firm of 51 employees outpacing all mutual fund companies in the area where it prides itself most--long-term investing. In addition to its small- and mid-cap vehicles, the firm offers the Ariel Premier Bond Fund (APBFX). According to Lipper, the fixed-income portfolio posted one-year returns of 6.74%, and a three-year average return of 5.73%, compared to the sector averages of 5.72% and 4.95%, respectively.

The firm's recent fortunes led to its launching the Ariel Premier Growth Fund (APGFX) on Feb. 1. Does it mean that they're shunning their tried-and-true philosophy? No way. "In our view, we're buying, in our naturally contrarian way, growth when it's out of favor," says Hobson. Chicago-based Lincoln Capital Management, which has managed Ariel's bond funds since 1995 and has prior experience managing the $20 billion Vanguard U.S. Growth Fund (VWUEX), serves as the subadvisor for the new fund. Currently, the fund, which has been promoted through print ads and direct mail solicitations, has more than $12 million in assets.

KEEPING FOCUSED IN TOUGH TIMES

Rogers has had his challenges keeping Ariel on the path of sustained growth. Always having faith in his ability to succeed, he showed great courage in starting the firm in 1983, after working only two years as an analyst for William Blair & Co. in Chicago. He was only 24 at the time, but the entrepreneurial lifestyles of his parents, both lawyers, prepared him for the commitment it would take to build a business from scratch in an industry with few examples of successful African Americans to follow. His father was responsible for Rogers' conversion to an active investor when he gave him stock as a gift at the age of 12.

With a knack for forging relationships, he teamed up with the Calvert family of mutual funds in 1986 for the mutual funds side of the business only. And he had built a strong enough reputation in the Chicago area to begin expanding his staff. He recruited McKissack as director of research in 1986, launched the Appreciation Fund in 1989, and enjoyed a solid performance until the early 1990s.

As his mutual funds lagged the performance of their peers during the early '90s, scrutiny of the Ariel investment style surfaced. By 1991, Hobson, a former intern, had joined the team and prodded Rogers to break away from Calvert in 1994 so that Ariel could reach its true potential.

The move "wasn't due to any negative feelings about Calvert," explains Hobson. "It was about trying to manage and control the messages our customers, shareholders, and valued partners were getting, and what their perception of what Ariel stood for at that point. We weren't sure that they would be able to weed through two company messages and come away with the themes that we thought were most important."

This was the moment of truth for Ariel: standing on its own after several years of moderate performance. Again, Rogers demonstrated the will to forge ahead but admits it was the most difficult time he has faced in business. Ariel paid Calvert $4 million as part of the separation package, and the firm lost $100 million in assets when customers balked at staying with the firm.

Soon, Rogers says, Ariel's investment strategy was out of favor and "We went from managing $2.3 billion to $1.1 billion over a short period of time, and it was extraordinarily uncomfortable and frightening."

But the move paid off as fund performance improved. He began to innovatively spread his "slow and steady" gospel through such vehicles as the sponsorship of a stock ticker at Chicago Bulls games during the team's hey day and partnerships with professional organizations like the Black M.B.A. Association.

At one point, it seemed their disciplined portfolio management style stood in the way of Ariel's success. The firm experienced poor performance in 1999 at the height of a bull market driven by dotcom mania, challenging its resolve to stick to patient investing. "It was very easy two years ago for people to get pulled away from their principles if they were value managers. People found excuses to add this tech stock, this dotcom company, or this new issue to their portfolio. We didn't succumb to any of that pressure," says Rogers. "When value came back in favor we benefited completely, while a lot of our peers only partially benefited because they had moved away from their core strategy during the growth stock bubble of the late '90s."

The next hurdle for Ariel is living up to the standard of excellence it has set. "We have to make sure that we have the human and systems resources to manage the growth that we've seen," says McKissack.

With the launch of the new growth fund and the firm's higher profile, Rogers sees a prime opportunity to push for his funds to be included as a selection in more 401(k) plans. Currently, Ariel funds are an investment choice in retirement plans for the NBA Players Association, Coca-Cola, Mitsubishi, and Johnson Publishing Co., a leading BE INDUSTRIAL/SERVICE 100 company. Quips Rogers: "We're just scratching the surface."

He and his team are ready to plant new seeds to expand the business. "We need help from our shareholders to go to their place of employment and ask that Ariel be added as an investment option," he says. "We want to be a catalyst to getting more people to invest in the stock market."

Ariel Capital Management
Founded: 1983

        Assets    Staff

1997   $2,100.0    22
1998   $2,700.0    31
1999   $3,700.0    37
2000   $5,165.4    42
2001   $7,819.0    51

* ASSETS UNDER MANAGEMENT IN MILLIONS OF DOLLARS. AS OF DEC. 31, 2001.
PREPARED BY B.E. RESEARCH.