Value investing is back — and no one’s happier about that than John Rogers.
Rogers is co-CEO and chairman of Chicago-based Ariel Investments, which says it’s the oldest Black-owned money manager in the country. Founded in 1983, it invests in small- and mid-cap value stocks.
Ariel Fund, the $16 billion firm’s flagship mutual fund, returned 78 percent over the 12 months through May 31, as value stocks have rebounded from 12 years in the doldrums. That performance puts the fund in the ninth percentile of mid-cap value funds for the past year, according to research firm Morningstar.
Value stocks began outperforming growth in October, and Rogers, 63, maintains the party is just beginning. According to data compiled by Ariel, periods when value outperforms growth last 33 months on average, going back to 1926.
“The last 12 years were the most painful period for value relative to growth,” Rogers says. “We think this recovery is just a start. We’re in the early innings.”
Rogers was introduced to stock investing by his father, a lawyer, at the age of 12 and quickly fell in love with it. His dad would give him $250 worth of blue-chip shares for each birthday and Christmas. “I looked forward to reading quarterly reports, and newsletters that gave you ideas,” the Chicago native says. “He let me keep dividend checks, so I learned about the connection between profits and dividends.”
But investing wasn’t Rogers’ first career choice. As a student at Princeton University, where he captained the basketball team, Rogers intended to become a basketball coach. He was inspired by fiery Chicago Bulls coach Dick Motta, whose basketball camps he attended as a youth.
However, at Princeton, legendary coach Pete Carril told Rogers in no uncertain terms that he lacked court vision. In his sophomore year, Rogers was the last player Carril selected to the squad. “He said, ‘I’ll keep you on the team because you play hard, but you have no idea what you’re doing,’” Rogers says. “I realized my knowledge and vision weren’t up to the standards to be an extraordinary coach.”
But it was a bit different with equities. “Fortunately, it seemed like I had the vision to choose stocks,” Rogers says. “I could see around the corner and not get swept up by current trends. It’s hard to teach vision.” He sensed he had an ability to look out further than most investors, which he sees as crucial for success, especially in value investing.
Since starting Ariel almost 40 years ago, Rogers has hewed to his small- and mid-cap investing style — an approach he modeled after his hero, Warren Buffett.
“People can argue whether Michael Jordan, LeBron James, or Kareem Abdul-Jabbar is the best basketball player of all time,” Rogers says. “But Warren Buffett stands alone as the greatest investor of all time.”
At Ariel, Rogers says, the investment team targets “the real leaders in industries — high-quality companies with the ability to grow faster that have true moats around them. Moats are the most important element. We learned that from Warren.”
After Buffett, Rogers admires a number of other top investors, including Mario Gabelli of GAMCO Investors, Bill Miller of Miller Value Partners, Ralph Wanger of Wanger Asset Management, Thomas Russo of Gardner Russo & Gardner, Staley Cates of Southeastern Asset Management, and Eddie Brown of Brown Capital Management.
“All of them are so quirky and comfortable being independent thinkers,” Rogers says. “They’re willing to take contrary perspectives. That’s in their DNA, and it’s in mine too.” He attributes his own independent streak to growing up as an only child in Chicago’s Hyde Park, a diverse, intellectually oriented neighborhood that includes the University of Chicago.
There, he was raised by parents who were both racial trailblazers. His mother was the first Black female graduate of the University of Chicago law school in 1946. And his father served as a Tuskegee airman in World War II before becoming a judge.
Rogers says he didn’t feel an obligation to break racial barriers himself, but the existence of such barriers “was drilled into me as a child.” His parents made clear to him that Black people had made substantial social progress but little, if any, economic progress.
His mother’s grandfather had operated what Rogers says was the largest Black-owned hotel in the country, but it was burned down in the Tulsa Race Massacre of 1921. “That had a profound impact on her life: how unfair it was to have all your economic opportunity taken away,” he says. “My mom talked about that often.”
Rogers does feel an obligation to help shrink the racial wealth disparity. “Black wealth and Black businesses matter,” he said in congressional testimony last year. “Black businesses are important to the future growth of the American economy, but today, their future is in doubt.”
At Ariel, Rogers and his team have pushed portfolio companies to diversify their leadership. “We have a long history of getting the first minority on companies’ boards,” Rogers says. Ariel has helped accomplish that at about 50 of its holdings, including JLL and Sotheby’s, he says.
This engagement is part of Ariel’s commitment to environmental, social, and governance investing. Rogers says he learned about the importance of environmental and governance issues while serving on the boards of companies such as McDonald’s Corp. and Aon.
Rogers and his colleagues have tweaked their investment approach in other ways over the years. For example, “we learned the hard way through the 2008-09 financial crisis that we needed to up our game on balance-sheet analysis,” Rogers says. The Ariel Fund posted a return of negative 48 percent in 2008.
The firm reacted by creating its own debt ratings system. “That’s a critical improvement, which will hopefully protect us on the downside,” Rogers says.
Ariel also has incorporated behavioral finance into its strategy over the years. A talk by Nobel laureate economist Daniel Kahneman introduced Rogers to the topic. “He was very inspirational,” the investment manager says. “We always understood the psychology of investing, but to have an academic perspective on it is really helpful.”
Rogers cites several elements of behavioral finance that have been useful for Ariel:
- The endowment effect: falling in love with a company and then overvaluing it. “Maintaining your objectivity is important,” he says.
- The recency effect: getting swept up with the euphoria or depression of the moment. “People have an inability to look over the horizon,” Rogers says.
- Anchoring: getting tied to old views. “People are uncomfortable moving their earnings estimates in light of new information,” he says.
- Confirmation bias: reading content that matches what you already believe. “You have to look outside your comfort zone and hear a contrary perspective,” Rogers says.
To fight these biases, Ariel deploys its analysts as devil’s advocates to make the negative case for each of the firm’s portfolio holdings. “That’s critical to our success, because it’s so easy to get swept up in biases,” Rogers says.
Ariel also has enlisted Business Intelligence Associates to teach its analysts how to question and listen better, read body language, and determine when people are answering questions truthfully.
As for stocks Ariel has purchased based on all of this philosophy, Rogers’ favorites include investment bank Lazard, private-equity firm KKR & Co., Madison Square Garden Entertainment Corp., and TV-ratings tracker Nielsen Co.
“We love fee-generating financial services companies,” Rogers says. “Lazard is extremely well run by CEO Ken Jacobs.” According to Rogers, the company shines in global investment banking, corporate advisory work, and asset management. “We plan to own it forever,” he adds.
Ariel views KKR as a stalwart brand with a long, strong track record in private equity. “We think more assets will go into private equity,” Rogers says. “It’s so hard to outperform the S&P 500. Private equity is the place to be.”
And while MSG Entertainment CEO James Dolan is a controversial figure in the sports and media industries, “he has done nothing but make money for investors,” Rogers says.
MSG owns iconic properties such as Madison Square Garden. And Rogers is excited about the MSG Sphere at The Venetian, an entertainment venue the company is building in Las Vegas. “I’m optimistic that will be a game changer for traditional arenas,” Rogers says.
Finally, Nielsen is “the currency for all TV companies” because its ratings determine what advertisers will pay, he says.
While the last decade-plus has been challenging for value firms like Ariel, Rogers is sanguine about the future of value stocks. “Valuation metrics are so stretched on a historical basis,” he says. “Growth is way too expensive compared to value on any measure. We think valuations have to come back to historical norms.”
As of May 31, the forward price-earnings ratio for the Russell 1000 Value Index totaled 63 percent of the forward PE for the Russell 1000 Growth Index, compared to an average of 72 percent since 1978, according to Bank of America.
Rogers believes the economy’s hot recovery — GDP, for example, grew 6.4 percent in the first quarter — favors value stocks. “Talking to experts like Bob Aliber” — professor emeritus of international economics and finance at the University of Chicago — “we understand that ultimately the recovery will cause higher inflation, which means higher interest rates,” he says.
And rising rates will hammer the discounted cash flows of growth stocks. In a higher interest-rate environment, Rogers believes investors will value the booming short-term earnings of cyclical companies over the long-term earnings of growth companies.
“The wind is at our backs for the first time in a long time,” he says.
When Rogers was a junior at Princeton, Coach Carril asked him to host a high school basketball prospect from Chicago. It was Craig Robinson, the brother of Michelle Obama (then Michelle Robinson). Rogers became good friends with Robinson and through him met Barack Obama.
When Obama entered the political scene in Chicago, “I was just enough older [three years] that he felt comfortable coming to me for political and fundraising advice,” Rogers says. The two shared a passion for basketball and have played together frequently.
With his off-the-charts work ethic and competitiveness and his strong vision, Obama would make an excellent investor, Rogers says. “Barack is comfortable thinking about the future and technology,” he says. “My instinct is he would be growth-stock oriented — growth at a reasonable price. He wouldn’t chase the hottest stock.” Rogers thinks Obama would be comfortable investing in industries that evolve with the country.
Rogers’ friendship with Obama isn’t his only high-profile connection outside the investment world. The Ariel founder is one of the few who can say they beat basketball icon Michael Jordan in a game of one-on-one. Rogers was able to obtain a video of the competition, held at a Jordan fantasy camp in 2003, and The Wall Street Journal posted it online.
Rogers had the audacity to pat the Hall of Famer on the stomach after his first score, and Jordan moaned, “Oh, no,” just before Rogers’ game-winning shot dropped through the basket. The two hugged afterward.
Enough hoop junkies found the clip so that Rogers has been stopped on the street and asked if he’s the guy who beat Michael Jordan.
Rogers ranks the victory among his top ten accomplishments. But he expresses some humility about it. The game went only to three baskets. “If it was to ten, he’d win, and if we played another 100 times, he’d probably win them all,” Rogers says.
Jordan, legendary for his competitive streak, has been “nothing but friendly and kind to me,” Rogers says. “He did tell people he would get me back in the gym to show me what he did in the NBA, but I wouldn’t go back.”