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Rogers: I'm Very, Very Optimistic About Equities

Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

I'm here at the Morningstar Ibbotson Conference, and today I had great pleasure of sitting down with John Rogers; he is the chairman and CEO of Ariel Investments. We talked about his equity market outlook and his outlook for his own basket of stocks.

So, John, stocks have enjoyed a really nice runup, and your portfolios in particular have performed very well. I think the question is given where valuations are currently, what's next for stocks, and how optimistic are you about stocks given current valuations?

John Rogers: I am very, very optimistic today. I think what the market is missing is that this economic recovery is going to be substantially stronger than people have anticipated. Everywhere I go now, people are talking about hiring again, companies are paying dividends again, they are buying back stock, they are generating lots and lots of cash, and I just think that the market hasn't really caught on to how strong this recovery is going to be.

Benz: So you're a value guy, and you still feel that there is upside left in your portfolios given the strong runup?

Rogers: I do think there's substantial opportunities left in the marketplace, and a lot of our favorite companies we still think they have room to run.

Several of the CEOs and CFOs that I've been meeting with recently have said this is just getting started. One CFO told me the other day this is just the third inning of a nine-inning game, and that's how I am feeling. It's just something about this optimism, it's just becoming greater and greater and it's building and building.

Benz: So when you think about your portfolio and think about areas or particular companies that you are excited about right now. Can you give us some examples?

Rogers: Well, our favorite areas have been the ones that have been doing the best the last couple of years, coming off the March '09 lows. So our media names, we still love CBS. We think they're well positioned, they've paid down debt, they are more diversified in their revenue structure than ever. We love them. We think Viacom in the cable space is very cheap. MTV is coming back with great programming, and Nickelodeon continues to be powerful.

And then we even see value in some of the print media, magazine companies like Meredith and newspaper companies like Gannett. They are still struggling through this period, but we think the recovery is going to be significant. Both of those companies have strong television properties that we think will give them some extra counterweight and margin of safety as we come through this recovery. So media is our biggest bet and the one we believe in.

Second strong area that continues to be very strong is our real estate related companies. CB Richard Ellis and Jones Lang Lasalle and commercial real estate have exploded off the bottom. Things are starting to click on all cylinders both in their leasing business as well as in their outsourcing business--those things have been very strong recently. And we think you're going to see more and more capital transactions, and their money management subsidiaries will start to move higher and get the kind of active fee structure and bonuses that we think will help the profitability going forward.

Now some of the newer areas that we're adding to, health care, we're investing there, more heavily than ever.

Benz: Where within health care?

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Rogers: In particular, the device companies, companies like Zimmer for the knee replacements and joint replacements…

Benz: Good demographic trends on the side of Zimmer.

Rogers: Exactly. St. Jude Medical, I think is another one that works with the heart device area, and we love those types of companies.

We also like the life sciences businesses. Companies like Thermo Fisher Scientific and Bio-Rad. Those are two large significant long-term holdings for us.

And then finally, we're starting to look for areas that have been out of favor, where there was a real cloud, and we're spending a lot of time right now. We haven't bought them yet, but the homebuilders. Warren Buffett talked about that we are a year away from the recovery in the home market when housing prices will start to go up again. So we're starting to look around for the companies that supply important products inside the home.

Benz: One area I wanted to talk to you about, John, is asset management. You have been an owner within that sector. What's your thinking there right now?

Rogers: Well, you know, Warren Buffett always says, stay within your circle of competence, and so being in the mutual fund industry now for 25 years almost and in investment management for 28 years, we feel like we know the space really well. So we love our favorite right now, Lazard. Lazard is well-known for their investment banking operations and restructuring business, but their emerging-markets mutual funds have been doing really well. They've shown explosive growth, and they are using that platform to expand, and we think they are going to be a terrific long-term holding.

We continue to like Franklin Resources. We love T. Rowe Price and their culture and their management team, and we're gaining confidence in Janus now. We think Janus is starting to turn the corner with their new CEO. We think Perkins Wolf has worked well together with Janus, so we love that space. It's a space we've been in now for over 20 years, and I think it will always be a big holding for us.

Benz: One other thing I wanted to talk to you about, John, is fixed income, and you obviously are an equity manager, but you have some opinions on the fixed-income market. Earlier this year, I know your firm was saying that you thought investor stampede into bonds was maybe a little bit unhealthy. Are you still feeling that way?

Rogers: We do. Our vice chairman, Charlie Bobrinskoy, spent over 20 years at Solomon Brothers, and you know they were really big in the fixed-income markets, and he understands it really well. And he has been really clear that this has been a fixed-income bubble, and he is particularly concerned around the municipal bond area also.

And so we agree, I agree, that people have gotten too cautious and are too conservative. Putting money in the fixed income today when there is real opportunity in equities, I think has been a major mistake, and if you read Warren Buffett's recent annual report, he talks about that: You just can't over-rely on the fixed income because there is so much more opportunity now in the equity markets, and he believes in America and the growth in American businesses, and so do we.