Hobson: Ariel Still Finding Value

Laura Lutton: I'm Laura Lutton. I'm here at the Morningstar Investment Conference with Mellody Hobson, president of Ariel Investments.

Thanks for joining us, Mellody.

Mellody Hobson: Thanks for having me.

Lutton: Tell us a little bit about what you're seeing in the marketplace and relative to the stocks that you hold in the Ariel portfolios.

Hobson: Well certainly on the domestic equity side, we're finding value, which is probably a little shocking to most people because we're in such an extended run here. But even at this stage, we are finding things to buy, and we think a lot of it has to do with the commoditization of the market by the index funds, really, means that if you are orphaned, you are truly orphaned and creates a value for us to buy. That's one thing we're seeing. The valuations on our portfolios are lower than that of our value indices as well as the broad market. We feel like we're insulated on the downside, of the market does have a comeuppance, but we also feel that we have upside in the portfolio because of that valuation differential. Whenever we've been in this position like this, it has generally been a good thing for our funds and the returns that come thereafter.

The overall market we would say, obviously, this has been quite a run, and you never know what will quite undo it. These bull markets do not go on forever even though we may think that they will. It will ultimately have its moment. But with that said, corporations are in pretty good financial shape. Their balance sheets were really cleaned up through the financial crisis. That means that to the extent that we have some trouble ahead at any point, I think they'll be able to withstand it pretty well.

Lutton: Do you think the tax cut is fully priced in at this point, or is there room ...

Hobson: We do not. We do not believe the tax cut is fully priced in. We think the tax cut will still continue to surprise people on the upside. Analysts have been slow to adjust, somewhat because they haven't known exactly how it was going to affect all of the companies as things have been worked out. I do think that part of the reason that we are seeing the market behave the way it has is because I think this tax cut has provided more stimulus to companies and to the overall economy.

Lutton: Just this week, Warren Buffett and Jamie Dimon came out with this call for companies to stop giving earnings guidance, said that causes too much short-term-ism in the market. You're a long term investor, you're on the board of JP Morgan. Tell us a little bit about your view of that call.

Hobson: It's so interesting because on the one hand, I think analysts like to have some kind of guide post, they like something to be able to direct their models to, etc. I think without guidance, it puts more onus on the analyst to do the work, and we're comfortable with that. If there were no guidance, I think that we would continue to be able to distinguish ourselves from the marketplace and our peers by just doing the work.

I do think the short-term-ism is something that is very problematic, it's something that very much concerns us. We have a turtle as a logo, and we talk about long-term, patient investing, and the velocity of money has just sped up. The holding periods are so much shorter, it's whiplash. I think as a result of that, they're short-changing themselves in terms of the returns that they could be getting, but are missing out on because they're trading too much.

Lutton: That gives you an advantage, right? If you're willing to be long term ...

Hobson: It does. We literally tell people we play time arbitrage, and we take advantage of these dislocations by having a longer term view. I think there's a bigger issue, and I think Buffett and Jamie Dimon are getting at it, which is what is really being compromised, what kind of returns are really being compromised. That could be a key to driving longer term outlooks.

Certainly, I think this quarter-to-quarter game that companies are playing is a losing game. When we go into meet with management teams, we do not talk to them about quarterly results. We're talking to them about big picture results. What is your company going to look like, three, five years from now, not three quarters from now, that means nothing to us, that's noise. That's not how you make real money. Real money, as Buffett says, is made over time.

Lutton: Gotta be long-term oriented.

Hobson: Exactly.

Lutton: Thank you Mellody for being here.

Hobson: Thanks.