Here's What Ariel's Great Investors Are Buying

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At The Motley Fool, we understand that it often pays to zig when Wall Street zags, but that doesn't mean that we don't pay attention to what leading fund managers are buying and selling. And funds that aren't always in lockstep with the broader market can be a particularly valuable source of insight.

Every quarter, fund managers overseeing more than $100 million must disclose their quarter-end holdings publicly by filing Securities and Exchange Commission Form 13-F. The form lists all U.S.-traded securities the manager held at the end of the quarter. Although the form doesn't disclose the manager's short positions or the manager's intraquarter trades, it can shine a bright light on his or her "long" stock bets. To help us make use of 13-F data, we turned to Motley Fool partner AlphaClone, a research and investment-management firm that tracks hedge fund public disclosures and develops investment strategies based on them.

Q2 2011 update
John Rogers founded Ariel Capital Management in 1983. The firm invests in value-priced small and medium-sized companies, favoring those with high barriers to entry, sustainable competitive advantages, and predictable fundamentals that allow for double-digit cash earnings growth.

Why should you look at Ariel Capital Management's moves? According to AlphaClone's back-test simulation, anyone who invested in Ariel Capital Management's 10 largest long positions (in equal portions) at the time they were disclosed publicly each quarter would have returned 348.9% since 2000, versus 7.4% for the S&P 500 as of Sept. 15. (Note that this data reflects the holdings of the overall Ariel Capital Management company, and not necessarily any one particular fund.)

The total market value of Ariel Capital Management's disclosed equity holdings as of June 30, 2011 -- the latest quarter for which data is available -- was $5.4 billion across 117 holdings. The company's 10 largest positions and associated changes in number of shares held as of June 30, 2011, were:

Jones Lang Lasalle (NYS: JLL)  -- reduced 1.6%.
Gannett (NYS: GCI)  -- reduced 8.6%.
Lazard (NYS: LAZ)  -- reduced 1.0%.
Mohawk Industries (NYS: MHK)  -- reduced 1.5%.
Interpublic Group (NYS: IPG)  -- increased 2.0%.
Zimmer Holdings (NYS: ZMH)  -- increased 2.1%.
DeVry (NYS: DV)  -- reduced 26.8%.
Janus Capital Group (NYS: JNS)  -- increased 18.4%.
Bio-Rad Laboratories (NYS: BIO)  -- reduced 15.3%.
International Game Technology (NYS: IGT)  -- increased 3.6%.

During the quarter, Ariel also increased its position in First American Financial, Newell Rubbermaid, and Royal Caribbean (NYS: RCL) , among others. Among the stocks that it reduced its exposure to were CBS and Tiffany. Also, it sold out of several stocks entirely, such as McClatchy.

Since Ariel's June report, Royal Caribbean announced that it was addressing some accounting issues, which sent its shares reeling a bit. It's also facing several stock fraud lawsuits, suggesting that would-be investors need to tread carefully.

Some of Ariel's choices have faced scrutiny even longer. Janus Capital received some bad press for governance practices that leave considerable room for improvement, as shareholders rejected the company's compensation policies. Bio-Rad Laboratories has also been under a cloud, suspected of bribing foreign officials.

Anyone's loss of faith in Gannett is understandable, given the company's exposure to the ailing newspaper industry. But it does have a more promising non-newsprint stake in CareerBuilder.

Selected Q2 2011 commentary
Ariel Capital Management has more than 42% of its assets in the services sector, with financials and consumer cyclicals comprising another 17% and 11% of the portfolio, respectively. These proportions have stayed quite stable in recent quarters.

Here's where the firm is winning and losing currently and making new bets:

Recent winner
International Game Technology was a big winner for the company during the quarter, rising nearly 9%.   The economy has been a challenge for casino companies, but IGT has been making some strategic partnerships and pursuing new contracts. Cost-cutting helped the company report strong earnings during the period. It has a four-star (out of five stars) rating at Motley Fool CAPS.

Recent loser
AFLAC (NYS: AFL) shed value in the quarter, dropping nearly 11%. Japan's top insurer is known for its strong leadership and has been growing its dividend aggressively. Some think that the company's stock was unfairly punished because of worries about Japan's earthquake and tsunami aftermaths -- it has since fallen further, to rather attractive levels. The company has a five-star rating in Motley Fool CAPS.

New bets
The largest new addition is Chesapeake Energy (NYS: CHK) , which posted strong results during the quarter, such as in some promising Texas oilfields. As much as investors might be impressed with the company's performance, though, it has also garnered many demerits for its lavish executive compensation and shareholder-unfriendliness. Nevertheless, it has a five-star rating at Motley Fool CAPS.

We should never blindly copy any investor's moves, no matter how talented the investor. But it can be useful to keep an eye on what smart folks are doing, and 13-F forms can be great places to find intriguing candidates for our portfolios.

Have any thoughts on this fund company or its holdings? Leave a comment below!

At the time this article was published Longtime Fool contributorSelena Maranjianowns shares of Chesapeake Energy, but she holds no other position in any company mentioned. Check out herholdings and a short bio. The Motley Fool owns shares of AFLAC, Zimmer Holdings, International Game Technology, and Jones Lang Lasalle.Motley Fool newsletter serviceshave recommended buying shares of Chesapeake Energy, First American Financial, Jones Lang Lasalle, and AFLAC. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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