Ariel Fund Investor Cl (ARGFX) N-CSRCertified annual shareholder report (management investment company)

DEAR FELLOW SHAREHOLDER:

There was no shortage of drama during the third quarter. Much of the post-Covid enthusiasm has been drained from stocks as a bear market has taken hold and prices have begun to reflect worst case scenarios. Wall Street is firmly in the grips of recession fears and obsessed with the Federal Reserve’s ability to navigate the tradeoff between a hard economic landing and runaway inflation. These troubles are compounded by a bruising combination of lingering supply chain disruptions, escalating geopolitical risk in Europe and the growing possibility of a full-blown energy crisis. Most corporate leaders lack hands-on experience managing through these challenges—degrees of difficulty that have been largely absent for the last 50 years. Against this backdrop, earnings expectations are beginning the painful reset to reflect today’s economic reality. Uncertainty rules the day.

Not all is lost, however, as demand remains resilient in the face of rising prices. Consumer spending—which accounts for more than two-thirds of U.S. economic activity—increased +0.4% in August, after falling -0.2% in July.¹ Meanwhile, strong corporate and consumer balance sheets are helping to buffer economic weakness. Although sentiment continues to slide as evidenced by softening consumer confidence and tepid guidance updates from management teams, this contrary indicator could ultimately be telegraphing better days ahead.

Which brings us to the bright, silver lining—valuation. We believe the best indicator of future stock returns is the price an investor pays for shares. A falling stock market has given us the opportunity to load up on our favorite companies at bargain prices as index earnings multiples have generally fallen below their 25-year averages.² As we detailed in our second quarter letter, our own portfolios are selling close to historic discounts. This, in combination with our strong belief in the long-term resilience of the U.S. economy as well as the prospects for our holdings, allows us to tune out the noise while calmly and deliberately executing our nearly 40-year-old, patient investing strategy.

LEVERAGING UNCERTAINTY

In response to the prevailing anxiety, Wall Street is laser focused on the short term. And yet, as market pundits work to dissect daily—and even hourly—share price moves, our portfolio company management teams concede their lack of near-term visibility. While navigating the here and now, these executives are largely focused on the sustained health of their businesses. The dichotomy between investor perceptions and management’s reality reminds us that stock prices are much more volatile than the asset values that underpin them.

In such a topsy-turvy environment, knee jerk reactions to short-term gyrations can decimate value. For that reason, our sole consideration of recent events and macroeconomic developments is how they might affect the long-term intrinsic worth of our names. While guessing the near-term direction of tomorrow’s stock prices has a large and vocal audience, we are focused on the next five-to-ten years, not the next five-to-ten months. Much has been written on the ineffectiveness of market timing and the futility of forecasting short-term economic phenomena, but it captures Wall Street’s imagination. It also heightens hysteria. These emotional responses drive the volatility that creates our biggest opportunities—like the depths of the 2008-2009 financial crisis and peak pandemic fears in 2020.

“While guessing the near-term direction of tomorrow’s stock prices has a large and vocal audience, we are focused on the next five-to-ten years, not the next five-to-ten months.”

As the market swings from one scenario to another, we focus on assessing the Private Market Values of businesses based on a consistent application of our investment philosophy and process. Our Private Market Value (PMV)

methodology assesses recent transactions, determines break-up values and performs discounted cash flow analysis to calculate the full and fair price an independent buyer would pay to own an entire company and control its free cash flow. Simplified measures such as price-to-earnings ratios³ are easy to compute and can offer a healthy sanity check to some valuation metrics, but they can also give an illusion of precision in an impetuous market, obscuring the reality that estimating earnings in a recession (that may or may not happen) or period of unstable inflation is quite difficult.

SHOPPING IN OUR CLOSET

In a slowing economy, consumers often tighten their belts. They will forego new clothes and instead revisit overlooked, already-owned treasures by “shopping in their closets.” These days, many are asking what we are buying in the face of today’s widespread price dislocations? Not unlike everyday consumers, we believe the best values are currently to be had in our own “closet.” By purchasing shares of existing and previously owned portfolio holdings, we are doubling down on the undervalued companies and management teams we know best. When markets indiscriminately punish the good, the bad and the ugly in equal measure, our deep knowledge of our companies and longstanding relationships with their corporate leaders provide us with courage, conviction and clarity amid chaos.

During the third quarter, we added to some of our favorite names as their share prices withered under market and, at times, company specific circumstances. For example, Ariel Fund took advantage of price weakness in the leading manufacturer and distributor of floor coverings, Mohawk Industries Inc. (MHK), as the slowing U.S. housing market began to change consumer discretionary spending. Higher natural gas prices and constrained supply in Europe presented another headwind. With softer demand and lower margins likely, management has increased prices, enhanced service levels and restructured to reduce costs. Having owned the name in various Ariel    

portfolios since 2004, we believe the company can deliver sales growth and generate strong cash flow despite inflation, rising rates and geopolitical instability.

Paramount Global (PARA) is another Ariel Fund favorite whose shares have weakened in recent months. We have successfully owned variations of this successor company to Viacom and CBS on and off since 2006. We nearly eliminated our entire firm-wide position at $100.34 a share in March 2021. Although linear television and suspended operations in Russia have pinched near-term results, the company’s fresh array of content has propelled global subscriptions to 64 million active users. CBS was the #1 ranked network for the 20th consecutive quarter and Paramount Pictures opened five #1 films in a row, with “Top Gun Maverick” grossing over $1.3 billion to date. With its shares now selling at $19.04—a gaping -59% discount to our estimate of its intrinsic worth—our enthusiasm for the name is higher today than ever.

Lastly, in recent months, both Ariel and Ariel Appreciation Funds re-purchased shares in Generac Holdings, Inc. (GNRC), a leading global manufacturer of power generation equipment for the residential, light commercial and industrial markets. We first initiated a position in GNRC in our small cap separate account portfolios in February 2019 at $52 when generators were considered luxury goods. Concerns about climate change and aging infrastructure, as well as a hybrid work environment, have spurred a new reality. The U.S. suffered 383 electricity disturbances last year, up from 141 in 2016.4 As hurricanes, wildfires and sweltering heat causes widespread outages, the demand for backup power has increased, making the home generator almost as essential as the refrigerators they power.

Generac was a pandemic darling and we profitably parted ways in December 2020 when its rapid price appreciation to $227.34 made its shares too rich for our value blood. It is worth noting, the stock doubled from there before falling. This September, we re-initiated a position in the

Funds at $181.21 as demand for big-ticket items is being suppressed by more expensive debt financing along with inflation-driven price increases. Since the time of our re-entry, the stock has fallen further as dealers struggle to keep up with installations. Still, we remain attracted to the company’s unmatched distribution network, strong product portfolio and underlying long-term demand. And despite the company’s need to work through some backlog to grow again, we delight in the opportunity to own the deeply discounted stock of a unique, high-quality business that commands a whopping 75% market share in the North American residential market.

LOOKING FORWARD

Our approach to extreme market movements is simple in theory, but its real-life application is not an easy undertaking. Value investing requires great effort and conviction. Our job is to respond, not react. There is a difference. Reacting is often impulsive, while responding leads us to take a longer-term view. These days, we spend our time checking and rechecking our analyses, confirming our investment theses, and making sure our companies have the competitive advantages and financial wherewithal to withstand any near-term pain. In the short term, anything can happen. In the long term, fundamentals drive all outcomes.

PORTFOLIO COMINGS AND GOINGS

In Ariel Fund, we initiated a new position in GCM Grosvenor Inc. (GCMG), a 50-year-old, Chicago-based, alternative asset manager that pioneered fund-of-funds investing and provides clients with customized multi-manager portfolios and portfolios of direct and co-investments. We believe the company has the potential to achieve economies of scale and grow market share as it expands globally, especially through its ESG and Impact strategies.

On the sell side, Ariel Fund successfully exited our investment in Keysight Technologies, Inc. (KEYS) which is a top electronic test and measurement business. No names were eliminated from Ariel Appreciation Fund this quarter.

As always, we appreciate the opportunity to serve you and welcome any questions or comments you might have.

Sincerely,

John W. Rogers, Jr.		Mellody Hobson
Chairman and Co-CEO		Co-CEO and President

All major indices closed the trailing one-year period in bear market territory. Persistently high inflation, escalating geopolitical tensions in Russia/Ukraine, energy-price shocks and aggressive central-bank tightening have weighed on consumer and business confidence. Recession watch has taken hold as many investors fear a Fed-induced hard landing. While Wall Street sits on edge and markets remain erratic, we are actively leaning into the moment by judiciously acquiring the downtrodden shares of quality companies whose value we believe should be realized over the long term. Against this backdrop Ariel Fund traded -25.05% lower over the trailing one-year-period, underperforming the Russell 2500 Value Index’s -15.35% return and the -21.11% loss of the Russell 2500 Index.

Global leader in for-profit education, Adtalem Global Education (ATGE) was a top contributor over the trailing one-year period, on solid top and bottom-line financial results. With the recent completion of the Walden acquisition and the divestiture of the Financial Services segment, ATGE has become a pure-play healthcare education provider with the scale and capabilities to capitalize on robust demand for skilled nurses, MDs and PhDs across the country.

Leading manufacturer of consumer food products, J.M. Smucker Co. (SJM) also aided relative results over the period. Despite cost inflation, industry-wide supply chain challenges and the Jif peanut butter product recall, strong consumer demand across SJM’s product-lines drove a top-and bottom-line earnings beat and subsequent raise in full year 2023 guidance. Looking ahead, we remain confident in management’s ability to drive long term growth and create value for shareholders throughout the current operating environment.

By comparison, shares of rebranded leading entertainment company, Paramount Global (PARA), (formerly ViacomCBS Inc.) was the largest detractor to relative performance over the trailing one-year period. Strength in filmed entertainment and market share gains in streaming were partially offset by weakness in linear television. PARA’s decision to suspend services in Russia also negatively impacted earnings growth. Nonetheless, the company has continued to display strong business fundamentals. PARA’s fresh array of global content is driving subscriber momentum worldwide across its direct-to-consumer platform with global subscriptions reaching nearly 64 million active users. Additionally, CBS was ranked the #1 network for the 20th consecutive quarter and Paramount Pictures opened five #1 films in a row, with Top Gun Maverick grossing over

$1.3 billion to date. At today’s valuation, we believe PARA’s risk/reward is skewed sharply to the upside.

Leading manufacturer and distributor of floorcovering products, Mohawk Industries Inc. (MHK) also underperformed in the period. MHK has consistently demonstrated its ability to deliver sales growth and generate strong cash flow despite significant inflation, rising interest rates, and geopolitical instability. However, this quarter was an inflection point as the slowing U.S. housing market began to change consumer discretionary spend. Higher natural gas prices and constrained supply in Europe presented another headwind. Given these factors, MHK guided to softening demand and increasing pressure on margins moving forward. Management initiated corrective actions across the enterprise including implementing further price increases, enhancing service levels and restructuring to reduce costs. In our view, MHK’s track record of success managing through economic cycles and healthy balance sheet have the company well positioned to benefit from long-term growth in residential remodeling, new home construction and commercial projects. At current levels, MHK is trading at a -67% discount to our estimate of private market value.

Escalating geopolitical tensions, persistently high inflation, slowing economic growth and the potential for excessive Fed tightening continues to fuel recessionary fears. And yet, we view the probability of the most severe “hard landing,” or deep recession, to be less likely. Unemployment remains near historic lows and balance sheets of U.S. financial institutions and households are generally in good shape. We continue to be cautiously optimistic these factors will protect against a severe downturn. Meanwhile, values are abundant when the investment environment feels the most uncomfortable. With 39 years of experience, we are trained and battle-tested for these moments. We believe bear markets and oversold stocks create ripe buying opportunities for long-term, patient investors. We are diligently evaluating the collapsing prices of stocks on our watchlist versus our expectations of what these companies and their underlying business fundamentals should be valued at over the long-term. In times like these, we believe the worst-case scenario gets priced in giving us a margin of safety1 to buy and hold our favorite companies with confidence through the uncertainty until the market digests the volatility. Although our portfolios have sold off in recent months, in our view they are statistically cheap—trading at a significant discount to their private market values (PMV)²—or what some call intrinsic worth. In the past, portfolio dislocations of this magnitude have often served as a prelude to our most robust recoveries.

All major indices closed the trailing one-year period in bear market territory. Persistently high inflation, escalating geopolitical tensions in Russia/Ukraine, energy-price shocks and aggressive central-bank tightening have weighed on consumer and business confidence. Recession watch has taken hold as many investors fear a Fed-induced hard landing. While Wall Street sits on edge and markets remain erratic, we are actively leaning into the moment by judiciously acquiring the downtrodden shares of quality companies whose value we believe should be realized over the long term. Against this backdrop, Appreciation Fund fell -18.50% over the trailing one-year-period, underperforming the Russell Midcap Value Index’s return of -13.56% and ahead of the -19.39% loss posted by the Russell Midcap Index.

Distributor of pharmaceutical and medical products, Cardinal Health, Inc. (CAH) was the top contributor to relative results in the period as leadership changes within the C-suite and governance enhancements on the board were viewed to be a positive for shares. Management also provided a new profit outlook for Fiscal 2023 and announced an improvement plan for the medical segment. We are encouraged by these changes and think CAH’s underlying fundamentals and competitive advantages around preventative maintenance screenings and medication management will continue to improve. We believe valuations of health care companies like CAH that focus on cost optimization and promote technological efficiency across the supply chain will be rewarded over the long term.

Personal auto insurer, Progressive Corporation (PGR) also aided performance over the trailing one-year period. PGR continues to deliver solid earnings results highlighted by premium growth. The company’s auto losses remain below historic levels as the continuation of work-from-home policies due to the pandemic has resulted in relatively benign rush hour traffic, where accident frequency is higher. Looking ahead, we expect the top line will continue to benefit from PGR’s digital dominance for auto insurance in the direct channel, bundled homeowner’s insurance offering and commercial insurance expansion.

Alternatively, shares of Stanley Black & Decker (SWK) underperformed over the trailing one-year period, as inflation and rapidly rising rates drove a swift deterioration in consumer demand. In response, SWK is laser-focused on reducing inventory to generate cash flow and re-sizing the cost base through simplifying its corporate structure, optimizing operations and transforming the supply chain. Though the macroeconomic backdrop remains challenging, we have conviction in SWK’s experienced executive management team and think the balance sheet is well

positioned to weather the storm. At current levels, SWK is trading at a substantial, historically high discount to our estimate of private market value.

Entertainment holding company, Madison Square Garden Entertainment Corp. (MSGE) also weighed on relative results. The company announced a potential spin-off of its live entertainment and MSG Networks businesses from TAO and MSG Sphere, its coming Las Vegas property. Management also noted a high-single digit increase in the capital budget for Sphere. In our view, this divestiture would address different investor bases as MSG Sphere and TAO Company would represent higher growth initiatives, while the remaining assets are generally slower growth, albeit stable cash flow generators. At the consolidated level, we continue to have conviction in MSGE’s improving long-term fundamental outlook. Management is projecting a record year in the booking business and sees momentum at TAO. We also expect shares to benefit from normalized 2022-23 NBA and NHL seasons, as well as a full-year of Online Sports Betting now live in New York. Looking ahead, we remain bullish on digital access to sports, as well as the opportunity at the Sphere. In our view, the underlying value of MSGE’s physical assets coupled with our conviction around management’s expertise make this an attractive opportunity.

Escalating geopolitical tensions, persistently high inflation, slowing economic growth and the potential for excessive Fed tightening continues to fuel recessionary fears. And yet, we view the probability of the most severe “hard landing,” or deep recession, to be less likely. Unemployment remains near historic lows and balance sheets of U.S. financial institutions and households are generally in good shape. We continue to be cautiously optimistic these factors will protect against a severe downturn. Meanwhile, values are abundant when the investment environment feels the most uncomfortable. With 39 years of experience, we are trained and battle-tested for these moments. We believe bear markets and oversold stocks create ripe buying opportunities for long-term, patient investors. We are diligently evaluating the collapsing prices of stocks on our watchlist versus our expectations of what these companies and their underlying business fundamentals should be valued at over the long-term. In times like these, we believe the worst-case scenario gets priced in giving us a margin of safety¹ to buy and hold our favorite companies with confidence through the uncertainty until the market digests the volatility. Although our portfolios have sold off in recent months, in our view they are statistically cheap—trading at a significant discount to their private market values (PMV)²—or what some call intrinsic worth. In the past, portfolio dislocations of this magnitude have often served as a prelude to our most robust recoveries.

DEAR FELLOW SHAREHOLDER:

Ariel Focus Fund declined -7.45% in the third quarter, trailing the Russell 1000 Value Index and the S&P 500 Index which fell -5.62% and -4.88%, respectively. Year-to-date, Ariel Focus Fund has fallen -18.92%, trailing the Russell 1000 Value, which returned -17.75% but beating the S&P 500 which moved into bear market territory with a negative return of -23.87%.

TALKING STOCK

Our recent quarterly letters have been dominated by the macro themes of inflation, interest rates and a possible

recession. While these economic trends continue to drive U.S. equity markets, we will focus this letter on some of the stocks that have had the largest impact on performance. We would be remiss, however, without a brief comment on the market as a whole. We monitor investor sentiment so that we can be “greedy when others are fearful and fearful when others are greedy,” as Warren Buffett has wisely counseled. Today, fear is in abundance. A year ago, over 40% of financial advisors reported being “bullish,” with only 23% “bearish.” Today, those percentages have basically reversed. Only 25% are now bullish, with 42% bearish.¹ Meanwhile, the bond market is

telegraphing a recession with an inverted yield curve. These days, 2-year Treasuries yield 4.44%, while 10-year Treasuries yield 3.99%. The market is anticipating a Fed-induced recession in the U.S. and is punishing the shares of economically sensitive companies. We acknowledge the growing probability of a near-term recession while working to maintain a portfolio of companies trading below our calculation of intrinsic value due to the market’s excessive short-term focus.

“We monitor investor sentiment so that we can be ‘greedy when others are fearful and fearful when others are greedy,’ as Warren Buffett has wisely counseled. Today, fear is in abundance.”

In the most recent quarter, BOK Financial Corporation (BOKF) was the largest positive contributor to performance, returning +18.23% in a down market. As we write, BOK Financial has become our second largest position. It is the former Bank of Oklahoma, renamed to reflect its expansion throughout much of the American Southwest. What has not changed, in our opinion, is the company’s strong credit culture as first established by its largest shareholder George Kaiser. In an oil and gas industry famous for “wildcatters,” boom and bust cycles, and credit losses, Kaiser and a team of bank executives led by CEO Stacy Kymes have established BOK Financial as a leading bank in the region. We believe the company has the ability to choose the best clients, growing without relaxing credit discipline.

Although BOK Financial earned a return on equity of +11.3% in the second quarter, it trades at 1.3 times book, well below other regional banks. We believe the stock is languishing because there is no near-term catalyst. Mr. Kaiser has publicly stated that Oklahoma and surrounding states need a leading independent regional bank. As a result, he has structured its ownership to make it very difficult for it to be acquired by a larger bank.

As value investors, we are often attracted to companies trading below their intrinsic value because of “an absence of a future catalyst.” A core teaching of Ben Graham, the founder of value investing, is that a company selling at a large discount to its private market value2 may have no obvious near-term means of closing this gap. But in the long run, the market is a weighing machine that measures cashflows, not popularity. While we wait, we have been compensated with strong performance from BOK Financial.

Our second largest contributor in the quarter was Hanger Inc. (HNGR) which jumped +29.54% after announcing a sale to Patient Capital for $18.75 per share. Unfortunately, the acquisition price was negotiated after Hanger had posted disappointing first quarter earnings. The deal produced a return of only +2.3% for Hanger shareholders this year. We must acknowledge that while Hanger remained a leader in providing orthotic and prosthetic (O&P) services to its patients, many of whom had tragically lost limbs through accident or disease, the company was never able to achieve our profitability projections and was sold for a price well below our calculation of intrinsic value. Ariel Focus Fund exited its position in Hanger this quarter.

In the most recent quarter, our biggest detractor was ZimVie Inc. (ZIMV) which declined -38.35%. ZimVie is a manufacturer and distributor of medical products, principally implants for dental and spinal surgery. The company was spun out of Zimmer Biomet last November. In our opinion, ZimVie has become an “orphan stock” with a market capitalization of only $200 million as we write. Its shares were distributed to all holders of Zimmer Biomet, many of whom could not own a company with such a small market cap. Likewise, Wall Street analysts have little incentive to follow the company. In hindsight, we believe ZimVie is probably not large enough to remain a stand-alone public company and estimate a change-of-control valuation materially above today’s stock price.

Mohawk Industries, Inc. (MHK) fell -26.51%, in sympathy with broad weakness in housing related stocks during the quarter. Various Ariel portfolios have owned Mohawk continuously since 2004. The company is a leader

in the manufacture and distribution of residential and commercial flooring. Historically, carpeting represented the bulk of Mohawk’s sales. Recently, the market has moved toward non-carpet floorings including ceramic tyle, laminates, wood and luxury vinyl. This shift has required Mohawk to create new capabilities through acquisition and capital expenditures. Recently, increasing prices on many of its inputs (for example, carpet fibers are oil based) have forced Mohawk to raise its own prices. In the second quarter, Mohawk reported operating margins below our expectations and those of Wall Street analysts. Recently, rising interest rates have pushed mortgage rates higher, making homes less affordable. New home construction and sales of existing homes often drive orders for new flooring. Current market expectations are for 2023 Mohawk earnings to be revised downward. We acknowledge this possibility, but its shares have been punished excessively. By our calculations, Mohawk is currently trading at only 6.2 times our estimate of next twelve months earnings. We believe we are being more than fairly compensated for the risk of short-term earnings revisions.

The Western Union Company (WU) shares returned -16.65% during the quarter. Our investment thesis around Western Union has been relatively consistent over our ownership history. We believe the company’s network of 500,000 global agents gives it an economic advantage in the business of cross-border remittance payments. A worker sending money home to their family needs an agent near where they work AND near their family back home. Western Union’s leadership position gives it economies of scale in spreading fixed costs over the largest number of transactions. The network also makes Western Union the logical partner of choice for companies seeking to “white-label” their own remittance products. Wall Street analysts are currently focused on the risk of increasing digital money transfer, even though Western Union’s own digital business is growing over +30%. We often view negative sentiment as a positive contrarian indicator. Currently, Western Union is Ariel Focus Fund’s most contrarian holding with six analyst sell ratings, eleven “holds” and only one “buy.” Its shares trade at a modest 7.1 times our estimate of next twelve-month earnings.

After this recent period of market turbulence, our portfolio ended September trading at a weighted average of only 7.9 times next twelve-month earnings. At quarter-end, our portfolio traded at a -39.7% discount to our private market value estimate. Although recent market volatility has been painful, it has left us with a portfolio of companies attractively priced relative to their future earnings and intrinsic value.

ONE FINAL NOTE…

The war in Ukraine has had an outsized effect on global markets. Recent battlefield success by Ukrainian armed forces has, in our view, increased the possibility of a settlement. Putin has been denied his goal of a complete conquest of Ukraine. We believe an eventual settlement will include Russian sovereignty over Crimea and a commitment to neutrality by Ukraine (i.e., a pledge not to join NATO). In exchange, Russia will withdraw its illegal annexation of the Donbas region in Southeast Ukraine. Like many compromises, this will not completely satisfy anyone. But an end to the risk of nuclear Armageddon—a measure of face-saving for Putin—and a return to the possibility of economic growth for Europe will, in our opinion, be enough to force a peace deal. We believe this outcome would be well received by U.S. equity markets.

As always, we appreciate the opportunity to serve you and welcome any questions or comments you might have.

Sincerely,

Charles K. Bobrinskoy

Vice Chairman and Portfolio Manager

All major indices closed the trailing one-year period in bear market territory. Persistently high inflation, escalating geopolitical tensions in Russia/Ukraine, energy-price shocks and aggressive central-bank tightening have weighed on consumer and business confidence. Recession watch has taken hold as many investors fear a Fed-induced hard landing. While Wall Street sits on edge and markets remain erratic, we are actively leaning into the moment by judiciously acquiring the downtrodden shares of quality companies whose value we believe should be realized over the long term. Against this backdrop, Ariel Focus Fund declined -14.91% over the trailing one-year-period, underperforming the -11.36% return posted by Russell 1000 Value Index and ahead of the -15.47% loss of the S&P 500 Index.

Oil and natural gas explorer, APA Corporation (APA) was the top contributor to relative returns over the trailing one-year period. Shares jumped on the announcement of a successful oil discovery at Krabdagu 1, an exploration well offshore Suriname. Strong U.S. well performance, continued capital and cost discipline and better than expected commodity prices also aided performance. Management initiated a 60% capital return framework for shareholders through a combination of dividend and share repurchases; and bought back over 13% of the outstanding share float in the period. APA also provided an outlook forecasting free cash flow of approximately $6.5 billion over the next three years, in addition to $0.8 billion of proceeds from a mineral rights sale in the Delaware Basin. Collectively, the free cash flow expectation plus the proceeds account for more than 60% of the market capitalization of APA as of September 30, 2022, which suggests significant upside from current trading levels.

Producer and marketer of crop nutrients, Mosaic Co. (MOS) also advanced over the period on solid financial results. MOS has continued to demonstrate its ability to raise prices and offset input cost inflation, as well as return significant capital to shareholders through buybacks. Meanwhile, trade flows have shifted with Russia and Belarus, the second and third largest fertilizer exporters globally, banning exports and facing sanctions imposed by the west. As a result, MOS is expanding production to help meet global demand. Given management’s optimistic outlook and disciplined approach towards capital allocation, we continue to believe the company is well positioned from a risk/reward standpoint.

By comparison, shares of leading manufacturer and distributer of medical devices specializing in spine and dental products, ZimVie, Inc. (ZIMV) sharply declined in the period, following a downward revision in full-year guidance. Over the long-term,

we believe the foreign exchange headwinds the company is facing will soften and expect the management team to enhance its focus on research and development, as well as expand the product portfolio across its core value chain.

Leading manufacturer and distributor of floorcovering products, Mohawk Industries Inc. (MHK) also underperformed in the period. MHK has consistently demonstrated its ability to deliver sales growth and generate strong cash flow despite significant inflation, rising interest rates, and geopolitical instability. However, this quarter was an inflection point as the slowing U.S. housing market began to change consumer discretionary spend. Higher natural gas prices and constrained supply in Europe presented another headwind. Given these factors, MHK guided to softening demand and increasing pressure on margins moving forward. Management initiated corrective actions across the enterprise including implementing further price increases, enhancing service levels and restructuring to reduce costs. In our view, MHK’s track record of success managing through economic cycles and healthy balance sheet have the company well positioned to benefit from long-term growth in residential remodeling, new home construction and commercial projects. At current levels, MHK is trading at a -67% discount to our estimate of private market value.

Escalating geopolitical tensions, persistently high inflation, slowing economic growth and the potential for excessive Fed tightening continues to fuel recessionary fears. And yet, we view the probability of the most severe “hard landing,” or deep recession, to be less likely. Unemployment remains near historic lows and balance sheets of U.S. financial institutions and households are generally in good shape. We continue to be cautiously optimistic these factors will protect against a severe downturn. Meanwhile, values are abundant when the investment environment feels the most uncomfortable. With 39 years of experience, we are trained and battle-tested for these moments. We believe bear markets and oversold stocks create ripe buying opportunities for long-term, patient investors. We are diligently evaluating the collapsing prices of stocks on our watchlist versus our expectations of what these companies and their underlying business fundamentals should be valued at over the long-term. In times like these, we believe the worst-case scenario gets priced in giving us a margin of safety¹ to buy and hold our favorite companies with confidence through the uncertainty until the market digests the volatility. Although our portfolios have sold off in recent months, in our view they are statistically cheap—trading at a significant discount to their private market values (PMV)²—or what some call intrinsic worth. In the past, portfolio dislocations of this magnitude have often served as a prelude to our most robust recoveries.

DEAR FELLOW SHAREHOLDER:

Global equities suffered their third consecutive quarter of losses this year as investors wrestled with tightening monetary policies, inflation and a looming recession. The MSCI ACWI Index declined -6.82%, while the MSCI EAFE and MSCI ACWI ex U.S. indices dropped -9.36% and -9.91%, respectively. Ariel International Fund and Ariel Global Fund underperformed during the three-month period largely due to a risk-on rally in July and early August. Conversely, year-to-date, our Funds mostly outperformed their core and value indices.

Despite record declines in the first half of 2022, we believe a more significant market correction still lies ahead. However, our investment process and philosophy remain consistent. We believe our concentrated strategies are designed to generate compelling risk-adjusted returns over the long run, and owning undervalued, high dividend yielding, quality companies with strong balance sheets positions us well for long-term outperformance.

As discussed in prior letters, we are experiencing the effects of a regime change from quantitative easing (QE) to quantitative tightening (QT).¹ As a result, we anticipate junk bonds and junk equities will face the greatest challenges. In our first quarter letter, we explained junk equities by introducing the four Ls—Lofty valuations, Leverage, Loss-making companies and Liquidity risk. In our second quarter letter, we highlighted Leverage and its risk to all equity investors. This quarter, we will focus on the consequences of “Lofty valuations and expectations.”

FROM GOLDILOCKS TO STAGFLATION

In our view, the Goldilocks era has ended—a period where growth was perceived as neither too fast nor too slow, but “just right.” Since the 2008 Financial Crisis, we have lived through a decade and a half of record-breaking QE. Massive monetary accommodation, further amplified by COVID-19-related stimulus, drove high multiples for U.S. stocks and an explosion in values for speculative assets.²

The Goldilocks years were an ideal environment for risk-taking investors. However, as the saying goes, “nothing lasts forever.” The U.S. Federal Reserve, European Central Bank and other major central banks have shifted from protecting Wall Street with QE, to defending Main Street from inflation with QT. As interest rate hikes and contractionary policies continue, we will likely see a larger reckoning unfold in the markets—exposing the bad bets of the prior regime.

“The U.S. Federal Reserve, European Central Bank and other major central banks have shifted from protecting Wall Street with Quantitative Easing (QE), to defending Main Street from inflation with Quantitative Tightening (QT).”

Global growth is expected to decline from 5.7% in 2021, to 2.9% in 2022—much lower than The World Bank’s projections in January.³ Meanwhile, inflation levels remain elevated at multi-year highs. Against this backdrop, the world is at risk of severe stagflation—a phenomenon whereby growth is slow and inflation is high—reminiscent of the 1970s. Recovery from the last stagflation slump required tightening policies, which led to a global recession. The actions triggered large stock market declines and substantial debt crises in developed and emerging economies in the early 1980s.⁴ We would not be surprised if similar outcomes play out—particularly in the U.S.

LOFTY VALUATIONS AND EXPECTATIONS

U.S. equity investors should be concerned about market valuations. Notwithstanding large declines this year, U.S. stocks continue to trade at historically elevated levels. For the last ten years, the U.S. has been the best-performing market.⁵

We also see a similar mismatch in the fixed-income landscape. During most of 2020 and 2021, U.S. Federal Funds rates stood at 0%. While those rates have risen to over 3% today, Fed expectations currently sit at 4.6%–far too low relative to inflation. Figure 1 illustrates Fed Funds (blue line) relative to core inflation (black line) in the past. Since the 1950s, Fed Funds have almost always been raised at least 200-500 basis points above core inflation to address spiraling prices. As such, we believe the expected 4.6% peak Fed Funds rate is nowhere near the level of positive real rates historically required to extinguish our high and accelerating inflation. Interest rate expectations across the fixed-income market likely remain too low as earnings expectations for stocks look too high.

FINDING VALUE IN EUROPE AND EMERGING MARKETS

We believe European markets have much more attractive risk/reward dynamics today. While we still see valuation risk, we have identified more companies trading with a larger margin of safety.⁸ On a relative basis, European businesses sell at some of the most inexpensive valuation levels versus the U.S. in more than a half-century. We believe the Russia-Ukraine war and other geopolitical and commodity concerns are mostly priced in. As contrarian investors, we see opportunities in the volatility. The energy crisis in Europe is acute but mainly impacts the manufacturing sector. Health Care names such as

GlaxoSmithKline plc, Novartis AG, Roche Holding AG, and Sanofi S.A. are stable businesses with strong research and development pipelines and reliable dividends. Healthcare is less energy-intensive than the auto, chemical or aluminum industries. In our view, high dividend yielding European companies in less cyclical sectors such as Health Care, Communications, Consumer Staples and Utilities with strong balance sheets will be resilient in a challenging global macroeconomic environment.

We are bullish on emerging market (EM) opportunities, particularly in Latin America. When we launched Ariel’s international and global strategies in 2011, we were negative on the EM landscape. At that time, many investors poured into EM stocks with high growth expectations, which we believed would disappoint and cause valuations to deflate. This has now happened.⁹ After a decade of disappointment, we believe Latin American stocks look particularly attractive, and we have been allocating more capital in Brazil, Peru and Chile.

THE ROAD AHEAD: FROM PASSIVE TO ACTIVE

Benjamin Graham once said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” The pendulum is swinging on multiple fronts—from QE to QT, Goldilocks to Stagflation, and Wall Street to Main Street. Therefore, we believe outperformance in the next decade is unlikely to come from a passive, growth-momentum approach. In our view, active, value-oriented strategies are more likely to shine. This plays to the strengths of our investment process. While the current market environment is volatile and uncertain, we believe our portfolios are positioned to weather the storm—as they are heavily weighted toward undervalued, high dividend yielding companies with low operating and financial leverage.

As always, we appreciate the opportunity to serve you and welcome any questions or comments you might have.

Sincerely,

Rupal J. Bhansali

Chief Investment Officer

International and Global Equities

Performance data quoted represents past performance. Past performance does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains and represents returns of the Investor Class shares. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Performance data current to the most recent month-end for Ariel International Fund may be obtained by visiting our website, arielinvestments.com.

Central banks around the world worked to reign in inflation with interest rate hikes while quantitative tightening (QT) represents a regime change. Both efforts drove all major indices into the red over the period. Meanwhile, Russia’s war in Ukraine, China’s zero-Covid policy, record debt and concerns over the economic outlook for the Eurozone pose further threats to the global economy. Recession watch has taken hold as many investors fear a full-blown energy crisis and central bank induced hard landing. While Wall Street sits on edge and markets remain erratic, we continue to steer clear of what we call the 4Ls: Lofty Valuations, Loss Making Companies, Leveraged Balance Sheets and Liquidity Risk. Our low portfolio turnover continues to underscore our patient approach as we believe our global portfolios, which are heavily weighted towards undervalued, higher dividend yielding and better-quality defensive holdings, should produce strong long-term performance. Against this backdrop Ariel International Fund gave back -19.70% over the trailing one-year period, significantly outperforming both the MSCI EAFE and MSCI ACWI ex-US indices, which returned -25.13% and -25.17%, respectively. Ariel International Fund also delivered returns ahead of the -20.16% return posted by the MSCI EAFE Value Index and the -20.02% loss of the MSCI ACWI ex-US Value Index.

Ariel’s non-consensus approach seeks to identify undervalued, out-of-favor, franchise-quality companies that are misunderstood and mispriced. Ariel International Fund continues to be significantly overweight Communication Services, Utilities, Health Care and Consumer Staples. The portfolio is meaningfully underweight Industrials, Information Technology, Energy and Real Estate as well as lacks exposure to Materials. At the sector level, stock selection within Financials and Information Technology were the largest sources of positive attribution. By comparison, the Fund’s underweight exposure to Energy and relative positioning within cash were the greatest detractors from performance over the trailing one-year period.

Leading market maker in European derivatives, Deutsche Boerse AG, which operates the Frankfurt stock exchange, was a top contributor to performance over the period. Shares advanced as high market volatility and rapidly rising rates drove an increase in demand for interest rate derivatives. Deutsche Boerse’s clearing business is also benefitting from the macro backdrop, as uncertainty around the future availability and pricing for energy heading into the high demand winter season presented additional tailwinds from higher volumes of energy derivatives.

Despite a volatile regulatory backdrop, shares of tobacco maker, Philip Morris International Inc. also traded higher in the period. The delivery of another earnings beat continues to validate our longer-term investment thesis. The company is experiencing strong underlying momentum in reduced risk products (RRPs) which is driving better than expected top and bottom-line results. We see years of penetration potential

ahead for Philip Morris as its heated tobacco and vaping product line, IQOS, takes market share away from traditional cigarettes while driving improved average selling prices and profitability. The company believes it is on track to drive more than 50% of revenues from RRPs by 2025. Furthermore, at current trading levels, we believe the company’s operating leverage, pricing power, and improving free cash flow profile offer a strong margin of safety.¹

In contrast, French multinational tire manufacturer, Michelin (CGDE), was the largest detractor from relative performance over the period as investor sentiment for companies tied to the automotive industry remains weak on the back of macro, geo-political and supply chain concerns. Despite near term headwinds, we remain focused on Michelin’s strong global competitive position, cyclical resiliency, and attractive normalized profitability.

British home and auto insurer, Direct Line Insurance Group PLC, also traded lower in the period as elevated prices for new and used cars alongside a tight global automotive supply chain have increased the cost of claims across the auto insurance industry. We remain enthusiastic about the investment opportunity in Direct Line given high levels of normalized profitability. We expect the company to benefit from strong price increases in future premiums.

To help manage unintended risks in the portfolio, we employ currency hedging techniques, including buying and selling currency on a spot basis and entering into short-term foreign currency forward contracts. This approach can result in either gains or losses. For the 12-month period, it resulted in net realized losses of $19,379,880 for Ariel International Fund.

High and persistent inflation, supply chain disruptions and lingering demand-related distortions have forced policymakers to reverse course from quantitative easing (QE) towards a new regime defined by quantitative tightening (QT). However, QT and rapidly rising interest rates may help curb inflation but likely at a great cost to economic growth. Although stocks look considerably less expensive than they did at the start of the year, we do not believe broad market valuations have come down enough to reflect the impact further rate hikes will have on corporate profits, as greater debt servicing costs weigh on the bottom-line. Taken together, we view these factors to be an increasing source of vulnerability for market multiples. In our view, the repricing of risk across asset classes is not yet done. For this reason, we expect lower quality equities to be among the most vulnerable. We think the sweet spot will be owning undervalued, high dividend yielding, quality companies with resilient business models and strong balance sheets. We have strong conviction in our current positioning and believe our global portfolios are poised for long-term outperformance.

Performance data quoted represents past performance. Past performance does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains and represents returns of the Investor Class shares. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Performance data current to the most recent month-end for Ariel Global Fund may be obtained by visiting our website, arielinvestments.com.

Central banks around the world worked to reign in inflation with interest rate hikes while quantitative tightening (QT) represents a regime change. Both efforts drove all major indices into the red over the period. Meanwhile, Russia’s war in Ukraine, China’s zero-Covid policy, record debt and concerns over the economic outlook for the Eurozone pose further threats to the global economy. Recession watch has taken hold as many investors fear a full-blown energy crisis and central bank induced hard landing. While Wall Street sits on edge and markets remain erratic, we continue to steer clear of what we call the 4Ls: Lofty Valuations, Loss Making Companies, Leveraged Balance Sheets and Liquidity Risk. Our low portfolio turnover continues to underscore our patient approach as we believe our global portfolios, which are heavily weighted towards undervalued, higher dividend yielding and better-quality defensive holdings, should produce strong long-term performance. Against this backdrop, Ariel Global Fund traded -9.99% lower over the trailing one-year period, significantly outperforming both the MSCI ACWI Index and MSCI ACWI Value Index which returned -20.66% and -13.97%, respectively.

Ariel’s non-consensus approach seeks to identify undervalued, out-of-favor, franchise-quality companies that are misunderstood and mispriced. Ariel Global Fund continues to be significantly overweight defensive sectors such as Health Care, Communication Services, Consumer Staples and Utilities, as well as meaningfully underweight Industrials, Information Technology and Consumer Discretionary. Additionally, the Ariel Global Fund lacks exposure to Energy and Materials. At the sector level, stock selection within Financials and Information Technology, as well as the Fund’s relative positioning within Health Care and cash were the largest sources of positive attribution. Meanwhile, the lack of exposure to Energy and the Fund’s Utilities holdings were the greatest performance detractors over the trailing one-year period.

Brazilian insurance company, BB Seguridade Participacoes was the top contributor to performance in the period, as the company continued to deliver strong operational performance highlighted by sales growth, a low loss ratio and better than expected net investment income. By all indications, BBS is in the early innings of a long-term growth story driven by the wealth and savings of a burgeoning middle class. The company has high and sustainable returns on equity due to its best-in-class distribution network, the low-risk nature of its insurance products and the capital-light insurance brokerage business. With shares currently offering an attractive dividend yield and no debt, we believe the company is well-positioned to continue benefitting from the rising interest rate environment as well as growing insurance penetration rates in Brazil.

Peruvian banking franchise, Credicorp, Ltd. was another contributor to relative returns over the trailing one-year period as improving financial results and successful execution across its digital initiatives drove shares higher. We remain focused on

Credicorp’s attractive long-term earnings potential. The company continues to garner higher customer satisfaction and strengthen its competitive moat by educating the unbanked and prospecting through a centralized data analytics platform to expand its client base. The company also views venture capital and the underdeveloped fintech market in Peru as an opportunity to boost growth and enhance shareholder value. At current levels, we believe the valuation is attractive and think Credicorp’s risk/reward dynamics are skewed to the upside, particularly in a rising interest rate environment

Alternatively, French multinational tire manufacturer, Michelin (CGDE), was the largest detractor from relative performance over the period as investor sentiment for companies tied to the automotive industry remains weak on the back of macro, geo-political and supply chain concerns. Despite near term headwinds, we remain focused on Michelin’s strong global competitive position, cyclical resiliency, and attractive normalized profitability.

British home and auto insurer, Direct Line Insurance Group PLC, also traded lower in the period as elevated prices for new and used cars alongside a tight global automotive supply chain have increased the cost of claims across the auto insurance industry. We remain enthusiastic about the investment opportunity in Direct Line given high levels of normalized profitability. We expect the company to benefit from strong price increases in future premiums.

To help manage unintended risks in the portfolio, we employ currency hedging techniques, including buying and selling currency on a spot basis and entering into short-term foreign currency forward contracts. This approach can result in either gains or losses. For the 12-month period, it resulted in net realized gains of $5,869,067 for Ariel Global Fund.

High and persistent inflation, supply chain disruptions and lingering demand-related distortions have forced policymakers to reverse course from quantitative easing (QE) towards a new regime defined by quantitative tightening (QT). However, QT and rapidly rising interest rates may help curb inflation but likely at a great cost to economic growth. Although stocks look considerably less expensive than they did at the start of the year, we do not believe broad market valuations have come down enough to reflect the impact further rate hikes will have on corporate profits, as greater debt servicing costs weigh on the bottom-line. Taken together, we view these factors to be an increasing source of vulnerability for market multiples. In our view, the repricing of risk across asset classes is not yet done. For this reason, we expect lower quality equities to be among the most vulnerable. We think the sweet spot will be owning undervalued, high dividend yielding, quality companies with resilient business models and strong balance sheets. We have strong conviction in our current positioning and believe our global portfolios are poised for long-term outperformance.

Koninklijke Ahold Delhaize N.V. (or “Ahold”) is a grocery chain with roughly half its business in the Benelux region of Europe (Belgium, the Netherlands, and Luxembourg), and the other half in the US. In the US, the company owns ‘household name’ brands such as Food Lion, Stop & Shop, Fresh Direct and Peapod. The company was formed through the merger of Koninklijke Ahold N.V. and Delhaize Group SA in 2016. The large scale, complementary strengths and limited geographic overlap of the combined companies has driven strong synergies. Ahold’s solid execution and judicious investment spending have resulted in superior operating margins, excellent free cash flow generation, and generous payouts to shareholders in dividends and buybacks. Ahold operates mostly through traditional supermarket formats and has been able to differentiate itself from competitors with its focus on high-quality fresh and private market label offerings. Instead of risky expansion, the company has focused on the regions and local markets where it has dominance.

DOING WELL BY DOING GOOD

Ariel initially made a small investment in Ahold almost a decade ago, when investors were focused on the company’s slower top-line and free cash flow growth. Meanwhile, we believed Ahold management’s plan to reinvest cost savings into more nutritional and affordable private label and organic foods would ultimately drive a defensible and sustainable franchise.

We predicted that the company’s strategy to invest in fresher, better quality produce at affordable price points would not hamper margins – but drive market share gains and profit growth. We took advantage of the significant weakness in Ahold’s shares and opportunistically bought most of our current position in the midst of overblown fears following Amazon’s acquisition of Whole Foods. We believed the

transaction’s threats to Ahold were overestimated, and that Amazon was less experienced in managing a perishable supply chain. We thought it more likely that any market share loss to Whole Foods or others would be at the expense of smaller regional players, while leaders like Ahold would likely continue to benefit from internal initiatives and industry tailwinds.

Since our purchase, Ahold’s shares have recovered. The company continues to generate strong cash flow, higher than average operating margins, and maintains its #1 or #2 market positions in the regions it serves. Ahold’s returns on invested capital (ROIC) have remained highly attractive in the 15-20 percent range and have been generally stable for the majority of the last decade – relative to the high-single-digits ROIC that is typical of other industry participants. Ahold’s shares continue to generate a strong 3.5+ percent dividend yield with significant incremental return of capital to investors – atop the dividend shareholders already see in the form of share buybacks.

WORK FROM HOME = EAT FROM HOME

Although this was not part of our initial investment thesis – Ahold became a major beneficiary of changed lifestyle patterns during the pandemic. As more people worked from home in the US and Europe, a larger share of food consumed came from grocery stores. Additionally, fears of contracting COVID-19 drove consumers to buy more of their food from one retailer, with fewer average shopping trips per week. This significantly benefitted large grocers like Ahold – which offers a large selection of product along with online ordering, pick-up and delivery services. Additionally, current market data suggests that Ahold is still retaining most of these share gains as people return to the office in 2022.

MORE WELLNESS AND MORE GOODNESS: AHOLD & ESG

Environmental, social and governance (ESG) research is fully integrated into Ariel’s International & Global investment process. Our portfolio managers are certified by the Sustainability Accounting Standards Board (SASB) – an institution that establishes industry-specific standards for the recognition and disclosure of material ESG impacts by public companies. During our initial research, we were impressed to find that Ahold has and continues to move forward with a range of progressive ESG initiatives.

These include:

Ahold has tied more than 50 percent of its annual senior executive incentive compensation to progress on key ESG metrics. These measurements include: increasing the

proportion of healthy food products sold, reducing food waste and reducing emissions.

In addition, the company includes its ESG Report in its financial statements. This means that Ahold’s reported ESG data is subject to review by its auditor.

Ahold remains an excellent example of a quality, stable business that continues to demonstrate remarkably high levels of profitability and social responsibility.

CarMax, Inc. (NYSE: KMX) is the leading used-vehicle retailer in the United States with an unrivaled platform for buying, selling, and moving cars. The company’s brand, analytics, scale and cost advantages enable it to gain market share in any environment. Facing a slowing economy in the short term, CarMax rightly continues to invest for the long-term, leaning into its omnichannel strategy while competitors recede. For patient investors like Ariel, this industry heavyweight is uniquely positioned for outsized benefits.

MACRO CONCERNS WEIGH ON THE SHORT-TERM OUTLOOK

CarMax shares declined over 20 percent in late September after the company reported same store sales below the management team’s projected estimate. Broad inflation, climbing interest rates and low consumer confidence have caused a decline in sales. Vehicle affordability is a key headwind for consumers. With a ubiquitous brand name, well-known digital offerings, and facilities within 60 miles of most US car owners, CarMax has been gaining share in the face of this slowdown. Despite these gains, sales declined sharply as the summer progressed.

THE ABILITY TO ADJUST TO CUSTOMER PREFERENCES

As the macroeconomic backdrop rapidly changes, the company is focusing on what it can control. On average, more than a third of CarMax’s vehicles are at least six years old, but the company has the unique ability to match demand, using its purchasing scale to procure wanted inventory. This is a competitive advantage. CarMax’s other key edge is its ability to provide credit seamlessly through a

large captive finance operation in partnership with third-party lenders. A CarMax pre-qualification provides customers security in their ability to finance, without choosing a specific vehicle. On the sourcing side, CarMax’s instant appraisal and offer system help the company fill its inventory on solid terms.

FOCUSED ON THE LONG-TERM OPPORTUNITY

As the leader in a large and highly fragmented market, there is an ongoing opportunity to gain market share. There are approximately 40,000 used vehicle dealers in the United States, but only a few players like CarMax can offer the full experience customers increasingly demand. For example, the company offers consumers the ability to move between physical and digital storefronts. The company continues to focus on the future – improving its already robust omnichannel experience and digital auction system. CarMax stands to gradually absorb share from dealers who cannot make these necessary investments. While CarMax’s investments have temporarily elevated its sales, general and administrative expenses, Ariel believes this strategy will ultimately drive market share gains and higher returns on invested capital in the long run.

We believe Wall Street is underestimating the value of CarMax’s brand and its growing digital and logistical capabilities. The company’s scale and solid cost management will help it deliver above-market growth and profitability. We expect CarMax to grow its annual sales volumes, improve operating margins and return excess cash to shareholders. As of September 30, 2022, shares traded at $66.02 – a 41.6 percent discount to our private market value of $113.03.

Generac Holdings, Inc. (NYSE: GNRC) has been a leading global manufacturer of power generation equipment for the residential, commercial, and industrial markets since its founding in 1959. The company’s broad product offerings include: portable generators, engine-powered tools, industrial backup generators and more recently, solar storage and energy management solutions. Generac claims approximately 75 percent market share in North America for its core generator business. After several years of exceptional growth, the stock has been under pressure as investors grapple with higher interest rates and slower growth in the US. However, Ariel believes that Generac is uniquely positioned to benefit from growing demand for backup power, driven by more severe weather patterns and an aging power grid.

REACHING A TIPPING POINT

Until recently, residential standby generators had been a tough sell for homeowners. They were difficult to distribute, expensive, and only rarely needed. However, current events have caused a surge in demand. In 2019, California’s largest utility provider began implementing rolling power outages to prevent wildfires. In 2020, the pandemic turned homes into both sanctuaries and workplaces, amplifying the need for reliable power. And in 2021, Winter Storm Uri disrupted power to 4.5 million Texas residents. After barely budging for over two decades, Generac’s market penetration is on pace to double in the coming years. Given its dominant market share, the company has been the primary beneficiary of current trends, growing its sales over 30 percent annually and more than doubling its earnings per share (EPS) since 2018.

MONITORING INVESTOR ENTHUSIASM

The stock has fallen over 60 percent from its peak last November as investors grapple with rising interest rates and the possibility of a global recession. With corporate

valuation now back to pre-pandemic levels, we think the pendulum has swung too far. In its core home generator business, Generac entered the year with over $1 billion in services backlog and has quadrupled its manufacturing capacity to meet demand. Its often-overlooked commercial business has just scratched the surface on providing backup solutions to critical infrastructure – from wireless communication towers to hospitals. Most recently, the company has entered into the more nascent and complementary solar storage and grid services markets.

A VISIONARY MANAGEMENT TEAM

We believe Generac’s management team has been visionary. Over the past several years, the company utilized its strong balance sheet and excellent free cash flow generation to expand an unmatched distribution network. The company’s brand has become synonymous with reliable backup power. The Generac name also represents a unique solution for powering, storing and managing distributed energy for households and grid operators. With those investments in the rearview and its enviable competitive positioning, the company’s management team estimates that Generac has quintupled its addressable market. Now more than just a niche manufacturer, we believe Generac is uniquely positioned more broadly as an industry-leading solution to an aging electrical grid.

A LONG TERM VIEW

At today’s valuation, investors have overly penalized Generac amidst today’s market volatility. As unbridled enthusiasm has shifted to overblown pessimism, we are taking advantage of an opportunity to own the leader in backup power generation. This is well-timed as the electrical grid proves to be ill-equipped to handle the electrification-of-everything. As of September 30th, shares traded at $178, a 46 percent discount to our private market value.

Founded in 1987 and headquartered in Orville, Ohio: The J.M. Smucker Company (NYSE: SJM or “Smucker’s”) produces some of America’s most beloved consumer products. From pantry staples, to pet food, to coffee – the company’s market-leading brands like Folgers Coffee and JIF peanut butter – are found in nearly 90 percent of U.S. households. Despite some acquisition-driven growth challenges over the years, Smucker’s stock price has recently performed extremely well. The company has been a prime beneficiary of both the recent work-from-home trend and investors’ appreciation of its consistency and pricing power amidst an uncertain economic environment.

A REFOCUSED STRATEGY

Under its prior management team, Smucker’s struggled with an acquisition-led growth strategy. As a result, its performance trailed its peers and its stock price languished. However, new CEO Mark Smucker has divested non-core businesses and streamlined its number of products to refocus the business on its most successful and fastest-growing brands. The current management team brings a more prudent eye on capital allocation – continuing to look for tuck-in acquisitions, but only with the disciplined intent to complement the company’s current portfolio.

STRONG AND RESILIENT BRANDS

The economic uncertainty arising from the pandemic has created a perfect storm of opportunity for Smucker’s. Consumer demand for at-home coffee and food brands increased dramatically during the crisis. With much of the workforce only slowly beginning to return to the office, that same tailwind should persist. More recently, rising inflation and recession fears have pressured consumer

spending and punished more discretionary businesses. And yet, Smucker’s has been able to leverage its brands and pricing power to pass along rising input costs. As consumers seek to manage their budgets by eating at home, Ariel expects the company to continue thriving even if the economy weakens.

RETURNING CASH TO INNOVATION (AND SHAREHOLDERS)

Despite the pandemic and the resulting economic uncertainty, Smucker’s has not stopped innovating. The company’s new partnership with Dunkin’ Donuts and investments in Uncrustables have been very successful – providing a long runway in its premium coffee and away-from-home food segments. In the pet category, Milk Bone and Meow Mix have been gaining market share. Beyond reinvesting for growth, the company is committed to returning excess cash to shareholders. Over the past ten years, Smucker’s has grown its dividend 8 percent annually and repurchased over $3 billion in shares. Going forward, the company aims to return 50 percent of cash flow from operations to pay down debt and return capital to investors through dividends or buybacks.

A LONG-TERM VIEW

The markets have finally begun to appreciate our long-term view of Smucker’s, due to its refocused business and a bulletproof track record of pricing power and consistency. The company’s unmatched portfolio of market-leading brands is well-positioned for the long-term, regardless of the near-term macroeconomic uncertainty. As of September 30th, the stock traded at $137, a slight discount to our estimate of intrinsic value.