N-CSR 1 ariel_ncsr.htm ANNUAL CERTIFIED SHAREHOLDER REPORT ariel_ncsr.htm
 
As filed with the Securities and Exchange Commission on November 26, 2013
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES

Investment Company Act File Number 811-4786

Ariel Investment Trust
(Exact name of registrant as specified in charter)

200 East Randolph Drive
Suite 2900
Chicago, Illinois, 60601
(Address of principal executive offices) (Zip code)

Mareile Cusack
200 East Randolph Drive
Suite 2900
Chicago, Illinois 60601
(Name and address of agent for service)

with a copy to:

Arthur Don, Esq.
Greenberg Traurig, LLP
77 West Wacker Drive
Suite 3100
Chicago, IL 60601

Registrant's telephone number, including area code: (312) 726-0140

Date of fiscal year end: September 30, 2013
Date of reporting period:  September 30, 2013


 
 
 
 
 
 
 
 
 
Item 1. Reports to Stockholders.

The following is a copy of the report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940 (the “Act”) (17 CFR 270.30e-1)
 
 
(REPORT COVER)
 
 
 
 
 
 
 
 
 
 
 
One of Ariel Investments’ guiding principles is to communicate openly with our shareholders so they may gain a clear understanding of our investment philosophy, portfolio decisions and results, as well as our opinions on the underlying market. In reviewing the materials contained in The Patient Investor, please consider the information provided on this page. While our investment decisions are rooted in detailed analysis, it is important to point out that actual results can differ significantly from those we seek. We candidly discuss a number of individual companies. Our opinions are current as of the date they were written but are subject to change.
 
We want to remind investors that the information in this report is not sufficient on which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. Equity investments are affected by market conditions. Ariel Fund, Ariel Appreciation Fund, Ariel Focus Fund and Ariel Discovery Fund invest in small and/or midsized companies. Investing in small and mid-cap stocks is riskier and more volatile than investing in large cap stocks, in part because smaller companies may not have the scale, depth of resources and other assets of larger firms. Ariel Fund and Ariel Appreciation Fund often invest a significant portion of their assets in companies within the consumer discretionary and financial services sectors and their performance may suffer if these sectors underperform the overall stock market. Ariel Focus Fund invests in common stocks of companies of any size and is a non-diversified fund, which means its investments are concentrated in fewer stocks than diversified funds. Ariel Focus Fund generally holds 25-30 stocks and therefore may be more volatile than a more diversified investment. Ariel International Fund and Ariel Global Fund invest in foreign securities and may use currency derivatives and ETFs. Investments in foreign securities may underperform and may be more volatile than comparable U.S. stocks because of the risks involving foreign economies and markets, foreign political systems, foreign regulatory standards, foreign currencies and taxes. The use of currency derivatives and ETFs may increase investment losses and expenses and create more volatility. Investments in emerging and developing markets present additional risks, such as difficulties selling on a timely basis and at an acceptable price.
 
Performance data quoted represents past performance. Past performance does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains. 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 the Funds may be obtained by visiting our website, arielinvestments.com. The extraordinary performance shown for the recent short-term periods may not be sustainable and is not representative of the performance over longer periods.
 
Investors should consider carefully the investment objectives, risks, and charges and expenses before investing. For a current summary prospectus or full prospectus which contains this and other information about the Funds offered by Ariel Investment Trust, call us at 800.292.7435 or visit our website, arielinvestments.com. Please read the summary prospectus or full prospectus carefully before investing. Distributed by Ariel Distributors, LLC, a wholly owned subsidiary of Ariel Investments, LLC.
 
ARIEL INVESTMENT TRUST
c/o U.S. Bancorp Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
800.292.7435 | arielinvestments.com
 
 
  
 
 
 
 
 
(BANNER)
 
          Annualized
   
Quarter
  
1 Year
  
3 Year
  
5 Year
  
10 Year
  
20 Year
Since Inception
Ariel Fund (inception 11/6/86)                            
Investor Class
+
8.78%
+
33.28%
+
15.75%
+
13.07%
+
7.94%
+
10.45%
+
11.46%
Institutional Class
+
8.83
+
33.72
+
15.97
+
13.20
+
8.00
+
10.48
+
11.48
Russell 2500TM Value Index
+
6.43
+
27.58
+
17.12
+
11.07
+
10.03
+
11.03
+
11.55
Russell 2000® Value Index
+
7.59
+
27.04
+
16.57
+
9.13
+
9.29
+
10.29
+
10.88
S&P 500® Index
+
5.24
+
19.34
+
16.27
+
10.02
+
7.57
+
8.80
+
9.92
Ariel Appreciation Fund (inception 12/1/89)                            
Investor Class
+
8.84%
+
34.31%
+
17.65%
+
14.68%
+
9.01%
+
11.17%
+
11.16%
Institutional Class
+
8.92
+
34.76
+
17.83
+
14.79
+
9.07
+
11.20
+
11.19
Russell Midcap® Value Index
+
5.89
+
27.77
+
17.27
+
11.86
+
10.91
+
11.17
+
11.62
Russell Midcap® Index
+
7.70
+
27.91
+
17.53
+
12.97
+
10.78
+
10.82
+
11.38
S&P 500® Index
+
5.24
+
19.34
+
16.27
+
10.02
+
7.57
+
8.80
+
9.11
Ariel Focus Fund (inception 6/30/05)
                            
Investor Class
+
6.95%
+
28.02%
+
14.20%
+
7.99%
  
—
  
—
+
5.01%
Institutional Class
+
7.02
+
28.36
+
14.38
+
8.09
  
—
  
—
+
5.07
Russell 1000® Value Index
+
3.94
+
22.30
+
16.25
+
8.86
  
—
  
—
+
5.80
S&P 500® Index
+
5.24
+
19.34
+
16.27
+
10.02
  
—
  
—
+
6.49
Ariel Discovery Fund (inception 1/31/11)
                            
Investor Class
+
2.47%
+
17.31%
  
—
  
—
  
—
  
—
+
8.64%
Institutional Class
+
2.53
+
17.64
  
—
  
—
  
—
  
—
+
8.87
Russell 2000® Value Index
+
7.59
+
27.04
  
—
  
—
  
—
  
—
+
12.62
S&P 500® Index
+
5.24
+
19.34
  
—
  
—
  
—
  
—
+
13.05
Ariel International Fund (inception 12/30/11)
                            
Investor Class
+
11.03%
+
28.11%
  
—
  
—
  
 
  
—
+
13.66%
Institutional Class
+
11.05
 +
28.42
  
—
  
—
  
 
  
—
+
13.88
MSCI EAFE® Index
+
11.61
 +
24.29
  
—
  
—
  
 
  
—
+
19.90
Ariel Global Fund (inception 12/30/11)
                            
Investor Class
+
8.49%
 +
28.84%
  
—
  
—
  
—
  
—
+
15.68%
Institutional Class
+
8.50
 +
29.15
  
—
  
—
  
—
  
—
+
15.97
MSCI AC World IndexSM
+
8.02
 +
18.37
  
—
  
—
  
—
  
—
+
18.28
 
The inception date for the Institutional Class shares of all Funds is December 30, 2011. Performance information for the Institutional Class prior to that date reflects the actual performance of a Fund’s Investor Class (and uses the actual expenses of the Fund’s Investor Class, for such period of time), without any adjustments. For any such period of time, the performance of a Fund’s Institutional Class would have been substantially similar to, yet higher than, the performance of its Investor Class, because the shares of both classes are invested in the same portfolio of securities, but the classes bear different expenses, which are primarily differences in distribution and service fees. Descriptions for the indexes can be found in the individual fund summaries in the report. The extraordinary performance shown for the recent short-term periods may not be sustainable and is not representative of the performance over longer periods.
 
  3  
 
 
 
 
 
 
 
(BANNER)
 
Turtle Talk
Lessons for the next 30 years
 
In October, we hosted Ariel Investments’ 30th Anniversary Client Conference. We focused the entire conference on a key discipline that influences our views and process—behavioral finance. The root of behavioral finance assumes that inefficiencies exist in the market because human beings are fallible and emotional. Our goal is to understand and exploit the inefficiencies to improve returns for our investors. To that end, we constantly read and study behavioral finance to hone our craft.
 
The panels were heavy on academics: Princeton Professor Burton Malkiel, University of Chicago Professors Richard Thaler and Tobias Moskowitz, and Harvard Professor Cass Sunstein, to name just a few. Although this was an institutional event, we have posted the best content from this conference on our website. Visit arielinvestments.com for insights from these thought-leaders.
 
Thank you for your continued support of Ariel and the opportunity to serve you. We look forward to the next 30 years!
 
arielinvestments.com 4 800.292.7435
 
 
 
 
 
 
(BANNER)
 
 
 
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 Fund and Ariel Appreciation Fund may be obtained by visiting arielinvestments.com.
 
  
 
Dear Fellow Shareholder: For the quarter ending September 30th, Ariel Fund rose +8.78%, which handily outperformed the +6.43% return of its primary benchmark, the Russell 2500 Value Index, as well as the +7.59% rise of the Russell 2000 Value Index. The S&P 500 gained +5.24%. During the period, our financial names grew +7.15% versus +2.85% for those in the benchmark. This difference accounted for 157 basis points of outperformance. Conversely, our producer durable and health care names were both relatively weak but ultimately detracted just -0.37% from our quarter end return. Year-to-date, the portfolio is up +28.04% which compares favorably to the Russell 2500 Value and Russell 2000 Value benchmarks, which rose +22.50% and +23.07%, respectively.
 
Meanwhile, Ariel Appreciation Fund surged +8.84% during the quarter, which trounced the +5.89% return of the Russell Midcap Value Index and also outperformed the +7.70% gain of the Russell Midcap Index. Our financial names were the big winners, specifically mortgage insurer First American Financial Corp. (FAF), investment banking boutique Lazard Ltd (LAZ) and global asset manager Blackstone Group L.P. (BX). On the flip side, our lack of exposure to the technology sector cost us the most, albeit a negligible -0.39%. So far this year, the portfolio has gained +31.23% versus +22.94% for the Russell Midcap Value Index and +24.34% for the Russell Midcap Index.
 
For the one-year period ending September 30, 2013, Ariel Fund gained +33.28% versus a rise of +27.58% for the Russell 2500 Value Index. During the same period, Ariel Appreciation Fund surged +34.31% compared to the Russell Midcap Value Index, which returned +27.77%. Meanwhile, the S&P 500 Index gained +19.34% over the one-year period. The sweet spot for both Funds was the consumer discretionary sector. Meanwhile, energy detracted from results in both funds. On a stock-by-stock basis, Gannett Co., Inc. (GCI) and Interpublic Group of Cos., Inc. (IPG) were top performers in Ariel Fund, gaining +56.90% and +57.85%, respectively. Weaker performers included Contango Oil & Gas Co. (MCF) and Janus Capital Group Inc. (JNS), which fell -21.30% and -7.18%. Ariel Appreciation Fund’s best performers were Interpublic Group of Cos., Inc. and Towers Watson (TW); the latter rose +103.27%. Its laggards included Contango Oil & Gas Co. and Apollo Group, Inc. (APOL), Apollo lost -28.36%.
 
The Buckets
Having recently celebrated the firm’s 30th anniversary, we cannot help but reflect on the lessons that have made us better over time. Of course, new people often add to the equation. One such person who has contributed to our domestic equity investment process in a positive and concrete way is deep value portfolio manager David Maley, who brought a thoughtful portfolio management practice to our firm when he joined us four and a half years ago.
 
  5  
 
 
 
As you know, we seek to own great businesses. More specifically, those with high barriers to entry, high returns on equity, low capital reinvestment requirements, robust cash flows, strong balance sheets, and talented management teams. In a perfect world, we prefer to own these gems with a high level of conviction. But since the world is not perfect, we are also willing to hold companies in which we have moderate conviction, as long as our ownership comes at the right price. We completely shun businesses in which we have low, or no, conviction.
(GRPAHIC)
Regarding price, we favor large discounts, welcome medium discounts and will accept smaller discounts in one specific instance. To be more precise, we seek to own companies trading at a 40% discount to our internally generated estimate of private market value (PMV)1. We will accept a more moderate 25% discount only when re-establishing a position in a still-admired name that we have owned in the past. In order to ensure that our portfolio weightings reflect these preferences, we have adopted a tool David calls “the buckets.” Each bucket has a discount level paired with a conviction level, which together help us determine portfolio weights. As such, our largest positions should represent great companies selling at deep discounts. From there, we have diminishing portfolio weightings.
 
In practice, each holding is assigned a conviction rating and a valuation rating, both of which are determined by the portfolio managers and revisited on a weekly basis. Initially, we decide our level of conviction—of which there are only two choices: high or moderate. As already noted, we do not buy low conviction stocks, and if a company devolves to low conviction, it should be sold. Next, we determine the degree of discount: large, medium or small. We then assign every stock to a “bucket” with position size guidelines prescribed to them. For example, high conviction holdings trading at large discounts represent 3.5% to 5% positions in the portfolio. Moderate conviction issues trading at large discounts and/or high conviction names selling at medium discounts have weightings ranging from 2% to 3.5%. Lastly, moderate conviction holdings at medium discounts and high conviction stocks trading at small discounts represent just 1% to 2% of the portfolio. Besides low conviction names, the one area we also actively avoid is moderate conviction/small discount issues since they are much less attractive from a risk/ reward perspective. The chart below visually illustrates this breakdown.
 
 
(CHART)
 
This tool differs from others in that it is not tied to sector weightings in benchmarks and relative value is not considered. Perhaps this categorization process is best illustrated with two contrasting stock examples. For example, investment banking boutique Lazard Ltd is currently a high conviction holding that trades at a large discount to its private market value and therefore represents a heftier weighting in Ariel Fund (3.6%) and a 4.0% position in Ariel Appreciation Fund.
 
arielinvestments.com 6 800.292.7435
 
 
 
 
 
Meanwhile, sports and entertainment conglomerate Madison Square Garden Co. (MSG) is a high conviction name whose strong two-year run leaves it trading at a small discount—hence a diminished weighting. (1.6% in Ariel Fund and 0.9% in Ariel Appreciation Fund.)
(GRAPHIC)
The key to this enhancement is that it adds an even higher level of structure and discipline to our portfolio management process. Ultimately, it challenges us to continually consider our enthusiasm for every holding, as well as our view on its evolving valuation. Changes in either of these perspectives force a deep and meaningful research team discussion since the position is no longer in its proper bucket. In the end, the buckets help us align our view of a stock’s risk and return with its weighting in the portfolio. That is, stocks with the potential for strong, positive impact belong toward the top of the portfolio, while less promising holdings should be small positions. The buckets also clearly illustrate that the portfolio management process is a dynamic one—in practice and implementation.
 
Portfolio Comings and Goings
During the quarter, Ariel Fund initiated a position in U.S. Silica Holdings Inc. (SLCA), a supplier of industrial-grade sand to the oil and gas markets. Silica (the technical name for this sand) is critical in the process of hydraulic fracturing, and in our view, mastering the logistics and transportation of this commodity constitutes a durable competitive advantage. We believe the market is underestimating the likely pace of growth in U.S. Silica’s revenue and earnings over the next several years (as demand continues to meaningfully increase), as well as the attractive cash flow characteristics of the company’s business. Meanwhile, Ariel Appreciation Fund added Bristow Group Inc. (BRS), a leading helicopter services provider to the offshore oil and gas industry. We did not eliminate any positions in Ariel Fund or Ariel Appreciation Fund this quarter.
 
We appreciate the opportunity to serve you and welcome your questions or comments. Feel free to contact us at email@arielinvestments.com.
 
Sincerely,
 
-s- john w. rogers, jr.
-s- mellody hobson
John W. Rogers, Jr.
Mellody Hobson
Chairman and CEO
President
 
1 Private Market Value (PMV) is our estimated value a rational buyer would pay for an entire business given all relevant information. The buyer can be either strategic or financial. The assumption underlying this methodology is that value will always eventually be recognized, whether it be in the public or private markets.
 
  7  
 
 
 
 
Ariel Fund Performance Summary
Inception: November 6, 1986
 
 
 image  
ABOUT THE FUND
The Fund pursues long-term capital appreciation by investing in small- to medium-sized companies.
 
 
 
 
AVERAGE ANNUAL TOTAL RETURNS as of September 30, 2013
                  
   
3rd Quarter
  
1 Year
  
3 Year
  
5 Year
  
10 Year
  
20 Year
  
Life of Fund
Investor Class
 
    +8.78%
 
+33.28
 %
    +15.75%
 
   +13.07%
 
      +7.94%
 
    +10.45%
 
+11.46
%
Institutional Class+
 
+8.83
  
+33.72
 
+15.97
 
+13.20
 
  +8.00
 
+10.48
 
+11.48
  
Russell2500TM Value Index
  
+6.43
  
+27.58
 
+17.12
 
+11.07
 
+10.03
 
+11.03
 
+11.55
  
Russell2000® Value Index
 
+7.59
  
+27.04
 
+16.57
 
  +9.13
 
  +9.29
 
+10.29
 
+10.88
  
S&P 500® Index
 
+5.24
  
+19.34
 
+16.27
 
+10.02
 
  +7.57
 
  +8.80
 
+9.92
  
Performance data quoted represents past performance and does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains. 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. To access performance data current to the most recent month-end, visit arielinvestments.com.
         
COMPOSITION OF EQUITY HOLDINGS (%)
    Russell 
 Russell
  
    2500 2000
S&P
 
Ariel
Value
Value
 500
 
Fund†
Index
Index
Index
         
Financial services
 33.23 37.11 38.41 17.62
         
Consumer discretionary
 33.22 11.27 11.00 14.41
         
Producer durables
 12.47 13.55 14.32 11.19
         
Health care
 9.08 4.91 4.60 12.84
         
Materials & processing
 5.52 6.65 5.66 3.86
         
Technology
 3.09 8.90 10.15 15.43
         
Energy
 2.13 6.53 6.62 10.48
         
Consumer staples
 1.26 1.74 2.48 8.73
         
Utilities
 0.00 9.33 6.76 5.44
 
† Sector weightings are calculated based on equity holdings in the Fund and exclude cash in order to make a relevant comparison to the indexes.
 
IMAGE
 
Expense Ratio (as of 9/30/2013)*
Investor Class
1.03%
Institutional Class
0.72%
 
TOP TEN EQUITY HOLDINGS
          
             
1   KKR & Co. L.P.
4.2
%
6  Western Union Co.
  
3.4
%
2   Gannett Co., Inc.
3.7
%
7  CBRE Group, Inc.
  
3.3
%
    3   Interpublic Group of Cos., Inc.
3.7
 %
8  Fair Isaac Corp.
  
3.3
%
4   Lazard Ltd
3.6
%
9  Dun & Bradstreet Corp.
  
3.2
%
5   Jones Lang LaSalle Inc.
3.5
%
10 Royal Caribbean Cruises Ltd.
  
3.2
%
 
+The inception date for the Institutional Class shares is December 30, 2011. Performance information for the Institutional Class prior to that date reflects the actual performance of the Fund’s Investor Class (and uses the actual expenses of the Fund’s Investor Class, for such period of time), without any adjustments. For any such period of time, the performance of the Fund’s Institutional Class would have been substantially similar to, yet higher than, the performance of the Fund’s Investor Class, because the shares of both classes are invested in the same portfolio of securities, but the classes bear different expenses, which are primarily differences in distribution and service fees. Notes: The graph and performance table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The Russell 2500TM Value Index measures the performance of small to mid-cap value companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000® Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes’ trademarks, service marks and copyrights. The S&P 500® is a broad market-weighted index dominated by blue-chip stocks. All indexes are unmanaged, and an investor cannot invest directly in an index. Total return does not reflect a maximum 4.75% sales load charged prior to 7/15/94.
 
*As of September 30, 2012, Ariel Fund’s Investor Class shares had an annual expense ratio of 1.06%, and its Institutional Class shares had an annualized expense ratio of 0.68%.
 
arielinvestments.com
8
800.292.7435
 
 
 
 
 
Ariel Appreciation Fund Performance Summary
Inception: December 1, 1989
  
 
 image  
ABOUT THE FUND
The Fund pursues long-term capital appreciation by investing in medium-sized companies.
 
 
 
 
 
AVERAGE ANNUAL TOTAL RETURNS as of September 30, 2013
  
   
3rd Quarter
    
1 Year       
 
3 Year
  
5 Year
 
10 Year
  
20 Year
  
Life of Fund
  
Investor Class
 
    +8.84%
 
 
    +34.31%
 
    +17.65%
  
    +14.68%
  
      +9.01%
  
   +11.17%
  
   +11.16%
 
Institutional Class+
 
+8.92
  
 
+34.76
 
+17.83
 
+14.79
  
  +9.07
 
+11.20
 
+11.19
  
Russell Midcap® Value Index
 
+5.89
  
 
+27.77
 
+17.27
 
+11.86
 
+10.91
 
+11.17
 
+11.62
  
Russell Midcap ® Index
  
+7.70
  
 
+27.91
 
+17.53
 
+12.97
 
+10.78
  
+10.82
 
+11.38
  
S&P 500® Index
 
+5.24
  
 
+19.34
 
+16.27
 
+10.02
 
  +7.57
 
  +8.80
 
  +9.11
  
Performance data quoted represents past performance and does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains. 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. To access performance data current to the most recent month-end, visit arielinvestments.com.
 
COMPOSITION OF EQUITY HOLDINGS (%)
   
Russell
    
 
Ariel
Midcap
Russell
S&P
  Appreciation 
 Value
Midcap
500
 
Fund†
Index
Index
Index
         
Financial services
36.82
32.76
21.07
17.62
         
Consumer discretionary
32.38
9.63
18.45
14.41
         
Health care
14.73
7.73
10.35
12.84
         
Producer durables
13.57
12.13
13.01
11.19
         
Consumer staples
1.29
2.83
5.42
8.73
         
Energy
1.21
6.97
6.65
10.48
         
Technology
0.00
9.05
11.88
15.43
         
Materials & processing
0.00
5.67
6.40
3.86
         
Utilities
0.00
13.24
6.78
5.44
 
† Sector weightings are calculated based on equity holdings in the Fund and exclude cash in order to make a relevant comparison to the indexes.
 
IMAGE
 
Expense Ratio (as of 9/30/2013)*
Investor Class
1.13%
Institutional Class
0.80%
 
TOP TEN EQUITY HOLDINGS
              
1
   First American Financial Corp.
4.0
 %
6
  
Towers Watson
3.4
%
2
  
Lazard Ltd
4.0
%
7
  
AFLAC Inc.
3.3
%
3
  
Western Union Co.
3.9
%
8
  
Illinois Tool Works Inc.
3.3
%
4
  
Interpublic Group of Cos., Inc.
3.6 % 
9
  
Viacom, Inc.
3.3
%
5
  
Hospira, Inc.
3.5
%
 10   
 St. Jude Medical, Inc.
3.2
%
 
+The inception date for the Institutional Class shares is December 30, 2011. Performance information for the Institutional Class prior to that date reflects the actual performance of the Fund’s Investor Class (and uses the actual expenses of the Fund’s Investor Class, for such period of time), without any adjustments. For any such period of time, the performance of the Fund’s Institutional Class would have been substantially similar to, yet higher than, the performance of the Fund’s Investor Class, because the shares of both classes are invested in the same portfolio of securities, but the classes bear different expenses, which are primarily differences in distribution and service fees. Notes: The graph and performance table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The Russell Midcap® Value Index measures the performance of mid-cap value companies with lower price-to-book ratios and lower forecasted growth values. The Russell Midcap® Index measures the performance of mid-cap companies. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes’ trademarks, service marks and copyrights. The S&P 500® is a broad market-weighted index dominated by blue-chip stocks. All indexes are unmanaged, and an investor cannot invest directly in an index. Total return does not reflect a maximum 4.75% sales load charged prior to 7/15/94.
*As of September 30, 2012, Ariel Appreciation Fund’s Investor Class shares had an annual expense ratio of 1.17%, and its Institutional Class shares had an annualized expense ratio of 0.99%.
 
  9  
 
 
 
 
 
IMAGE
 
     
 
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 Focus Fund may be obtained by visiting arielinvestments.com.
 
  
 
Dear Fellow Shareholder: Ariel Focus Fund generated strong performance this past quarter and year to date. Ariel Focus Fund increased +6.95% in the quarter as compared to +3.94% for the Russell 1000 Value Index and +5.24% for the S&P 500 Index. Through the first three quarters of this year the Fund has gained +28.12%, outpacing the +20.47% return of the Russell 1000 Value Index and +19.79% for the S&P 500 Index.
 
A broad selection of companies within our portfolio has driven our strong results thus far in 2013. Seven holdings have increased by more than +40% this year. Just as importantly, we have managed to avoid major disappointments in 2013. We had six stocks decrease in value, but not one was more than 4%. Moreover, our positive performance has been well-diversified across industry sectors. We had at least 5% of the portfolio invested in seven separate sectors this year. Our return in these seven sectors was at least 22%.
 
For the one-year period ending September 30, 2013, Ariel Focus Fund gained +28.02% versus a rise of +22.30% for the Russell 1000 Value Index. Meanwhile, the S&P 500 Index gained +19.34% over the one-year period. The Fund’s top-performing sector was financial services, while consumer discretionary stocks were laggards for the portfolio. On a stock-by-stock basis, Morgan Stanley (MS) and Walgreen Co. (WAG) were top performers in Ariel Focus Fund, gaining +62.48% and +51.64%, respectively. Weaker performers included International Business Machines Corp. (IBM) and Apollo Group, Inc. (APOL), which lost -9.09% and -28.36%, respectively.
 
It is not easy to generalize about the source of this year’s positive results for Ariel Focus Fund when they have been so broad-based. In contrast, we can speak more confidently about where the outperformance did not come from. It did not come from a portfolio of high beta names leveraged to a recovering market. Four out of our five best performers have one-year betas of less than 1.0. Walgreen Co. (WAG), Western Union Co. (WU), Microsoft Corp. (MSFT), and Lockheed Martin Corp. (LMT) all have betas of 0.9 or less. Only Morgan Stanley (MS), up +41.84% this year through the third quarter, can fairly be called a high beta name.
 
arielinvestments.com
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800.292.7435
 
 
 
 
 
Opportunities arising from market overreactions to short-term problems in 2012 have driven our 2013 results. At Ariel, we look for good companies with strong long-term prospects trading at significant discounts to intrinsic value because of well-publicized short-term issues. That strategy worked wonderfully with this year’s top contributor, Walgreens. Walgreens has posted solid long-term growth rates while growing market share in a consolidating industry for some time now. In 2012, however, Walgreens’ stock was pummeled during a dispute with pharmaceutical benefits manager Express Scripts. While the often-heated negotiations between the two companies clearly pressured results, the stock’s poor performance in the first half of last year was an overreaction in our view. When the two companies reached an agreement, both Walgreens’ results and its stock rebounded. Somewhat perversely, last year’s dispute has given Walgreens “easy comps,” that is, last year’s weak numbers make this year’s numbers look all that much stronger in comparison. Walgreens’ +48.09% return in 2013 puts its stock very near our calculation of its intrinsic value. We now view shares of leading competitor CVS Caremark Corp. (CVS) as cheaper than that of Walgreens, so we have been buying the former and selling the latter.
 
IMAGE
 
Western Union is another holding whose 2013 outperformance was born in 2012 problems. Last year, the stock declined more than 30% over two days in reaction to missed earnings resulting from the loss of a corporate partner in Mexico, an important destination for the money transfer business. Additionally, the market became concerned with talk in Washington of “closing the border.” Reduced global immigration would indeed hurt Western Union’s business. Once again, the market overreacted in our view. This leading wide-moat company, which enjoys very high margins for a financial services company, traded for less than 9x our calculation of forward earnings in the fourth quarter of last year. We bought more Western Union, making the company the largest position in Ariel Focus Fund at various times this year. The company has succeeded in finding new Mexican partners, and earnings are starting to grow again. Money transfers across international borders have increased dependably for decades. Today more human beings cross more borders than at any time in history. Western Union’s stock is up +40.27% this year and yet remains relatively attractive at around 11x forward earnings. Given this valuation, the company continues to be a large position in the portfolio.
 
Although we mentioned our energy holdings briefly above, two of our holdings merit more discussion. Chesapeake Energy Corp. (CHK) and National Oilwell Varco (NOV) were both among our top five contributors during the quarter. Last year, both stocks were hurt by unexpectedly low natural gas prices and the resulting reduced profit expectations for natural gas drilling. We believe natural gas will be an important part of helping the U.S. and North America reach energy independence. This will have profound effects on our economy, not to mention geopolitics. Chesapeake and National Oilwell Varco are well-positioned to benefit from this trend, which we expect to last for decades. We should note, however, that Chesapeake’s +57.85% increase this year has made it another stock that has moved from “ridiculously cheap” to “modestly attractive,” in our opinion.
 
While we had some big winners this quarter, some investments lagged. Target Corp. (TGT) dropped -6.50% due to lower than expected sales growth and profitability in Canada and soft same-store sales growth in the U.S. amidst a challenging retail environment. We have recently added to our position on weakness. Our greatest disappointment so far in 2013 has been International Business Machines Corp. (IBM), which has missed our revenue expectations in four of the last five quarters. Sales in emerging markets have been particularly disappointing. We believe IBM’s stock is quite cheap, trading at about 10x forward earnings estimates after adjusting for cash on the balance sheet. We recently added to our position. We also take some solace from noting that Berkshire Hathaway Inc. (BRK.B) is IBM’s largest shareholder. We are paying close attention to IBM, making sure our thesis remains intact—especially in emerging markets.
 
  11  

 
 
 
 
Other stocks posting modest declines this year include our new holdings Mosaic Co. (MOS) and CVS Caremark, as well as Apollo Group, Inc. (APOL), DIRECTV (DTV) and AFLAC Inc. (AFL) (which we exited previously).
 
In the third quarter, we sold two stocks. We sold KKR & CO. L.P. (KKR) when it approached our calculation of intrinsic value. Doing so was painful for us, because we think KKR is a great company employing many of the people we most respect in the financial services industry. Market sentiment toward publicly-traded private equity firms such as KKR varies wildly: “The market either loves ‘em, or it hates ‘em, never in-between.” At any given time, the market seems convinced the private equity model is broken and companies will never earn carried interest profits again. At other times, the market seems convinced the good times will last forever. The bearish sentiment was in force in 2012 when we first purchased KKR below $11 per share. The bullish sentiment was in force in the third quarter when we sold our last shares at $21. Finally, we sold The Northern Trust Corp. (NTRS) in the third quarter on valuation as it became too much loved for our contrarian taste.
 
IMAGE
 
We added four new names in the quarter. We initiated a position in CVS as we trimmed our holdings of Walgreens. We love the retail pharmacy business and believe these companies will play an important role in containing health care costs going forward. That said, we are not thrilled with Walgreens’ recent acquisition streak and prefer CVS’s focus on its core businesses of drug stores and pharmaceutical benefits management. In addition, CVS is now trading about two P/E multiple points cheaper than Walgreens, appealing to our value instincts.
 
We also bought Mosaic, a leading fertilizer manufacturer and distributor. We have followed Mosaic for years believing that world population growth and the resulting increase in demand for food will increase the need for more and better fertilizers. Mosaic’s stock dropped sharply this quarter when competitor companies in Belarus and Russia announced an end to their pricing cartel. This is exactly the kind of short-term sell-off we love. Headlines focused on near-term problems gave us an opportunity to purchase a great company in a great industry with extremely high barriers to entry. Try opening a new fertilizer plant some time. Good luck. We also purchased real estate title insurance provider First American Financial Corp. (FAF), a current holding in all of our other mutual funds. We took advantage of a temporary price dip and added First American to Ariel Focus Fund. In addition, we bought independent oil and gas exploration and production company Apache Corp. (APA).
 
In last quarter’s letter we noted that stocks in the U.S. had become significantly less attractive, making us relatively more cautious. After another strong quarter for the market and an even stronger quarter for our fund, we are finding it harder to find new opportunities. We ended the quarter with an unusually large amount of cash, more than 6%. This cash was mainly the result of inflows but also from a dearth of new stocks meeting both our quality and value requirements. We believe the market is now fairly valued—definitely not as cheap as it was a year ago on our metrics. As a result, Ariel Focus Fund sports a somewhat more defensive stance. A market run might cause the portfolio to lag, but we believe prudence is in order at these valuation levels.
 
We appreciate the opportunity to serve you and welcome your questions or comments. Feel free to contact us at email@arielinvestments.com.
 
Sincerely,
 
IMAGE
Charles K. Bobrinskoy
Portfolio Manager
 
arielinvestments.com
12
800.292.7435

 
 
 
 
Ariel Focus Fund Performance Summary
        
Inception: June 30, 2005
  
 
   (charles k. bobrinskoy)  
ABOUT THE FUND
  
 
The Fund pursues long-term capital appreciation.1
 
 
 
 
 
  
     
 
AVERAGE ANNUAL TOTAL RETURNS as of September 30, 2013
              
   
3rd Quarter
  
1 Year
  
3 Year
  
5 Year
  
Life of Fund
  
Investor Class
  
    +6.95%
  
    +28.02%
  
    +14.20%
  
      +7.99%
  
    +5.01%
  
Institutional Class +
  
+7.02
  
+28.36
  
+14.38
  
  +8.09
  
+5.07
  
Russell 1000® Value Index
  
+3.94
  
+22.30
  
+16.25
  
  +8.86
  
+5.80
  
S&P 500® Index
  
+5.24
  
+19.34
  
+16.27
  
+10.02
  
+6.49
  
Performance data quoted represents past performance and does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains. 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. To access performance data current to the most recent month-end, visit arielinvestments.com.
       
COMPOSITION OF EQUITY HOLDINGS (%)
 
Ariel
Focus
Fund†
 Russell
1000
Value
 Index
S&P
500
Index
     
       
Financial services
21.40
29.21
17.62
       
Producer durables
17.84
10.29
11.19
       
Energy
15.14
14.91
10.48
       
Consumer discretionary
14.38
7.04
14.41
       
Health care
12.44
12.83
12.84
       
Technology
11.51
8.55
15.43
       
Consumer staples
5.74
5.33
8.73
       
Materials & processing
1.55
2.99
3.86
       
Utilities
0.00
8.87
5.44
       
† Sector weightings are calculated based on equity holdings in the Fund and exclude cash in order to make a relevant comparison to the indexes.
 
(Line Graph)
 
         
Expense Ratio (as of 9/30/2013)*
  
Investor Class
  
Institutional Class
Net
     1.25%
 
 1.00 %
Gross
     1.54%   1.19 %
 
TOP TEN EQUITY HOLDINGS
              
1
  
Stanley Black & Decker, Inc.
  
5.5%
  
6
  
Lockheed Martin Corp.
   5.2%  
2
  
International Business Machines Corp.
   5.5%  
7
  
Target Corp.
   3.7%  
3
  
National Oilwell Varco
  
5.4%
  
8
  
Johnson & Johnson
   3.7%  
4
  
Western Union Co.
  
5.4%
  
9
  
Snap-on Inc.
   3.4%  
5
  
Microsoft Corp.
  
5.3%
     10  
Walgreen Co.
   3.4%  
 
1As of 02/01/2013 Ariel Focus Fund has the ability to invest in common stocks of companies of any size.
+The inception date for the Institutional Class shares is December 30, 2011. Performance information for the Institutional Class prior to that date reflects the actual performance of the Fund’s Investor Class (and uses the actual expenses of the Fund’s Investor Class, for such period of time), without any adjustments. For any such period of time, the performance of the Fund’s Institutional Class would have been substantially similar to, yet higher than, the performance of the Fund’s Investor Class, because the shares of both classes are invested in the same portfolio of securities, but the classes bear different expenses, which are primarily differences in distribution and service fees.
*As of September 30, 2012, Ariel Focus Fund (Investor Class) had an annual net expense ratio of 1.25% and a gross expense ratio of 1.58%. As of September 30, 2012, Ariel Focus Fund (Institutional Class) had an annualized net expense ratio of 1.00% and an annualized gross expense ratio of 1.29%. Effective February 1, 2014, Ariel Investments, LLC, the Adviser, has contractually agreed to waive fees and reimburse expenses (the “Expense Cap”) in order to limit Ariel Focus Fund’s total annual operating expenses to 1.00% of net assets for the Investor Class and 0.75% of net assets for the Institutional Class through the end of the fiscal year ending September 30, 2016. Through January 31, 2014, the Expense Cap will continue to be 1.25% for the Investor Class and 1.00% for the Institutional Class.
 
Notes: The graph and performance table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The Russell 1000® Value Index measures the performance of large-cap value companies with lower price-to-book ratios and lower expected growth values. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes’ trademarks, service marks and copyrights. The S&P 500® is a broad market-weighted index dominated by blue-chip stocks. All indexes are unmanaged, and an investor cannot invest directly in an index.
 
  13  
 
 
 
 
 
(Graphic)
 
     
 
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 Discovery Fund may be obtained by visiting arielinvestments.com.
  
     
 
Dear Fellow Shareholder: This was a disappointing quarter for Ariel Discovery Fund, as our return of +2.47% lagged the +7.59% return of the Russell 2000 Value Index and the +5.24% gain of the S&P 500 Index. Year-to-date, Ariel Discovery Fund has returned +19.67%, as compared to +23.07% for the Russell 2000 Value and +19.79% for the S&P 500 Index. We continue to trail the benchmark since inception due to a tough launch, but even with this tough quarter our two-year annual return of +27.18% is respectable compared to the Russell 2000 Value Index and the S&P 500 Index.
                               
Ariel Discovery Fund Results Ended September 30, 2013
   
3Q13
    
YTD
    
1 Year
    
2 Year
    
Since 01/31/11
  
                   
Inception
  
Ariel Discovery Fund
  
+2.47%
    
+19.67%
    
+17.31%
    
+27.18%
    
+8.64%  
 
Russell 2000 Value Index
  
+7.59%
    
+23.07%
    
+27.04%
    
+29.80%
    
+12.62%
  
S&P 500 Index
  
+5.24%
    
+19.79%
    
+19.34%
    
+24.65%
    
+13.05%
  
 
Top performers during the quarter were Furmanite Corp. (FRM), which gained +47.98%; Emergent BioSolutions Inc. (EBS), up +32.11%; and Gulf Island Fabrication, Inc. (GIFI), which returned +28.51%. On the downside were Vical Inc. (VICL), losing -60.38%; JAKKS Pacific, Inc. (JAKK), down -40.71% before it was sold, and Pendrell Corp. (PCO), which fell by -25.67% (although it remains up +52.67% year-to-date). Vical is discussed in detail below.
 
Year-to-date, our biggest contributors were Furmanite, which gained +84.36%; ARC Document Solutions Inc. (ARC), up +79.30%; and Market Leader, Inc. (LEDR), which rose by +68.40% before we sold it prior to the close of its acquisition by Trulia (TRLA). Vical has been our biggest loser year-to-date, falling by -57.39%. JAKKS dropped by -46.00%, and Rentech, Inc. (RTK) was down by -24.71%.
 
arielinvestments.com
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800.292.7435
 
 
 
 
 
As noted above, for the one-year period ending September 30, 2013, Ariel Discovery Fund gained +17.31% versus a gain of +27.04% for the Russell 2000 Value Index. Meanwhile, the S&P 500 Index gained +19.34% over the one-year period. The results were driven by individual stock results. Our two biggest contributors to performance were large holdings Market Leader Inc. (LEDR), up +64.63%, and Madison Square Garden Co. (MSG), which gained +50.34%. Top detractors for the past year were Vical Incorporated (VICL), down -71.36%, and Imation Corp. (IMN), which lost -26.65%.
 
(Graphic)
 
Vical
We typically use these letters to discuss our approach to deep value investing, to outline the case for our favorite stocks, or to comment on trends in the market which we believe will affect our portfolio holdings. This quarter, however, we will share the story of a stock we have held for more than a decade which, at first glance, appears to have “blown up.” We want to explain why we have owned it, how our valuation work continues to indicate a bargain within our long-term discipline, and how we will evaluate the company going forward. Most importantly, we want to demonstrate why we think the company is on solid footing and continues to provide a great long-term investment opportunity.
 
On Monday, August 12th, after announcing that the Phase III trial of its Allovectin compound, a metastatic melanoma therapy, had failed, Vical stock dropped by 57%. Specifically, it did not meet either the primary endpoint of objective response rate or the secondary goal of overall survival. This result obviously disappointed the company, shareholders, and, most of all, cancer patients. Many had hoped this immunotherapy compound would revolutionize treatment for those battling this terrible disease.
 
Although we would have preferred a better outcome on Allovectin, our thesis for Vical was not a simple bet on its success. In our analysis, the company’s infectious disease platform – with multiple promising products –was worth well more than the $240 million enterprise value of Vical just prior to the announcement. We continue to believe that is the case. All along, we knew a Phase III failure for Allovectin would lead to a short-term hit to the stock, but we believed in the long-term, Vical was an undervalued infectious disease company. To us, Allovectin represented a free option on a cancer treatment with enormous upside potential. This option proved to be of no value, but our view on the rest of the company has not changed.
 
Due to the impending binary event surrounding Allovectin, we limited our position size. Indeed, we frequently reduced our weighting in the stock over the years when it traded higher. Just prior to the Allovectin announcement we had a weighting of roughly 3.5%, reflecting our view of extreme long-term undervaluation combined with near-term uncertainty. By comparison, our larger positions tend to be in the range of 5.0% to 6.0%, when we find severe dislocations but greater clarity.
 
Some History
We first bought Vical shares in late 2002 in our Ariel Micro-Cap Value Product as part of a “basket” of eight micro-cap biotechnology stocks combined to equal one normal position. A sustained market decline had left the industry in shambles, and we were able to buy the small positions in emerging companies for roughly half their net cash. True, we had limited insight into any specific early-stage compound’s approval, but we were able to own cheap assets—cash—and invest in science (difficult to value, but potentially quite valuable). As the market recovered in 2003, the stocks moved sharply higher, and we sold all except for Vical.
 
We held Vical and later built it into a normal-sized position in both our Ariel Micro-Cap Value Product and eventually Ariel Discovery Fund. We realized its shares were priced like a one-product, early-stage biotech company. In reality, Vical’s DNA delivery technology platform allowed it to build a deep, well-advanced pipeline of compounds whose potential outcomes are related but not identical. In addition, management did an outstanding job over time of partnering with larger pharmaceutical companies, enabling Vical to conserve cash and minimize dilution.
 
  15  
 
 
 
 
 
Products
Success with Allovectin would have led to significant upside, but its failure has no bearing on the likelihood of success for Vical’s infectious disease candidates:
 
ASP00113 (formerly TransVax) – This is a therapeutic vaccine for cytomegalovirus (CMV) in transplant patients. Vical has partnered with Astellas, granting an exclusive license in exchange for up to $130 million in payments and double-digit royalties. Astellas recently launched a Phase III for stem cell transplant, and is expected to begin a Phase II for solid organ transplant later this year.
 
CyMVectin – CMV vaccine for prevention of congenital infection. This could potentially be an opportunity of more than $2 billion for adolescent females. Vical is exploring partnerships for development of this promising compound.
 
Vaxfectin Adjuvant – This mixture is designed to increase immune responses when added to a vaccine. It has value either in Vical programs or as a technology for license or sale.
 
Herpes Simplex Program – This early stage program uses a Vaxfectin-formulated vaccine against HSV-2. The company expects to initiate a Phase I/II trial in late 2013.
 
Other – Vical also has a pandemic influenza rapid response technology, collaborations with Sanofi and Anges in angiogenesis, and two approved animal vaccines.
 
Given its current price of $1.25/share, the company’s enterprise value is a meager $38 million. To value Vical, we look at the company as a collection of assets held in cash ($70 million), product candidates, approved animal vaccines, and intellectual property in the form of its DNA technology platform. The company has one Phase III candidate being fully funded by a major global firm plus a number of potentially valuable assets. Thus we believe the valuation is extraordinarily low; in our opinion the market’s reaction to the Allovectin failure was wildly overdone.
 
For each of the prospective compounds, we estimate the following: market potential, Vical’s likely share upon approval, and the probability of success. We then calculate the probability-weighted revenues for each candidate, apply an appropriate price/sales multiple, and discount these values back to the present. Each compound then has a probabilistic present value. To err on the side of conservatism, we do not add in any value for the animal vaccines or for the DNA technology platform itself – thereby assigning no value to any potential future discoveries. Finally, to be extremely conservative, we assume that all cash including any raised from equity offerings or from Astellas will be spent, and we assume a doubling of the share count.
 
(Graphic)
 
These calculations produce a fair value that is nearly 30% above the stock price before the Allovectin announcement. Again, there is uncertainty — as each compound will ultimately either have value or it will not—but we believe the risk/reward in the long-term continues to be in our favor. Success with any one compound could lead to a valuation far above current levels, and, as compounds advance, the likelihood of interest from larger pharmaceutical firms and the opportunity to monetize these assets increases.
 
arielinvestments.com
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800.292.7435
 
 
 
 
 
 
The key to our ownership going forward will be the actions of management and the Board of Directors. We have been impressed with CEO Vijay Samant’s stewardship of capital over the years and have communicated to him and his Board that the failed trial puts additional pressure on them in this regard. In our opinion, the company’s leadership needs to be open to further partnerships, asset sales and potentially even the sale of the company. Such actions should eliminate the need to raise capital at dilutive prices and therefore preserve and potentially enhance the value we believe exists in Vical. The duration and size of our ownership will depend greatly on how we view these issues. The company has already made significant cost reductions in recent weeks, and we believe that Vijay Samant and the Board of Directors will be focused on proper capital allocation.
 
(Graphic)
 
Again, we were truly disappointed in the Allovectin results and never enjoy reporting news that hurts your returns. That said, we believe there is a great deal of value in Vical stock, and if correct, we expect to be rewarded for our patience. We will continue to monitor the actions of management and the Board closely and as a major shareholder we will strongly encourage them to act in owners’ interests.
 
Portfolio Comings and Goings
There were several deletions during the quarter. We sold out of Orion Energy Systems, Inc. (OESX), Ballantyne Strong, Inc. (BTN) and Gaiam, Inc. (GAIA) due to their small sizes, as we plan to focus on stocks with market capitalizations of at least $100 million going forward. We sold one of our original holdings, Madison Square Garden Co. (MSG), as it had grown from under $2 billion in market capitalization in early 2011 to over $4.5 billion. We eliminated JAKKS Pacific after its declining business caused it to issue a dilutive convertible bond, leading us to believe our thesis had dissolved. We sold the last of our position in Market Leader shortly before its deal to be acquired by Trulia closed. Finally, we sold our position in Vical to realize a tax loss in early September, but have repurchased the stock as of this writing as the necessary 31 days have passed.
 
We added three attractive new names during the quarter, as follows:
 
RealNetworks, Inc. (RNWK) — Based in Seattle, RealNetworks is best known for its RealPlayer media player software. The company has struggled in recent years, but we were attracted by the return of founder Rob Glaser to a company trading barely above its net cash and below our estimate of liquidation value. Since our initial purchase, the company has introduced RealPlayer Cloud, which along with other new products makes us confident that Mr. Glaser is likely to lead a successful turnaround.
 
Superior Industries Intl Inc. (SUP) — Los Angeles-based Superior is the leading wheel supplier to the North American auto industry. The company is solidly profitable, pays a dividend yielding over 4%, and has attractive long-term growth prospects if it is able to effectively increase its capacity. Yet the stock trades below book value, with no debt and significant excess cash.
 
Brooks Automation, Inc. (BRKS) — Based outside of Boston, Brooks produces semiconductor manufacturing equipment, and has recently expanded into the life sciences area. The company has a leadership position in tool automation for semiconductor makers. The company has a pristine balance sheet with excess cash, solid leadership under CEO Steve Schwartz, and currently trades for roughly its book value.
 
We appreciate the opportunity to serve you and welcome your questions or comments. Feel free to contact us at email@arielinvestments.com.
 
Sincerely,
 
(David M. Maley)
 
  17  
 
 
 
 
 

 Ariel Discovery Fund Performance Summary
Inception: January 31, 2011
 
(photo)  
ABOUT THE FUND
 
The Fund pursues long-term capital appreciation and
searches for a margin of safety1 by investing in small
companies trading at significant discounts to their
intrinsic values.
 
 
 
 
 
AVERAGE ANNUAL TOTAL RETURNS as of September 30, 2013
 
3rd Quarter
1 Year
Life of Fund
Investor Class
+2.47
%
+17.31
%
+8.64
%
Institutional Class+
+2.53
  
+17.64
  
+8.87
  
Russell 2000® Value Index
+7.59
  
+27.04
  
+12.62
  
S&P 500® Index
+5.24
  
+19.34
  
+13.05
  
Performance data quoted represents past performance and does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains. 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. To access performance data current to the most recent month-end, visit arielinvestments.com.
 
COMPOSITION OF EQUITY HOLDINGS (%)
   
Russell
  
 
Ariel
2000
S&P
 
Discovery
 Value
500
 
Fund†
Index
Index
       
Technology
18.31
10.15
15.43
       
Financial services
17.83
38.41
17.62
       
Producer durables
16.18
14.32
11.19
       
Consumer discretionary
14.61
11.00
14.41
       
Energy
11.26
6.62
10.48
       
Materials & processing
9.06
5.66
3.86
       
Utilities
6.54
6.76
5.44
       
Health care
6.21
4.60
12.84
       
Consumer staples
0.00
2.48
8.73
 
† Sector weightings are calculated based on equity holdings in the Fund and exclude cash in order to make a relevant comparison to the indexes.
 
GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION (INVESTOR CLASS)
 
(line graph)
 
Expense Ratio (as of 9/30/2013)*
Investor Class
Institutional Class
Net
1.50%
1.25%
Gross
2.90%
1.93%
 
TOP TEN EQUITY HOLDINGS
        
1
First American Financial Corp.
5.7%
  
6
  
Rosetta Stone Inc.
3.3%
  
2
Contango Oil & Gas Co.
4.8%
  
7
  
Erickson Air-Crane, Inc.
3.0%
  
3
Cowen Group, Inc.
4.0%
  
8
  
POZEN Inc.
3.0%
  
4
International Speedway Corp.
3.9%
  
9
  
Pendrell Corp.
2.9%
  
5
Rentech, Inc.
3.4%
  
10
  
AV Homes, Inc.
2.7%
  
 
1Attempting to purchase with a margin of safety on price cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations on our part, declining fundamentals or external forces.
+The inception date for the Institutional Class shares is December 30, 2011. Performance information for the Institutional Class prior to that date reflects the actual performance of the Fund’s Investor Class (and uses the actual expenses of the Fund’s Investor Class, for such period of time), without any adjustments. For any such period of time, the performance of the Fund’s Institutional Class would have been substantially similar to, yet higher than, the performance of the Fund’s Investor Class, because the shares of both classes are invested in the same portfolio of securities, but the classes bear different expenses, which are primarily differences in distribution and service fees.
*As of September 30, 2012 Ariel Discovery Fund (Investor Class) had an annual net expense ratio of 1.50% and an annual gross expense ratio of 5.18%. As of September 30, 2012, Ariel Discovery Fund (Institutional Class) had an annualized net expense ratio of 1.25% and an annualized gross expense ratio of 4.78%. Effective February 1, 2014, Ariel Investments, LLC, the Adviser, has contractually agreed to waive fees or reimburse expenses (the “Expense Cap”) in order to limit Ariel Discovery Fund’s total annual operating expenses to 1.25% of net assets for the Investor Class and 1.00% for the Institutional Class through the end of the fiscal year ending September 30, 2016. Through January 31, 2014, the Expense Cap will continue to be 1.50% for the Investor Class and 1.25% for the Institutional Class.
 
Notes: The graph and performance table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The Russell 2000® Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes’ trademarks, service marks and copyrights. The S&P 500® is a broad market-weighted index dominated by blue-chip stocks. All indexes are unmanaged, and an investor cannot invest directly in an index.

arielinvestments.com 
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800.292.7435
 
 
 
 

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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 and Ariel Global Fund may be obtained by visiting arielinvestments.com.
  
     
 
Dear Fellow Shareholder: As you know, stocks continued a massive global rally this quarter. So we are happy to report a quarter of strong absolute performance and solid relative results. During the quarter, Ariel International Fund gained +11.03%, versus the MSCI EAFE Index, which returned +11.61%. Additionally, Ariel Global Fund rose +8.49%, topping the MSCI ACWI Index, which advanced +8.02%.
 
For the one-year period ending September 30, 2013, Ariel International Fund returned +28.11% versus +24.29% for the MSCI EAFE Index. Over the same period, Ariel Global Fund advanced +28.84% compared to the MSCI ACWI Index, which gained +18.37%. For both funds, the top contributing sector was information technology, while the top detracting sector was telecommunication services. For Ariel International Fund, on a stock specific basis, top contributors were Nokia Corp. and Roche Holding AG, gaining +158.31% and +49.23%, respectively. Detractors included NTT DoComo, Inc. and Nintendo Co., Ltd., sliding -2.20% and -9.83%, respectively. Top contributors for Ariel Global Fund were Nokia Corp. and Gilead Sciences, Inc. returning +155.49% and +89.48%, respectively. Detractors included NTT DoComo, Inc., returning -5.47%, and Mobistar SA, falling -19.63%, respectively.
 
Turning to philosophy and process, as we have mentioned before, we are true bottom-up stock pickers, but oftentimes market pressures bearing down on an area cause us to dive into that part of the market to find bargains. In our second-quarter 2013 letter, we explored how this tactic drove a significant weighting in Japanese stocks that worked very well and quite quickly. Mind you, we did not “bet” on Japan, but rather used the market’s pessimism toward its overall economy in order to initiate positions in thriving multinationals that happened to be headquartered in Japan.
 
In this quarter’s letter we will explore a more recent, similar move: our international and global portfolios now have significant overweightings (versus their benchmarks) in health care stocks. To some this positioning may represent a very different tactic—a sector stance versus a geographical one. To our minds the idea is very similar, however: Market pressures drove low prices for a large group of securities from which we hand-pick wonderful companies for our portfolios. It makes little difference to us whether negativity compresses stock prices in a country, region, sector, or industry; what matters is the gems such pressure creates.
 
  19  
 
 
 
 
 
We think the history of the health care sector over the last quarter-century has been shaped largely by heuristics, mental shortcuts used to make decision-making easier, as well as behavioral biases. In the 1990s, the health care sector was globally a darling of growth investors. Investors worldwide saw gradual revenue gains, wonderful margins, and massive cash flows and created a heuristic explanation for it. Specifically, investors reasoned, the population in the developed world was getting older, creating a vast, long-term demand for drugs, medical devices, etc. This story, which of course was rooted in reality, ultimately became overly simplistic: Health care is a growth sector, and therefore its stocks deserve to be priced at a premium to the market. Indeed, during the massive global rally from their January 31, 1992 inception dates through March 31, 2000, the DJ Global Health Care Index’s +220.07% total gain topped the DJ Global Index’s +198.47% return.
 
(GRAPHIC)
 
When a complex narrative based on reality becomes overly simplistic, groupthink replaces actual analysis. As such, the market created very rosy forecasts for health care companies that were inevitably too good to be true. But as optimism peaked, key health care companies encountered short-term issues. A wave of key drugs faced patent expirations, but with relatively few new approved drugs to replace them. Thus, pharmaceutical giants were unable to meet revenue and earnings targets. So the market created a new gloomy heuristic to explain disappointing numbers in the beginning of the new century. Health care companies, the argument went, had gotten fat and happy (and therefore lazy) in the heyday of the 1990s and were now doomed to slow growth because their scientific creativity had waned. Thus, in the two multi-year global rallies of this century, health care stocks have lagged. From January 2004 to October 2007, the DJ Global Index gained a total +85.04%, but the health care sector index gained just +40.85%. Similarly, from March 2009 to April 2011, the DJ Global Health Care Index returned +65.48%, well below the +103.98% leap of the broad global index.
 
The experience of specific companies, of course, differed from firm to firm but followed the general pattern. Below we will explain the current opportunities we see in the stocks of Johnson & Johnson and Roche, but first we will describe how they got there.
 
Johnson & Johnson was a true favorite in the 1990s mega-cap bull market, with its glory days persisting until the end of 2002. From that point through 2010, it hit a relative rough patch. During the 1991 to 2002 period, Johnson & Johnson’s revenues gained a remarkable +10.2% annually; in the subsequent period they slipped to a still-solid +6.8%. Its earnings decline was not as steep. The company compounded earnings per share (EPS) at a remarkable +13.6% in the 1990s and early 2000s period before slipping to +10.4% annually in the second era. Its price/earnings (P/E) ratios showcased its increasing popularity in the first period, as well as its fall from grace. Johnson & Johnson’s earnings multiple soared from 26.1x in 1991 to a lofty 37.6x in 1998 before drifting down in the bear market to 24.9x at the end of 2002. From there it plummeted, however, to a low of just 12.9x at the end of 2010. Note that while investors chopped its P/E multiple in half from 2002 to 2010, its earnings per share more than doubled.
 
Roche’s story is different, and even more provocative. Its revenue growth has been quite steady, shifting only slightly from 9% in the 1991 to 2005 period down to 8% in the 2005 to 2012 period. Its earnings and P/E multiple, however, have been more jumpy throughout the multi-decade period, largely because Roche has had negative earnings years such as 1997 and 2002. Still, there is a very clear drop in sentiment in the recent period not reflected in fundamental results. That is, in 2005 Roche earned $1.37 per share, rising to $3.02 per share last year—a growth rate of +11.9% annually—without any negative earnings years. The recent steady growth is far better, we think, than the volatile rise of +9.8% per year from 1991 to 2005. And yet the market chopped Roche’s P/E ratio in half, from 27.3x in 2005 to 13.6x in 2011 (before it recovered a bit recently).

arielinvestments.com 
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800.292.7435
 
 
 
 
 
(GRAPHIC)
 
What we see, then, is two companies with very long, strong track records before one even considers any details about the businesses—and both stocks are much cheaper than they have been historically. That prompted us to investigate, and when we dove deeply we got even more interested.
 
After its slide in the current century, Johnson & Johnson took the opportunity to reinvigorate itself. Alex Gorsky, who became CEO in 2012, led a major transformation; he charged his new operations head, Sandra Peterson, with structural improvements across the company. On the pharmaceutical side, it refocused its Research & Development (R&D) on blockbuster segments such as anti-coagulants and oncology. In its medical technology division, the company boldly exited the underperforming drug-eluding stent business and deployed foreign cash through the acquisition of high-margin specialty implant maker Synthes, a Swiss company. Johnson & Johnson even bolstered its consumer brands such as Neutrogena and Band-Aid, which offer lower margins but steady cash flows. More importantly, it has gotten past the embarrassing 2010 recalls of the children’s versions of Tylenol, Motrin, Zyrtec and Benadryl, and all four are now back on the shelves. We always look forward, even when analyzing a 127-year old company, and at this point see a lean, mean heavyweight ready to compete.
 
In our view, Roche has traditionally been misunderstood. It has generally been priced as a traditional pharmaceutical company, but in reality it functions as a biotechnology giant. That is, after fully acquiring long-time partner Genentech, 70% of its revenues come from biologics, which have much higher margins than traditional compounds. This structure allows the company to fund the world’s largest pharmaceutical R&D budget of $9 billion annually. It homes in on targeted therapy cancer drugs in particular. While most competitors are still at the nascent stage of evaluation, Roche already has some of these personalized treatments on the market and many in late-stage development. Roche is at the forefront of immunotherapy—drugs eliciting the body’s natural immune system. Such drugs potentially offer a breakthrough, curing certain types of cancer, meaning patients now measure success in somewhat lengthened lifespans. With many drugs already on the market and this type of very promising pipeline, we have a hard time seeing the company as a slow grower.
 
We hope this level of detail explains the difference between backdrop and foreground, which work in concert in such a situation. That is, the backdrop is negativity related to a set of stocks, whether they be competitors in an industry, domiciled in the same country or exposed to a certain macroeconomic expectation. It matters, but largely insofar as it causes expectations and prices to drop. In the foreground are the companies themselves. The aforementioned details about individual companies, which of course are just the headlines to our diligent research, demonstrate that a good business on an even better trajectory is most important to us. When the two combine, we see a beautiful picture.
 
We appreciate the opportunity to serve you and welcome your questions or comments. Feel free to contact us at email@arielinvestments.com.
 
Sincerely,
 
-s- Rupal J. Bhansali
 
Rupal J. Bhansali
Portfolio Manager
 
  21  
 
 
 
 
 
Ariel International Fund Performance Summary
Inception: December 30, 2011
 
(photo of rupal j. bhansali)
 ABOUT THE FUND
The Fund pursues long-term capital appreciation by investing primarily in companies outside the U.S. in developed international markets.
 
 
 
AVERAGE ANNUAL TOTAL RETURNS as of September 30, 2013
      
 
3rd Quarter
 1 Year
Life of Fund
Investor Class
    +11.03%
    +28.11%
    +13.66%
Institutional Class
+11.05
+28.42
+13.88
MSCI EAFE® Index
+11.61
+24.29
+19.90
Performance data quoted represents past performance and does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains. 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. To access performance data current to the most recent month-end, visit arielinvestments.com.
 
COMPOSITION OF EQUITY HOLDINGS1 (%)
 
Ariel
MSCI
 
International
EAFE
 
Fund†
Index
     
Information technology
19.85
4.33
     
Financials
17.76
25.43
     
Consumer discretionary
17.04
11.82
     
Consumer staples
15.45
11.22
     
Health care
11.53
9.95
     
Telecommunication services
7.03
5.46
     
Energy
4.15
6.87
     
Utilities
3.36
3.71
     
Industrials
3.24
13.00
     
Materials
0.59
8.21
† Sector weightings are calculated based on equity holdings in the Fund and exclude cash in order to make a relevant comparison to the indexes.
 
COUNTRY WEIGHTINGS (%)
   
Japan
19.21
U.K.
15.96
Switzerland
14.54
Germany
9.35
China
5.78
Netherlands
5.44
Italy
5.14
U.S.
4.47
Finland
4.08
France
2.98
Ireland
2.82
Canada
2.80
Sweden
1.89
Luxembourg
1.57
Hong Kong
1.36
Spain
1.18
Norway
0.68
Singapore
0.45
Czech Republic
0.30
 
TOP TEN COMPANIES^
1
Roche Holding AG
5.1%
2
Deutsche Boerse AG
4.8%
3
Koninklijke Ahold NV
4.6%
4
GlaxoSmithKline plc
3.8%
5
Tesco plc
3.6%
6
Nokia Corp.
3.4%
7
Snam SpA
2.8%
8
China Mobile Ltd.
2.7%
9
Nestle SA
2.7%
10
Shimamura Co., Ltd.
2.5%

^  For the purposes of determining the Fund’s top ten
    companies, securities of the same issuer are
    aggregated.
 
(LINE GRAPH)
 
Expense Ratio (as of 9/30/2013)*
  Investor Class  Institutional Class
Net
1.40%
1.15%
Gross
9.36%
6.53%
  
1The sectors above are the Global Industry Classification Standard (“GICS”) sector classifications. GICS was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”) and is licensed for use by Ariel Investments, LLC. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
 
*As of September 30, 2012 Ariel International Fund (Investor Class) had an annualized net expense ratio of 1.40% and an annualized gross expense ratio of 17.00%. As of September 30, 2012, Ariel International Fund (Institutional Class) had an annualized net expense ratio of 1.15% and an annualized gross expense ratio of 15.70%. Effective February 1, 2014, Ariel Investments, LLC, the Adviser, has contractually agreed to waive fees or reimburse expenses (the “Expense Cap”) in order to limit Ariel International Fund’s total annual operating expenses to 1.25% of net assets for the Investor Class, and 1.00% of net assets for the Institutional Class, through the end of the fiscal year ending September 30, 2016. Through January 31, 2014, the Expense Cap will continue to be 1.40% for the Investor Class and 1.15% for the Institutional Class.
 
Notes: The performance table does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. MSCI EAFE® Index is an unmanaged, market weighted index of companies in developed markets, excluding the U.S. and Canada. An investor cannot invest directly in an index.
 
arielinvestments.com 
22 800.292.7435
 
 
 
 
 
Ariel Global Fund Performance Summary
Inception: December 30, 2011
 
(photo of rupal j. bhansali) ABOUT THE FUND
The Fund pursues long-term capital appreciation by investing primarily in companies both within and outside the U.S., in countries with developed or emerging markets.
 
 
 
AVERAGE ANNUAL TOTAL RETURNS as of September 30, 2013
      
 
3rd Quarter
 1 Year
Life of Fund
Investor Class
+8.49%
+28.84%
+15.68%
Institutional Class
+8.50%
+29.15%
+15.97%
MSCI AC World IndexSM
+8.02%
+18.37%
+18.28%
Performance data quoted represents past performance and does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains. 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. To access performance data current to the most recent month-end, visit arielinvestments.com.
 
COMPOSITION OF EQUITY HOLDINGS1 (%)
 
Ariel
MSCI
 
Global
AC World
 
Fund†
Index
     
Health care
20.92
10.11
     
Information technology
20.22
12.07
     
Financials
13.80
21.57
     
Consumer discretionary
13.51
11.87
     
Consumer staples
11.32
9.99
     
Telecommunication services
7.07
4.17
     
Industrials
5.35
10.79
     
Energy
4.29
9.87
     
Materials
2.00
6.26
     
Utilities
1.52
3.29
† Sector weightings are calculated based on equity holdings in the Fund and exclude cash in order to make a relevant comparison to the indexes.
 
COUNTRY WEIGHTINGS (%)
   
U.S.
41.37
U.K.
11.75
Switzerland
9.63
Japan
7.77
China
5.34
Germany
5.32
Netherlands
3.86
Finland
2.55
France
2.51
Italy
2.32
Ireland
2.29
Canada
1.38
Hong Kong
0.99
Spain
0.81
Luxembourg
0.66
Turkey
0.47
Brazil
0.45
Czech Republic
0.28
Sweden
0.14
Singapore
0.11
 
TOP TEN COMPANIES^
1
Microsoft Corp.
4.5%
2
Johnson & Johnson
4.2%
3
Roche Holding AG
4.1%
4
Gilead Sciences, Inc.
3.5%
5
Koninklijke Ahold NV
3.1%
6
Deutsche Boerse AG
3.1%
7
China Mobile Ltd.
2.8%
8
Tesco plc
2.6%
9
Quest Diagnostics Inc.
2.4%
10
GlaxoSmithKline plc
2.3%
^ For the purposes of determining the Fund’s top ten companies, securities of the same issuer are aggregated.
 
(LINE GRAPH)
 
Expense Ratio (as of 9/30/2013)*
  Investor Class  Institutional Class
Net
1.40%
1.15%
Gross
5.37%
2.51%
 
1The sectors above are the Global Industry Classification Standard (“GICS”) sector classifications. GICS was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”) and is licensed for use by Ariel Investments, LLC. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
 
*As of September 30, 2012 Ariel Global Fund (Investor Class) had an annualized net expense ratio of 1.40% and an annualized gross expense ratio of 12.33%. As of September 30, 2012, Ariel Global Fund (Institutional Class) had an annualized net expense ratio of 1.15% and an annualized gross expense ratio of 4.07%. Effective February 1, 2014, Ariel Investments, LLC, the Adviser, has contractually agreed to waive fees or reimburse expenses (the “Expense Cap”) in order to limit Ariel Global Fund’s total annual operating expenses to 1.25% of net assets for the Investor Class, and 1.00% of net assets for the Institutional Class, through the end of the fiscal year ending September 30, 2016. Through January 31, 2014, the Expense Cap will continue to be 1.40% for the Investor Class and 1.15% for the Institutional Class.
 
Notes: The performance table does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. MSCI ACWI (All Country World Index) IndexSM is an unmanaged, market weighted index of global developed and emerging markets. An investor cannot invest directly in an index.
 
  23  
 
 
 
 
 
(GRAPHIC)
 
As with many of our Deep Value holdings, we believe that Cowen Group, Inc. (COWN) is an underfollowed and widely misunderstood small-cap company, providing an attractive risk/reward profile at current prices. Cowen Group was formed when Cowen Holdings, a boutique investment bank with roots dating back to 1918, was purchased by Ramius LLC in 2009. The venerable Cowen brand remains, but top management is made up primarily of members of RCG Holdings LLC, which founded Ramius, an alternative asset manager, in 1994. Ramius is a highly successful and well respected alternative asset manager with roughly $9 billion in assets under management and an outstanding track record in product lines such as U.S. Small Activist, Global Long/Short Credit, Healthcare Royalty, Real Estate, and Alternative Solutions.
 
Extraordinary Leadership
Cowen Group’s seasoned management team is led by CEO Peter Cohen, who was CEO of Shearson Lehman from 1983 to 1990. Ramius Chair and Cowen Group Vice Chair Thomas Strauss rose to President of Salomon Brothers in 1986. Ramius purchased Cowen in 2009 to ensure a permanent capital base, but internal and external challenges in the investment banking and brokerage businesses led to a very difficult period for the combined company. Jeff Solomon, an original Ramius executive, is now leading Cowen & Co., the investment bank and brokerage arm, through a drastic overhaul which appears to be successfully taking hold. Finally, Michael Singer was brought in to lead Ramius in 2012 from Third Avenue Management, where he was Head of Alternative Investments. This is a savvy team with decades of experience on both sides of the business; we have been extraordinarily impressed with them in our series of meetings over the past couple of years, as well as by the actions they have taken to build the business and maximize shareholder value. We take great comfort in knowing insiders own more than 20% of the company.
 
A Unique Collection of Assets
The combination of the two businesses creates a firm with three profit centers: asset management; a research-driven investment bank with a full suite of advisory and capital markets capabilities; as well as invested firm capital. Ramius has a history of wisely investing firm capital to drive growth in its operating businesses. A very significant portion of the firm’s highly liquid balance sheet is invested alongside Ramius investment management clients; since 1999, Ramius has generated a 16% Return on Equity (ROE) with its internal capital. Ramius’s business model is highly scalable—it could manage up to $20 billion on its current platform. And finally, Cowen & Co. appears to have turned the corner as it is well-positioned to serve active investment managers and growth companies with a vastly improved cost structure.
 
Attractive Valuation
Despite a substantial year-to-date gain, Cowen Group shares still trade at just 80% of its book value. Yet, we believe all three business lines will generate solid long-term returns. In our opinion, the struggles at the broker-dealer have masked the value of Ramius and of the company’s asset base. Not to mention a deferred tax asset from past losses that will become very valuable as the combined company returns to profitability. We view COWN stock as undervalued by 40% or more at current levels, and most importantly, we believe the asset base provides the margin of safety1 which we seek in all of our Deep Value holdings.
 
1 Attempting to purchase with a margin of safety on price cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations on our part, declining fundamentals or external forces.
 
arielinvestments.com 
24 800.292.7435
 
 
 
 
 
(GRAPHIC)
 
Harman Intl Industries Inc. (HAR) is a maker of high fidelity audio and infotainment systems with headquarters in Stamford, CT. It is a well-known global brand, admired by professionals and consumers alike. Harman has a long-standing reputation providing premium audio and infotainment solutions in the luxury car market, including BMW and Mercedes. Its superior and reliable quality has made Harman the audio speaker of choice for mission critical live events, such as major rock concerts and the Democratic Convention.
 
Our Investment Opportunity
In recent years, despite its position as a dominant player in its chosen markets, the company has seen declining sales and earnings even as their peers in the auto parts sector were experiencing robust recoveries. Despite its product superiority and pricing power, the company had become complacent about its cost structure which led to the loss of a key customer. To make matters worse, the lucrative contract was lost just as car demand plummeted.
 
With the company reeling under both revenue and earnings pressure, its board brought in a new management team from outside the industry. With a fresh perspective, the new CEO, Dinesh Paliwal, identified the need to improve the cost structure, while also expanding revenue potential. A key component of his vision was to move from a product-based approach to a highly customizable, flexible, platform-based approach. This disruptive strategy would enable the company to profitably deliver innovation at the high end, and value in mid-priced vehicles, thereby expanding the market opportunity and lowering costs at the same time.
 
Our Insight
From our contrarian vantage point, a win-win situation was clearly emerging - not only would Harman benefit from an expanded marketplace securing high, mid and mainstream entry-level car segments, it would also help its customers differentiate their product by offering more compelling features at attractive prices. With our patient view, we could see an inflection point emerging in the form of new design wins and growing order backlogs which would inevitably drive higher revenues and earnings.
 
During a bold but painful transition, Harman suffered several years of weaker earnings amidst falling margins. Our research clearly suggested that the low margins were due to the high cost structure “sins of the past” which did not portend the future. With every earnings disappointment, the stock fell and the valuation simultaneously became more attractive which presented a terrific accumulation opportunity. We slowly and deliberately built our position while averaging down on the stock as it fell, waiting for our thesis to unfold.
 
Attractive Valuation
Recently the shares of Harman have rallied as investors are beginning to appreciate the transformational strategy and its full potential. We believe the best is yet to come and we continue to own the shares.
 
  25  
 
 
 
 
 
(GRAPHIC)
 
Jones Lang LaSalle Inc. (JLL) is a leading financial and professional services firm specializing in real estate. With over 200 corporate offices worldwide and operations in more than 1,000 locations in 70 countries, the company offers integrated real estate and investment management services to owner, occupier, investor and developer clients.
 
Full Service Provider of Commercial Real Estate Services
Jones Lang LaSalle is a “one-stop shop” for all things real estate related for its clients. An increasing number of corporate clients are asking that they be serviced not only geographically, but also across product lines. Jones Lang LaSalle possesses the global scale required to serve the complex needs of these clients. In fact, the company is one of a few firms that offers sales and leasing advisory-related transaction services; outsourcing property and facility management; project and development services; as well as investment management. LaSalle Investment Management is one of the world’s largest and most diversified real estate investment management firms with $46 billion of assets under management as of this past June.
 
Outsourcing Adoption Represents an Attractive Growth Vehicle
Jones Lang LaSalle is a global leader in a critical niche where scale is crucial to large and multinational companies. As companies focus on their core competencies, the trend in outsourcing of professional real estate services continues. As one of the largest global single-source service providers, Jones Lang LaSalle should benefit while taking market share from smaller regional and local firms. These gains in outsourcing should drive strong growth in the company’s property and facilities management services business, and also create a greater percentage of recurring revenues and a more stable profit base in the company’s operating model. In fact, approximately 55% of its business is contractual or recurring in nature. We expect Jones Lang LaSalle to benefit from outsourcing trends as businesses look to save valuable resources, specifically, time and money, by hiring external experts to manage their real estate needs.
 
LaSalle Investment Management
We remain convinced that market participants fail to recognize the inherent value in Jones Lang LaSalle’s investment management business. We expect capital to continue to flow into real estate given the under-allocation of the asset class by many institutional funds. Additionally, real estate is perfect for those in search for yield. By our estimates, the investment management business on its own is worth nearly $30 per share, or just over one-fourth of our estimated private market value for the company.
 
Attractive Valuation
With its solid cash flows and investment grade balance sheet, Jones Lang LaSalle is positioned to increase its market share as it leverages its real estate services across its global footprint. At its current valuation, the stock is trading at less than 13x our forward twelve month cash earnings estimate and a 20% discount to our estimate of private market value.
 
arielinvestments.com 
26 800.292.7435
 
 
 
 
 
(GRAPHIC)
 
Stanley Black & Decker, Inc. (SWK) is the leading manufacturer of tools, and the second largest provider of commercial security solutions and engineered fasteners used in everything from cars to medical equipment. In 2009, the company resulted from a merger of Stanley Works and Black & Decker. The company controls a stable of well-respected brands, including DeWalt, Bostitch and Emhart, in addition to its namesakes.
 
Headwinds and Missteps
The company has faced two key headwinds over the last several years. First, the housing downturn took a steep toll on Stanley Black & Decker’s construction and do-it-yourself tools segment. Revenue in the segment declined 24% in 2009 and has yet to recover to pre-recession levels. The company not only had to manage a once-in-a-lifetime demand shock, but also the integration of the largest merger in its history. Four years later, with the housing market yet to recover, the company has achieved new profitability highs in the tools segment, which far exceeded initial cost savings estimates from the Black & Decker merger. Second, Europe has been a challenge following the acquisition of Swedish security company Niscayah for $1.2 billion in 2011. The acquisition proved ill-timed, as the European market for commercial security services has been sluggish and Niscayah’s profitability has failed to meet expectations. Management has acknowledged this rare misstep and has been working to consolidate the security business under the Stanley brand.
 
Driving Organic Growth
Historically, Stanley Black & Decker has grown via acquisitions, completing more than 50 over the last decade. Newly acquired companies are subject to the Stanley Fulfillment System, which drives improvements in working capital and return on investment. In the third quarter of 2012, management announced it was taking a break from large acquisitions to focus on driving organic growth. The same apparatus that has integrated new acquisitions in the past is now tasked with capitalizing on internal expansion opportunities, such as emerging markets, healthcare and oil pipelines. Management expects these initiatives to generate $850 million of incremental revenue, while helping set the stage for long-term growth. Investors are not giving the company credit for the value of these initiatives or for the potential upside as the company’s end-markets recover over the coming years.
 
Attractive Valuation
With residential housing, commercial construction and the European economy still performing below normalized levels, Stanley Black & Decker’s management team has been operating well in a tough environment. As of September 30, 2013, shares traded at a 16% discount to our estimate of private market value of $108.03.
 
  27  
 
 
 
 
 Ariel Fund Statistical Summary
(unaudited)
                                             
           
52-Week Range
  
Earnings per Share
  
P/E Calendar
    
                   
2011
  
2012
  
2013
  
2011
  
2012
  
2013
  
Market
   
Ticker
  
Price
          
Actual
  
Actual
  
Estimated
  
Actual
  
Actual
  
Estimated
  
Cap.
Company
  
Symbol
  
9/30/13
  
Low
  
High
  
Calendar
  
Calendar
  
Calendar
  
P/E
  
P/E
  
P/E
  
($MM)
Symmetry Medical Inc.
  
SMA
  
8.16
  
7.44
  
12.83
  
0.36
  
0.57
  
0.50
  
22.7
  
14.3
  
16.3
  
304
Contango Oil & Gas Co.
  
MCF
  
36.75
  
33.22
  
52.64
  
4.41
  
3.79
  
3.24
  
8.3
  
9.7
  
11.3
  
558
International Speedway Corp.
  
ISCA
  
32.30
  
24.22
  
35.77
  
1.54
  
1.40
  
1.50
  
20.9
  
23.0
  
21.5
  
854
MTS Systems Corp.
  
MTSC
  
64.35
  
41.42
  
65.47
  
3.42
  
3.77
  
3.87
  
18.8
  
17.1
  
16.6
  
1,004
Interface, Inc.
  
TILE
  
19.84
  
12.94
  
20.30
  
0.67
  
0.62
  
0.84
  
29.6
  
32.0
  
23.6
  
1,313
U.S. Silica Holdings Inc.
  
SLCA
  
24.90
  
12.37
  
28.50
  
0.60
  
1.50
  
1.64
  
41.5
  
16.6
  
15.2
  
1,324
Brady Corp.
  
BRC
  
30.50
  
29.11
  
36.45
  
2.54
  
2.38
  
2.04
  
12.0
  
12.8
  
15.0
  
1,476
Simpson Manufacturing Co., Inc.
  
SSD
  
32.57
  
27.49
  
34.33
  
1.12
  
1.01
  
1.11
  
29.1
  
32.2
  
29.3
  
1,582
Janus Capital Group Inc.
  
JNS
  
8.51
  
7.68
  
10.18
  
0.85
  
0.65
  
0.69
  
10.0
  
13.1
  
12.3
  
1,613
Meredith Corp.
  
MDP
  
47.62
  
29.27
  
49.10
  
2.85
  
2.87
  
3.04
  
16.7
  
16.6
  
15.7
  
1,733
Littelfuse, Inc.
  
LFUS
  
78.22
  
47.75
  
83.79
  
4.21
  
4.11
  
4.51
  
18.6
  
19.0
  
17.3
  
1,750
DeVry Inc.
  
DV
  
30.56
  
20.37
  
34.51
  
3.94
  
3.04
  
2.58
  
7.8
  
10.1
  
11.8
  
1,925
Fair Isaac Corp.
  
FICO
  
55.28
  
40.47
  
55.80
  
2.17
  
2.68
  
2.95
  
25.5
  
20.6
  
18.7
  
1,946
Charles River Laboratories Intl Inc.
  
CRL
  
46.26
  
35.54
  
48.73
  
2.56
  
2.75
  
2.88
  
18.1
  
16.8
  
16.1
  
2,270
First American Financial Corp.
  
FAF
  
24.35
  
20.39
  
27.40
  
0.86
  
1.70
  
1.88
  
28.3
  
14.3
  
13.0
  
2,604
Bristow Group Inc.
  
BRS
  
72.76
  
48.10
  
73.97
  
3.60
  
1.73
  
3.78
  
20.2
  
42.1
  
19.2
  
2,645
Bio-Rad Laboratories, Inc.
  
BIO
  
117.56
  
99.00
  
127.17
  
7.25
  
7.05
  
6.75
  
16.2
  
16.7
  
17.4
  
2,763
Anixter Intl Inc.
  
AXE
  
87.66
  
54.11
  
89.61
  
5.94
  
5.32
  
6.23
  
14.8
  
16.5
  
14.1
  
2,852
Sotheby’s
  
BID
  
49.13
  
27.98
  
49.60
  
2.49
  
1.58
  
1.79
  
19.7
  
31.1
  
27.4
  
3,357
City National Corp.
  
CYN
  
66.66
  
46.83
  
71.88
  
3.21
  
3.83
  
3.95
  
20.8
  
17.4
  
16.9
  
3,624
Madison Square Garden Co.
  
MSG
  
58.07
  
39.04
  
63.44
  
1.35
  
1.72
  
1.93
  
43.0
  
33.8
  
30.1
  
3,674
Washington Post Co.
  
WPO
  
611.35
  
327.00
  
613.84
  
17.68
  
25.02
  
25.13
  
34.6
  
24.4
  
24.3
  
3,817
Jones Lang LaSalle Inc.
  
JLL
  
87.30
  
72.56
  
101.46
  
4.99
  
5.61
  
6.11
  
17.5
  
15.6
  
14.3
  
3,879
Dun & Bradstreet Corp.
  
DNB
  
103.85
  
70.38
  
112.10
  
5.58
  
6.67
  
7.22
  
18.6
  
15.6
  
14.4
  
4,029
Lazard Ltd
  
LAZ
  
36.02
  
26.15
  
39.50
  
1.31
  
1.20
  
1.75
  
27.5
  
30.0
  
20.6
  
4,649
International Game Technology
  
IGT
  
18.93
  
12.37
  
21.20
  
1.12
  
1.13
  
1.43
  
17.0
  
16.7
  
13.2
  
4,937
IDEX Corp.
  
IEX
  
65.25
  
39.74
  
65.32
  
2.76
  
2.89
  
3.42
  
23.6
  
22.6
  
19.1
  
5,335
KKR & Co. L.P.
  
KKR
  
20.58
  
13.35
  
21.78
  
0.73
  
2.90
  
2.25
  
28.2
  
7.1
  
9.1
  
5,718
Snap-on Inc.
  
SNA
  
99.50
  
70.38
  
101.67
  
4.71
  
5.13
  
5.88
  
21.1
  
19.4
  
16.9
  
5,788
Gannett Co., Inc.
  
GCI
  
26.79
  
16.35
  
26.96
  
2.23
  
2.43
  
2.28
  
12.0
  
11.0
  
11.8
  
6,139
Hospira, Inc.
  
HSP
  
39.22
  
28.62
  
42.60
  
3.06
  
2.01
  
2.20
  
12.8
  
19.5
  
17.8
  
6,497
Interpublic Group of Cos., Inc.
  
IPG
  
17.18
  
9.38
  
17.55
  
0.77
  
0.87
  
0.94
  
22.3
  
19.7
  
18.3
  
7,253
CBRE Group, Inc.
  
CBG
  
23.13
  
16.86
  
25.69
  
1.12
  
1.38
  
1.60
  
20.7
  
16.8
  
14.5
  
7,667
McCormick & Co., Inc.
  
MKC
  
64.70
  
60.75
  
75.26
  
2.80
  
3.06
  
3.17
  
23.1
  
21.1
  
20.4
  
7,755
Newell Rubbermaid Inc.
  
NWL
  
27.50
  
18.80
  
28.47
  
1.59
  
1.70
  
1.83
  
17.3
  
16.2
  
15.0
  
7,920
Royal Caribbean Cruises Ltd.
  
RCL
  
38.28
  
29.96
  
40.71
  
2.80
  
1.84
  
2.38
  
13.7
  
20.8
  
16.1
  
8,408
Mohawk Industries, Inc.
  
MHK
  
130.25
  
77.67
  
134.75
  
3.79
  
4.48
  
6.55
  
34.4
  
29.1
  
19.9
  
9,445
Western Union Co.
  
WU
  
18.66
  
11.93
  
19.11
  
1.65
  
1.85
  
1.50
  
11.3
  
10.1
  
12.4
  
10,299
Nordstrom, Inc.
  
JWN
  
56.20
  
50.94
  
63.34
  
3.18
  
3.61
  
3.65
  
17.7
  
15.6
  
15.4
  
10,953
J.M. Smucker Co.
  
SJM
  
105.04
  
81.60
  
114.72
  
5.20
  
5.78
  
6.33
  
20.2
  
18.2
  
16.6
  
11,042
 
Note: Holdings are as of September 30, 2013. All earnings per share numbers are fully diluted and reflect the company’s cash earnings. Such numbers are from continuing operations and are adjusted for non-recurring items. All estimates of future earnings per share shown in this table are prepared by Ariel Investments research analysts as of September 30, 2013 and have not been updated to reflect any subsequent events. P/E ratios are based on earnings stated and September 30, 2013 stock price.
 
arielinvestments.com
28
800.292.7435
 
 
 
 
 
 Ariel Appreciation Fund Statistical Summary
(unaudited)
                                             
           
52-Week Range
  
Earnings per Share
  
P/E Calendar
    
                   
2011
  
2012
  
2013
  
2011
  
2012
  
2013
  
Market
   
Ticker
  
Price
          
Actual
  
Actual
  
Estimated
  
Actual
  
Actual
  
Estimated
  
Cap.
Company
  
Symbol
  
9/30/13
  
Low
  
High
  
Calendar
  
Calendar
  
Calendar
  
P/E
  
P/E
  
P/E
  
($MM)
Contango Oil & Gas Co.
  
MCF
  
36.75
  
33.22
  
52.64
  
4.41
  
3.79
  
3.24
  
8.3
  
9.7
  
11.3
  
558
International Speedway Corp.
  
ISCA
  
32.30
  
24.22
  
35.77
  
1.54
  
1.40
  
1.50
  
20.9
  
23.0
  
21.5
  
854
Janus Capital Group Inc.
  
JNS
  
8.51
  
7.68
  
10.18
  
0.85
  
0.65
  
0.69
  
10.0
  
13.1
  
12.3
  
1,613
DeVry Inc.
  
DV
  
30.56
  
20.37
  
34.51
  
3.94
  
3.04
  
2.58
  
7.8
  
10.1
  
11.8
  
1,925
Apollo Group, Inc.
  
APOL
  
20.81
  
15.98
  
29.47
  
4.48
  
3.33
  
1.91
  
4.6
  
6.2
  
10.9
  
2,338
First American Financial Corp.
  
FAF
  
24.35
  
20.39
  
27.40
  
0.86
  
1.70
  
1.88
  
28.3
  
14.3
  
13.0
  
2,604
Bristow Group Inc.
  
BRS
  
72.76
  
48.10
  
73.97
  
3.60
  
1.73
  
3.78
  
20.2
  
42.1
  
19.2
  
2,645
Bio-Rad Laboratories, Inc.
  
BIO
  
117.56
  
99.00
  
127.17
  
7.25
  
7.05
  
6.75
  
16.2
  
16.7
  
17.4
  
2,763
Sotheby’s
  
BID
  
49.13
  
27.98
  
49.60
  
2.49
  
1.58
  
1.79
  
19.7
  
31.1
  
27.4
  
3,357
City National Corp.
  
CYN
  
66.66
  
46.83
  
71.88
  
3.21
  
3.83
  
3.95
  
20.8
  
17.4
  
16.9
  
3,624
Madison Square Garden Co.
  
MSG
  
58.07
  
39.04
  
63.44
  
1.35
  
1.72
  
1.93
  
43.0
  
33.8
  
30.1
  
3,674
Jones Lang LaSalle Inc.
  
JLL
  
87.30
  
72.56
  
101.46
  
4.99
  
5.61
  
6.11
  
17.5
  
15.6
  
14.3
  
3,879
Lazard Ltd
  
LAZ
  
36.02
  
26.15
  
39.50
  
1.31
  
1.20
  
1.75
  
27.5
  
30.0
  
20.6
  
4,649
International Game Technology
  
IGT
  
18.93
  
12.37
  
21.20
  
1.12
  
1.13
  
1.43
  
17.0
  
16.7
  
13.2
  
4,937
KKR & Co. L.P.
  
KKR
  
20.58
  
13.35
  
21.78
  
0.73
  
2.90
  
2.25
  
28.2
  
7.1
  
9.1
  
5,718
Snap-on Inc.
  
SNA
  
99.50
  
70.38
  
101.67
  
4.71
  
5.13
  
5.88
  
21.1
  
19.4
  
16.9
  
5,788
Gannett Co., Inc.
  
GCI
  
26.79
  
16.35
  
26.96
  
2.23
  
2.43
  
2.28
  
12.0
  
11.0
  
11.8
  
6,139
Hospira, Inc.
  
HSP
  
39.22
  
28.62
  
42.60
  
3.06
  
2.01
  
2.20
  
12.8
  
19.5
  
17.8
  
6,497
Interpublic Group of Cos., Inc.
  
IPG
  
17.18
  
9.38
  
17.55
  
0.77
  
0.87
  
0.94
  
22.3
  
19.7
  
18.3
  
7,253
Towers Watson
  
TW
  
106.96
  
49.74
  
108.34
  
4.81
  
5.37
  
5.73
  
22.2
  
19.9
  
18.7
  
7,399
CBRE Group, Inc.
  
CBG
  
23.13
  
16.86
  
25.69
  
1.12
  
1.38
  
1.60
  
20.7
  
16.8
  
14.5
  
7,667
Newell Rubbermaid Inc.
  
NWL
  
27.50
  
18.80
  
28.47
  
1.59
  
1.70
  
1.83
  
17.3
  
16.2
  
15.0
  
7,920
Tiffany & Co.
  
TIF
  
76.62
  
55.83
  
83.33
  
3.40
  
3.25
  
3.61
  
22.5
  
23.6
  
21.2
  
9,803
Western Union Co.
  
WU
  
18.66
  
11.93
  
19.11
  
1.65
  
1.85
  
1.50
  
11.3
  
10.1
  
12.4
  
10,299
Nordstrom, Inc.
  
JWN
  
56.20
  
50.94
  
63.34
  
3.18
  
3.61
  
3.65
  
17.7
  
15.6
  
15.4
  
10,953
J.M. Smucker Co.
  
SJM
  
105.04
  
81.60
  
114.72
  
5.20
  
5.78
  
6.33
  
20.2
  
18.2
  
16.6
  
11,042
Blackstone Group L.P.
  
BX
  
24.89
  
13.31
  
25.61
  
1.38
  
1.77
  
2.30
  
18.0
  
14.1
  
10.8
  
11,658
Northern Trust Corp.
  
NTRS
  
54.39
  
45.93
  
62.02
  
2.50
  
2.81
  
3.05
  
21.8
  
19.4
  
17.8
  
13,059
Zimmer Holdings, Inc.
  
ZMH
  
82.14
  
61.97
  
85.08
  
5.14
  
5.67
  
6.15
  
16.0
  
14.5
  
13.4
  
13,927
Stanley Black & Decker, Inc.
  
SWK
  
90.57
  
66.18
  
92.36
  
5.94
  
5.38
  
6.51
  
15.2
  
16.8
  
13.9
  
14,498
Coach, Inc.
  
COH
  
54.53
  
45.87
  
61.94
  
3.23
  
3.63
  
3.77
  
16.9
  
15.0
  
14.5
  
15,323
St. Jude Medical, Inc.
  
STJ
  
53.64
  
30.25
  
54.36
  
3.49
  
3.65
  
3.91
  
15.4
  
14.7
  
13.7
  
15,405
Omnicom Group Inc.
  
OMC
  
63.44
  
45.11
  
70.50
  
3.49
  
3.76
  
4.17
  
18.2
  
16.9
  
15.2
  
16,554
T. Rowe Price Group, Inc.
  
TROW
  
71.93
  
62.34
  
80.26
  
2.92
  
3.36
  
3.83
  
24.6
  
21.4
  
18.8
  
18,712
Carnival Corp.
  
CCL
  
32.64
  
32.07
  
39.95
  
2.36
  
1.91
  
1.57
  
13.8
  
17.1
  
20.8
  
19,309
AFLAC Inc.
  
AFL
  
61.99
  
47.20
  
63.63
  
6.27
  
6.60
  
6.20
  
9.9
  
9.4
  
10.0
  
28,831
CBS Corp.
  
CBS
  
55.16
  
31.84
  
57.47
  
2.05
  
2.65
  
3.16
  
26.9
  
20.8
  
17.5
  
31,194
Franklin Resources, Inc.
  
BEN
  
50.55
  
41.15
  
56.54
  
2.92
  
3.13
  
3.64
  
17.3
  
16.1
  
13.9
  
32,109
Thermo Fisher Scientific Inc.
  
TMO
  
92.15
  
57.21
  
94.74
  
4.16
  
4.93
  
5.35
  
22.2
  
18.7
  
17.2
  
33,222
Illinois Tool Works Inc.
  
ITW
  
76.27
  
58.20
  
78.56
  
4.11
  
4.36
  
4.78
  
18.6
  
17.5
  
16.0
  
34,160
Viacom, Inc.
  
VIAB
  
83.58
  
47.61
  
85.22
  
3.98
  
4.42
  
4.95
  
21.0
  
18.9
  
16.9
  
35,587
 
Note: Holdings are as of September 30, 2013. All earnings per share numbers are fully diluted and reflect the company’s cash earnings. Such numbers are from continuing operations and are adjusted for non-recurring items. All estimates of future earnings per share shown in this table are prepared by Ariel Investments research analysts as of September 30, 2013 and have not been updated to reflect any subsequent events. P/E ratios are based on earnings stated and September 30, 2013 stock price.
 
  29  
 
 
 
 
 
 Ariel Focus Fund Statistical Summary
(unaudited)
                                             
           
52-Week Range
  
Earnings per Share
  
P/E Calendar
    
                   
2011
  
2012
  
2013
  
2011
  
2012
  
2013
  
Market
   
Ticker
  
Price
          
Actual
  
Actual
  
Estimated
  
Actual
  
Actual
  
Estimated
  
Cap.
Company
  
Symbol
  
9/30/13
  
Low
  
High
  
Calendar
  
Calendar
  
Calendar
  
P/E
  
P/E
  
P/E
  
($MM)
DeVry Inc.
  
DV
  
30.56
  
20.37
  
34.51
  
3.94
  
3.04
  
2.58
  
7.8
  
10.1
  
11.8
  
1,925
Apollo Group, Inc.
  
APOL
  
20.81
  
15.98
  
29.47
  
4.48
  
3.33
  
1.91
  
4.6
  
6.2
  
10.9
  
2,338
First American Financial Corp.
  
FAF
  
24.35
  
20.39
  
27.40
  
0.86
  
1.70
  
1.88
  
28.3
  
14.3
  
13.0
  
2,604
Snap-on Inc.
  
SNA
  
99.50
  
70.38
  
101.67
  
4.71
  
5.13
  
5.88
  
21.1
  
19.4
  
16.9
  
5,788
Hospira, Inc.
  
HSP
  
39.22
  
28.62
  
42.60
  
3.06
  
2.01
  
2.20
  
12.8
  
19.5
  
17.8
  
6,497
Western Union Co.
  
WU
  
18.66
  
11.93
  
19.11
  
1.65
  
1.85
  
1.50
  
11.3
  
10.1
  
12.4
  
10,299
Blackstone Group L.P.
  
BX
  
24.89
  
13.31
  
25.61
  
1.38
  
1.77
  
2.30
  
18.0
  
14.1
  
10.8
  
11,658
Mosaic Co.
  
MOS
  
43.02
  
39.75
  
64.65
  
4.40
  
4.08
  
3.23
  
9.8
  
10.5
  
13.3
  
12,786
Zimmer Holdings, Inc.
  
ZMH
  
82.14
  
61.97
  
85.08
  
5.14
  
5.67
  
6.15
  
16.0
  
14.5
  
13.4
  
13,927
Stanley Black & Decker, Inc.
  
SWK
  
90.57
  
66.18
  
92.36
  
5.94
  
5.38
  
6.51
  
15.2
  
16.8
  
13.9
  
14,498
Omnicom Group Inc.
  
OMC
  
63.44
  
45.11
  
70.50
  
3.49
  
3.76
  
4.17
  
18.2
  
16.9
  
15.2
  
16,554
Chesapeake Energy Corp.
  
CHK
  
25.88
  
16.23
  
27.46
  
2.80
  
0.42
  
1.49
  
9.2
  
61.6
  
17.4
  
17,224
DIRECTV
  
DTV
  
59.75
  
47.71
  
67.85
  
3.47
  
4.58
  
4.80
  
17.2
  
13.1
  
12.5
  
32,819
Apache Corp.
  
APA
  
85.14
  
67.91
  
89.17
  
11.79
  
9.62
  
8.20
  
7.2
  
8.9
  
10.4
  
33,155
National Oilwell Varco
  
NOV
  
78.11
  
63.08
  
82.47
  
4.70
  
5.83
  
5.35
  
16.6
  
13.4
  
14.6
  
33,393
Illinois Tool Works Inc.
  
ITW
  
76.27
  
58.20
  
78.56
  
4.11
  
4.36
  
4.78
  
18.6
  
17.5
  
16.0
  
34,160
Bank of New York Mellon Corp.
  
BK
  
30.19
  
22.42
  
32.36
  
2.34
  
2.03
  
2.30
  
12.9
  
14.9
  
13.1
  
34,733
Baxter Intl Inc.
  
BAX
  
65.69
  
59.67
  
74.60
  
4.41
  
4.53
  
4.88
  
14.9
  
14.5
  
13.5
  
35,656
Target Corp.
  
TGT
  
63.98
  
58.01
  
73.50
  
4.24
  
4.37
  
3.88
  
15.1
  
14.6
  
16.5
  
40,379
Lockheed Martin Corp.
  
LMT
  
127.55
  
85.88
  
131.60
  
10.02
  
10.06
  
9.90
  
12.7
  
12.7
  
12.9
  
40,936
Walgreen Co.
  
WAG
  
53.80
  
31.88
  
56.84
  
2.80
  
2.72
  
3.25
  
19.2
  
19.8
  
16.6
  
50,841
Morgan Stanley
  
MS
  
26.95
  
15.95
  
29.50
  
1.26
  
1.59
  
1.90
  
21.4
  
16.9
  
14.2
  
52,783
CVS Caremark Corp.
  
CVS
  
56.75
  
44.33
  
62.36
  
2.80
  
3.43
  
4.30
  
20.3
  
16.5
  
13.2
  
69,710
Goldman Sachs Group, Inc.
  
GS
  
158.21
  
113.23
  
170.00
  
4.51
  
14.13
  
15.00
  
35.1
  
11.2
  
10.5
  
71,053
JPMorgan Chase & Co.
  
JPM
  
51.69
  
38.83
  
56.93
  
4.48
  
5.20
  
5.70
  
11.5
  
9.9
  
9.1
  
194,571
International Business Machines Corp.
IBM
  
185.18
  
181.10
  
215.90
  
13.45
  
15.25
  
16.46
  
13.8
  
12.1
  
11.3
  
202,851
Johnson & Johnson
  
JNJ
  
86.69
  
67.80
  
94.42
  
4.32
  
5.31
  
5.80
  
20.1
  
16.3
  
14.9
  
244,299
Microsoft Corp.
  
MSFT
  
33.31
  
26.26
  
36.43
  
2.73
  
2.70
  
2.64
  
12.2
  
12.3
  
12.6
  
277,221
Exxon Mobil Corp.
  
XOM
  
86.04
  
84.70
  
95.49
  
8.42
  
8.10
  
7.50
  
10.2
  
10.6
  
11.5
  
378,716
 
Note: Holdings are as of September 30, 2013. All earnings per share numbers are fully diluted and reflect the company’s cash earnings. Such numbers are from continuing operations and are adjusted for non-recurring items. All estimates of future earnings per share shown in this table are prepared by Ariel Investments research analysts as of September 30, 2013 and have not been updated to reflect any subsequent events. P/E ratios are based on earnings stated and September 30, 2013 stock price.
 
arielinvestments.com
30
800.292.7435
 
 
 
 
 
  Ariel Fund Schedule of Investments
September 30, 2013 
 
 
Number of Shares
  
Common Stocks—99.04%
    
Value
  
 
     
Consumer discretionary & services—32.90%
        
 
2,985,821
  
Gannett Co., Inc.
  
$
79,990,145
  
 
4,589,866
  
Interpublic Group of Cos., Inc.
    
78,853,898
  
 
1,806,440
  
Royal Caribbean Cruises Ltd.
    
69,150,523
  
 
1,343,968
  
Meredith Corp.
    
63,999,756
  
 
482,504
  
Mohawk Industries, Inc.(a)
    
62,846,146
  
 
1,895,596
  
International Speedway Corp., Class A
    
61,227,751
  
 
3,160,345
  
International Game Technology
    
59,825,331
  
 
1,999,454
  
Newell Rubbermaid Inc.
    
54,984,985
  
 
86,182
  
Washington Post Co., Class B
    
52,687,366
  
 
1,262,290
  
DeVry Inc.
    
38,575,582
  
 
777,165
  
Sotheby’s
    
38,182,116
  
 
577,274
  
Madison Square Garden Co., Class A(a)
    
33,522,301
  
 
258,468
  
Nordstrom, Inc.
    
14,525,902
  
           
708,371,802
  
     
Consumer staples—1.25%
        
 
143,945
  
J.M. Smucker Co.
    
15,119,983
  
 
182,500
  
McCormick & Co., Inc.
    
11,807,750
  
           
26,927,733
  
     
Energy—2.11%
        
 
1,235,343
  
Contango Oil & Gas Co.(b)
    
45,398,855
  
 
     
Financial services—32.90%
        
 
4,419,859
  
KKR & Co. L.P.
    
90,960,698
  
 
2,142,203
  
Lazard Ltd, Class A
    
77,162,152
  
 
862,499
  
Jones Lang LaSalle Inc.
    
75,296,163
  
 
3,881,555
  
Western Union Co.
    
72,429,816
  
 
3,117,053
  
CBRE Group, Inc., Class A(a)
    
72,097,436
  
 
1,270,458
  
Fair Isaac Corp.
    
70,230,918
  
 
671,478
  
Dun & Bradstreet Corp.
    
69,732,990
  
 
7,535,316
  
Janus Capital Group Inc.
    
64,125,539
  
 
2,610,288
  
First American Financial Corp.
    
63,560,513
  
 
793,760
  
City National Corp.
    
52,912,042
  
           
708,508,267
  
     
Health care—9.00%
        
 
1,480,926
  
Charles River Laboratories Intl Inc.(a)
    
68,507,637
  
 
1,647,050
  
Hospira, Inc.(a)
    
64,597,301
  
 
363,783
  
Bio-Rad Laboratories, Inc., Class A(a)
    
42,766,329
  
 
2,184,342
  
Symmetry Medical Inc.(a) (b)
    
17,824,231
  
           
193,695,498
  
     
Materials & processing—5.47%
        
 
1,471,097
  
Simpson Manufacturing Co., Inc.
    
47,913,629
  
 
1,403,000
  
U.S. Silica Holdings Inc.
    
34,934,700
  
 
1,760,301
  
Interface, Inc.
    
34,924,372
  
           
117,772,701
  
     
Producer durables—12.35%
        
 
894,541
  
Bristow Group Inc.
    
65,086,803
  
 
560,213
  
Snap-on Inc.
    
55,741,194
  
 
1,415,929
  
Brady Corp., Class A
    
43,185,834
  
 
645,576
  
IDEX Corp.
    
42,123,834
  
 
457,966
  
Littelfuse Inc.
    
35,822,101
  
 
372,262
  
MTS Systems Corp.
    
23,955,060
  
           
265,914,826
  
     
Technology—3.06%
        
 
752,503
  
Anixter Intl Inc.(a)
    
65,964,413
  
 
     
Total common stocks (Cost $1,272,731,939)
    
2,132,554,095
  
 
 
Principal Amount
  
Repurchase Agreement—1.10%
    
Value
  
 
$
23,614,921
  
Fixed Income Clearing Corporation, 0.00%, dated 09/30/2013, due 10/01/2013,
        
     
repurchase price $23,614,921, (collateralized by Federal Home Loan Bank, 0.120%,
        
     
due 03/28/2014) (Cost $23,614,921)
  
$
23,614,921
  
     
Total Investments (Cost $1,296,346,860)—100.14%
    
2,156,169,016
  
     
Liabilities less Other Assets—(0.14)%
    
(2,984,845
)
     
Net Assets—100.00%
  
$
2,153,184,171
  
 
(a)    
Non-income producing.
(b)    
Affiliated company (See Note Six).
  A category may contain multiple industries as defined by the Global Industry Classification Standards.
  The accompanying notes are an integral part of the financial statements.
 
 
 31
 
 
 
 
 
 
  Ariel Appreciation Fund Schedule of Investments
September 30, 2013 
 
  
Number of Shares
  
Common Stocks—95.02%
    
Value
  
   
     
Consumer discretionary & services—30.77%
        
 
3,980,830
  
Interpublic Group of Cos., Inc.
  
$
68,390,659
  
 
732,500
  
Viacom, Inc., Class B
    
61,222,350
  
 
2,783,790
  
International Game Technology
    
52,697,145
  
 
922,100
  
CBS Corp., Class B
    
50,863,036
  
 
1,384,156
  
International Speedway Corp., Class A
    
44,708,239
  
 
777,500
  
Coach, Inc.
    
42,397,075
  
 
655,700
  
Omnicom Group Inc.
    
41,597,608
  
 
1,428,300
  
Gannett Co., Inc.
    
38,264,157
  
 
661,600
  
Nordstrom, Inc.
    
37,181,920
  
 
562,100
  
Sotheby’s
    
27,615,973
  
 
988,700
  
Newell Rubbermaid Inc.
    
27,189,250
  
 
1,126,000
  
Apollo Group, Inc., Class A(a)
    
23,432,060
  
 
554,150
  
Carnival Corp.
    
18,087,456
  
 
304,800
  
Madison Square Garden, Co., Class A(a)
    
17,699,736
  
 
572,735
  
DeVry Inc.
    
17,502,782
  
 
112,800
  
Tiffany & Co.
    
8,642,736
  
           
577,492,182
  
     
Consumer staples—1.23%
        
 
219,475
  
J.M. Smucker Co.
    
23,053,654
  
   
     
Energy—1.15%
        
 
586,482
  
Contango Oil & Gas Co.
    
21,553,214
  
   
     
Financial services—34.99%
        
 
3,081,600
  
First American Financial Corp.
    
75,036,960
  
 
2,081,620
  
Lazard Ltd, Class A
    
74,979,952
  
 
3,879,200
  
Western Union Co.
    
72,385,872
  
 
1,007,000
  
AFLAC Inc.
    
62,423,930
  
 
648,500
  
Jones Lang LaSalle Inc.
    
56,614,050
  
 
1,025,500
  
Northern Trust Corp.
    
55,776,945
  
 
1,034,300
  
Franklin Resources, Inc.
    
52,283,865
  
 
772,200
  
City National Corp.
    
51,474,852
  
 
1,721,800
  
Blackstone Group L.P.
    
42,855,602
  
 
1,852,255
  
KKR & Co. L.P.
    
38,119,408
  
 
4,362,775
  
Janus Capital Group Inc.
    
37,127,215
  
 
871,050
  
CBRE Group, Inc., Class A(a)
    
20,147,386
  
 
243,300
  
T. Rowe Price Group, Inc.
    
17,500,569
  
           
656,726,606
  
     
Health care—13.99%
        
 
1,675,200
  
Hospira, Inc.(a)
    
65,701,344
  
 
1,121,700
  
St. Jude Medical, Inc.
    
60,167,988
  
 
600,354
  
Thermo Fisher Scientific Inc.
    
55,322,621
  
 
593,900
  
Zimmer Holdings, Inc.
    
48,782,946
  
 
278,425
  
Bio-Rad Laboratories, Inc., Class A(a)
    
32,731,643
  
           
262,706,542
  
     
Producer durables—12.89%
        
 
594,200
  
Towers Watson, Class A
    
63,555,632
  
 
808,350
  
Illinois Tool Works Inc.
    
61,652,855
  
 
527,399
  
Stanley Black & Decker, Inc.
    
47,766,527
  
 
392,100
  
Snap-on Inc.
    
39,013,950
  
 
413,218
  
Bristow Group Inc.
    
30,065,742
  
           
242,054,706
  
   
     
Total common stocks (Cost $1,071,439,650)
    
1,783,586,904
  
   
  
Principal Amount
  
Repurchase Agreement—4.72%
    
Value
  
   
$
88,540,221
  
Fixed Income Clearing Corporation, 0.00%, dated 09/30/2013, due 10/01/2013,
        
     
repurchase price $88,540,221, (collateralized by U.S. Treasury Note, 1.250%,
        
     
due 04/15/2014) (Cost $88,540,221)
  
$
88,540,221
  
     
Total Investments (Cost $1,159,979,871)—99.74%
    
1,872,127,125
  
     
Other Assets less Liabilities—0.26%
    
4,881,540
  
     
Net Assets—100.00%
  
$
1,877,008,665
  
 
(a)    
Non-income producing.
  A category may contain multiple industries as defined by the Global Industry Classification Standards.
  The accompanying notes are an integral part of the financial statements. 
 
arielinvestments.com
 32
800.292.7435
 
 
 
 
 
  Ariel Focus Fund Schedule of Investments
September 30, 2013 
 
  
Number of Shares
  
Common Stocks—93.07%
    
Value
  
   
     
Consumer discretionary & services—13.38%
        
 
32,400
  
Target Corp.
  
$
2,072,952
  
 
80,900
  
Apollo Group, Inc., Class A(a)
    
1,683,529
  
 
27,300
  
DIRECTV(a)
    
1,631,175
  
 
19,500
  
Omnicom Group Inc.
    
1,237,080
  
 
25,400
  
DeVry Inc.
    
776,224
  
           
7,400,960
  
     
Consumer staples—5.34%
        
 
34,800
  
Walgreen Co.
    
1,872,240
  
 
19,100
  
CVS Caremark Corp.
    
1,083,925
  
           
2,956,165
  
     
Energy—14.09%
        
 
38,400
  
National Oilwell Varco
    
2,999,424
  
 
72,200
  
Chesapeake Energy Corp.
    
1,868,536
  
 
20,500
  
Exxon Mobil Corp.
    
1,763,820
  
 
13,600
  
Apache Corp.
    
1,157,904
  
           
7,789,684
  
     
Financial services—19.92%
        
 
159,400
  
Western Union Co.
    
2,974,404
  
 
11,200
  
Goldman Sachs Group, Inc.
    
1,771,952
  
 
63,250
  
Morgan Stanley
    
1,704,588
  
 
29,000
  
JPMorgan Chase & Co.
    
1,499,010
  
 
54,700
  
Blackstone Group L.P.
    
1,361,483
  
 
37,500
  
Bank of New York Mellon Corp.
    
1,132,125
  
 
23,400
  
First American Financial Corp.
    
569,790
  
           
11,013,352
  
     
Health care—11.58%
        
 
23,700
  
Johnson & Johnson
    
2,054,553
  
 
45,700
  
Hospira, Inc.(a)
    
1,792,354
  
 
18,000
  
Zimmer Holdings, Inc.
    
1,478,520
  
 
16,400
  
Baxter Intl Inc.
    
1,077,316
  
           
6,402,743
  
     
Materials & processing—1.44%
        
 
18,500
  
Mosiac Co.
    
795,870
  
   
     
Producer durables—16.61%
        
 
33,500
  
Stanley Black & Decker, Inc.
    
3,034,095
  
 
22,400
  
Lockheed Martin Corp.
    
2,857,120
  
 
18,900
  
Snap-on Inc.
    
1,880,550
  
 
18,500
  
Illinois Tool Works Inc.
    
1,410,995
  
           
9,182,760
  
     
Technology—10.71%
        
 
16,300
  
International Business Machines Corp.
    
3,018,434
  
 
87,200
  
Microsoft Corp.
    
2,904,632
  
           
5,923,066
  
   
     
Total common stocks (Cost $40,301,939)
    
51,464,600
  
   
 
Principal Amount
  
Repurchase Agreement—4.92%
    
Value
  
               
$
2,720,193
  
Fixed Income Clearing Corporation, 0.00%, dated 09/30/2013, due 10/01/2013,
        
     
repurchase price $2,720,193, (collateralized by U.S. Treasury Note, 0.250%,
        
     
due 06/30/2014) (Cost $2,720,193)
  
$
2,720,193
  
     
Total Investments (Cost $43,022,132)—97.99%
    
54,184,793
  
     
Cash, Other Assets less Liabilities—2.01%
    
1,111,767
  
     
Net Assets—100.00%
  
$
55,296,560
  
 
(a)    
Non-income producing.
  A category may contain multiple industries as defined by the Global Industry Classification Standards.
  The accompanying notes are an integral part of the financial statements. 
 
  33  
 
 
 
 
 
  Ariel Discovery Fund Schedule of Investments
September 30, 2013 
 
 
Number of Shares
  
Common Stocks—82.21%
    
Value
  
   
     
Consumer discretionary & services—12.01%
        
 
45,600
  
International Speedway Corp., Class A
  
$
1,472,880
  
 
76,600
  
Rosetta Stone Inc.(a)
    
1,243,218
  
 
58,800
  
XO Group Inc.(a)
    
759,696
  
 
77,600
  
Callaway Golf Co.
    
552,512
  
 
25,600
  
Superior Industries Intl Inc.
    
456,448
  
           
4,484,754
  
     
Energy—9.26%
        
 
49,254
  
Contango Oil & Gas Co.
    
1,810,085
  
 
62,400
  
Mitcham Industries, Inc.(a)
    
954,096
  
 
28,200
  
Gulf Island Fabrication, Inc.
    
691,182
  
           
3,455,363
  
     
Financial services—14.66%
        
 
87,400
  
First American Financial Corp.
    
2,128,190
  
 
432,500
  
Cowen Group, Inc., Class A(a)
    
1,492,125
  
 
56,800
  
AV Homes, Inc.(a)
    
991,728
  
 
30,500
  
MB Financial, Inc.
    
861,320
  
           
5,473,363
  
     
Health care—5.10%
        
 
196,200
  
POZEN Inc.(a)
    
1,124,226
  
 
41,000
  
Emergent Biosolutions Inc.(a)
    
781,050
  
           
1,905,276
  
     
Materials & processing—7.45%
        
 
641,994
  
Rentech, Inc.
    
1,271,148
  
 
24,100
  
Simpson Manufacturing Co., Inc.
    
784,937
  
 
59,399
  
Landec Corp.(a)
    
724,668
  
           
2,780,753
  
     
Producer durables—13.30%
        
 
71,297
  
Erickson Air-Crane, Inc.(a)
    
1,116,511
  
 
32,300
  
Brink’s Co.
    
914,090
  
 
20,639
  
Team, Inc.(a)
    
820,400
  
 
135,000
  
Spartan Motors Inc.
    
819,450
  
 
71,100
  
Furmanite Corp.(a)
    
703,890
  
 
7,550
  
Littelfuse Inc.
    
590,561
  
           
4,964,902
  
     
Technology—15.05%
        
 
226,100
  
Imation Corp.(a)
    
927,010
  
 
96,180
  
PCTEL, Inc.
    
851,193
  
 
89,500
  
RealNetworks, Inc.(a)
    
766,120
  
 
31,300
  
Tessera Technologies, Inc.
    
605,655
  
 
125,300
  
ARC Document Solutions Inc.(a)
    
575,127
  
 
34,400
  
Multi-Fineline Electronix, Inc.(a)
    
557,968
  
 
52,800
  
Brooks Automation, Inc.
    
491,568
  
 
199,518
  
Tellabs, Inc.(a)
    
452,906
  
 
70,000
  
Sigma Designs, Inc.(a)
    
391,300
  
           
5,618,847
  
     
Utilities—5.38%
        
 
548,500
  
Pendrell Corp.(a)
    
1,064,090
  
 
178,963
  
ORBCOMM Inc.(a)
    
943,135
  
           
2,007,225
  
   
     
Total common stocks (Cost $28,090,418)
    
30,690,483
  
   
 
Principal Amount
  
Repurchase Agreement—4.27%
    
Value
  
   
$
1,595,908
  
Fixed Income Clearing Corporation, 0.00%, dated 09/30/2013, due 10/01/2013,
        
     
repurchase price $1,595,908, (collateralized by U.S. Treasury Note, 0.250%,
        
     
due 06/30/2014) (Cost $1,595,908)
  
$
1,595,908
  
     
Total Investments (Cost $29,686,326)—86.48%
    
32,286,391
  
     
Cash, Other Assets less Liabilities—13.52%
    
5,048,662
  
     
Net Assets—100.00%
  
$
37,335,053
  
 
(a)    
Non-income producing.
  A category may contain multiple industries as defined by the Global Industry Classification Standards.
  The accompanying notes are an integral part of the financial statements. 
 
arielinvestments.com
 34
800.292.7435
 
 
 
 
 
  Ariel International Fund Schedule of Investments
September 30, 2013 
 
 
Number of Shares
  
Common Stocks—84.74%
    
Value
  
     
     
Canada—2.37%
        
 
232
  
Fairfax Financial Holdings Ltd.
  
$
93,823
  
 
1,213
  
Power Financial Corp.
    
37,742
  
 
347
  
Tim Hortons Inc.
    
20,125
  
           
151,690
  
     
China—4.90%
        
 
887
  
Baidu, Inc. ADR(a)
    
137,645
  
 
2,295
  
China Mobile Ltd. ADR
    
129,507
  
 
4,072
  
China Mobile Ltd.
    
45,545
  
           
312,697
  
     
Czech Republic—0.25%
        
 
72
  
Komercni Banka AS
    
16,029
  
     
     
Finland—3.46%
        
 
26,927
  
Nokia Corp. ADR
    
175,295
  
 
6,962
  
Nokia Corp.
    
45,755
  
           
221,050
  
     
France—2.52%
        
 
3,183
  
Eutelsat Communications
    
100,634
  
 
895
  
BNP Paribas SA
    
60,540
  
           
161,174
  
     
Germany—7.92%
        
 
4,078
  
Deutsche Boerse AG
    
306,796
  
 
10,924
  
Telefonica Deutschland Holding AG
    
86,233
  
 
3,744
  
Dialog Semiconductor plc(a)
    
71,645
  
 
1,886
  
Infineon Techologies AG
    
18,868
  
 
53
  
Rational AG
    
15,810
  
 
72
  
MTU Aero Engines AG
    
6,727
  
           
506,079
  
     
Hong Kong—1.15%
        
 
26,585
  
Yue Yuen Industrial
    
73,696
  
     
     
Ireland—2.39%
        
 
3,073
  
Ryanair Holdings plc ADR
    
152,851
  
     
     
Italy—4.36%
        
 
35,928
  
Snam SpA
    
181,978
  
 
19,722
  
Mediaset SpA
    
80,043
  
 
377
  
DiaSorin SpA
    
16,244
  
           
278,265
  
     
Japan—16.28%
        
 
1,600
  
Shimamura Co., Ltd.
    
159,031
  
 
2,500
  
Tokyo Electron Ltd.
    
133,781
  
 
1,100
  
Nintendo Co., Ltd.
    
124,554
  
 
2,900
  
Japan Tobacco Inc.
    
104,146
  
 
2,703
  
Canon Inc. ADR
    
86,496
  
 
700
  
Daito Trust Construction Co., Ltd.
    
69,861
  
 
2,000
  
Canon Inc.
    
63,686
  
 
800
  
Murata Manufacturing Co., Ltd.
    
60,959
  
 
1,800
  
OBIC Co. Ltd.
    
57,958
  
 
415
  
Toyota Motor Corp. ADR
    
53,132
  
 
600
  
Toyota Motor Corp.
    
38,273
  
 
700
  
Denso Corp.
    
32,616
  
 
1,600
  
Nikon Corp.
    
27,883
  
 
700
  
Chugai Pharmaceuticals Co., Ltd.
    
14,343
  
 
936
  
Nintendo Co., Ltd ADR
    
13,216
  
           
1,039,935
  
     
Luxembourg—1.33%
        
 
841
  
RTL Group
    
85,217
  
     
     
Netherlands—4.61%
        
 
16,993
  
Koninklijke Ahold NV
    
294,374
  
 
  35  
 
 
 
 
 
Ariel International Fund Schedule of Investments (continued) 
September 30, 2013  
               
  Number of Shares  
Common Stocks—84.74% (cont’d)
   Value  
     
     
Norway—0.58%
        
 
2,448
  
Gjensidige Forsikring ASA
  
$
36,965
  
     
     
Singapore—0.38%
        
 
373
  
Avago Technologies Ltd.
    
16,084
  
 
1,000
  
Oversea-Chinese Banking Corp. Ltd.
    
8,210
  
           
24,294
  
     
Spain—1.00%
        
 
1,391
  
Tecnicas Reunidas SA
    
63,699
  
     
     
Sweden—1.60%
        
 
1,929
  
H&M Hennes & Mauritz AB, Class B
    
83,773
  
 
212
  
Autoliv Inc.
    
18,527
  
           
102,300
  
     
Switzerland—12.33%
        
 
1,201
  
Roche Holding AG
    
323,905
  
 
2,490
  
Nestle SA
    
174,150
  
 
409
  
Zurich Insurance Group Ltd
    
105,331
  
 
3,375
  
UBS AG
    
69,041
  
 
135
  
Swisscom AG
    
64,876
  
 
381
  
Actelion Ltd.
    
27,047
  
 
42
  
Banque Cantonale Vaudoise
    
23,140
  
           
787,490
  
     
     
United Kingdom—13.52%
        
 
4,659
  
GlaxoSmithKline plc ADR
    
233,742
  
 
39,948
  
Tesco plc
    
232,172
  
 
11,542
  
HSBC Holdings plc
    
125,080
  
 
1,426
  
Royal Dutch Shell plc ADR
    
93,660
  
 
1,033
  
Royal Dutch Shell plc, Class A
    
34,115
  
 
741
  
Croda Intl plc
    
31,850
  
 
6,961
  
Wm. Morrison Supermarkets plc
    
31,554
  
 
5,263
  
British Telecom Group plc
    
29,173
  
 
454
  
BT Group plc ADR
    
25,106
  
 
1,163
  
The Restaurant Group plc
    
10,016
  
 
946
  
IG Group Holdings plc
    
8,867
  
 
346
  
GlaxoSmithKline plc
    
8,724
  
           
864,059
  
     
United States—3.79%
        
 
1,641
  
Harman Intl Industries Inc.
    
108,683
  
 
1,355
  
TIBCO Software Inc.(a)
    
34,674
  
 
378
  
Schlumberger Ltd.
    
33,400
  
 
1,540
  
Tumi Holdings Inc.(a)
    
31,031
  
 
1,132
  
Ruckus Wireless, Inc.(a)
    
19,052
  
 
585
  
Broadcom Corp., Class A
    
15,216
  
           
242,056
  
     
     
Total common stocks (Cost $4,458,576)
    
5,413,920
  
     
Number of Shares  
Investment Companies—3.35%
    
Value
  
               
     
Exchange Traded Funds—3.35%
        
 
2,896
  
Vanguard MSCI EAFE ETF
  
$
114,624
  
 
1,636
  
Vanguard MSCI Pacific ETF
    
99,371
  
           
213,995
  
     
     
Total investment companies (Cost $180,325)
    
213,995
  
     
Total Investments (Cost $4,638,901)—88.09%
    
5,627,915
  
     
Cash, Other Assets less Liabilities—11.91%
    
761,164
  
     
Net Assets—100.00%
  
$
6,389,079
  
 
(a) Non-income producing.
ADR American Depositary Receipt.
The accompanying notes are an integral part of the financial statements.
 
arielinvestments.com
 36
800.292.7435
 
 
 
 
 
Ariel Global Fund Schedule of Investments
September 30, 2013  
               
Number of Shares  
Common Stocks—80.07%
   Value  
     
     
Brazil—0.36%
        
 
4,495
  
Telefonica Brasil SA ADR
  
$
100,868
  
     
     
Canada—1.11%
        
 
654
  
Fairfax Financial Holdings Ltd.
    
264,483
  
 
776
  
Tim Hortons Inc.
    
45,006
  
           
309,489
  
     
China—4.27%
        
 
12,920
  
China Mobile Ltd. ADR
    
729,076
  
 
2,346
  
Baidu, Inc. ADR(a)
    
364,052
  
 
5,000
  
China Mobile Ltd.
    
55,925
  
 
1,168
  
Mindray Medical Intl Ltd
    
45,424
  
           
1,194,477
  
     
Czech Republic—0.22%
        
 
277
  
Komercni Banka AS
    
61,666
  
     
     
Finland—2.04%
        
 
52,134
  
Nokia Corp. ADR
    
339,392
  
 
34,994
  
Nokia Corp.
    
229,986
  
           
569,378
  
     
France—2.01%
        
 
12,112
  
Eutelsat Communications
    
382,934
  
 
2,640
  
BNP Paribas SA
    
178,576
  
           
561,510
  
     
Germany—4.26%
        
 
11,370
  
Deutsche Boerse AG
    
855,388
  
 
25,541
  
Telefonica Deutschland Holding AG
    
201,618
  
 
6,916
  
Dialog Semiconductor plc(a)
    
132,345
  
           
1,189,351
  
     
Hong Kong—0.79%
        
 
79,500
  
Yue Yuen Industrial
    
220,381
  
     
     
Ireland—1.83%
        
 
10,287
  
Ryanair Holdings plc ADR
    
511,675
  
     
     
Italy—1.86%
        
 
66,983
  
Snam SpA
    
339,274
  
 
44,330
  
Mediaset SpA
    
179,916
  
           
519,190
  
     
Japan—6.22%
        
 
4,800
  
Shimamura Co., Ltd.
    
477,094
  
 
5,700
  
Tokyo Electron Ltd.
    
305,021
  
 
5,400
  
Japan Tobacco Inc.
    
193,926
  
 
1,155
  
Toyota Motor Corp. ADR
    
147,875
  
 
1,300
  
Daito Trust Construction Co., Ltd.
    
129,742
  
 
3,700
  
Canon Inc.
    
117,819
  
 
2,800
  
OBIC Co. Ltd.
    
90,157
  
 
1,000
  
Murata Manufacturing Co., Ltd.
    
76,199
  
 
1,957
  
Canon Inc. ADR
    
62,624
  
 
3,500
  
Nikon Corp.
    
60,995
  
 
350
  
Nintendo Co., Ltd.
    
39,631
  
 
1,800
  
Chugai Pharmaceuticals Co., Ltd.
    
36,881
  
           
1,737,964
  
     
Luxembourg—0.53%
        
 
1,454
  
RTL Group
    
147,332
  
     
     
Netherlands—3.09%
        
 
49,785
  
Koninklijke Ahold NV
    
862,438
  
     
     
Singapore—0.09%
        
 
3,000
  
Oversea-Chinese Banking Corp. Ltd.
    
24,630
  
     
     
Spain—0.65%
        
 
3,952
  
Tecnicas Reunidas SA
    
180,978
  
     
     
Sweden—0.11%
        
 
370
  
Autoliv Inc.
    
32,334
  
 
  37  
 
 
 
 
 
Ariel Global Fund Schedule of Investments (continued)
September 30, 2013  
               
Number of Shares  
Common Stocks—80.07% (cont’d)
   Value  
   
     
Switzerland—7.71%
        
 
4,197
  
Roche Holding AG
  
$
1,131,916
  
 
1,422
  
Zurich Insurance Group Ltd
    
366,212
  
 
3,517
  
Nestle SA
    
245,978
  
 
10,858
  
UBS AG
    
222,119
  
 
390
  
Swisscom AG
    
187,421
  
           
2,153,646
  
     
Turkey—0.38%
        
 
7,142
  
Turkcell Iletisim Hizmetleri AS ADR(a)
    
105,345
  
   
     
United Kingdom—9.41%
        
 
123,322
  
Tesco plc
    
716,730
  
 
12,279
  
GlaxoSmithKline plc ADR
    
616,037
  
 
5,574
  
Royal Dutch Shell plc ADR
    
366,100
  
 
22,312
  
HSBC Holdings plc
    
241,793
  
 
4,923
  
Royal Dutch Shell plc, Class A
    
162,585
  
 
2,217
  
HSBC Holdings plc ADR
    
120,294
  
 
19,686
  
British Telecom Group plc
    
109,122
  
 
20,699
  
Wm. Morrison Supermarkets plc
    
93,827
  
 
1,641
  
BT Group plc ADR
    
90,747
  
 
1,842
  
Croda Intl plc
    
79,173
  
 
1,253
  
GlaxoSmithKline plc
    
31,594
  
           
2,628,002
  
     
United States—33.13%
        
 
37,427
  
Microsoft Corp.
    
1,246,693
  
 
13,464
  
Johnson & Johnson
    
1,167,194
  
 
15,480
  
Gilead Sciences, Inc.(a)
    
972,763
  
 
10,945
  
Quest Diagnostics Inc.
    
676,292
  
 
9,259
  
Harman Intl Industries Inc.
    
613,224
  
 
22,712
  
Broadcom Corp., Class A
    
590,739
  
 
21,240
  
Acacia Research Corporation
    
489,794
  
 
23,775
  
Tumi Holdings Inc.(a)
    
479,066
  
 
3,061
  
Praxair, Inc.
    
367,963
  
 
21,381
  
NVIDIA Corp.
    
332,688
  
 
6,554
  
U.S. Bancorp
    
239,745
  
 
3,205
  
Wal-Mart Stores, Inc.
    
237,042
  
 
4,307
  
Coach, Inc.
    
234,861
  
 
1,708
  
Berkshire Hathaway Inc., Class B(a)
    
193,875
  
 
2,131
  
Schlumberger Ltd.
    
188,295
  
 
2,101
  
Philip Morris Intl Inc.
    
181,926
  
 
6,770
  
TIBCO Software Inc.(a)
    
173,244
  
 
9,677
  
Ruckus Wireless, Inc.(a)
    
162,864
  
 
2,243
  
The PNC Financial Service Group, Inc.
    
162,505
  
 
11,442
  
QLogic Corp.(a)
    
125,175
  
 
1,721
  
Fluor Corp.
    
122,122
  
 
3,384
  
EMC Corp.
    
86,495
  
 
1,668
  
Expeditors Intl of Washington
    
73,492
  
 
655
  
Occidental Petroleum Corp.
    
61,269
  
 
2,058
  
Cisco Systems, Inc.
    
48,198
  
 
220
  
M&T Bank Corp.
    
24,622
  
           
9,252,146
  
   
     
Total common stocks (Cost $19,255,795)
    
22,362,800
  
   
Principal Amount  
Repurchase Agreement—2.96%
   Value  
   
$
827,549
  
Fixed Income Clearing Corporation, 0.00%, dated 09/30/2013, due 10/01/2013, repurchase price $827,549 (collateralized by U.S. Treasury Note, 0.250%, due 06/30/2014) (Cost $827,549)
  
$
827,549
  
     
Total Investments (Cost $20,083,344)—83.03%
    
23,190,349
  
     
Cash, Other Assets less Liabilities—16.97%
    
4,738,976
  
     
Net Assets—100.00%
  
$
27,929,325
  
 
(a) Non-income producing.
ADR American Depositary Receipt.
The accompanying notes are an integral part of the financial statements.
 
arielinvestments.com
 38
800.292.7435
 
 
 
 
 
 
Statements of Assets & Liabilities
 September 30, 2013
 
   
Ariel Fund
    
Ariel Appreciation
Fund
    
Ariel Focus Fund
    
Ariel Discovery
Fund
  
 
Assets:
                        
Investments in unaffiliated issuers, at value
                        
(cost $1,187,494,301, $1,071,439,650,
                        
$40,301,939 and $28,090,418, respectively)
   $ 2,069,331,009     $ 1,783,586,904     $ 51,464,600     $ 30,690,483  
Investments in affiliated issuers, at value
                                
(cost $85,237,638)
     63,223,086       —       —       —  
Repurchase agreements, at value
                                
(cost $23,614,921, $88,540,221,
                                
$2,720,193 and $1,595,908, respectively)
     23,614,921       88,540,221       2,720,193       1,595,908  
Cash
     —       —       1,098,285       412,400  
Receivable for fund shares sold
     4,135,376       5,632,947       21,470       4,817,501  
Receivable for securities sold
     2,359,907       —       1,954,602       —  
Dividends and interest receivable
     1,618,469       2,456,504       30,120       512  
Prepaid and other assets
     27,440       24,888       5,595       6,634  
Total assets
     2,164,310,208       1,880,241,464       57,294,865       37,523,438  
 
Liabilities:
                                
Payable for securities purchased
     8,162,747       910,541       1,945,746       154,415  
Payable for fund shares redeemed
     2,390,887       1,817,794       15,898       1,342  
Accrued management fees
     —       —       —       —  
Accrued distribution fees
     —       —       —       —  
Other liabilities
     572,403       504,464       36,661       32,628  
Total liabilities
     11,126,037       3,232,799       1,998,305       188,385  
Net assets
   $ 2,153,184,171     $ 1,877,008,665     $ 55,296,560     $ 37,335,053  
 
Net assets consist of:
                                
Paid-in capital
   $ 1,415,039,003     $ 1,055,732,141     $ 41,924,372     $ 34,391,663  
Undistributed net investment income (loss)
     9,084,642       14,237,079       368,560       (117,111 )
Accumulated net realized gain (loss)
                                
on investments
     (130,761,630 )     94,892,191       1,840,967       460,436  
Net unrealized appreciation on investments
     859,822,156       712,147,254       11,162,661       2,600,065  
Total net assets
   $ 2,153,184,171     $ 1,877,008,665     $ 55,296,560     $ 37,335,053  
 
Investor Class shares:
                                
Net assets
   $ 1,787,490,482     $ 1,758,276,714     $ 43,924,207     $ 10,239,512  
Shares outstanding (no par value,
                                
unlimited authorized)
     27,260,834       32,665,765       3,170,476       821,052  
Net asset value, offering and redemption
                                
price per share
   $ 65.57     $ 53.83     $ 13.85     $ 12.47  
 
Institutional Class shares:
                                
Net assets
   $ 365,693,689     $ 118,731,951     $ 11,372,353     $ 27,095,541  
Shares outstanding (no par value,
                                
unlimited authorized)
     5,566,251       2,200,786       819,769       2,161,308  
Net asset value, offering and redemption
                                
price per share
   $ 65.70     $ 53.95     $ 13.87     $ 12.54  
 
The accompanying notes are an integral part of the financial statements.
 
  39  
 
 
 
 
 
Statements of Assets & Liabilities (continued)
      
September 30, 2013
 
   
Ariel International
    
Ariel Global
  
   
Fund
    
Fund
  
Assets:
            
Investments in unaffiliated issuers, at value
            
(cost $4,638,901 and $19,255,795, respectively)
   $ 5,627,915     $ 22,362,800  
Repurchase agreements, at value
                
(cost $0 and $827,549, respectively)
     —       827,549  
Foreign currencies (cost $774,985 and $541,221, respectively)
     781,492       542,042  
Cash
     27,109       —  
Dividends and interest receivable
     13,355       35,721  
Receivable for dividend reclaims
     5,321       16,329  
Receivable for fund shares sold
     21,800       3,600,630  
Receivable for securities and foreign currencies sold
     3,620       811,124  
Appreciation of forward currency contracts
     4,208       —  
Prepaid and other assets
     4,155       4,155  
Total assets
     6,488,975       28,200,350  
 
Liabilities:
                
Payable for securities and foreign currencies purchased
     56,165       187,789  
Depreciation of forward currency contracts
     —       45,421  
Other liabilities
     43,731       37,815  
Total liabilities
     99,896       271,025  
Net assets
   $ 6,389,079     $ 27,929,325  
 
Net assets consist of:
                
Paid-in capital
   $ 5,308,535     $ 24,322,290  
Undistributed net investment income
     1,452       115,929  
Accumulated net realized gain on investments, foreign currencies
                
and forward currency contracts
     79,460       427,865  
Net unrealized appreciation (depreciation) on:
                
Investments
     989,014       3,107,005  
Translation of assets and liabilities in foreign currency
     6,410       1,657  
Forward currency contracts
     4,208       (45,421 )
Total net assets
   $ 6,389,079     $ 27,929,325  
 
Investor Class shares:
                
Net assets
   $ 2,259,618     $ 1,953,896  
Shares outstanding (no par value, unlimited authorized)
     182,571       151,402  
Net asset value, offering and redemption price per share
   $ 12.38     $ 12.91  
 
Institutional Class shares:
                
Net assets
   $ 4,129,461     $ 25,975,429  
Shares outstanding (no par value, unlimited authorized)
     336,688       2,035,547  
Net asset value, offering and redemption price per share
   $ 12.26     $ 12.76  
 
The accompanying notes are an integral part of the financial statements.
 
arielinvestments.com
40
800.292.7435
 
 
 
 
 
Statements of Operations
      
September 30, 2013
 
   
Ariel Fund
    
Ariel Appreciation
Fund
    
Ariel Focus Fund
    
Ariel Discovery
Fund
  
Investment income:
                        
Dividends
                        
Unaffiliated issuers
   $ 32,277,116     $ 32,910,860     $ 1,164,619     $ 106,448  
Affiliated issuers
     1,985,094
(a)
     —       —       —  
Interest
     2,829       3,809       103       48  
Total investment income
     34,265,039       32,914,669       1,164,722       106,496  
 
Expenses:
                                
Management fees
     10,948,043       10,775,114       357,724       158,294  
Distribution fees (Investor Class)
     3,991,925       3,691,766       92,351       17,679  
Shareholder service fees
                                
Investor Class
     1,640,518       1,485,378       33,364       27,245  
Institutional Class
     229,336       26,236       2,292       5,395  
Transfer agent fees and expenses
                                
Investor Class
     626,381       543,077       63,228       25,156  
Institutional Class
     17,220       18,225       15,805       15,660  
Printing and postage expenses
                                
Investor Class
     333,941       291,191       10,274       5,136  
Institutional Class
     23,127       2,315       2,387       2,083  
Trustees’ fees and expenses
     192,829       163,651       28,550       25,465  
Professional fees
     70,632       65,734       35,437       33,888  
Custody fees and expenses
     38,991       32,667       4,234       7,769  
Federal and state registration fees
     69,672       60,882       38,564       41,302  
Interest expense
     —       485       16       —  
Miscellaneous expenses
     142,380       119,456       13,288       8,879  
Total expenses before reimbursements
     18,324,995       17,276,177       697,514       373,951  
Expense reimbursements
     —       —       (128,181 )     (158,405 )
Net expenses
     18,324,995       17,276,177       569,333       215,546  
Net investment income (loss)
     15,940,044       15,638,492       595,389       (109,050 )
 
Realized and unrealized gain (loss):
                                
Net realized gain (loss) on investments
                                
Unaffiliated issuers
     123,726,350       130,435,078       4,539,556       523,977  
Affiliated issuers
     (1,340,488 )(a)     —       —       —  
Change in net unrealized appreciation
                                
(depreciation) on investments
                                
Unaffiliated issuers
     400,287,399       303,858,363       6,608,928       2,032,787  
Affiliated issuers
     (14,426,710 )     —       —       —  
Net gain on investments
     508,246,551       434,293,441       11,148,484       2,556,764  
Net increase in net assets resulting
                                
from operations
   $ 524,186,595     $ 449,931,933     $ 11,743,873     $ 2,447,714  
 
(a)  See Note Six for information on affiliated issuers.
The accompanying notes are an integral part of the financial statements.
 
  41  
 
 
 
 
 
Statements of Operations (continued)
        
September 30, 2013
 
   
Ariel International
    
Ariel Global
  
   
Fund
    
Fund
  
Investment income:
            
Dividends
            
Unaffiliated issuers
   $ 97,862
(a)
   $ 316,157
(a)
Interest
     168       14  
Total investment income
     98,030       316,171  
Expenses:
                
Management fees
     42,804       148,710  
Distribution fees (Investor Class)
     4,116       4,087  
Shareholder service fees
                
Investor Class
     29,177       23,101  
Institutional Class
     1,543       35  
Transfer agent fees and expenses
                
Investor Class
     18,053       17,740  
Institutional Class
     14,547       14,476  
Printing and postage expenses
                
Investor Class
     4,143       4,270  
Institutional Class
     1,141       1,029  
Trustees’ fees and expenses
     24,705       23,911  
Professional fees
     37,021       36,758  
Custody fees and expenses
     12,390       12,393  
Administration fees
     50,005       47,773  
Fund accounting fees
     38,401       38,450  
Federal and state registration fees
     38,257       38,257  
Interest expense
     —       75  
Miscellaneous expenses
     9,631       8,977  
Total expenses before reimbursements
     325,934       420,042  
Expense reimbursements
     (272,593 )     (244,864 )
Net expenses
     53,341       175,178  
Net investment income
     44,689       140,993  
 
Realized and unrealized gain (loss):
                
Net realized gain (loss) on:
                
Investments
     102,126       526,128  
Foreign currency transactions
     (21,784 )     (48,929 )
Forward currency contracts
     (4,312 )     32,884  
Total
     76,030       510,083  
Change in net unrealized appreciation (depreciation) on:
                
Investments
     978,757       3,179,935  
Foreign currency translations
     (3,045 )     (427 )
Forward currency contracts
     6,508       (33,925 )
Total
     982,220       3,145,583  
Net gain on investments
     1,058,250       3,655,666  
Net increase in net assets resulting from operations
   $ 1,102,939     $ 3,796,659  
 
(a)
Net of $8,634 and $22,764 in foreign taxes withheld, respectively.
The accompanying notes are an integral part of the financial statements.
 
arielinvestments.com
42
800.292.7435
 
 
 
 
 
Statements of Changes in Net Assets
         September 30, 2013
 
   
Ariel Fund
    
Ariel Appreciation Fund
  
   
Year Ended
    
Year Ended
    
Year Ended
    
Year Ended
  
   
September 30, 2013
    
September 30, 2012
    
September 30, 2013
    
September 30, 2012
  
                         
Operations:
                        
Net investment income
   $ 15,940,044     $ 8,944,539     $ 15,638,492     $ 10,167,987  
Net realized gain on investments and
                                
foreign currency transactions
     122,385,862       164,986,831       130,435,078       143,483,582  
Change in net unrealized appreciation
                                
on investments and foreign currency translations
     385,860,689       279,689,160       303,858,363       190,262,984  
Net increase in net assets from operations
     524,186,595       453,620,530       449,931,933       343,914,553  
 
Distributions to shareholders:
                                
Net investment income
                                
Investor Class
     (13,897,254 )     (3,209,712 )     (9,935,949 )     (5,037,290 )
Institutional Class
     (1,919,506 )     —       (466,245 )     —  
Capital gains
                                
Investor Class
     —       —       (124,307,350 )     (12,669,548 )
Institutional Class
     —       —       (4,377,634 )     —  
Total distributions
     (15,816,760 )     (3,209,712 )     (139,087,178 )     (17,706,838 )
 
Share transactions:
                                
Shares issued
                                
Investor Class
     359,508,970       151,950,739       343,272,599       126,814,299  
Institutional Class
     255,741,230       138,331,784       100,002,805       27,151,771  
Shares issued in reinvestment of
                                
dividends and distributions
                                
Investor Class
     13,561,824       3,126,505       128,962,269       17,189,462  
Institutional Class
     1,916,647       —       4,841,384       —  
Shares redeemed
                                
Investor Class
     (447,133,981 )     (530,059,038 )     (301,678,641 )     (320,271,771 )
Institutional Class
     (64,287,054 )     (39,105,643 )     (14,640,606 )     (15,093,497 )
Net increase (decrease) from share transactions
     119,307,636       (275,755,653 )     260,759,810       (164,209,736 )
Total increase in net assets
     627,677,471       174,655,165       571,604,565       161,997,979  
 
Net assets:
                                
Beginning of year
     1,525,506,700       1,350,851,535       1,305,404,100       1,143,406,121  
End of period
   $ 2,153,184,171     $ 1,525,506,700     $ 1,877,008,665     $ 1,305,404,100  
Undistributed net investment income included
                                
in net assets at end of period
   $ 9,084,642     $ 8,961,358     $ 14,237,079     $ 9,000,781  
 
Capital share transactions:
                                
Investor Class shares
                                
Shares sold
     6,354,966       3,363,093       7,195,510       3,057,990  
Shares issued to holders in reinvestment of dividends
     268,073       72,373       3,344,332       462,832  
Shares redeemed
     (7,998,994 )     (11,567,838 )     (6,469,646 )     (7,774,642 )
Net increase (decrease)
     (1,375,955 )     (8,132,372 )     4,070,196       (4,253,820 )
Institutional Class shares
                                
Shares sold
     4,511,389       2,906,650       2,051,810       691,655  
Shares issued to holders in reinvestment of dividends
     37,901       —       125,177       —  
Shares redeemed
     (1,053,361 )     (836,328 )     (306,674 )     (361,182 )
Net increase
     3,495,929       2,070,322       1,870,313       330,473  
 
The accompanying notes are an integral part of the financial statements.
 
  43  
 
 
 
 
 
Statements of Changes in Net Assets (continued) 
 
   
Ariel Focus Fund
    
Ariel Discovery Fund
  
   
Year Ended
    
Year Ended
    
Year Ended
    
Year Ended
  
   
September 30, 2013
    
September 30, 2012
    
September 30, 2013
    
September 30, 2012
  
                         
Operations:
                        
Net investment income (loss)
   $ 595,389     $ 411,225     $ (109,050 )   $ (41,578 )
Net realized gain (loss) on investments and
                                
foreign currency translations
     4,539,556       1,031,677       523,977       (30,024 )
Change in net unrealized appreciation on
                                
investments and foreign currency translations
     6,608,928       6,098,672       2,032,787       1,431,994  
Net increase in net assets from operations
     11,743,873       7,541,574       2,447,714       1,360,392  
 
Distributions to shareholders:
                                
Net investment income
                                
Investor Class
     (388,497 )     (251,088 )     —       —  
Institutional Class
     (144,372 )     —       —       —  
Total distributions
     (532,869 )     (251,088 )     —       —  
 
Share transactions:
                                
Shares issued
                                
Investor Class
     7,822,581       5,258,595       7,482,223       3,061,772  
Institutional Class
     274,193       12,267,539       23,609,880       1,937,626  
Shares issued in reinvestment of
                                
dividends and distributions
                                
Investor Class
     329,876       216,920       —       —  
Institutional Class
     141,445       —       —       —  
Shares redeemed
                                
Investor Class
     (6,175,087 )     (21,371,032 )     (2,601,356 )     (3,045,673 )
Institutional Class
     (2,051,820 )     (2,465,594 )     (87,335 )     (7,259 )
Net increase (decrease) from share transactions
     341,188       (6,093,572 )     28,403,412       1,946,466  
Total increase in net assets
     11,552,192       1,196,914       30,851,126       3,306,858  
 
Net assets:
                                
Beginning of year
     43,744,368       42,547,454       6,483,927       3,177,069  
End of period
   $ 55,296,560     $ 43,744,368     $ 37,335,053     $ 6,483,927  
Undistributed net investment income (loss) included
                                
in net assets at end of period
   $ 368,560     $ 306,040     $ (117,111 )   $ (8,061 )
 
Capital share transactions:
                                
Investor Class shares
                                
Shares sold
     613,808       505,813       647,875       311,977  
Shares issued to holders in reinvestment of dividends
     30,686       21,911       —       —  
Shares redeemed
     (512,745 )     (2,077,979 )     (225,687 )     (325,227 )
Net increase (decrease)
     131,749       (1,550,255 )     422,188       (13,250 )
Institutional Class shares
                                
Shares sold
     22,528       1,188,218       1,958,061       211,314  
Shares issued to holders in reinvestment of dividends
     13,157       —       —       —  
Shares redeemed
     (170,276 )     (233,858 )     (7,337 )     (730 )
Net increase (decrease)
     (134,591 )     954,360       1,950,724       210,584  
 
The accompanying notes are an integral part of the financial statements.
                          
 
arielinvestments.com
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800.292.7435
 
 
 
 
 
            September 30, 2013
 
   
Ariel International Fund
    
Ariel Global Fund
  
   
Year Ended
September 30, 2013
    
December 30,
2011* to
September 30, 2012
    
Year Ended
September 30, 2013
    
December 30,
2011* to
September 30, 2012
  
                         
Operations:
                        
Net investment income
   $ 44,689     $ 43,848     $ 140,993     $ 164,780  
Net realized income (loss) on investments and
                                
foreign currency translations
     76,030       (18,847 )     510,083       (93,167 )
Change in net unrealized appreciation (depreciation)
                                
on investments and foreign currency translations
     982,220       17,412       3,145,583       (82,342 )
Net increase (decrease) in net assets from operations
     1,102,939       42,413       3,796,659       (10,729 )
                                 
Distributions to shareholders:
                                
Net investment income
                                
Investor Class
     (15,673 )     —       —       —  
Institutional Class
     (49,135 )     —       (178,895 )     —  
Total distributions
     (64,808 )     —       (178,895 )     —  
                                 
Share transactions:
                                
Shares issued
                                
Investor Class
     584,748       1,333,707       4,331,957       1,028,574  
Institutional Class
     1,684,025       1,892,889       11,936,499       10,730,157  
Shares issued in reinvestment of
                                
dividends and distributions
                                
Investor Class
     7,164       —       —       —  
Institutional Class
     42,602       —       174,482       —  
Shares redeemed
                                
Investor Class
     (45,795 )     (28,900 )     (3,700,060 )     (37,634 )
Institutional Class
     (161,249 )     (656 )     (100,495 )     (41,190 )
Net increase from share transactions
     2,111,495       3,197,040       12,642,383       11,679,907  
Total increase in net assets
     3,149,626       3,239,453       16,260,147       11,669,178  
                                 
Net assets:
                                
Beginning of year
     3,239,453       —       11,669,178       —  
End of period
   $ 6,389,079     $ 3,239,453     $ 27,929,325     $ 11,669,178  
Undistributed net investment income included
                                
in net assets at end of period
   $ 27,548     $ 47,667     $ 134,427     $ 172,329  
                                 
Capital share transactions:
                                
Investor Class shares
                                
Shares sold
     51,714       137,205       349,980       102,641  
Shares issued to holders in reinvestment of dividends
     696       —       —       —  
Shares redeemed
     (4,245 )     (2,799 )     (297,535 )     (3,684 )
Net increase
     48,165       134,406       52,445       98,957  
Institutional Class shares
                                
Shares sold
     151,490       197,020       965,584       1,067,618  
Shares issued to holders in reinvestment of dividends
     4,189       —       16,842       —  
Shares redeemed
     (15,944 )     (67 )     (10,062 )     (4,435 )
Net increase
     139,735       196,953       972,364       1,063,183  
 
* Commencement of operations.
The accompanying notes are an integral part of the financial statements.
 
  45  
 
 
 
 
 
Financial Highlights For a share outstanding throughout each period (continued) 
 
Ariel Fund
(Investor Class)
   Year Ended September 30  
   
2013
    
2012
    
2011
    
2010
    
2009
  
Net asset value, beginning of year
   $ 49.67     $ 36.74     $ 42.78     $ 35.78     $ 36.53  
Income from investment operations:
                                        
Net investment income (loss)
     0.48       0.29       0.09       (0.07 )     0.13  
Net realized and unrealized gains (losses) on investments
     15.91       12.73       (6.13 )     7.08       (0.50 )
Total from investment operations
     16.39       13.02       (6.04 )     7.01       (0.37 )
 
Distributions to shareholders:
                                        
Dividends from net investment income
     (0.49 )     (0.09 )     (0.00 )(a)     (0.01 )     (0.38 )
Total distributions
     (0.49 )     (0.09 )     (0.00 )     (0.01 )     (0.38 )
Net asset value, end of period
   $ 65.57     $ 49.67     $ 36.74     $ 42.78     $ 35.78  
Total return
     33.28 %     35.48
%
     (14.11 )%     19.58 %     (0.36 )%
Supplemental data and ratios:
                                        
Net assets, end of period, in thousands
   $ 1,787,490     $ 1,422,415     $ 1,350,852     $ 1,953,134     $ 1,712,693  
Ratio of expenses to average net assets
     1.03 %     1.06
%
     1.04 %     1.06 %     1.14 %
Ratio of net investment income (loss) to
average net assets
     0.83 %     0.56
%
     0.16 %     (0.16 )%     0.41 %
Portfolio turnover rate
     30 %     27
%
     29 %     40 %     45 %
Ariel Fund
(Institutional Class)
  
Year Ended
    
December 30, 2011(d)
                          
   
September 30,
    
to
                          
    2013    
September 30, 2012
                          
Net asset value, beginning of year
   $ 49.79     $ 42.97                          
Income from investment operations:
                                        
Net investment income
     0.59       0.36                          
Net realized and unrealized gains on investments
     16.00       6.46                          
Total from investment operations
     16.59       6.82                          
 
Distributions to shareholders:
                                        
Dividends from net investment income
     (0.68 )     —                          
Total distributions
     (0.68 )     —                          
Net asset value, end of period
   $ 65.70     $ 49.79                          
Total return
     33.72 %     15.87 % (b)                      
Supplemental data and ratios:
                                        
Net assets, end of period, in thousands
   $ 365,694     $ 103,092                          
Ratio of expenses to average net assets
     0.72 %     0.68 % (c)                      
Ratio of net investment income to
average net assets
     1.04 %     1.06 % (c)                      
Portfolio turnover rate
     30 %     27 % (b)                      
 
(a)
Amount is less than $(0.005).
(b)
Not annualized.
(c)
Annualized.
(d)
Commencement of operations.
 
The accompanying notes are an integral part of the financial statements.
 
arielinvestments.com
46
800.292.7435
 
 
 
 
 
September 30, 2013
 
Ariel Appreciation Fund
(Investor Class)
   Year Ended September 30  
   
2013
    
2012
    
2011
    
2010
    
2009
  
Net asset value, beginning of year
   $ 45.13     $ 34.81     $ 37.79     $ 32.16     $ 36.39  
Income from investment operations:
                                        
Net investment income (loss)
     0.44       0.35       0.13       (0.03 )     0.08  
Net realized and unrealized gains (losses) on investments
     13.08       10.52       (3.10 )     5.70       (1.02 )
Total from investment operations
     13.52       10.87       (2.97 )     5.67       (0.94 )
 
Distributions to shareholders:
                                        
Dividends from net investment income
     (0.33 )     (0.16 )     (0.01 )     (0.04 )     (0.18 )
Distributions from capital gains
     (4.49 )     (0.39 )     —       —       (3.11 )
Total distributions
     (4.82 )     (0.55 )     (0.01 )     (0.04 )     (3.29 )
Net asset value, end of period
   $ 53.83     $ 45.13     $ 34.81     $ 37.79     $ 32.16  
Total return
     34.31 %     31.57 %     (7.86 )%     17.64 %     3.54 %
Supplemental data and ratios:
                                        
Net assets, end of period, in thousands
   $ 1,758,277     $ 1,290,470     $ 1,143,406     $ 1,330,400     $ 1,234,115  
Ratio of expenses to average net assets
     1.13 %     1.17 %     1.15 %     1.18 %     1.25 %
Ratio of net investment income (loss)
to average net assets
     1.00 %     0.79 %     0.30 %     (0.06 )%     0.42 %
Portfolio turnover rate
     28 %     28 %     26 %     41 %     44 %
                                         
Ariel Appreciation Fund
(Institutional Class)
  
Year Ended
    
December 30, 2011(c)
                          
 
  
September 30,
    
to
                          
    2013    
September 30, 2012
                          
Net asset value, beginning of year
   $ 45.19     $ 38.70                          
Income from investment operations:
                                        
Net investment income
     0.35       0.32                          
Net realized and unrealized gains on investments
     13.34       6.17                          
Total from investment operations
     13.69       6.49                          
 
Distributions to shareholders:
                                        
Dividends from net investment income
     (0.44 )     —                          
Distributions from capital gains
     (4.49 )     —                          
Total distributions
     (4.93 )     —                          
Net asset value, end of period
   $ 53.95     $ 45.19                          
Total return
     34.76 %     16.77 % (a)                      
Supplemental data and ratios:
                                        
Net assets, end of period, in thousands
   $ 118,732     $ 14,934                          
Ratio of expenses to average net assets
     0.80 %     0.99 % (b)                      
Ratio of net investment income
to average net assets
     1.35 %     1.08 % (b)                      
Portfolio turnover rate
     28 %     28 % (a)                      
 
(a)
Not annualized.
(b)
Annualized.
(c)
Commencement of operations.
 
The accompanying notes are an integral part of the financial statements.
 
  47  
 
 
 
 
 
Financial Highlights For a share outstanding throughout each period (continued)
 
Ariel Focus Fund
(Investor Class)
   Year Ended September 30  
   
2013
    
2012
    
2011
    
2010
    
2009
  
Net asset value, beginning of year
   $ 10.95     $ 9.27     $ 9.49     $ 8.79     $ 9.74  
Income from investment operations:
                                        
Net investment income
     0.14       0.10       0.04       0.04       0.05  
Net realized and unrealized gains (losses) on investments
     2.89       1.64       (0.23 )     0.70       (0.94 )
Total from investment operations
     3.03       1.74       (0.19 )     0.74       (0.89 )
 
Distributions to shareholders:
                                        
Dividends from net investment income
     (0.13 )     (0.06 )     (0.03 )     (0.04 )     (0.06 )
Total distributions
     (0.13 )     (0.06 )     (0.03 )     (0.04 )     (0.06 )
Net asset value, end of period
   $ 13.85     $ 10.95     $ 9.27     $ 9.49     $ 8.79  
Total return
     28.02 %     18.81 %     (2.07 )%     8.37 %     (9.02 )%
Supplemental data and ratios:
                                        
Net assets, end of period, in thousands
   $ 43,925     $ 33,274     $ 42,547     $ 54,609     $ 34,877  
Ratio of expenses to average net assets, including waivers
     1.25 %     1.25 %     1.25 %     1.25 %     1.25 %
Ratio of expenses to average net assets, excluding waivers
     1.54 %     1.58 %     1.51 %     1.58 %     1.87 %
Ratio of net investments income to average net assets, including waivers
     1.19 %     0.88 %     0.37 %     0.36 %     0.68 %
Ratio of net investments income to average net assets, excluding waivers
     0.90 %     0.55 %     0.11 %     0.03 %     0.06 %
Portfolio turnover rate
     41 %     32 %     40 %     52 %     42 %
 
Ariel Focus Fund
(Institutional Class)
  
Year Ended
    
December 30, 2011(c)
                          
   
September 30,
    
to
                          
    2013    
September 30, 2012
                          
Net asset value, beginning of year
   $ 10.97     $ 9.82                          
Income from investment operations:
                                        
Net investment income
     0.19       0.10                          
Net realized and unrealized gains on investments
     2.87       1.05                          
Total from investment operations
     3.06       1.15                          
 
Distributions to shareholders:
                                        
Dividends from net investment income
     (0.16 )     —                          
Total distributions
     (0.16 )     —                          
Net asset value, end of period
   $ 13.87     $ 10.97                          
Total return
     28.36 %     11.71 %(a)                        
Supplemental data and ratios:
                                        
Net assets, end of period, in thousands
   $ 11,372     $ 10,470                          
Ratio of expenses to average net assets, including waivers
     1.00 %     1.00 %(b)                        
Ratio of expenses to average net assets, excluding waivers
     1.19 %     1.29 %(b)                        
Ratio of net investments income to average net assets, including waivers
     1.46 %     1.15 %(b)                        
Ratio of net investments income to average net assets, excluding waivers
     1.27 %     0.86 %(b)                        
Portfolio turnover rate
     41 %     32 %(a)                        
 
(a)
Not annualized.
(b)
Annualized.
(c)
Commencement of operations.
 
The accompanying notes are an integral part of the financial statements.
 
arielinvestments.com 48 800.292.7435
 
 
 
 
 September 30, 2013
 
Ariel Discovery Fund
(Investor Class)
  
Year Ended
     January 31, 2011(c)
to
September 30, 2011		  
   
2013
    
2012
      
Net asset value, beginning of year
   $ 10.63     $ 7.71     $ 10.00  
Income from investment operations:
                        
Net investment loss
     (0.06 )     (0.08 )     (0.06 )
Net realized and unrealized gains (losses) on investments
     1.90       3.00       (2.23 )
Total from investment operations
     1.84       2.92       (2.29 )
                         
Net asset value, end of period
   $ 12.47     $ 10.63     $ 7.71  
Total return
     17.31 %     37.87 %     (22.90 )%(a)
Supplemental data and ratios:
                        
Net assets, end of period, in thousands
   $ 10,239     $ 4,240     $ 3,177  
Ratio of expenses to average net assets, including waivers
     1.50 %     1.50 %     1.50 %(b)
Ratio of expenses to average net assets, excluding waivers
     2.90 %     5.18 %     6.75 %(b)
Ratio of net investment loss to average net assets, including waivers
     (0.79 )%     (0.92 )%     (1.17 )%(b)
Ratio of net investment loss to average net assets, excluding waivers
     (2.19 )%     (4.60 )%     (6.42 )%(b)
Portfolio turnover rate
     31 %     33 %     18 %(a)
Ariel Discovery Fund
(Institutional Class)
  
Year Ended
    
December 30, 2011(c)
          
   
September 30,
    
to
          
     2013    
September 30, 2012
          
Net asset value, beginning of year
   $ 10.66     $ 9.01          
Income from investment operations:
                        
Net investment loss
     (0.03 )     (0.05 )        
Net realized and unrealized gains on investments
     1.91       1.70          
Total from investment operations
     1.88       1.65          
                         
Net asset value, end of period
   $ 12.54     $ 10.66          
Total return
     17.64 %     18.31 %(a)        
Supplemental data and ratios:
                        
Net assets, end of period, in thousands
   $ 27,096     $ 2,244          
Ratio of expenses to average net assets, including waivers
     1.25 %     1.25 %(b)        
Ratio of expenses to average net assets, excluding waivers
     1.93 %     4.78 %(b)        
Ratio of net investment loss to average net assets, including waivers
     (0.61 )%     (0.75 )%(b)        
Ratio of net investment loss to average net assets, excluding waivers
     (1.29 )%     (4.28 )%(b)        
Portfolio turnover rate
     31 %     33 %(a)        
 
(a)
Not annualized.
(b)
Annualized.
(c)
Commencement of operations.
 
The accompanying notes are an integral part of the financial statements.
 
  49  
 
 
 
 
 
Financial Highlights For a share outstanding throughout each period (continued) 
 
Ariel International Fund
(Investor Class)

  
Year Ended
September 30, 2013
    
December 30, 2011(c)
to
September 30, 2012
  
Net asset value, beginning of year
   $ 9.77     $ 10.00  
Income from investment operations:
                
Net investment income
     0.07       0.16  
Net realized and unrealized gains (losses) on investments
     2.65       (0.39 )
Total from investment operations
     2.72       (0.23 )
                 
Distributions to shareholders:
                
Dividends from net investment income
     (0.11 )     —  
Total distributions
     (0.11 )     —  
Net asset value, end of period
   $ 12.38     $ 9.77  
Total return
     28.11 %     (2.30 )%(a)
Supplemental data and ratios:
                
Net assets, end of period, in thousands
   $ 2,260     $ 1,313  
Ratio of expenses to average net assets, including waivers
     1.40 %     1.40 %(b)
Ratio of expenses to average net assets, excluding waivers
     9.36 %     17.00 %(b)
Ratio of net investment income to average net assets, including waivers
     0.98 %     2.93 %(b)
Ratio of net investment loss to average net assets, excluding waivers
     (6.98 )%     (12.67 )%(b)
Portfolio turnover rate
     29 %     21 %(a)
Ariel International Fund
(Institutional Class)

  
Year Ended
September 30, 2013
    
December 30, 2011(c)
to
September 30, 2012
  
Net asset value, beginning of year
   $ 9.78     $ 10.00  
Income from investment operations:
                
Net investment income
     0.14       0.11  
Net realized and unrealized gains (losses) on investments
     2.59       (0.33 )
Total from investment operations
     2.73       (0.22 )
                 
Distributions to shareholders:
                
Dividends from net investment income
     (0.25 )     —  
Total distributions
     (0.25 )     —  
Net asset value, end of period
   $ 12.26     $ 9.78  
Total return
     28.42 %     (2.20 )%(a)
Supplemental data and ratios:
                
Net assets, end of period, in thousands
   $ 4,129     $ 1,926  
Ratio of expenses to average net assets, including waivers
     1.15 %     1.15 %(b)
Ratio of expenses to average net assets, excluding waivers
     6.53 %     15.70 %(b)
Ratio of net investment income to average net assets, including waivers
     1.09 %     3.41 %(b)
Ratio of net investment loss to average net assets, excluding waivers
     (4.29 )%     (11.14 )%(b)
Portfolio turnover rate
     29 %     21 %(a)
 
(a)
Not annualized.
(b)
Annualized.
(c)
Commencement of operations.
 
The accompanying notes are an integral part of the financial statements.
 
arielinvestments.com 50 800.292.7435
 
 
 
 
September 30, 2013
 
Ariel Global Fund
(Investor Class)

  
Year Ended
September 30, 2013
    
December 30, 2011(c)
to
September 30, 2012
  
Net asset value, beginning of year
   $ 10.02     $ 10.00  
Income from investment operations:
                
Net investment income
     0.02       0.18  
Net realized and unrealized gains (losses) on investments
     2.87       (0.16 )
Total from investment operations
     2.89       0.02  
                 
Net asset value, end of period
   $ 12.91     $ 10.02  
Total return
     28.84 %     0.20 %(a)
Supplemental data and ratios:
                
Net assets, end of period, in thousands
   $ 1,954     $ 992  
Ratio of expenses to average net assets, including waivers
     1.40 %     1.40 %(b)
Ratio of expenses to average net assets, excluding waivers
     5.37 %     12.33 %(b)
Ratio of net investment income to average net assets, including waivers
     0.81 %     2.67 %(b)
Ratio of net investment loss to average net assets, excluding waivers
     (3.16 )%     (8.26 )%(b)
Portfolio turnover rate
     39 %     26 %(a)
Ariel Global Fund
(Institutional Class)
  
Year Ended
September 30, 2013
    
December 30, 2011(c)
to
September 30, 2012
  
Net asset value, beginning of year
   $ 10.04     $ 10.00  
Income from investment operations:
                
Net investment income
     0.08       0.14  
Net realized and unrealized gains (losses) on investments
     2.81       (0.10 )
Total from investment operations
     2.89       0.04  
                 
Distributions to shareholders:
                
Dividends from net investment income
     (0.17 )     —  
Total distributions
     (0.17 )     —  
Net asset value, end of period
   $ 12.76     $ 10.04  
Total return
     29.15 %     0.40 %(a)
                 
Supplemental data and ratios:
                
Net assets, end of period, in thousands
   $ 25,975     $ 10,677  
Ratio of expenses to average net assets, including waivers
     1.15 %     1.15 %(b)
Ratio of expenses to average net assets, excluding waivers
     2.51 %     4.07 %(b)
Ratio of net investment income to average net assets, including waivers
     0.97 %     3.26 %(b)
Ratio of net investment income (loss) to average net assets, excluding waivers
     (0.39 )%     0.34 %(b)
Portfolio turnover rate
     39 %     26 %(a)
 
(a)
Not annualized.
(b)
Annualized.
(c)
Commencement of operations.
 
The accompanying notes are an integral part of the financial statements.
 
  51  
 
 
 
 
 
Notes to the Financial Statements
 
Note One | Organization
Ariel Investment Trust (the “Trust”) is a Massachusetts business trust registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. Ariel Fund, Ariel Appreciation Fund, Ariel Focus Fund, Ariel Discovery Fund, Ariel International Fund and Ariel Global Fund (the “Funds”) are series of the Trust. Ariel Focus Fund is a non-diversified Fund, all other Funds are diversified. The Funds issue two classes of shares: an Investor Class and an Institutional Class.
 
Note Two | Significant accounting policies
The following is a summary of significant accounting policies consistently followed by the Funds in the preparation of their financial statements. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require management to make certain estimates and assumptions at the date of the financial statements. Actual results may differ from such estimates.
 
Securities valuation— Securities for which market quotations are readily available are valued at the last sale price on the national securities exchange on which such securities are primarily traded and, in the case of securities reported on the Nasdaq system, are valued based on the Nasdaq Official Closing Price. If a closing price is not reported, equity securities for which reliable bid and ask quotations are available are valued at the mean between bid and ask prices.
 
Certain common stocks that trade on foreign exchanges are subject to valuation adjustments to account for the market movement between the close of a foreign market in which the security is traded and the close of the New York Stock Exchange. These securities are valued by pricing vendors that consider the correlation patterns of price movements of the foreign security to the intraday trading in the U.S. markets.
 
Debt obligations having a maturity of 60 days or less are valued at amortized cost, which approximates market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Trustees.
 
Securities transactions and investment income — Securities transactions are accounted for on a trade date basis. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date and interest income is recognized on an accrual basis. Dividends from foreign securities are recorded on the ex-dividend date, or as soon as the information is available.
 
Fair value measurements— Accounting Standards Codification (ASC) 820-10 establishes a three-tier framework for measuring fair value based on a hierarchy of inputs. The hierarchy distinguishes between market data obtained from independent sources (observable inputs) and the Funds’ own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds’ investments and are summarized below:
 
Level 1 — quoted prices in active markets for identical securities
Level 2 — other significant observable inputs (including quoted prices for similar securities, “quoted” prices in inactive markets, dealer indications, and inputs corroborated by observable market data)
Level 3 — significant unobservable inputs (including the Funds’ own assumptions in determining the fair value of investments)
 
The Funds use valuation techniques to measure fair value that are consistent with the market approach and/ or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.
 
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
The following is a summary of the inputs used as of September 30, 2013 in valuing the Funds’ investments carried at fair value:
                         
         
Ariel
    
Ariel
    
Ariel
  
   
Ariel Fund
    
Appreciation
    
Focus
    
Discovery
  
         
Fund
    
Fund
    
Fund
  
Level 1
   $ 2,132,554,095     $ 1,783,586,904     $ 51,464,600     $ 30,690,483  
Level 2*
     23,614,921       88,540,221       2,720,193       1,595,908  
Level 3
     —       —       —       —  
Fair
Value at
09/30/2013
   $ 2,156,169,016     $ 1,872,127,125     $ 54,184,793     $ 32,286,391  
 
*As of September 30, 2013, Level 2 investments held are repurchase agreements. See Schedule of Investments.
             
   
Ariel International
    
Ariel Global
  
   
Fund
    
Fund
  
Level 1
   $ 5,627,915     $ 22,362,800  
Level 2**
     4,208       782,128  
Level 3
     —       —  
Fair Value
at 09/30/2013
   $ 5,632,123     $ 23,144,928  
 
**As of September 30, 2013, Level 2 investments held are forward currency contracts, which are reflected at the unrealized appreciation (depreciation) on the contract, and repurchase agreements. See Schedule of Investments.
 
arielinvestments.com 
52 800.292.7435
 
 
 
 

September 30, 2013
 
       
   
Ariel Global Fund
       
Transfers into Level 1
   $ 61,666  
Transfers out of Level 1     —  
Transfers into Level 2     —  
Transfers out of Level 2     (61,666 )
 
There were no transfers between levels for Ariel Fund, Ariel Appreciation Fund, Ariel Focus Fund, Ariel Discovery Fund and Ariel International Fund. Transfers were made due to valuation adjustments on foreign common stocks to account for the market movement between the close of a foreign market and the close of the New York Stock Exchange. Transfers between levels are recognized at the end of the reporting period.
 
Forward currency contracts derive their value from underlying exchange rates. These instruments are normally valued by pricing vendors using pricing models. The pricing models typically use inputs that are observed from active markets such as exchange rates. As such, forward currency contracts were categorized as Level 2.
 
Foreign currency— Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party. Realized gains (losses) and unrealized appreciation (depreciation) on securities include the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
 
Forward currency contracts— Ariel International Fund and Ariel Global Fund enter into forward currency contracts to provide the appropriate currency exposure related to protecting the value of securities and related receivables and payables against changes in foreign exchange rates. The primary risk associated with a Fund’s use of these contracts is that a counterparty will fail to fulfill its obligation to pay gains due to the Fund under the contracts. Counterparty risk is mitigated by entering into forward currency contracts only with highly rated counterparties. Forward currency contracts are subject to the translations of foreign exchange rate fluctuations. Contracts are “marked-to-market” daily and any resulting unrealized gains (losses) are recorded as unrealized appreciation (depreciation) on foreign currency translations. The Funds record realized gains (losses) at the time the forward currency contract is settled or closed on the Statement of Operations as realized gain (loss) on foreign currency transactions.
 
Repurchase agreements— The Funds may enter into repurchase agreements with recognized financial institutions and in all instances hold underlying securities as collateral with a value at least equal to the total repurchase price such financial institutions have agreed to pay.
 
Federal taxes— It is the Funds’ policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all taxable income to shareholders. Management has analyzed the Funds’ tax positions taken for all open federal income tax years (September 30, 2010 – 2013), and has concluded that no provision for federal income tax is required in the financial statements.
 
Class and expense allocations— Each class of shares has equal rights as to assets and earnings, except that shareholders of each class bear certain class-specific expenses related to marketing and distribution, shareholder servicing and shareholder reporting. Income, other non-class-specific expense, and gains and losses on investments are allocated to each class of shares based on its relative net assets. Expenses that are not directly attributable to one or more Funds are allocated among applicable Funds on an equitable and consistent basis considering such things as the nature and type of expense and the relative net assets of the Funds.
 
Distributions to shareholders— Dividends from net investment income and net realized capital gains, if any, are declared and paid at least annually and recorded on the ex-dividend date.
 
Distributions to shareholders are determined in accordance with federal income tax regulations and may differ from net investment income and realized capital gains for financial reporting purposes. Reclassifications between net asset accounts are made at the end of the fiscal year for such differences that are permanent in nature. These differences are primarily due to a redemption in-kind and foreign currency. Reclassifications recorded at September 30, 2013 were as follows:
                   
         
Ariel
    
 
  
   
Ariel Fund
    
Appreciation
    
Ariel Focus
  
         
Fund
     Fund  
Paid-in-capital
   $ 25,581,974     $ —     $ —  
Undistributed
                        
net investment
                        
income
     —       —       —  
Accumulated net
realized gain (loss)
     (25,581,974 )     —       —  
 
   
Ariel
    
Ariel
    
 
  
   
Discovery
    
International
    
Ariel Global
  
   
Fund
    
Fund
    
Fund
  
Paid-in-capital
   $ —     $ —     $ —  
Undistributed
                        
net investment
                        
income (loss)
     —       (26,096 )     (18,498 )
Accumulated net
                        
realized gain
     —       26,096       18,498  
 
  53  
 
 
 
 
 
Notes to the Financial Statements (continued) 
 
Note Three | Investment transactions, distributions and federal income tax matters
Purchases and proceeds from sales of securities, excluding short-term investments and U.S. government securities, for the year ended September 30, 2013 were as follows:
                                     
     
Ariel Fund
    
Ariel Appreciation
      
Ariel Focus Fund
    
Ariel Discovery
    
Ariel International
    
Ariel Global
  
         
Fund
          
Fund
    
Fund
    
Fund
  
Purchases
   $ 656,769,514     $ 473,953,557     $ 19,105,330     $ 26,635,955     $ 3,096,815     $ 13,917,275  
Sales
     543,644,131       410,573,950       22,515,008       4,727,917       1,211,909       5,444,849  
 
The cost and unrealized appreciation and depreciation of securities on a federal income tax basis at September 30, 2013 were as follows:
                                     
    Ariel Fund    
Ariel Appreciation
    
Ariel Focus Fund
    
Ariel Discovery
    
Ariel International
    
Ariel Global
  
         
Fund
          
Fund
    
Fund
    
Fund
  
Cost
   $ 1,352,835,248     $ 1,186,582,218     $ 43,434,972     $ 29,698,181     $ 4,647,919     $ 20,085,257  
 
Unrealized
                                                
appreciation
   $ 884,675,417     $ 725,090,196     $ 11,948,023     $ 3,175,356     $ 1,042,275     $ 3,223,171  
Unrealized
                                                
depreciation
     (81,341,649 )     (39,545,289 )     (1,198,202 )     (587,146 )     (62,279 )     (118,079 )
Net
                                                
unrealized
                                                
appreciation
   $ 803,333,768     $ 685,544,907     $ 10,749,821     $ 2,588,210     $ 979,996     $ 3,105,092  
 
The difference between book basis and tax basis unrealized appreciation and depreciation is attributable primarily to the deferral of losses on wash sales and partnership adjustments.
 
The tax character of distributions paid during the years ended September 30 was as follows:
                                     
   
Ariel Fund
    
Ariel Appreciation Fund*
    
Ariel Focus Fund
  
                                     
   
2013
    
2012
    
2013
    
2012
    
2013
    
2012
  
Distribution from:
                                    
Ordinary income
   $ 15,816,760     $ 3,209,712     $ 10,939,554     $ 5,037,290     $ 532,869     $ 251,088  
Long-term capital gains
     —       —       128,147,624       12,669,548       —       —  
Total distributions
   $ 15,816,760     $ 3,209,712     $ 139,087,178     $ 17,706,838     $ 532,869     $ 251,088  
                                                 
   
Ariel Discovery Fund
    
Ariel International Fund
    
Ariel Global Fund
  
                                                 
      2013       2012       2013       2012       2013       2012  
Distribution from:
                                                
Ordinary income
   $ —     $ —     $ 64,808     $ —     $ 178,895     $ —  
Long-term capital gains
     —       —       —       —       —       —  
Total distributions
   $ —     $ —     $ 64,808     $ —     $ 178,895     $ —  
 
arielinvestments.com 
54 800.292.7435
 
 
 
 

September 30, 2013
 
The components of accumulated earnings at September 30, 2013 on a federal income tax basis were as follows:
                   
   
Ariel Fund
    
Ariel Appreciation Fund
    
Ariel Focus Fund
  
Undistributed ordinary income
   $ 10,463,158     $ 48,390,835     $ 320,201  
Undistributed long-term capital gains
     —       87,340,779       2,302,166  
Tax accumulated earnings
     10,463,158       135,731,614       2,622,367  
Accumulated capital and other losses
     (75,651,758 )     3       —  
Unrealized appreciation
     803,333,768       685,544,907       10,749,821  
Total accumulated earnings
   $ 738,145,168     $ 821,276,524     $ 13,372,188  
   
   
Ariel Discovery Fund
    
Ariel International Fund
    
Ariel Global Fund
  
Undistributed ordinary income
   $ —     $ 90,347     $ 266,873  
Undistributed long-term capital gains
     472,291       3,791       233,413  
Tax accumulated earnings
     472,291       94,138       500,286  
Accumulated capital and other losses
     (117,111 )     (4,208 )     45,421  
Unrealized appreciation
     2,588,210       990,614       3,061,328  
Total accumulated earnings
   $ 2,943,390     $ 1,080,544     $ 3,607,035  
 
At September 30, 2013, Ariel Discovery Fund had a post December ordinary loss deferral of $117,111.
 
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses arising in taxable years after December 22, 2010, may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for up to eight years and treated as short-term losses. The Act requires that post-enactment net capital losses be used before pre-enactment net capital losses. At September 30, 2013, Ariel Fund had pre-enactment net capital losses for federal income tax purposes of $75,651,758, expiring in the year 2018.
 
For the year ended September 30, 2013, the Ariel Fund had in-kind redemptions and in-kind contributions. The proceeds from in-kind redemptions were $112,642,360 and the net gain from such redemption was $25,581,974. The gains from in-kind redemptions are not taxable to the Fund for federal income tax purposes. The in-kind contributions was $2,397,456, which the Fund recorded at fair market value.
 
  55  
 
 
 
 
 
Notes to the Financial Statements (continued) 
 
Note Four | Investment advisory and other transactions with related parties
 
Ariel Investments, LLC (the “Adviser”) provides investment advisory and administrative services to Ariel Fund, Ariel Appreciation Fund, Ariel Focus Fund and Ariel Discovery Fund under an agreement (the “Management Agreement”). The Advisor provides investment advisory services to Ariel International Fund and Ariel Global Fund under an Advisory Agreement (collectively, the “Agreements”). Pursuant to the Agreements, the Adviser is paid a monthly fee on average daily net assets at the annual rates shown below:
                           
 
        
          Ariel          
Ariel Discovery
     Ariel    
Ariel Global
  
Management Fees
  
Ariel Fund
    
Appreciation
    
Ariel Focus Fund
     Fund    
International
     Fund  
         
Fund
                
Fund
        
Average Daily Net Assets
                                    
First $500 million
   0.65%     0.75%     0.75%     1.00%     1.00%     1.00%  
Next $500 million
   0.60%     0.70 %     0.70%     0.95%     0.95%     0.95%  
Over $1 billion
   0.55%     0.65%     0.65%     0.90%     0.90%     0.90%  
 
The Adviser has contractually agreed to reduce the fees paid by Ariel Focus Fund and Ariel Discovery Fund for its investment advisory and administrative services, and by Ariel International Fund and Ariel Global Fund for its investment advisory services. Beginning February 1, 2014, the Adviser will be paid a monthly fee on average daily net assets at the annual rates shown below:
                         
         
Ariel Discovery
    
Ariel
    
Ariel Global
  
Management Fees
  
Ariel Focus Fund
     Fund    
International
    
Fund
  
         
 
     Fund        
Average Daily Net Assets
                        
First $500 million
   0.65%     0.80%     0.80%     0.80%  
Next $500 million
   0.60%     0.75%     0.80%     0.80%  
Over $1 billion
   0.55%     0.70%     0.75%     0.75%  
 
The Adviser has contractually agreed to reimburse the Funds to the extent their respective total annual operating expenses exceed certain limits as shown below:
                                     
         
Ariel
                          
   
Ariel Fund
    
Appreciation
    
Ariel Focus Fund
    
Ariel Discovery Fund
  
         
Fund
                          
                                     
   
Investor Class
    
Investor Class
    
Investor
    
Institutional
    
Investor
    
Institutional
  
               
Class
    
Class
    
Class
    
Class
  
First $30 million*
     1.50%       1.50%       —       —       —       —  
Over $30 million*
     1.00%       1.00%       —       —       —       —  
On average daily net assets**
     —       —       1.25%       1.00%       1.50%       1.25%  
 
                   
Ariel International Fund
    
Ariel Global Fund
  
                                         
                   
Investor
    
Institutional
    
Investor
    
Institutional
  
                   
Class
    
Class
    
Class
    
Class
  
On average daily net assets**
                     1.40%       1.15%       1.40%       1.15%  
 
*Exclusive of brokerage, interest, taxes, distribution plan expenses and extraordinary items
**For the current year through January 31, 2014.
 
arielinvestments.com 
56 800.292.7435
 
 
 
 

September 30, 2013
 
Beginning February 1, 2014, the Adviser has contractually agreed to reimburse the Funds to the extent their respective total annual operating expenses exceed certain limits as shown below:
                                                 
   
Ariel Focus Fund
    
Ariel Discovery Fund
    
Ariel International Fund
    
Ariel Global Fund
  
 
   
Investor
    
Institutional
    
Investor
    
Institutional
    
Investor
    
Institutional
    
Investor
    
Institutional
  
   
Class
    
Class
    
Class
    
Class
    
Class
    
Class
    
Class
    
Class
  
On average daily net assets
   1.00%     0.75%     1.25%     1.00%     1.25%     1.00%     1.25%     1.00%  
Waiver***
   2016     2016     2016     2016     2016     2016     2016     2016  
 
***Through September 30 of the respective year. After these dates, there is no assurance that such expenses will be limited.
 
Ariel Distributors, LLC is the Funds’ distributor and principal underwriter (“the Distributor”). The Trust has adopted a plan of distribution under Rule 12b-1 of the 1940 Act applicable to the Investor Class of the Funds. Under the plan, 12b-1 distribution fees at an annual rate of 0.25% of average daily net assets are paid weekly to the Distributor for its services. For the year ended September 30, 2013 distribution fee expenses were as follows:
                         
       
Ariel
          
Ariel
    
   
Ariel Fund
  
Appreciation
  
Ariel Focus Fund
  
Ariel Discovery
  
International
    Ariel Global
       
Fund
      
Fund
     Fund  
Fund
 
Paid to distributor
 
$3,991,925
 
$3,691,766
 
$92,351
 
$17,679
 
$4,116
 
$4,087
Paid to broker/dealers
  
3,122,145
  
2,984,422
  
51,747
  
11,884
  
169
  
884
 
The remaining amounts were retained by the Distributor for its services, advertising, and other distribution expenses.
 
Trustees’ fees and expenses represent only those expenses of disinterested (independent) trustees of the Funds.
 
  57  
 
 
 
 
 
Notes to the Financial Statements (continued) 
 
Note Five | Forward currency contracts
 
At September 30, 2013, the open forward currency contracts (State Street Bank and Trust as counterparty) are:
                     
                     Unrealized
Contract Settlement Date  
Currency to be
  
Amount to be
  
Currency to be
  
Amount to be
  
Appreciation
   
Received
  
Received
  
Delivered
  
Delivered
  
(Depreciation)
 
Ariel International Fund
                    
10/15/2013
  
GBP
  
9,443
  
CHF
  
13,588
  
$259
10/15/2013
  
DKK
  
82,240
  
CHF
  
13,588
  
(107)
10/15/2013
  
AUD
  
10,515
  
JPY
  
951,040
  
125
10/15/2013
  
AUD
  
7,818
  
CHF
  
6,794
  
(226)
10/15/2013
  
AUD
  
17,945
  
CHF
  
15,594
  
(518)
10/16/2013
  
SGD
  
8,176
  
JPY
  
634,027
  
67
10/23/2013
  
AUD
  
39,204
  
CAD
  
37,215
  
413
10/23/2013
  
AUD
  
47,228
  
CAD
  
44,832
  
497
11/25/2013
  
AUD
  
23,967
  
CAD
  
22,554
  
414
11/25/2013
  
AUD
  
22,581
  
CAD
  
21,250
  
390
11/25/2013
  
SEK
  
347,876
  
EUR
  
39,896
  
81
11/25/2013
  
SEK
  
100,855
  
EUR
  
11,567
  
23
11/25/2013
  
SEK
  
101,341
  
EUR
  
11,622
  
24
11/25/2013
  
JPY
  
6,020,921
  
USD
  
61,943
  
(671)
12/16/2013
  
GBP
  
12,933
  
USD
  
20,202
  
725
12/16/2013
  
AUD
  
22,165
  
USD
  
20,202
  
376
12/20/2013
  
SGD
  
21,875
  
EUR
  
12,966
  
(106)
12/20/2013
  
SGD
  
24,393
  
EUR
  
14,458
  
(118)
12/27/2013
  
AUD
  
86,507
  
CAD
  
82,439
  
393
12/27/2013
  
EUR
  
27,391
  
USD
  
36,444
  
621
12/27/2013
  
GBP
  
34,600
  
USD
  
54,667
  
1,312
12/27/2013
  
SGD
  
27,723
  
USD
  
21,866
  
234
                   
$4,208
Ariel Global Fund
                    
10/15/2013
  
DKK
  
254,223
  
EUR
  
34,108
  
$(27)
10/15/2013
  
AUD
  
149,327
  
CHF
  
129,761
  
(4,312)
10/15/2013
  
ZAR
  
1,109,552
  
GBP
  
72,045
  
(6,317)
10/15/2013
  
AUD
  
60,420
  
EUR
  
42,635
  
(1,363)
10/15/2013
  
USD
  
113,262
  
GBP
  
74,244
  
(6,919)
10/15/2013
  
USD
  
108,449
  
CHF
  
102,317
  
(4,702)
10/15/2013
  
USD
  
118,771
  
CHF
  
112,056
  
(5,149)
10/15/2013
  
USD
  
96,831
  
JPY
  
9,508,848
  
87
10/15/2013
  
USD
  
174,159
  
JPY
  
17,102,448
  
156
10/18/2013
  
THB
  
1,617,568
  
JPY
  
5,137,719
  
(611)
10/18/2013
  
ILS
  
115,427
  
EUR
  
24,597
  
(532)
10/18/2013
  
MXN
  
514,864
  
EUR
  
30,746
  
(2,315)
10/23/2013
  
USD
  
80,951
  
EUR
  
61,590
  
(2,376)
10/23/2013
  
USD
  
85,891
  
JPY
  
8,607,212
  
(1,684)
10/23/2013
  
USD
  
91,036
  
JPY
  
9,122,799
  
(1,785)
11/06/2013
  
USD
  
328,080
  
EUR
  
246,950
  
(6,035)
11/25/2013
  
CAD
  
30,598
  
EUR
  
21,884
  
54
11/25/2013
  
SEK
  
767,541
  
EUR
  
88,025
  
179
11/25/2013
  
CAD
  
247,017
  
EUR
  
176,673
  
439
11/25/2013
  
AUD
  
131,232
  
EUR
  
88,330
  
2,482
11/25/2013
  
AUD
  
181,673
  
EUR
  
122,280
  
3,436
12/27/2013
  
SEK
  
863,894
  
EUR
  
99,963
  
(1,107)
12/27/2013
  
NOK
  
440,377
  
CHF
  
67,060
  
(1,208)
12/27/2013
  
AUD
  
249,090
  
EUR
  
172,675
  
(2,569)
12/27/2013
  
CAD
  
379,273
  
CHF
  
335,157
  
(3,464)
12/27/2013
  
USD
  
56,903
  
SEK
  
365,000
  
221
                   
$(45,421)
 
arielinvestments.com 
58 800.292.7435
 
 
 
 
 
September 30, 2013
 
As reflected in the Statement of Operations, realized net gain (loss) and the change in net unrealized appreciation (depreciation) on forward currency contracts for the year ended September 30, 2013 were:
           
   
Ariel International Fund
  
Ariel Global Fund
  
Realized net gain (loss) on forward currency contracts
 
$(4,312)
 
$32,884
  
Change in net unrealized appreciation (depreciation) on forward currency contracts
  
6,508
  
(33,925)
 
 
For the year ended September 30, 2013, the volume of the forward currency contracts is measured by the number of trades during the period and the average notional amount. The funds had 159 and 158 forward currency trades during the year with an average notional value of $24,931 and $114,693 for Ariel International Fund and Ariel Global Fund, respectively.
 
 
Note Six | Transactions with affiliated companies
If a Fund’s holding represents ownership of 5% or more of the voting securities of a company, the company is deemed to be an affiliate as defined in the 1940 Act. Ariel Fund had the following transactions during the year ended September 30, 2013, with affiliated companies:
                                           
         
Share Activity
          
Year Ended September 30, 2013
  
   
Balance
                
Balance
          
Dividends
    
Amount of Gain
  
   
September 30,
                
September 30,
          
Credited to
    
(Loss) Realized on
  
Security Name
  
2012
      Purchases    
Sales
    
2013
      Market Value    
Income
    
Sale of Shares
  
                                                         
Contango Oil & Gas Co.
     906,847       400,799       72,303       1,235,343     $ 45,398,855     $ 1,985,094     $ (1,521,737 )
Symmetry Medical Inc.
     2,267,400       76,144       159,202       2,184,342       17,824,231       —       181,248  
                                    $ 63,223,086     $ 1,985,094     $ (1,340,489 )
 
 
Note Seven | Line of credit
The Funds have a $125,000,000 Line of Credit (the “Line”), which is uncommitted, with State Street Bank and Trust Company. The Line is for temporary or emergency purposes such as to provide liquidity for shareholder redemptions. The Funds incur interest expense to the extent of amounts drawn (borrowed) under the Line. Interest is based on the federal funds rate in effect at the time of borrowing, plus a margin.
 
For the year ended September 30, 2013, the details of the borrowings were as follows:
                   
               
Weighted
  
Fund
  
Average Daily
    
Number of Days
    
Average Annualized
  
   
Borrowings
    
Outstanding
    
Interest Rate
  
Ariel Appreciation Fund
   $ 3,030,980       4       1.44 %
Ariel Focus Fund
     401,029       1       1.44 %
Ariel Global Fund
     1,979,340       1       1.37 %
 
  59  
 
 
 
 
 
Report of Independent Registered Public Accounting Firm 
 
To the Board of Trustees and Shareholders of
Ariel Investment Trust:
 
We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of Ariel Investment Trust, comprising Ariel Fund, Ariel Appreciation Fund, Ariel Focus Fund, Ariel Discovery Fund, Ariel International Fund (formerly, Ariel International Equity Fund) and Ariel Global Fund (formerly, Ariel Global Equity Fund) (collectively the “Funds”), as of September 30, 2013, and the related statements of operations for the year then ended and the related statements of changes in net assets and the financial highlights for the year then ended and for the year or periods ended September 30, 2012. These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The Funds’ financial highlights for the periods ended on and prior to September 30, 2011 were audited by other auditors whose report, dated November 8, 2011, expressed an unqualified opinion.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Funds are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting.
 
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2013, by correspondence with the Funds’ custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the Funds as of September 30, 2013, the results of their operations for the year then ended, and the changes in their net assets and the financial highlights for the respective periods stated in the first paragraph, in conformity with accounting principles generally accepted in the United States of America.
 
-s- Delitte & Touche LLP
 
Chicago, Illinois
November 19, 2013
 
arielinvestments.com 
60 800.292.7435
 
 
 
 
 
Important Supplemental Information
September 30, 2013
 
2013 Tax Information
The following information for the fiscal year ended September 30, 2013 for Ariel Fund, Ariel Appreciation Fund, Ariel Focus Fund, Ariel Discovery Fund, Ariel International Fund and Ariel Global Fund is provided pursuant to provisions of the Internal Revenue Code.
                   
         
Ariel
    
Ariel
  
   
Ariel Fund
    
Appreciation
    
Focus
  
         
Fund
    
Fund
  
Long term capital
                  
gain distributions paid
                  
during the year*
   $—     $128,147,624     $—  
Dividends received
                  
deduction % for
                  
corporate shareholders
   100%     100%     100%  
   
 
    
Ariel
    
Ariel
  
   
Ariel Discovery
    
International
    
Global
  
   
Fund
    
Fund
    
Fund
  
Long term capital
                  
gain distributions paid
                  
during the year*
   $—     $—     $—  
Dividends received
                  
deduction % for
                  
corporate shareholders
   0%     35%     17%  
*designated for purposes of the dividends paid deduction.
 
Complete information will be reported on Forms 1099-DIV sent to shareholders in January 2014. The Funds intend to designate the maximum amount of qualified dividend income allowed.
 
Foreign Tax Credit Pass Through
Pursuant to Section 853 of the Internal Revenue Code, the Ariel International Fund and Ariel Global Fund designate the following amounts as foreign taxes paid for the year ended September 30, 2013. Foreign taxes paid for purposes of Section 853 may be less than actual foreign taxes paid for financial statement purposes.
             
   
Ariel
    
Ariel
  
   
International
    
Global
 
   
Fund
      Fund  
Creditable Foreign Taxes Paid
     $8,634       $—  
Per Share Amount
     $0.0166       $—  
Portion of Ordinary Income
                
Distribution Derived from
                
Foreign Sourced Income*
     91.82 %       0 %  
*None of the Funds listed above derived any income from “ineligible foreign sources” as defined under Section 901(j) of the Internal Revenue Code.
 
Foreign taxes paid or withheld should be included in taxable income with an offsetting deduction from gross income or as a credit for taxes paid to foreign governments. Above figures may differ from those cited elsewhere in this repot due to differences in the calculation of income and gains under U.S. generally accepted accounting principles (book) purposes and Internal Revenue Service (tax) purposes. Shareholders are strongly advised to consult their own tax advisers with respect to the tax consequences of their investments in the Funds. In January, shareholders, excluding corporate shareholders, receive an IRS 1099-DIV regarding the Federal tax status of the dividends and distributions they received in the calendar year.
 
Proxy Voting Policies, Procedures, and Record
Both a description of the policies and procedures that the Funds’ investment adviser uses to determine how to vote proxies relating to portfolio securities and information regarding how the Funds voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 are available upon request by calling 800-292-7435. Such information for the Funds is also available on the Securities and Exchange Commission’s (“SEC”) web site at www.sec.gov.
 
Shareholder Statements and Reports
The Funds attempt to reduce the volume of mail sent to shareholders by sending one copy of financial reports, prospectuses and other regulatory materials to two or more account holders who share the same address. We will send you a notice at least 60 days before sending only one copy of these documents if we have not received written consent from you previously. Should you wish to receive individual copies of materials, please contact us at 800-292-7435. Once we have received your instructions, we will begin sending individual copies for each account within 30 days.
 
Availability of Quarterly Portfolio Schedule
The Funds file complete schedules of investments with the SEC for the quarters ended December 31 and June 30 of each fiscal year on Form N-Q which are available on the SEC’s website at www.sec.gov. Additionally, the Funds’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. For information on the Public Reference Room, call 800-SEC-0330.
 
All of the Funds’ quarterly reports contain a complete schedule of portfolio holdings. All quarterly reports are made available to shareholders on the Funds’ web site at www.arielinvestments.com. Shareholders also may obtain copies of shareholder reports upon request by calling 800-292-7435 or by writing to Ariel Investment Trust, c/o U.S. Bancorp Fund Services, LLC, P.O. Box 701, Milwaukee, Wisconsin, 53201-0701.
 
 
 61
 
 
 
 
 
 
Fund Expense Example
(unaudited)
 
Example
As a shareholder of the Funds, you incur ongoing costs, including management fees, distribution and service (12b-1) fees; and other Fund expenses. The Funds currently do not charge any transaction costs, such as sales charges (loads) on purchase payments, reinvested dividends or other distributions, redemption fees or exchange fees. The following example is intended to help you understand your ongoing costs (in dollars) of investing in each of the Funds and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that IRA, 403(b) and Coverdell ESA account holders are charged an annual $15 recordkeeping fee or a one-time, lifetime $60 fee. If these fees were included in either the Actual Expense or Hypothetical Example below, your costs would be higher.
 
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period of April 1, 2013-September 30, 2013.
 
Actual expenses
The first line of the table below for each Fund provides information about actual account values and actual expenses for that particular Fund. You may use the information in each of these lines, together with the amount you invested, to estimate the expenses that you paid over the period in each Fund. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000=8.6), then multiply the result by the number in the first line under the heading, entitled “Expenses Paid During Period”, to estimate the expenses you paid on your account during this period in each Fund.
 
Hypothetical example for comparison purposes
The right portion of the table below for each Fund provides information about hypothetical account values and hypothetical expenses based on each Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in each of the Funds to other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
 
Please note that the expenses shown in the table are meant to highlight only your ongoing costs in each of the Funds. Therefore, the right portion of the table for each Fund is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
                         
       
Actual
  
Hypothetical
(5% return before expenses)
    
Fund and Return
  
Beginning
Account Value
4/1/2013
  
Ending
Account Value
9/30/2013
  
Expenses
Paid During
Period*
  
Ending
Account Value
9/30/2013
  
Expenses
Paid During
Period*
  
Annualized
Expense Ratio*
Ariel Fund
                        
Investor Class
  
$1,000.00
  
$1,106.10
  
$5.39
  
$1,019.95
  
$5.17
  
1.02%
Institutional Class
  
1,000.00
  
1,107.70
  
3.91
  
1,021.36
  
3.75
  
0.74%
Ariel Appreciation Fund
                        
Investor Class
  
$1,000.00
  
$1,135.70
  
$6.00
  
$1,019.45
  
$5.67
  
1.12%
Institutional Class
  
1,000.00
  
1,137.20
  
4.29
  
1,021.06
  
4.05
  
0.80%
Ariel Focus Fund
                        
Investor Class
  
$1,000.00
  
$1,124.20
  
$6.66
  
$1,018.80
  
$6.33
  
1.25%
Institutional Class
  
1,000.00
  
1,125.80
  
5.33
  
1,020.05
  
5.06
  
1.00%
Ariel Discovery Fund
                        
Investor Class
  
$1,000.00
  
$1,054.10
  
$7.72
  
$1,017.55
  
$7.59
  
1.50%
Institutional Class
  
1,000.00
  
1,055.60
  
6.44
  
1,018.80
  
6.33
  
1.25%
Ariel International Fund
                        
Investor Class
  
$1,000.00
  
$1,154.90
  
$7.56
  
$1,018.05
  
$7.08
  
1.40%
Institutional Class
  
1,000.00
  
1,154.40
  
6.21
  
1,019.30
  
5.82
  
1.15%
Ariel Global Fund
                        
Investor Class
  
$1,000.00
  
$1,132.50
  
$7.48
  
$1,018.05
  
$7.08
  
1.40%
Institutional Class
  
1,000.00
  
1,134.20
  
6.15
  
1,019.30
  
5.82
  
1.15%
 
*Expenses are equal to each Fund’s annualized expense ratio indicated above multiplied by the average account value over the period, multiplied by 183/365 to reflect the most recent fiscal half year.
 
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Board of Trustees
 
                 
   
Position(s) held
  
Term of office and length
  
Principal occupation(s)
    
Name and age
  
with Fund
  
of time served
  
during past 5 years
  
Other directorships
                 
James W. Compton
  
Trustee, Member of
  
Indefinite, until successor
  
Retired President and CEO,
  
Seaway Bank and Trust
Age: 75
  
Governance and Audit
  
elected
  
Chicago Urban League,
  
Company, Commonwealth
   
Committees
      
1972 to 2006
  
Edison Company
       
Served as a Trustee
        
       
since 1997
        
                 
William C. Dietrich
  
Trustee, Chairman of Audit
  
Indefinite, until successor
  
Retired Executive Director,
    
Age: 64
  
Committee, Member of
  
elected
  
Shalem Institute for
    
   
Executive Committee
      
Spiritual Formation, Inc.
    
       
Served as a Trustee
        
       
since 1986
        
                 
Royce N. Flippin, Jr.
  
Lead Independent Trustee,
  
Indefinite, until successor
  
President, Flippin
    
Age: 79
  
Member of Management
  
elected
  
Associates since 1992
    
   
Contracts and Governance
            
   
Committees, Chairman of
  
Served as a Trustee
        
   
Executive Committee
  
since 1986 and Lead
        
       
Independent Trustee
        
       
since 2006
        
                 
Mellody L. Hobson
  
Chairman of the Board of
  
Indefinite, until successor
  
President, Ariel
  
DreamWorks Animation
Age: 44
  
Trustees and President,
  
elected
  
Investments since 2000
  
SKG, Inc. (Chairman), The
   
Member of Executive
          
Estée Lauder Companies
   
Committee
  
Served as a Trustee since
      
Inc., Groupon, Inc.,
       
1993, President since 2002
 
    
Starbucks Corporation,
       
and Chairman
      
After School Matters
       
since 2006.
      
(Chairman), Sundance
               
Institute, Chicago
               
Public Education Fund,
               
Investment Company
               
Institute (Board
               
of Governors), SEC Investor
               
Advisory Committee
                 
Christopher G. Kennedy
  
Trustee, Member of
  
Indefinite, until successor
  
Chairman of the Board
  
Interface Inc.
Age: 50
  
Audit and Governance
  
elected
  
of Trustees, University of
    
   
Committees
      
Illinois, Chairman,
    
       
Served as a Trustee since
  
Joseph P. Kennedy
    
       
1995
  
Enterprise, Inc.; Former
    
           
President, Merchandise
    
           
Mart Properties, Inc.,
    
           
2000 to 2011
    
                 
 
 
 63
 
 
 
 
 
 
Board of Trustees  (continued)
 
                 
   
Position(s) held
  
Term of office and length
  
Principal occupation(s)
    
Name and age
  
with Fund
  
of time served
  
during past 5 years
  
Other directorships
                 
Merrillyn J. Kosier
  
Trustee and Vice President
  
Indefinite, until successor
  
Executive Vice President,
  
Loyola University Council
Age: 53
      
elected
  
Ariel Investments since
  
of Regents, Member of
           
1999, Chief Marketing
  
the Investment Policy
       
Served as a Trustee
  
Officer, Mutual Funds since
  
Committee and Board of
       
since 2003 and Vice
  
2007
  
Advisors for the Graduate
       
President since 1999
      
School of Business, Harris
               
Theater for Music and
               
Dance, Lupus Foundation
               
of America, Inc.
                 
William M. Lewis, Jr.
  
Trustee, Member of
  
Indefinite, until successor
  
Managing Director
  
Darden Restaurants, Inc.
Age: 57
  
Management Contracts
  
elected
  
and Co-Chairman of
    
   
Committee
      
Investment Banking, Lazard
    
       
Served as a Trustee
  
Ltd. since 2004
    
       
since 2007
        
                 
H. Carl McCall
  
Trustee, Chairman of
  
Indefinite, until successor
  
Chairman, The State
    
Age: 77
  
Governance Committee,
  
elected
  
University of New York
    
   
Member of Audit
      
since 2011, Principal,
    
   
Committee
  
Served as a Trustee
  
Convent Capital, LLC,
    
       
since 2006
  
2004-2011
    
                 
John W. Rogers, Jr.
  
Trustee
  
Indefinite, until
  
Founder, Chairman, CEO
  
Exelon Corporation,
Age: 55
      
successor elected
  
and Chief Investment
  
McDonald’s Corporation,
           
Officer, Ariel Investments,
  
Chicago Urban League,
       
Served as a Trustee
  
Lead Portfolio Manager,
  
Trustee of the University
       
1986 to 1993 and
  
Ariel Fund & Co-Portfolio
  
of Chicago
       
since 2000
  
Manager, Ariel
    
           
Appreciation Fund
    
                 
James M. Williams
  
Trustee, Chairman of
  
Indefinite, until successor
  
Vice President and
  
SEI Mutual Funds
Age: 65
  
Management Contracts
  
elected
  
Chief Investment Officer,
    
   
Committee
      
J. Paul Getty Trust, since
    
       
Served as a Trustee
  
2002
    
       
since 2006
        
                 
 
TRUSTEES EMERITUS
(no Trustee duties or responsibilities)
John G. Guffey, Jr.
Bert N. Mitchell, CPA
 
Note: Number of portfolios in complex overseen by all Trustees is six. Address for all Trustees is 200 East Randolph St., Suite 2900, Chicago, IL 60601
 
arielinvestments.com
 64
800.292.7435
 
 
 
 
 
Officers
 
                 
   
Position(s) held
  
Term of office and length
  
Principal occupation(s)
  
Other directorships
Name and age
  
with Fund
  
of time served
  
during past 5 years
  
held by officer
                 
Mareile B. Cusack
  
Vice President, Anti-Money
  
Indefinite, until successor
  
Senior Vice President,
  
Smart Museum of Art
Age: 55
  
Laundering Officer and
  
elected
  
Ariel Investments since
  
(University of Chicago),
   
Assistant Secretary
      
2012, Vice President,
  
The Great Books
       
Served as Vice President
  
2007-2012, General
  
Foundation
       
and Assistant Secretary
  
Counsel since October
    
       
since 2008
  
2008
    
                 
       
Served as Anti-Money
        
        Laundering Officer since 2010        
                 
Mellody L. Hobson
  
Chairman, President, Chief
  
Indefinite, until successor
  
President, Ariel
  
DreamWorks Animation
Age: 44
  
Executive Officer and
  
elected
  
Investments, since 2000
  
SKG, Inc. (Chairman), The
   
Principal Executive Officer
          
Estée Lauder Companies
       
Served as a Trustee since
      
Inc., Groupon, Inc.,
       
1993, President since 2002
      
Starbucks Corporation,
       
and Chairman
      
After School Matters
       
since 2006
      
(Chairman), Sundance
               
Institute, Chicago
               
Public Education Fund,
               
Investment Company
               
Institute (Board
               
of Governors), SEC Investor
               
Advisory Committee
                 
Merrillyn J. Kosier
  
Trustee and Vice President
  
Indefinite, until successor
  
Executive Vice President,
  
Loyola University Council
Age: 53
      
elected
  
Ariel Investments since
  
of Regents, Member of the
           
1999, Chief Marketing
  
Investment Policy Committee
       
Served as a Trustee since
  
Officer, Mutual Funds since
  
and Board of Advisors for
       
2003 and Vice President
  
2007
  
the Graduate School of
       
since 1999
      
Business, Harris Theater for
               
Music and Dance, Lupus
               
Foundation of America, Inc.
                 
Jeffrey H. Rapaport
  
Vice President and
  
Served as Vice President
  
Vice President, Fund
    
Age: 37
  
Assistant Treasurer
  
and Assistant Treasurer
  
Administration since 2010;
    
       
since 2010
  
Senior Fund Administration
    
           
Analyst, Ariel Investments,
    
           
2007-2010; Fund
    
           
Administrator, Ariel
    
           
Investments, 2005-2007
    
                 
Anita M. Zagrodnik, CPA
  
Chief Financial Officer,
  
Indefinite, until successor
  
Senior Vice President,
    
Age: 53
  
Chief Compliance Officer,
  
elected
  
Fund Administration,
    
   
Vice President, Secretary
      
Ariel Investments since
    
   
and Treasurer
  
Served as Vice President since
  
2010; Vice President,
    
       
2003, Chief Financial Officer
  
Fund Administration, Ariel
    
       
and Treasurer since 2010,
  
Investments, 2003-2010
    
        Chief Compliance Officer, Ariel        
       
Investment Trust since 2004,
        
       
Secretary since 2007, Assistant
        
        Secretary from 2003-2007        
 
The Statement of Additional Information (SAI) for Ariel Investment Trust includes additional information about the Funds’ Trustees and Officers. The SAI is available without charge by calling 800.292.7435 or logging on to our website, arielinvestments.com. Note: Number of portfolios in complex overseen by all Officers is six. Address for all officers is 200 East Randolph St., Suite 2900, Chicago, IL 60601.
 
 
 65
 
 
 
 
 
 
(GRAPHIC)
 
 
 
 
 
(GRAPHIC)
 
 
 
 
 
(GRAPHIC)
 
 
 
 
 
Item 2. Code of Ethics.

The registrant has adopted a code of ethics that applies, as of the end of the period covered by this report that applies to the registrant’s principal executive officer and principal financial officer, or persons performing similar functions.  A copy of the code of ethics is available on our web site at www.arielmutualfunds.com and without charge, upon request by calling toll-free 1-800-292-7435.

During the period covered by this report, there were no implicit or explicit waivers to the provisions of the code of ethics.

Item 3. Audit Committee Financial Expert.

The registrant’s Board of Trustees has determined that (i) the registrant has the following audit committee financial experts serving on its audit committee and (ii) each audit committee financial expert is independent: (1) William C. Dietrich, (2) Christopher G. Kennedy, (3) James Compton and (4) H. Carl McCall.

Item 4. Principal Accountant Fees and Services.

(a)           Audit Fees.  The aggregate Audit Fees of Deloitte & Touche LLP (“Deloitte”) for professional services rendered for the audits of the financial statements, or services that are normally provided in connection with statutory and regulatory filings or engagements for the fiscal years ended September 30, 2013 and September 30, 2012, respectively, were $106,000 and $100,000.

(b)           Audit-Related Fees.  The aggregate Audit-Related Fees of Deloitte for services rendered for assurance and related services that are reasonably related to the performance of the audit or review of the registrant’s financial statements, but not reported as Audit Fees for the fiscal years ended September 30, 2013 and September 30, 2012, respectively, were $0 and $0.

For the twelve month periods ended September 30, 2013 and September 30, 2012, aggregate Audit-Related Fees billed by Deloitte that were required to be approved by the registrant’s Audit Committee for audit-related services rendered to the registrant’s investment advisor and any entity controlling, controlled by or under common control with the investment advisor that provides ongoing services to the registrant (the “Affiliated Service Providers”) that relate directly to the operations and financial reporting of the registrant were $0 and $0, respectively.

(c)           Tax Fees.  The aggregate Tax Fees of Deloitte for professional services rendered for the review of Federal, state and excise tax returns and other tax compliance consultations for the fiscal years ended September 30, 2013 and September 30, 2012, respectively, were $21,000 and $21,000.

Fees included in the Tax Fees category comprise all services performed by professional staff in the independent accountant’s tax division except those services related to the audit.

For the twelve month periods ended September 30, 2013 and September 30, 2012, the aggregate Tax Fees billed by Deloitte that were required to be approved by the registrant’s Audit Committee for tax compliance, tax advice and tax planning services rendered on behalf of Affiliated Service Providers that relate directly to the operations and financial reporting of the registrant were $0 and $0, respectively.
 
 
 
 

(d)           All Other Fees.  The aggregate Other Fees of Deloitte for all other non-audit services rendered to the registrant for the fiscal years ended September 30, 2013 and September 30, 2012, were $0 and $0.

For the twelve month periods ended September 30, 2013 and September 30, 2012, the aggregate fees in this category billed by Deloitte that were required to be approved by the registrant’s Audit Committee for services rendered on behalf of Affiliated Service Providers that relate directly to the operations and financial reporting of the registrant were $0 and $0, respectively.

(e)(1)           Audit Committee Pre-Approval Policies and Procedures.

The registrant’s Audit Committee must pre-approve all audit and non-audit services provided by the independent accountant relating to the operations or financial reporting of the registrant. Prior to the commencement of any audit or non-audit services to a fund, the Audit Committee reviews the services to determine whether they are appropriate and permissible under applicable law.

The registrant’s Audit Committee has adopted a policy whereby audit and non-audit services performed by the registrant’s independent accountant require pre-approval in advance at regularly scheduled Audit Committee meetings. If such a service is required between regularly scheduled Audit Committee meetings, pre-approval may be authorized by the Audit Committee Chairperson with ratification at the next scheduled audit committee meeting.

(2)           No services included in (b) – (d) above were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

(f)           Not applicable.

(g)           For the twelve month periods ended September 30, 2013 and September 30, 2012, aggregate non-audit fees billed by Deloitte for services rendered to the registrant were $21,000 and $21,000, respectively.

For the twelve month periods ended September 30, 2013 and September 30, 2012, aggregate non-audit fees billed by Deloitte for services rendered to the Affiliated Services Providers were $0 and $0, respectively.

(h)           The registrant’s Audit Committee of the Board of Trustees has considered whether the provision of non-audit services that were rendered to the registrant’s investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.  No such services were rendered.

Item 5. Audit Committee of Listed Registrants.

Not applicable.

Item 6. Schedule of Investments.

(a)  
Included as part of the report to shareholders filed under Item 1 of this Form.
 
(b)  
Not applicable.
 
 
 
 

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

Not applicable.

Item 8. Portfolio Managers of Closed-End Management Investment Companies.

Not applicable.

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

Not applicable.

Item 10. Submission of Matters to a Vote of Security Holders.

There have been no changes to the procedures by which shareholders may recommend nominees to the registrant’s Board of Trustees.

Item 11. Controls and Procedures.

(a)  
The registrant’s certifying officers have reasonably designed such disclosure controls and procedures to ensure material information relating to the registrant is made known to them by others, particularly during the period in which this report is being prepared.  The registrant’s certifying officers have determined that the registrant’s disclosure controls and procedures are effective based on their evaluation of these controls and procedures as of a date within 90 days prior to the filing date of this report.

(b)  
There were no significant changes in the registrant's internal controls over financial reporting, or in other factors that could significantly affect these controls, that occurred during the registrant’s second fiscal half-year, including any corrective actions with regard to significant deficiencies and material weaknesses.

Item 12. Exhibits.

(a)  
(1) Code of Ethics – Not applicable. Item 2 requirements satisfied through alternative means.

(a)  (2) Certification for each principal executive and principal financial officer of the registrant as required by Rule 30a-2 under the Act (17 CFR 270.30a-2(a)) – Filed as an attachment to this filing.

(a) 
(3) Written solicitation to purchase securities under Rule 23c-1 – Not applicable.

(b)  
Certifications required by Rule 30a-2(b) under the Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR 240.13a-14(b) or 240.15d-14(b)), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).  A certification furnished pursuant to this paragraph will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.  Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference – Filed as an attachment to this filing.
 
 
 
 
 
 
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Ariel Investment Trust


By:  /s/ Mellody Hobson                                       
        Mellody Hobson
        President and Principal Executive Officer

Date: November 22, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:  /s/ Mellody Hobson                                       
        Mellody Hobson
        President and Principal Executive Officer

Date: November 22, 2013


By:   /s/ Anita Zagrodnik                                        
        Anita Zagrodnik
        Treasurer and Chief Financial Officer

Date: November 22, 2013