4TH QUARTER 2006
About the Fund
Overall Morningstar RatingTM
The no-load Ariel Fund pursues long-term capital appreciation by investing in undervalued companies that show strong potential for growth. The Fund primarily invests in companies with market capitalizations between $1 billion and $5 billion.
The Overall Morningstar Rating is based on 378 domestic mid-cap blend funds as of 12/31/06. The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Ratings.
Fund Performance as of December 31, 2006 Annualized
Ariel Fund 1
Russell 2500 Value Index 2
Russell 2500 Index S&P 500 Index
Life of Fund
Lipper Rankings Within mid-cap core fund category
Performance data quoted represents past performance. Past performance does not guarantee future results. All performance assumes reinvestment of dividends and capital gains. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Performance data current to the most recent month-end may be obtained by visiting our web site, arielmutualfunds.com. Lipper, Inc. is a nationally recognized organization that reports performance and calculates rankings for mutual funds. Each fund is ranked within a universe of funds with similar investment objectives. Ranking is based on total returns.
Financial Services Consumer Discretionary & Services Producer Durables
Fund Facts Investment Style
Ariel Fund †
Russell 2500 Value Index
Russell 2500 Index
S&P 500 Index
Materials & Processing
Portfolio Characteristics Small/mid-cap value
Average Mkt Cap ($ weighted)
November 6, 1986
Number of Issues
Beta (Russell 3000 Index)
Investing in small and mid-cap stocks is more risky and more volatile than investing in large cap stocks. The Fund was rated two stars among 378, three stars among 310 and five stars among 117 domestic mid-cap blend funds for the three-, five- and ten-year periods ended 12/31/06, respectively. These ratings may change monthly. For each fund with at least a three-year history, Morningstar calculates a Morningstar RatingTM based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in an investment category receive five stars; the next 22.5% receive four stars; the next 35% receive three stars; the next 22.5% receive two stars and the bottom 10% receive one star. Morningstar does not guarantee the accuracy of this information. 1
Autos & Transportation
The Russell 2500® Value Index measures the performance of small and mid-sized, value-oriented companies with lower price-to-earnings ratios.
The Russell 2500® Index measures the performance of small and mid-sized companies.
Represents percentage of total equity holdings in the portfolio.
Equity Cash & Other
The Standard & Poor’s 500 Index is a broad market weighted index dominated by blue-chip stocks. For a current prospectus, which includes the investment objectives, risks, management fees, charges and expenses as well as other information, call 800-292-7435. Please read the prospectus and consider this information carefully before investing. ©2007, Ariel Distributors, LLC.
4th Quarter 2006
Portfolio Manager Commentary
Top Ten Equity Holdings 1 Markel Corp. Specialty insurance provider
2 Hewitt Associates, Inc. Human resources outsourcing and consulting firm
3 Janus Capital Group Inc. Mutual fund manager
4 Jones Lang LaSalle Inc. Real estate services and money management firm
5 Energizer Holdings, Inc. Consumer battery and razor manufacturer
6 Investors Financial Services Corp. Provider of asset administration services
7 HCC Insurance Holdings, Inc. Global provider of specialized property and casualty insurance
8 IDEX Corp. Industrial product manufacturer
9 Tribune Co. Publishing and broadcasting company
10 Mohawk Industries, Inc. Manufacturer and distributor of floor coverings
% of Portfolio in Top Ten
The quarter began with the Russell benchmarks on a tear—delivering nearly a year’s worth of performance in just two months. Investors were riding high on the second longest rally since 1929, now at four years and counting. Then in December the Russell Indices faltered as slower-thanexpected economic growth combined with higher-than-expected inflation proved that the so-called Goldilocks economy is not “just right.” However, Ariel’s portfolios of quality companies possessing trusted franchises, predictable earnings and solid financials largely dodged the December blues and delivered robust results for the month. By quarter-end, Ariel Fund produced a solid return, albeit lower than the benchmarks. During the quarter, several holdings posted impressive returns. Notably, Markel Corp.’s shares rose due to strong investment results and a benign hurricane season. Additionally, Interpublic Group of Cos., Inc.’s shares surged due to several sizeable wins giving its turnaround efforts added momentum. Some of the quarter’s gains were dampened by weaker performance of a few portfolio holdings. Specifically, Tribune Co. slid as bids for purchasing the company came in below expectations. We believe the company is pursuing all options to unlock shareholder value and expect that a favorable resolution will be reached by the end of March. Secondly, Anixter International Inc.’s stock declined as the price of copper fell substantially. Our independent verification shows that Anixter is much less exposed to copper prices than the market anticipates. During the period, we exited long-time holding American Greetings Corp. on recent strength, while our position in Radio One, Inc. was eliminated to pursue more compelling investment opportunities. Finally, we sold out of Valassis Communications, Inc. after the stock rose on the announcement that it had settled its dispute with ADVO, Inc. and will continue with its planned acquisition. No new positions were added during the quarter.
Ariel’s industry concentration helps to add value in areas we know well.
The market rally has held up longer than we ever would have imagined, and we believe a correction is inevitable—we are anticipating at least a ten percent drop in 2007. In our view, earnings expectations are overly optimistic. As the economy starts to decelerate, corporate profits naturally will do the same, bringing stock prices down with them. We believe this is a time to be both cautious and conservative. So we are sticking with the slow-and-steady-eddies which we believe have sturdy franchises, deep moats and robust cash flows that enable them to hold firm during periods of slowing economic growth.
About the Portfolio Managers
Quality Ariel seeks to invest in quality companies with quality management teams and solid financials.
As value investors, Ariel makes opportunistic purchases when companies that we believe are high quality are temporarily out of favor.
John W. Rogers, Jr., Lead Portfolio Manager John is the Founder, Chairman and Chief Investment Officer of Ariel Capital Management, LLC and has more than 24 years of professional experience managing portfolios and analyzing investments. John serves as the Lead Portfolio Manager of Ariel Fund and Ariel Appreciation Fund. As such, he is the final decision maker on all companies that move into and out of these portfolios and collaborates closely with the Portfolio Managers of each Fund. John received an AB in economics from Princeton University where he served as the captain of the varsity basketball team. John P. Miller, CFA, Portfolio Manager John has over 19 years of research and investment experience. He specializes in small-cap U.S. equities as well as the industrials, publishing and broadcasting industries. John began his investment career at Cantor Fitzgerald & Co. in 1987 and joined Ariel in 1989. He graduated from Western Illinois University and earned his MBA from The University of Chicago.
Slow and Steady Wins the Race
As of 12/31/06, Markel comprised 5.0% of Ariel Fund; Interpublic Group, 2.5%; Tribune, 3.4%; Anixter International, 2.6%; American Greetings, 0.0%; Radio One, 0.0%; Valassis Communications, 0.0%; and ADVO, 0.0%. This fact sheet candidly discusses a number of individual companies and sectors. These opinions are current as of the date of this fact sheet but are subject to change. The information provided in this fact sheet does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell arielmutualfunds.com 800-292-7435 any particular security.