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Ariel manager finds value off beaten path

A pair Knight Capital traders work their post floor New York Stock Exchange before close trading Friday Aug. 3 2012.

A pair of Knight Capital traders work at their post on the floor of the New York Stock Exchange before the close of trading, Friday, Aug. 3, 2012. Knight Capital's stock soared after the battered trading firm received a financial lifeline and clients said they expect to resume routing trades through the system. (AP Photo/Richard Drew)

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roeder report

David Roeder reports on real estate at 6:22 p.m. every Thursday on WBBM-AM (780) and WBBM-FM (105.9). The reports are repeated at 10:22 p.m. Thursday and 7:22 a.m. Sunday

Updated: September 6, 2012 6:24AM



With its corporate symbol of a turtle, Ariel Investments glories in its reputation as a steady fund steward unconcerned with where the money mobs go. It is committed to the long term. And it has a rock star in its midst.

In the world of fund managers, David Maley is hitting awesome chords. Maley, 51, joined Ariel from Maple Hill Capital in 2009 and in early 2011 launched the Ariel Discovery Fund (ARDFX). It calls itself a small-cap, “deep value” fund, which means that it aims to own companies trading at steep discounts to what Maley deems their intrinsic value. He buys with the intent to hold for at least five years and avoids companies with large debts.

His approach has topped the charts. As of June 30, Lipper ranked it the absolute best fund in its class for the second quarter and for the prior year. Morningstar called it one of the top funds of 2011. After fees, the fund has returned 8.98 percent of the 12 months ending June 30, while the Russell 2000 Value Index returned a negative 1.44 percent.

Maley’s target of companies valued at less than $2 billion puts him in a place where prices can swing wildly and on minimal information. That creates opportunities he tries to exploit.

“We try to invest with a margin of safety, which means trying to buy a stock at a price low enough where you can be wrong about what will happen to the company and still be right as an investor,” Maley said. He said he and fellow manager Kenneth Kuhrt constantly ask themselves if they’d buy the company at the market price if it weren’t publicly traded.

They keep the holdings to around 35 stocks, enough to diversify but not so many that they lose touch with management. The process has led them to winners such as top holdings Market Leader (LEDR), which Maley said aspires to be a Bloomberg-type data machine for Realtors, and Pervasive Software (PVSW), which works in a variety of cloud-computing applications.

As for the accolades, Maley insisted they haven’t given him a big ego around the office. “A lot of what we’ve done is because of the great team around here,” he said.

This rock star says the right things.

INCOME INCOMING: Launched during the bear market of 2008, Vanguard’s managed payout funds have taken a while to catch on. They take savings and try — emphasis on that word — to turn it into steady, monthly payments that don’t tap principal.

Morningstar’s associate director of fund analysis Dan Culloton examined the three product offerings and found them doing a decent job of living up to promises. Culloton, however, emphasized that while they are supposed to feel like annuities, they are not. The payments will vary with performance.

Vanguard Managed Payout Growth Focus (VPGFX) targets a 3 percent return. Growth and Distribution Focus (VPGDX) aims for 5 percent and Distribution Focus (VPDFX) aims for 7 percent. All benefit from Vanguard’s renowned focus on low fees. “There are no guarantees here, but they can be useful tools,” Culloton said.

STREET JUSTICE: One gets the sense that while last week’s trading glitch involving stocks managed by Knight Capital Group (KCG) isn’t the biggest scandal to hit Wall Street, it might be the one that provokes action. The computer snafu left Knight with a $440 million loss that threatens its survival.

To other Wall Street executives, the incident drives home the point that today’s soulless, computer-frenzied trading is out of control. Firms are just one software error away from financial ruin. Knight’s woe is more than short-term; its biggest customers, firms such as Scottrade, TD Ameritrade (AMTD) and Fidelity for a time reportedly refused to send it business because of a lack of trust.

Knight used to be an integral part of Wall Street’s plumbing. It now faces “street justice” more swift and sure than anything a federal regulator could mete out. The shares closed Friday at $4.05 and have lost 60 percent of their value since Wednesday.

SEE CBOE: For all the competition and soft volumes in the exchange business, the parent company of the Chicago Board Options Exchange is faring well. CBOE Holdings (CBOE) last week reported a 15 percent increase in its second quarter net income, to $38.5 million, on revenue that rose 10 percent, to $132.6 million.

It was the eighth straight quarter of growth in earnings per share. The company’s operating margin is now just shy of 50 percent.

With all that cash, it made sense that the company also lifted its quarterly dividend to 15 cents a share from 12 cents and authorized a $100 million stock buyback. The new dividend is payable Sept. 12 to shareholders of record Aug. 31. CBOE shares closed Friday at $28.19 and are up about 30 percent for the last 12 months.

CLOSING QUOTE: “Never bet on the end of the world. It only happens once.” — Art Cashin, director of floor operations, UBS Financial Services

Besides, there is always the difficulty in getting paid.



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