Ariel Investments' co-CEOs John W. Rogers Jr. and Mellody Hobson sat down with Pensions & Investments in early April to discuss new initiatives at the $16.2 billion asset manager, market events that have shaped the firm, and the importance of financial literacy. The pair also shared their thoughts on the reasons why their co-CEO partnership thrives, and their commitment to closing the racial wealth gap through affiliate Ariel Alternatives' Project Black fund.
Questions and answers have been edited for style, clarity and conciseness. For the full interview, please visit: pionline.com/ariel.
Q: Let's talk about emerging markets and how your new team is developing.
Mellody Hobson: We're very, very excited about this new asset class for us. We also think the timing is very good.
EMV, emerging markets value, has been out of favor and we're contrarians, you know — that's when we think you have the best opportunity to outperform. And so we're eager to get started with them. And we've done this before. We did it successfully with international and global and that was 12 years ago.
It's very important for firms to learn something new. I think that that's important — that you grow and you stay curious about new things. And while of course our international and global team has emerging markets exposure, having a dedicated EMV strategy will be a great new thing for the firm.
Q: P&I is celebrating its 50th anniversary this year. Ariel is celebrating its 40th. What do you consider the most seismic market changes you've witnessed over the firm's 40 years, and how did Ariel meet those events?
John W. Rogers: The first one, of course, was when the stock market crashed in 1987, and was down 22% in one day. There was this extraordinary amount of fear. We had never seen anything like it. It came out of the blue.
But for us, the firm just being 4 years old, it gave us an opportunity to show people that we were true contrarians. That we were going to live John Templeton's values of buying when there's maximum pessimism, or as Warren Buffet says, you want to be greedy when others are fearful.
So we were able to then call clients during that day and say, send us more money. We found this is a once-in-a-lifetime opportunity to buy bargains and it just showed what we were really about and that we were going to live our values under immense stress.
But we were able to find some great, great bargains that set us up for really a great recovery and great returns for the rest of '87 and into '88. And then, of course, the other financial crisis that lasted much longer was the 2008 and 2009 crisis — the lows got tested more than once. It was absolutely brutal.
It happened to come at a really bad time for us when the market collapsed and value underperformed and we underperformed our benchmarks. Five years before that, we'd had really great returns.
It tested us a lot because we were losing clients during that period. At the same time, we were underperforming, and that put a lot of stress on all of us. But the good news there is, again, we went back to our core beliefs, and bought while there was this sheer panic in the marketplaces and really got some extraordinary companies at throwaway prices.
So again, in '08 and '09, we took advantage of that, during that painful period, bought terrific bargains and ended up being No. 1 in our category coming out of the bottom of that financial crisis.
We've just been able to show in those two key periods that if you stick to your guns, clients start to understand that you're going to be the true value investor in times of turmoil. Our team understands it. And now the cool thing is that now our team is even more battle-tested than ever. You know, all of our senior investment professionals have gone through a financial crisis together.
So those have been the two real key tests to us during those periods. We think those are always opportunities. Not something to be fearful of.
Q: You talked about being battle-tested. What's next for Ariel Investments? What's the next 50 years going to look like?
John W. Rogers: I think Mellody has been leading the vision for the future, which has been great. Mellody calls it Ariel 2.0 and she's been using her network and her leadership skills, her experience to attract extraordinary talent, both in full-time teammates here and helping us to run Ariel. But then being able to think about new product areas like Project Black, that's part of Ariel Alternatives, and our new emerging markets team.
That's all a part of Mellody's vision. I think when you ask the question about the next 50 years, Ariel will be a more diversified firm than we were.
Mellody Hobson: We're going slow. The one thing I tell people is we add something every decade. We started small cap in 1983. We started midcap in 1990. We started SMID in 2000. We started international and global in 2011. We started Project Black in 2021, and then EMV is this year.
And so I think that one of the things you hear from us is, whatever we do, it's almost as if it were a concentric circle. It makes sense. If you hear that we're doing it, you say, oh, that's an extension of what they've already done. That the international global was an extension of what we had done for so many years in domestic.
Project Black was an extension of us. Many people say because of our long holding periods at Ariel, a decade, two decades for stocks, that we're like a public-private equity firm, because we have such a long-term horizon. Of course we do with the turtle as the logo. And so Project Black was just another natural extension and when people heard about it, especially around its core thesis, it made sense coming from Ariel. You didn't say, well, what are they doing and what do they know about this?
We will not just offer things for the sake of offering it, and we won't be a firm with dozens of products. We will never be that. We will be a boutique and in our areas of expertise, we will have people who know those areas in a deep way.
Q: So this is an evolution, part of the evolution of Ariel.
Mellody Hobson: Evolutionary. I also used a term lately that I heard somewhere, it's a bit of a refounding — refounding in that it has a broader platform, but it's still around all of our core beliefs and our core values. You're not hearing us talking about a growth strategy or some kind of rapid trading strategy.
Everything you hear from us is talking about being patient investors, being value investors, buying things when they're out of favor, seeing long-term growth prospects for those businesses. Again, having expertise in these areas as opposed to being jacks of all trades. Everything we've added is consistent with those messages and will continue to be.
Q: So, just staying on with Project Black, why the need and how do you see this fitting into improving the wide gap in wealth between Black and white households?
Mellody Hobson: I've talked about that a lot. How it came to be, which was a call from Jamie Dimon during the summer of civil unrest where George Floyd was horrifically murdered and he said a lot of people want to help Black businesses. Why? Because if you look at the data, if you look at the wealth gap in this country, the biggest gap exists among Black and brown Americans and white Americans.
That gap is gigantic. We have negative net worth in the Black community vs. our white counterparts at similar income levels. And so as a result of that, we said, how can we go to the area that is most in need?
And to the extent we don't close that wealth gap for Black and brown people, we have huge repercussions for all of society. So that's where we went. And then we said, how do we be creative about this?
I had this idea. The idea was could we be tier one suppliers to Fortune 500 companies that are saying, especially at that time when under so much pressure, that they wanted to figuratively and literally diversify their supply chain. Figuratively, because of the need to show that they were inclusive. But also literally after COVID and during COVID where the supply chain had been compromised.
These companies were saying that they wanted to have 10% to 15% of their spend be with diverse suppliers, and yet they were only at 2%. At the same time, 95% of minority business enterprises in this country have less than $5 million in revenue. So even if the big companies wanted to do business with us, we had a scale challenge on our side.
So we said, let's meet that scale challenge. Let's go out and buy businesses. Between a hundred million dollars and a billion dollars in revenue, and by virtue of our ownership, my word, minoritize, them by installing a majority minority board, by having members of the C-suite be Black and brown.
By sharing equity throughout the organization, by whenever we have the possibility of diversifying doing so in disadvantaged communities, we said we have the opportunity to have a lever here that could actually change outcomes for lots and lots of people.
Q: How will you both measure the success of Project Black?
Mellody Hobson: This is not about anecdotes, this is about metrics. I'm always saying that math has no opinion. So we will be tracking everything right out of the gate in terms of our hiring practices, in terms of the diversity inside of our organizations.
With our first business that we've bought, Sorenson, which provides tech-enabled services for the deaf and hard of hearing, we've already made tremendous strides.
We have someone responsible for measuring the impact of these businesses and reporting them out to our LPs so that they're very clear about what is happening and are we accomplishing the goals that we've set for ourselves.
Q: Here's a related question to Project Black. So I noticed during the COVID crisis, a lot of Black and brown communities became interested in the financial markets. What do you think about financial literacy for the broader community?
Mellody Hobson: We've been big believers that financial literacy is essential to the long-term financial success of our country and the world. And unfortunately, America is financially illiterate because we don't learn about investing in school. I give this example all the time that you can take wood shop or auto in a high school today and not a class on investing, which always leads me to ask people who is whittling, who is cleaning their own carburetor? No one. And yet that class on investing could have profound effects, not only on the individual but on future generations.
But the only way to do it is to do it in small bites. And one of the ways that people encounter a lot of their financial knowledge actually is at work. It's in their 401(k) plan, their 403(b), 457, where they get that list of options and they're confronted with a choice.
And so using that as a leverage point right now is probably the most obvious and easiest way to try to move the needle in terms of getting, and helping, people to be further along when it comes to being financially literate.
John W. Rogers: The only thing I would add is that during the Obama administration, I had a chance to chair his task force on financial literacy. It was called the Council for Financial Capability for Young Americans, and the concluding documents we gave to the president, we were really trying to inspire financial services companies to partner with urban public schools and utilize the model that we had created with the Ariel Community Academy that was started approximately 25 years ago, where we give the kids real money to invest in real stocks and really learn about what the stock market's all about, learn about compound interest, learn about entrepreneurship, learn about job creation and learn about financial services careers.
People always talk about the importance of STEM, which is important, but we know how important financial services are to this country and for some reason we just haven't thought about that, of not only educating people about how to save and invest, but also how to help prepare them for careers in finance where you can create multigenerational wealth and economic opportunity for, particularly, minority students that are in urban communities.
Q: Mellody, what is the biggest untold story of Mellody Hobson? Just looking at your accomplishments, it's hard for all of us not to be inspired by and to admire you. Anything else you have your sights on?
Mellody Hobson: I don't have specific ideas of things that I will do because I try not to limit myself to my own imagination. Because almost everything that has happened to me was beyond anything I could ever imagine. But I do stay open and curious to all possibilities, and I think that's given me a lot of opportunity. So I can't tell you in specifics what is to come, but I can tell you that I always dream big.
John W. Rogers: And I would say that one of the things that's maybe not asked what's not recognized about her, is that she's been a real pied piper for talent. I talk about that all the time when I'm giving advice to other companies of how do you build a diverse firm in the 21st century? So you get a leader like Mellody, who can attract the best talent. And we have so many great people leaving great firms and great careers to come join our small firm because they're inspired by her energy, her commitment to helping others, her commitment to excellence, and everything that she does. Really smart, thoughtful people want to come and work here, and I think that's part of the untold story of Mellody's leadership.
Q: One last question, I promise. What's the one important issue or any type of lasting thoughts you'd like to tell the institutional investing community?
John W. Rogers: I think that sometimes because we get more of the visibility, people don't really understand the depth of the talent that's here. All these stars that have been here for 10, 20, 30 years or more, and then some that have gone off and left and done wonderful things outside in the world.
Mellody Hobson: I would say the two things, one that is very important is, this is what we love to do. You know, Warren Buffett says do a job that you would do if you didn't need a job. We love this work. This is what we plan to do. You know, people always ask, what's next? What are you looking toward? We just want to be good at this.
Not just good, but great. And being great is a really hard task.
And then the other thing I would say, and I don't think it gets a lot of attention, I don't think many companies have a co-leadership model like we do that has worked as effectively as it has. You know, we are co-CEOs. John and I truly love and respect each other.
Even when we disagree, and we disagree a lot, there's a basic anchor of respect.
That co-leadership model, I'm just shocked more people don't do it because it works so well for us. We divide and conquer.
Q: It doesn't work for everyone.
John W. Rogers: We talk multiple times a day. There's no decision that I make, business or personal, without coming to Mellody to get her thoughts and her advice and her counsel because of the respect and love I have for her. And the admiration I have for her.
And she's always going to tell me not always what I want to hear but the things that I need to hear when you're making some of the toughest decisions that we all have to make in life. So I think that's another part of the story that's maybe not well understood.