Late last month Ariel Capital Management, the Chicago firm known for its two value funds, and whose slogan has long been "Slow and Steady Wins the Race," announced that it was planning a new growth fund.

The move has caught the interest of some analysts who note that Ariel is branching into a new discipline--growth--at a time when dismal markets have growth funds flat on their backs with poor returns and steady outflows.

Analysts also note that Lincoln Capital, the firm Ariel hired as a subadvisor for the product, has had a tumultuous year, missing the market on some key allocation decisions. Notably, Lincoln subadvised the Vanguard U.S. Growth fund, from 1987 until June 22 when Vanguard fired it for underperformance.

"It is pretty unusual, seeing them do that in a bear market for that investment style," said Morningstar analyst Peter DiTeresa, who tracks Ariel. "Fund companies are notorious for launching funds in a bull market in a given style and often near their peak."

In With the Hare?

Yet, Ariel is doing just the opposite. The firm wouldn't comment on the launch because SEC regulations bar the promotion of funds during filing periods, but analysts suspect Ariel may be branching into new disciplines to avoid being pigeonholed when markets recover.

"Even though value is currently in favor with investors, growth will come back," said Charlie Bevis, an editor and researcher at Financial Research Corp. in Boston. "This is probably part of a strategy to have a fund in place once the pendulum swings back in favor of growth. It might seem a little odd, but you've got to look at the longer term horizon."

And Bevis said Ariel's move may be a harbinger of what is to come at other fund shops. "You might see some more growth funds filed," he said. Companies will "catch the wave as it starts to go forward," instead of jumping "on the crest of the wave when it's going to crash on the beach."

Learning from History

In the late 1990s value firms were mauled by the markets. They suffered poor returns. Portfolio managers were fired. Funds shut down. "It was bad news for a lot of value managers," said Chris Traulsen, another Morningstar analyst. "A lot of money left value funds for growth funds."

Ariel fared relatively well during that period, posting positive flows of $104.1 million in 1999, according to FRC. Still, analysts wonder if Ariel may be developing this new growth product to position itself for another high-growth period. "It does make sense for them to try to cover as many bases as possible," DiTeresa said.

And after Ariel's Appreciation value fund hit the skids in 2000, posting poor returns that prompted a rash of redemptions that amounted to $10.2 million in outflows for the year, the fund complex has recovered strongly, posting a positive $393.6 million in flows year to date. DiTeresa suspects Ariel is using the boon to attract its current investors to new products, helping them get in on an offering that when markets recover could skyrocket.

"It could pay off substantially for the fund's track record," he said. "Its numbers from inception will look quite strong."

A Fly in the Ointment

Still, there is the issue of Lincoln Capital and its track record. Analysts say that, because Ariel is not fundamentally a growth management firm, the company is smart to pick a sub-advisor. But why, Traulsen wonders, did Ariel pick this one? The analyst says Lincoln was bent on keeping the weightings of the Vanguard product it sub-advised in line with the Russell 1000 Index which prompted it in 2000 and this year to make serious bets on technology, some 50% of the fund. But the firm moved late on those allocations and got in just in time to catch a falling knife, Traulsen said. Then the firm made a bet on computer networking stocks and underperformed the category markedly, he said.

"They really seemed to fail to keep up with the times and manage the fund effectively through the growth of the late 90s and the downturn of 2000 and 2001," Traulsen said.

Ariel has worked with Lincoln Capital in the past, which may account for the decision to use them in this growth product. And Traulesn said the Lincoln-Vanguard debacle may prove to be a blip in an otherwise good record.

"I find that, yes, they have a long history of success, but on the whole they have struggled with changes and I'm not sure that they've found their way again," Traulsen said. "I wish I had a crystal ball."

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