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Ariel Fund

 

 

Investment objective

 

Ariel Fund pursues long-term capital appreciation by investing in undervalued companies that show strong potential for growth.

 

Fees and expenses of the Fund

 

The table below describes fees and expenses that you may pay if you buy and hold shares of the Fund. You do not pay a sales charge or load when you buy or sell shares.

Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
Management fees	0.61%
Distribution and service (12b-1) fees	0.25%
Other expenses	0.28%
Total annual operating expenses	1.14%

The example below illustrates the expenses you would pay on a $10,000 investment in Ariel Fund.  It assumes the Fund earned an annual return of 5% each year, the Fund’s operating expenses remain the same and that you redeem your shares at the end of each time period.   The example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds.  Your actual expenses may be greater or less than the amounts shown.

	1-Year	3-Year	5-Year	10-Year
Ariel Fund	$116	$362	$627	$1,384

 

Portfolio Turnover

 

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio).  Higher turnover rates may indicate higher transaction costs and may result in higher taxes when shares are held in a taxable account.  These costs, which are not reflected in annual fund operating expenses or in the example, affect the Fund’s performance.  During the most recent fiscal year, the Fund’s portfolio turnover rate was 45% of the average value of its portfolio.

 

Principal investment strategy

 

Ariel Fund invests primarily in common stocks of companies with market capitalizations between $1 billion and $5 billion, measured at the time of purchase.  Over time, the market capitalizations for the Fund’s portfolio companies may change.  

 

The essence of the Fund’s strategy is a combination of patience and stock selection.  The Fund seeks to hold investments for a relatively long period of time—generally two to five years.  As long as a portfolio company otherwise meets the Fund’s investment criteria and style, increased capitalization does not prevent the Fund from holding or buying more shares.

The Fund seeks to invest in quality companies in industries in which Ariel Investments, LLC (“Ariel,” “Ariel Investments” or the “Adviser”) has expertise such as the financial services and consumer discretionary sectors. The Fund only buys when Ariel believes that these businesses are selling at excellent values.

 

 

Quality companies typically share several attributes that Ariel believes should result in capital appreciation over time: high barriers to entry, sustainable competitive advantages, predictable fundamentals that allow for double digit earnings growth, skilled management teams and solid financials.  Ariel’s strategy to focus on a limited number of industries is designed to add value in areas in which it has expertise.  We believe such approach creates a concentrated portfolio of well-researched stocks.  As disciplined value investors, we make opportunistic purchases when great companies are temporarily out of favor—generally seeking to invest in companies that are trading at a low valuation relative to potential earnings and/or a low valuation relative to intrinsic worth.  We will sell a stock if its valuation reaches our private market value as determined by the Adviser or if there are material changes to a company’s fundamentals. 

 

The Fund does not invest in corporations whose primary source of revenue is derived from the production or sale of tobacco products or the manufacture of handguns.  We believe these industries are more likely to face shrinking growth prospects, draining litigation costs and legal liability that cannot be quantified.

 

Ariel Fund is a diversified fund that generally will not hold more than 50 securities in its portfolio.

 

Principal risks

 

Although Ariel makes every effort to achieve the Fund’s objective of long-term capital appreciation, Ariel cannot guarantee it will attain that objective.  You could lose money by investing in this Fund.  The principal risks include:

 

v	Small and medium capitalization stocks held by the Fund could fall out of favor and returns would subsequently trail returns from the overall stock market.  The performance of such stocks also could be more volatile.

 

v	The general level of stock prices could decline.

 

v

The Fund often invests a significant portion of its assets in companies within the financial services and consumer discretionary sectors and its performance may suffer if these sectors underperform the overall stock market.  You should consider investing in the Fund if you are looking for long-term capital appreciation and are willing to accept the associated risks.

 

You should consider investing in the Fund if you are looking for long-term capital appreciation and are willing to accept the associated risks.

 

(a)

After tax returns are calculated using the highest historical individual federal marginal income tax rates and do not reflect the impact of state and local taxes.  Actual after-tax returns depend on your tax situation and are not relevant if Fund shares are held in tax-deferred arrangements such as Individual Retirement Accounts (IRAs).

 

 

Investment adviser

 

Ariel Investments, LLC, is the investment adviser to the Fund.

 

Portfolio managers

 

John W. Rogers, Jr. , Lead Portfolio Manager since 1986

John P. Miller , CFA, Portfolio Manager since 2006

 

For important information about the purchase and sale of Fund shares, tax information and payments to broker- dealers and other financial intermediaries please refer to page 12.

 

 

 

 

Ariel Appreciation Fund

 

 

Investment objective

 

Ariel Appreciation Fund pursues long-term capital appreciation by investing in undervalued companies that show strong potential for growth.

 

Fees and expenses of the Fund

 

The table below describes fees and expenses that you may pay if you buy and hold shares of the Fund.  You do not pay a sales charge or load when you buy or sell shares.

Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
Management fees	0.73%
Distribution and service (12b-1) fees	0.25%
Other expenses	0.27%
Total annual operating expenses	1.25%

The example below illustrates the expenses you would pay on a $10,000 investment in Ariel Appreciation Fund.  It assumes the Fund earned an annual return of 5% each year, the Fund’s operating expenses remain the same and that you redeem your shares at the end of each time period.   The example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds.  Your actual expenses may be greater or less than the amounts shown.

	1-Year	3-Year	5-Year	10-Year
Ariel Appreciation Fund	$127	$396	$686	$1,511

 

Portfolio Turnover

 

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio).  Higher turnover rates may indicate higher transaction costs and may result in higher taxes when shares are held in a taxable account.  These costs, which are not reflected in annual fund operating expenses or in the example, affect the Fund’s performance.  During the most recent fiscal year, the Fund’s portfolio turnover rate was 44% of the average value of its portfolio.

 

Principal investment strategy

 

Ariel Appreciation Fund invests primarily in common stocks of companies with market capitalizations between $2.5 billion and $15 billion measured at the time of purchase.  Over time, the market capitalizations for the Fund’s portfolio companies may change.  

 

The essence of the Fund’s strategy is a combination of patience and stock selection.  The Fund seeks to hold investments for a relatively long period of time—generally two to five years.  As long as a portfolio company otherwise meets the Fund’s investment criteria and style, increased capitalization does not prevent the Fund fromholding or buying more shares.

 

The Fund seeks to invest in quality companies in industries in which Ariel has expertise such as the financial services and consumer discretionary sectors.  The Fund only buys when Ariel believes that these businesses are selling at excellent values.

 

 

Quality companies typically share several attributes that Ariel believes should result in capital appreciation over time: high barriers to entry, sustainable competitive advantages, predictable fundamentals that allow for double digit earnings growth, skilled management teams and solid financials.  Ariel’s strategy to focus on a limited number of industries is designed to add value in areas in which it has expertise.  We believe such approach creates a concentrated portfolio of well-researched stocks.  As disciplined value investors, we make opportunistic purchases when great companies are temporarily out of favor—generally seeking to invest in companies that are trading at a low valuation relative to potential earnings and/or a low valuation relative to intrinsic worth.  We will sell a stock if its valuation reaches our private market value as determined by the Adviser or if there are material changes to a company’s fundamentals.

 

The Fund does not invest in corporations whose primary source of revenue is derived from the production or sale of tobacco products or the manufacture of handguns.  We believe these industries are more likely to face shrinking growth prospects, draining litigation costs and legal liability that cannot be quantified.

 

Ariel Appreciation Fund is a diversified fund that generally will not hold more than 50 securities in its portfolio.

 

Principal risks

 

Although Ariel makes every effort to achieve the Fund’s objective of long-term capital appreciation, Ariel cannot guarantee it will attain that objective.  You could lose money by investing in this Fund.  The principal risks include:

 

v	Medium capitalization stocks held by the Fund could fall out of favor and returns would subsequently trail returns from the overall stock market.  The performance of such stocks also could be more volatile.

 

v	The general level of stock prices could decline.

 

v

The Fund often invests a significant portion of its assets in companies within the financial services and consumer discretionary sectors and its performance may suffer if these sectors underperform the overall stock market.  You should consider investing in the Fund if you are looking for long-term capital appreciation and are willing to accept the associated risks.

 

 

(a)

After tax returns are calculated using the highest historical individual federal marginal income tax rates and do not reflect the impact of state and local taxes.  Actual after-tax returns depend on your tax situation and are not relevant if Fund shares are held in tax-deferred arrangements such as Individual Retirement Accounts (IRAs).

Investment adviser

 

Ariel Investments, LLC, is the investment adviser to the Fund.

 

Portfolio managers

 

John W. Rogers, Jr. , Lead Portfolio Manager since 2002

Timothy Fidler , CFA, Portfolio Manager since 2009

Matthew F. Sauer , Portfolio Manager since 2006

 

For important information about the purchase and sale of Fund shares, tax information and payments to broker- dealers and other financial intermediaries please refer to page 12.

 

 

 

Ariel Focus Fund

 

 

Investment objective

 

Ariel Focus Fund pursues long-term capital appreciation by investing in undervalued companies that show strong potential for growth.

 

Fees and expenses of the Fund

 

The table below describes fees and expenses that you may pay if you buy and hold shares of the Fund.  You do not pay a sales charge or load when you buy or sell shares.

Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
Management fees		0.75%
Distribution and service (12b-1) fees		0.25%
Other expenses		0.87%
Total annual operating expenses		1.87%*
Less fee waiver or expense reimbursement		(0.62)%
Total annual fund operating expenses after fee waiver and/or expense reimbursement		1.25%
*	The Adviser is contractually obligated to waive fees or reimburse expenses in order to limit Ariel Focus Fund’s total annual operating expenses to 1.25% of net assets through the end of the fiscal year ending September 30, 2012.  The agreement automatically renews for additional one-year periods if not terminated in writing by the Board of Trustees or the Adviser before September 30 of each year.

The example below illustrates the expenses you would pay on a $10,000 investment in Ariel Focus Fund.  It assumes the Fund earned an annual return of 5% each year, the Fund’s operating expenses remain the same and that you redeem your shares at the end of each time period.  The example reflects contractual fee waivers and expense reimbursements through September 30, 2012.  The example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds.  Your actual expenses may be greater or less than the amounts shown.

	1-Year	3-Year	5-Year	10-Year
Ariel Focus Fund	$127	$463	$891	$2,084

 

Portfolio Turnover

 

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio).  Higher turnover rates may indicate higher transaction costs and may result in higher taxes when shares are held in a taxable account.  These costs, which are not reflected in annual fund operating expenses or in the example, affect the Fund’s performance.  During the most recent fiscal year, the Fund’s portfolio turnover rate was 42% of the average value of its portfolio.

 

Principal investment strategy

 

Ariel Focus Fund invests primarily in common stocks of companies with market capitalizations in excess of $10 billion measured at the time of purchase.  Over time, the market capitalizations for the Fund’s portfolio companies may change.   

 

The essence of the Fund’s strategy is a combination of patience and stock selection.  The Fund seeks to hold investments for a relatively long period of time—generally two to five years.  As long as a portfolio company otherwise meets the Fund’s investment criteria and style, increased capitalization does not prevent the Fund from holding or buying more shares. 

 

The Fund seeks to invest in quality companies in industries in which Ariel has expertise such as the financial services and consumer discretionary sectors.  The Fund only buys when Ariel believes that these businesses are selling at excellent values.

 

 

Quality companies typically share several attributes that Ariel believes should result in capital appreciation over time: high barriers to entry, sustainable competitive advantages, predictable fundamentals that allow for double digit earnings growth, skilled management teams and solid financials.  Ariel’s strategy to focus on a limited number of industries is designed to add value in areas in which it has expertise.  We believe such approach creates a concentrated portfolio of well-researched stocks.  As disciplined value investors, we make opportunistic purchases when great companies are temporarily out of favor—generally seeking to invest in companies that are trading at a low valuation relative to potential earnings and/ or a low valuation relative to intrinsic worth.  We will sell a stock if its valuation reaches our private market value as determined by the Adviser or if there are material changes to a company’s fundamentals. 

 

The Fund does not invest in corporations whose primary source of revenue is derived from the production or sale of tobacco products or the manufacture of handguns.  We believe these industries are more likely to face shrinking growth prospects, draining litigation costs and legal liability that cannot be quantified.

 

Ariel Focus Fund is a non-diversified fund, which means that the Fund could own as few as 12 securities, but will generally own about 20 securities in its portfolio.

 

Principal risks

 

Although Ariel makes every effort to achieve the Fund’s objective of long-term capital appreciation, Ariel cannot guarantee it will attain that objective.  You could lose money by investing in this Fund.  The principal risks of investing in the Fund include:

 

 

v	The stocks in companies held by the Fund could fall out of favor.

 

 

 

v

The Fund often invests a significant portion of its assets in companies within the financial services and consumer discretionary sectors and its performance may suffer if these sectors underperform the overall stock market.  You should consider investing in the Fund if you are looking for long-term capital appreciation and are willing to accept the associated risks.

 

 

 

 

 

The preceding policies do not apply to the following:

 

v	Purchases of shares with Fund dividend or capital gains distributions

 

v	Purchases or sales transacted through the Funds’ Automatic Investment Program involving predetermined amounts on predetermined dates

 

v	Redemptions of shares to pay Fund or account fees

 

v	Account transfers and re-registrations of shares within the same Fund

 

v	Purchases of shares in retirement accounts by asset transfer or direct rollover

 

v	Emergency situations (which will be determined by the Funds in their sole discretion)

 

The Funds use several methods to reduce the risks of market timing, including working with Intermediaries and the Funds’ transfer agent to monitor investor accounts (e.g., reviewing holding periods and transaction amounts) and reviewing trading activity to identify transactions that may be contrary to the Funds’ frequent trading policy. 

 

The Funds have not entered into any arrangements that permit organizations or individuals to market time the Funds.  Although the Funds will not knowingly permit investors to excessively trade shares of the Funds, investors seeking to engage in frequent trading may employ a variety of strategies to avoid detection, and there can be no guarantee that all market timing will be prevented, despite the best efforts of the Funds and its service providers.  The ability of the Funds to detect and curtail excessive trading practices also may be limited by operational systems and technological limitations.  The Funds reserve the right to terminate or amend the exchange privilege at any time.

 

Investing in the Funds through intermediaries and omnibus accounts

 

The Funds have entered into agreements with Intermediaries which trade shares in the Funds through omnibus accounts in order to help the Funds obtain transaction information from those Intermediaries for the purpose of identifying investors who engage in frequent trading.  The Funds cannot always detect or prevent excessive trading that may be facilitated by Intermediaries or by the use of omnibus accounts.  There can be no assurance that the Funds will successfully identify all Intermediaries with omnibus accounts in the Funds or all frequent trading that occurs in those accounts.  There can be no assurance that Intermediaries will properly administer the Funds’ frequent trading policies.

 

Intermediaries may apply frequent trading policies that differ from those used by the Funds.  If you invest in the Funds through an Intermediary, you should read that firm’s fund materials carefully to learn of any rules or fees that may apply to your trades.

 

Calculating the Funds’ share prices

 

The Funds calculate the price of Fund shares at net asset value (NAV) as of the close of trading on the New York Stock Exchange (NYSE) (normally 3:00 p.m.  Central Time) every day the NYSE is open for business.  The NAV is computed by subtracting the Fund’s liabilities from its total assets and dividing the result by the number of shares outstanding.

 

Equity securities held in the Funds’ portfolios generally are valued at their market prices.  Bonds generally are valued on the basis of quotations provided by pricing services or dealers in those securities.  In cases when quotations for a particular security are not readily available, the fair value of the security is determined based on procedures established by the Board of Trustees. 

 

For example, the Funds may calculate a fair value for a security if the principal market in which a portfolio security is traded closes early or if trading in a security is halted before a Fund calculates its NAV.  A security’s fair value may result in a value that is significantly different than its opening price the next day.  Further, the use of fair value pricing by a Fund may cause the NAV of its shares to differ significantly from the NAV that would be calculated using last or next reported prices.

 

 

 

Foreign securities may impose additional fair valuation considerations due to the potential for market timing activity.  For the purposes of valuation, the Funds define a foreign security as a security that trades solely or principally on a foreign exchange or other foreign market and for which no ADR, GDR or other domestic receipt exists.  In the event that the Funds purchase a foreign security, additional procedures would be established and used as described in the valuation procedures established by the Board of Trustees.

 

Determining the price for your transaction

 

If the Funds receive your request to purchase, sell or exchange Fund shares at or before NYSE Closing Time (normally 3:00 pm Central Time), you will receive the NAV calculated that day.   If your request is received after NYSE Closing Time, your request will be processed at the NAV calculated on the following business day.

 

In some cases the Funds may require additional documentation to complete your request to purchase, sell or exchange Fund shares.  Once the Funds receive your request in good form, your transaction will be processed at the next calculated price. 

 

If you are purchasing, selling or exchanging Fund shares through an Intermediary, your NAV is dependent upon when your Intermediary receives your request and sends it to the Funds.  To receive the closing price for the day you place your order, your Intermediary must receive your order at or before NYSE Closing Time and promptly transmit the order to the Funds.  The Funds rely on your Intermediary to have procedures in place to assure that our pricing policies are followed.

 

Distributions

 

Net realized capital gains of a Fund, if any, are distributed to all shareholders at least annually.  Net investment income of a Fund, if any, is declared and distributed once per year.  You may receive your Fund dividends and/or capital gains distributions in several ways:

 

v	Reinvestment .  Unless otherwise instructed, your dividends and capital gains distributions will be reinvested in additional Fund shares.  The share price is computed as of the declared dividend date.

 

v

Income only .  You may choose to automatically reinvest your capital gains distributions, but receive a check for income dividends.  If you prefer, we will send your dividend proceeds directly to your bank or financial institution via ACH transfer.  You must establish banking instructions at least 15 days prior to the distribution.

 

v

Cash .  If you elect to receive distributions and/or capital gains paid in cash, and the U.S.  Postal Service cannot deliver the check, or if a check remains outstanding for six months, each Fund reserves the right to reinvest the amount of the distribution check in your account, at the Fund’s then current net asset value, and to reinvest all subsequent distributions.

 

Please note:

 

v

The Funds will automatically reinvest distributions for IRA, ESA and 403(b) shareholders.  A cash payment of a distribution is considered a withdrawal of IRA earnings, and is subject to taxes and potential income tax penalties for those under age 59½.  Once you reach 59½, you are eligible to withdraw the earnings from your IRA and may request cash payments of the distributions.

 

v	For those not reinvesting their dividends, the Funds will normally mail distribution checks within 5 business days following the payable date.

 

 

 

Taxes

 

The tax status of your distributions from a Fund does not depend on whether you reinvest them or take them in cash, nor does it depend on how long you have owned your shares.  Rather, income dividends and short-term  capital gains distributions are taxed as ordinary income.  Long-term capital gains distributions are taxed as long-term capital gains and different tax rates apply for these distributions.  Every January, the Funds will send you and the IRS a statement called Form 1099-DIV.  This form will show the amount of each taxable distribution you received from the previous year.  If the total distributions you received for the year are less than $10, you may not receive a Form 1099-DIV.  Please note retirement account shareholders will not receive a Form 1099-DIV.  If you sell shares you have held for a year or longer, any gain or loss is treated as a capital gain or loss.  If you sell shares within one year of purchase, any gains are treated as ordinary income and losses are subject to special rules.

 

Disclosure of portfolio holdings

 

The Funds publicly disclose portfolio holdings as of the most recent quarter-end on the Funds’ website, generally within 5 business days of quarter-end.  A summary of the policies and procedures regarding the Funds’ disclosure of portfolio holdings may be found in the Funds’ Statement of Additional Information.  This information is also available on the Funds’ website at arielinvestments.com.

 

Index Descriptions

 

Please note that you cannot invest directly in an index, although you may invest in the underlying stocks represented in an index.

 

The S&P 500® Index is an unmanaged capitalization-weighted index of 500 stocks designed to represent the broad domestic market.  Because the S&P 500 ® Index is a widely recognized benchmark for the performance of U.S.  stocks, it is used to compare the performance of the Funds.  This index pertains to all Funds.

 

The Russell 2000 ® Value Index measures the performance of small-cap value companies with lower price-to-book ratios and lower forecasted growth values.  This index pertains to Ariel Discovery Fund.

 

The Russell 2500 ™ Value Index measures the performance of the small to mid-cap value segment of the U.S. equity universe.  It includes those Russell 2500 ™ companies with lower price-to-book ratios and lower forecasted growth values.  This index pertains to Ariel Fund.

 

The Russell 2500 ™ Index measures the performance of small to mid-cap companies.  This index pertains to Ariel Fund.

 

The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe.  The Russell Midcap Index is a subset of the Russell 1000 ® Index.  It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership.  The Russell Midcap Index represents approximately 27% of the total market capitalization of the Russell 1000 companies.  This index pertains to Ariel Appreciation Fund.

 

The Russell Midcap Value Index measures the performance of the mid-cap value segment of the U.S. equity universe.  It includes those Russell Midcap Index companies with lower price-to-book ratios and lower forecasted growth values.  This index pertains to Ariel Appreciation Fund.

 

The Russell 1000 ® Value Index measures the performance of the large-cap value segment of the U.S. equity universe.  It includes those Russell 1000 ® companies with lower price-to-book ratios and lower expected growth values.  This index pertains to Ariel Focus Fund.