Ariel Investments Case Study Part 3: Operational improvements

Mellody Hobson

Lesson time 09:55 min

Mellody reveals another obstacle that Ariel Investments faced during her tenure. She elaborates on the operational changes proposed to address industry research, portfolio and client diversification, and stock analysis. She will then ask you to consider how you would handle the challenge as a leader.

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Topics include: Operational Improvement #1: Moat Ratings • Operational Improvement #2: Client Diversification • Operational Improvement #3: Portfolio Management • Operational Improvement #4: Devil’s Advocate


[MUSIC PLAYING] - After we really came to terms with the underperformance that we had during that period, we were very realistic about we need to do some things better. So we did a post-mortem on everything, every aspect of our investment strategy. We did a deep dive on all of our work, our research process. We looked at the stocks that had really underperformed, tried to ask ourselves, what do we know about these names? What do they have in common? What is it that it can teach us, and maybe pitfalls to avoid in the future? When you think back to my toolkit, we needed to look forward to setting up the company for long-term success. We ultimately found some key places where we thought we could tighten things up. One was we had these moat ratings. We would determine the competitive landscape for a company and how strong their brand or franchise was versus their competition. Warren Buffett made that concept famous, the greatest investor of all time. The moat concept is that you have a business that, whatever the product or services that you offer, is so specific and good, it's very hard for competition to come in and, basically, compete with you. An example of a company we wouldn't buy, but a giant moat, would be Google. That's very hard to compete with them in the search space, even though Microsoft does. And so the question is, how wide is the moat? Is it a narrow moat, is a wide moat? That's part of the question that we would ask ourselves. We used to talk about moats in our meetings. Analysts would assign moat ratings to each company that tended to be, in hindsight, too subjective. And then we said, wait a minute. We want some rigor around this. You can't put a finger in the air and say, it's got a wide moat. If the moat is wide, it should show up on the balance sheet. And so you should be able to quantify the moat. Either the business is more profitable-- there must be something about it that you can point to. And so we became more rigorous around that concept, which was a key ingredient of our investment decision. One of the things that we reflected on during that period, as well, is this boom and bust period we had with clients-- that we had had this big addition of clients in the early zeros. And then we'd seen that fall off very dramatically during the worst of the financial crisis. And we really, again, looked at that experience and said, what can we learn from that, because that is not a way to run the railroad? We knew that was not how we wanted to run the business on a going forward basis, that we needed more stability, and we needed to be more thoughtful. We had thought maybe there were certain types of clients that would be stickier. And that didn't proved to be true. And I remember having this conversation again with my now husband, then boyfriend. And I was saying, well, maybe we should concentrate on this, or maybe we should concentrate on that. And he looked at me. And he said, you know what, M...

About the Instructor

Mellody Hobson knows how to make tough calls in trying times. As one of the most influential leaders in business today, she’s led companies through junctions of financial crisis, acquisitions, and restructuring. Become a more dynamic, confident business leader by diving into real-life case studies from Mellody’s career. Get an inside understanding of the pivotal decisions she’s made from the top, and build a strategic decision-making framework for your next step as a business leader.

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Mellody Hobson

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