In this section, we feature a few Company Spotlights – either new ideas recently added to our portfolios, or updates on some existing holdings.

We hope these features help you understand how our analysts and portfolio managers recommend stocks to purchase. Each quarter, we'll post several in-depth spotlights here for your review. Portfolio holdings are subject to change, and for specific information about portfolio composition as of the most recent quarter-end, please refer to the specific Fund or Product you are interested in.

Founded in 1744, today Sotheby’s is one of the world’s largest and most prestigious auction houses. The company offers properties across 70 collectible categories including fine art, antiques, rare jewelry, coins, medieval manuscripts and exotic sports cars. Beyond auctions, Sotheby’s also is involved in the purchase and resale of art and collectibles; brokering private purchases; and other art-related financing activities.

Premier Franchise and Client Base

By spending well over two centuries developing its brand, Sotheby’s has built up a number of competitive strengths. The company boasts over 100 years of appraisal history as well as highly-regarded proprietary research techniques for authenticating the history, originality and identity of art properties. Additionally, Sotheby’s provides clients with an extensive line-up of services including financing, appraisals, importing/exporting and marketing—making it difficult for smaller boutiques to compete. Long-term relationships are also critical in this business as clientele is concentrated among a small segment—largely museums, institutions and wealthy individuals. Sotheby’s expertise, high-touch service and reputation for garnering record bids has attracted a top-tier, global client base. In fact, more than half of the individuals featured in Forbes’ “100 World’s Richest People” and “100 Richest Americans” are Sotheby’s clients, as are 169 of the Top 200 Collectors as identified by Art News.

The Art of Buying Art

We last purchased shares of Sotheby’s in February 2002 when the stock price was pummeled after a well-publicized price-fixing scandal. Sotheby’s went through a major restructuring and also benefited from a rebound in the art world. By 2006, its stock was trading near our estimate of full value and our discipline led us to sell. In hindsight, we sold too early and have been watching and waiting for the right opportunity to buy again. That chance came last November when Sotheby’s suffered a weak Impressionist and Modern Art sale. Disappointingly, a Van Gogh, valued between $28 million and $35 million, failed to attract a suitable bid while other works sold below their estimates. Sotheby’s stock fell sharply on the news—losing 28% in one day—giving us a nice entry point.

Expanding Geographic Footprint

Despite concerns that the art market has peaked, we see considerable runway for growth. Over the past few years, wealthy collectors from Russia, China, India and the Middle East have greatly helped propel the industry. Notably, Sotheby’s 2007 art sales nearly doubled, and a number of works have received record-setting bids. To meet growing demand, Sotheby’s is expanding its presence in Beijing, Moscow and the Middle East. As of December 31, 2007, the company traded at $38.10, a compelling 25% discount to our private market value estimate of $51.

Sotheby's (NYSE: BID)
1334 York Avenue
New York, NY 10021
800-813-5968
www.sothebys.com

Citigroup is a preeminent financial services firm with a formidable geographic presence spanning 100 countries. Serving over 200 million customer accounts, Citigroup is one of the world’s largest financial institutions with assets of almost $2.2 trillion. It is also the largest provider of credit cards with more than 150 million accounts. Originally founded as City Bank of New York in 1812, Citi reached its impressive size and strength as a result of significant mergers and acquisitions, including Travelers and Salomon Smith Barney. Today, the company operates under three primary business groups—Global Consumer, Institutional Clients Group and Global Wealth Management.

Blue-Chip Brand

Often referred to as a U.S. bank, Citigroup is truly a global company, deriving 54% of its revenues outside the United States. To elevate an already highly-regarded brand name, Citigroup revitalized its identity by uniting all businesses under the well-known “Citi” name and familiar red arc. As one executive described, the Citi approach combines the service of a neighborhood bank with the resources of a global giant. Notably, in BusinessWeek’s annual survey of the 100 Best Global Brands, Citi was ranked 11th alongside perennial brand powerhouses like Coca-Cola, McDonald’s and Disney. We believe this world-class brand status will be an important competitive advantage as Citi expands into more emerging markets.

Subprime Issues Hit

Major players on Wall Street, once thought to be invincible, were hard hit by the subprime mortgage meltdown and widespread credit crunch that dominated the second half of 2007. Citigroup posted an 83% decline in net income in 2007, stemming from $18 billion in write-downs related to subprime credit and weakness in its fixed income market activities. A casualty of Citi’s subprime exposure was Chairman and CEO Charles Prince who resigned last fall. Vikram Pandit, head of Citi’s investment banking business, was named the new Chief Executive and Sir Win Bischoff took over as Chairman.

Regaining Strength

There are real issues facing Citigroup and the financial services industry overall. Yet we believe critics are excessively pessimistic and are not giving credit to the underlying strength of Citigroup’s diversified business model, worldclass brand, opportunities in emerging markets or its $113 billion in equity. In our view, the stock’s sharp decline of almost 50% this year, exceeds the reduction in Citigroup’s long-term earnings power. We believe Citigroup’s balance sheet has stabilized and brands like this don’t crumble easily. As of December 31, 2007, shares traded at $29.44, a 45% discount to our $54 estimate of private market value.

Citigroup, Inc. (NYSE: C)
399 Park Avenue
New York, NY 10043
800-285-3000
www.citigroup.com

Bio-Rad Laboratories, Inc. designs and manufactures products for two key segments of the health care industry: life science research and diagnostics. Its life science division produces laboratory equipment and tools used for cancer and genetic research as well as for preventive testing for things like food pathogens and mad cow disease. Its diagnostics business concentrates on the study of bodily fluids and human tissues, including blood typing, infectious disease testing, diabetes monitoring and molecular pathology. Bio-Rad’s pioneering work contributes to the discovery of new drugs, medical advancements and the lowering of health care costs worldwide.

Competitive Strength

Bio-Rad has several strategic advantages, including its brand name and reputation for excellence within the industry. While not as well-known to the average patient, the Bio-Rad name is highly regarded by hospitals, universities, major research institutions and biotech and pharmaceutical firms. Another key strength is the company’s vast product line-up, which spans 8,000 products, many of which command leading market share. Additionally, Bio-Rad consistently receives multiple industry awards for innovation and emerging technologies. For example, Bio-Rad was recently recognized with a Frost & Sullivan Product of the Year Award for a breakthrough called ProteOn XPR36. This system affords scientists an economical method to study protein interactions and should accelerate drug development as well as increase insight into complex cellular processes.

Overlooked Gem

Frequently, Bio-Rad’s strong business fundamentals go unnoticed by the broader investment community, primarily because the company is covered by just two Wall Street analysts. Some investors worry about the significant family ownership of Bio-Rad. Additionally, management refuses to run the business on a quarterly basis which can frustrate investors focused on quarterly results and create short-run stock volatility. Fortunately for Ariel, Bio-Rad was on our radar screen. In late 2005, we began building our position when the stock price dipped as an increase in competition put pressure on the pricing of its mad cow disease testing.

Focused on the Future

We have faith in Bio-Rad’s disciplined leadership, quality products—and as long-term investors, we are not overly concerned by short-term ups and downs. For example, the stock price dropped in February 2007 when management announced increased investments and the integration of two acquisitions would pressure earnings downward. As the year unfolded, higher than anticipated top-line growth offset spending increases. Ultimately, Bio-Rad significantly beat earnings expectations and we see no reason this financial momentum will not continue. As of December 31, 2007, shares traded at $103.62, an 11% discount to our $117 estimate of private market value.

Bio-Rad Laboratories, Inc. (AMEX: BIO)
1000 Alfred Nobel Drive
Hercules, CA 94547
510-724-7000
www.bio-rad.com