Investors are always on the lookout for asset managers who can
outperform market indexes with shrewd and timely
But it's tough to do. A recent study of more than 1,500 mutual
funds found that in the 15 years between 1998 and 2012 fewer than
20% of all funds managed to both survive and outperform their
All this makes the head-turning performance of
Milwaukee-basedArtisan Partners Asset Management (
) that much more impressive. Artisan is closing in on $100
billion in managed assets through 13 different strategies. For
each strategy, it offers a mutual fund as well as separately
Of the 12 funds that have long-term track records, nine have
outperformed benchmarks in both the last year and the most recent
three-year period, notes Jefferies analyst Surinder
) gives its coveted five-star rating to eight of the 12 funds
with long-term track records. Two others carry four-star
How The Business Works
In the asset management business, above-average performance
attracts investment dollars. And as assets under management pile
up, revenue and earnings follow apace. Also helping to pad assets
and revenue is the sustained rally in equity markets.
As a result, assets under management, revenue and earnings
have all ballooned. Artisan reported assets of nearly $97 billion
at the end of the third quarter. That's up 39% from the $69.8
billion in managed assets a year earlier. Revenue came in at $178
million -- also up 39% from 2012's third quarter. Artisan earned
67 cents a share in the quarter ended Sept. 30, up from 43 cents
in the corresponding 2012 period.
Artisan has the 18th largest market value of companies in
IBD's Finance-Investment Management industry group.BlackRock (
) andFranklin Resources (
) are the largest by market cap. With a market cap of $4.2
billion, Artisan ranks just behindAmerican Capital (
In asset management, as many a prospectus properly warns, past
performance does not guarantee future results. Still, with such a
strong record of above-market results, Artisan's success is worth
examining. What does this outfit do differently from the four in
five that fail to match their benchmarks?
Some observers point to its ability to attract superior
investment pros -- and get the best out of them.
"The bottom line for Artisan is they've done a good job in
identifying investment talent," noted Christopher Shutler,
analyst with William Blair & Co. He cites the 2002
recruitment of N. David Samra and Daniel O'Keefe from Harris
Associates. They are portfolio managers of Artisan Global Value,
a five-star Morningstar fund.
Artisan pays its top talent well. It also creates working
conditions conducive to portfolio manager success. "They're very
cognizant of setting up an environment that allows them to
thrive," said Shutler. It has five teams of portfolio managers --
each of which is autonomous. The five teams are Global Equity,
Growth, U.S. Value, Global Value and Emerging Markets. Each of
the five teams is responsible for at least two of the mutual
But the key is autonomy. "The teams are left on their own and
allowed to do what they do best," said Shutler. At many large
firms, portfolio managers are asked to sit in on daily research
calls that typically discuss stocks that are not in their
universe. Portfolio managers might also be asked to help with
sales and marketing. At Artisan, noted Shutler, "portfolio
managers are kept away from sales activities."
Or as Jefferies analyst Thind describes the Artisan portfolio
manager's mandate: "All you have to do is pick the stocks."
Upper management focuses on long-term performance, typically
disdaining counterproductive pressure to outperform every
quarter. "They don't put pressure on fund managers during periods
of short-term underperformance," said Thind. "They try to look at
things over an entire business cycle."
That long-term orientation is reflected in other Artisan
policies. "They try to limit themselves to clients who are
long-term investors," Thind said. He says Artisan has turned down
some potential investors, "preferring to stay away from fast
money." Such investors tend to move rapidly in and out of
Hyperactive fast money, he explains, can undermine fund
performance. "If money is moving in and out of funds rapidly, it
may force you to exit positions prematurely," said Thind.
Similarly, Artisan doesn't want to be forced into excessive
buying by huge cash inflows. As such, it moves rapidly to close
funds when it sees good buying opportunities narrowing for a
particular strategy. Funds that keep taking in money in such
situations often must buy second-tier stocks at inflated prices
to put the extra cash to work. "They're willing to temporarily
close funds to slow down inflows," said Thind.
For all its astute practices and superior performance, Artisan
remains hostage to the health of global equity markets. The
revenue and earnings of money managers are directly dependent on
the volume of managed assets. A market decline would lower the
value of assets and weigh on financial results. And Artisan may
be more vulnerable than many assets managers because it has until
now focused exclusively on equities.
Artisan's Newest Fund
Perhaps recognizing its exposure, Artisan in late November
said that it will add a credit opportunities fund. Starting in
2014, that fixed-income fund will begin to offer some
diversification. But right now they're all in on equities.
"Because they currently have 100% exposure to equity markets,
they are more sensitive to a market decline," said Thind.
Shutler describes Artisan as "absolutely vulnerable to a
downturn." But for now Artisan may continue to benefit from its
equities focus. "I would prefer to be in equities to fixed
income," he noted.
And Artisan's history of outperformance should help going
forward. For one thing, strong performance "is giving Artisan the
ability to maintain attractive fee rates." Shutler describes
Artisan fee rates as "above average."
That obviously helps the bottom line. And Artisan, says
Shutler, is inclined to reward investors through dividend
payouts. "The company doesn't see a need to maintain much cash on
the balance sheet. It's a very capital-light industry."
But intellectual capital counts. And as long as its
intellectual capital keeps outperforming, Artisan is in a
position to attract the investor capital it needs to