At Artisan Partners, Stock-Picking Strategy Pays Off
Investors are always on the lookout for asset managers who can outperform market indexes with shrewd and timely stock-picking.
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 benchmarks.
All this makes the head-turning performance of Milwaukee-basedArtisan Partners Asset Management ( APAM ) 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 managed accounts.
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 Thind.Morningstar ( MORN ) gives its coveted five-star rating to eight of the 12 funds with long-term track records. Two others carry four-star ratings.
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 ( BLK ) andFranklin Resources ( BEN ) are the largest by market cap. With a market cap of $4.2 billion, Artisan ranks just behindAmerican Capital ( ACAS ).
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 funds.
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 stocks.
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 flourish.