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Asset Manager Artisan Plans Long-Term Growth APAM

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It's no secret that investors love growth -- andArtisan Partners ( APAM ), a Milwaukee-based asset manager that offers both mutual funds and separate accounts, has supplied it.

Artisan Partners has ridden a strong bull market and its own above-average investment performance to impressive earnings. Artisan went public at $30 a share in March of last year. Shares recently traded around 53.

But in discussing earnings in February, CEO Eric Colson introduced a novel phrase into the corporate-growth lexicon. He emphasized that Artisan's commitment was to "thoughtful growth."

In a hyper-competitive business environment, where companies may be tempted to pursue growth at any cost, "thoughtful growth" sounds a bit oxymoronic. But it has worked thus far for Artisan.

The company has more than tripled assets under management (AUM) in the last decade. And eight of its 12 mutual funds have earned either four-star or five-star ratings from Morningstar.

"They have a really good batting average," noted Morningstar fund analyst Greg Carlson.

AUM is the key yardstick for companies like Artisan, which typically earn fees based on the volume of dollars they're handed to invest. A rising market swells AUM and makes virtually all asset managers look good.

Beating Benchmarks

But Artisan's record of topping benchmarks has also helped to attract the investment dollars that boost AUM, revenue and earnings. Roughly 90% of Artisan's managed assets have outperformed their benchmarks over trailing one-, three- and 10-year periods, Sandler O'Neill analyst Michael Kim wrote in March.

With rising equity prices, outperformance and fund inflows all chipping in, Artisan reported nearly $107 billion in AUM as of the end of April. That's a far stretch from the $57 billion it had under management at the end of 2011.

But how does "thoughtful growth" translate into sustained AUM and earnings growth? IBD asked Colson to detail management practices that reflect his "thoughtful growth" philosophy.

Colson cited the willingness to close funds quickly when investor dollars keep pouring in at a time when the market offers few bargains.

But doesn't the closing of a fund choke off AUM growth?

"A lot of people just grow at all costs," said Colson. But that can be counterproductive, he said.

"Sometimes assets can come in too fast. If you're getting millions of dollars every day and have to put it to work, that can weigh on the integrity of a strategy," Colson told IBD in an April interview.

His clear message: Portfolio managers with too much cash can wind up spending it unwisely, eventually degrading long-term performance.

Artisan recently closed its Global Value Strategy fund to new money. Global Value, one of Artisan's prime investment strategies, had $32.7 billion in AUM at the end of April.

In closing the fund to new money, Colson prioritized long-term performance prospects over short-term revenue gains.

"The valuations were getting fairly high," he said. "The team felt like the discount to intrinsic value was fairly narrow."

If a fund manager buys just because he has the money, long-term performance will suffer. And Artisan emphasizes long-term performance because that's what attracts new money. Benchmark-topping performance also allows Artisan to charge more for its services.

"We tend to have fees that are above average," Colson said.

Artisan's long-term focus extends to other management practices as well.

Said Jefferies analyst Surinder Thind: "They prefer to evaluate their asset-management personnel on an entire business cycle, which could be seven to 10 years. When you focus on the longer term, you can make bets which may not work for the short term. But Artisan management doesn't make you pay the consequences of short-term results."

Multiyear Yardsticks

Colson confirms that he does not judge managers by quarterly or even yearly results.

"People will be down for a year or two or three at times. If you're going to create a differentiated portfolio position, sometimes it takes time to be rewarded for that," he said.

Artisan has proved adept at recruiting top investment talent. Most recently, it recruited fixed-income manager Bryan Krug to establish a new credit strategy. Krug had regularly bested benchmarks as manager of Ivy Funds' Ivy High Income A Fund .

The recruitment of Krug will give Artisan its first fixed-income presence. Until now, all of Artisan's mutual funds and separate accounts have been invested in equities.

Colson pointed to two key factors that enabled Artisan to recruit a successful money manager such as Krug.

First, he was allowed to set up shop where he wanted, which was Kansas City, Kan.

And Artisan was able to convince Krug that he would be able to pursue an independent investment course. "He didn't want to work with an organization that told him how to invest ," said Colson. Investment autonomy is a key lure for independent-minded star managers, he adds.

Equity grants help, too. Artisan employees have a 32% equity interest in the company.

"We've given out equity ownership each year," noted Colson.

For all its enlightened management practices, Artisan, like all asset managers, remains highly vulnerable to a market downturn.

"The asset managers tend to do worse in market declines," noted Morningstar's Carlson.

Since revenue comes from management fees, a market decline hurts in two ways. The value of managed assets shrinks. And investors are more likely to withdraw money as the market sells off.

Colson concedes the vulnerability and adds that Artisan may be especially challenged by a market meltdown since "we're all equity."

Diversification into fixed income should eventually help. But for now, this new strategy has little in the way of managed assets and is being funded by Artisan seed money.

Over half of Artisan's assets are in mutual funds. But retail investors account for just roughly 6% of all managed assets. In both mutual funds and separate accounts, Artisan's investor base is skewed toward pension funds, endowments and other institutional investors. Colson must hope that his own thoughtful and patient practices will rub off on Artisan clients in tougher times.

With its market cap of about $4.1 billion, Artisan is 20th in size among 110 companies in IBD's Finance-Investment Management industry group.Oxford Lane Capital ( OXLC ),BlackRock ( BLK ) andFranklin Resources ( BEN ) are the biggest.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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