“Stocks follow profits” is the mantra for Artisan Fund’s investment philosophy; the fund management believes that exposure to growing assets is essential, notes fund expert Brian Kelly, editor of MoneyLetter.
In selecting stocks, the growth team evaluates if a company has “franchise characteristics.” The second component of the selection process is valuation. The third consideration is to identify companies well positioned for long-term growth at an early stage in their growth cycle so as to capture profit acceleration.
Another part of the growth team’s bottom-up fundamental analysis has always been the consideration of environmental, social, and governance (ESG) factors. But in late 2018, the team began to more heavily and formally integrate ESG into the way the team invests.
The final step of the Artisan growth investment process is capital allocation, which is designed to build portfolio position sizes according to conviction in a stock’s potential. Artisan identifies its fund investments as passing through three stages: “Garden, Crop, and Harvest.”
Garden investments are small positions which managers have approved, but where firms are early in the profit cycle development. Crop investments are those where the managers have conviction in the sustainability of the profit cycle: these holdings are larger and make up the majority of portfolio assets.
In the Harvest category, investments that have exceeded the managers’ estimate of intrinsic value, where there is a deterioration in the profit cycle, or negative developments. Harvest investments are generally being reduced or sold from the portfolio.
Artisan Small Cap Fund Investor Shares (ARTSX) reopened to new investors in March after being closed since 2013. It is structured similarly to the Artisan Mid Cap Fund (ARTMX), with between 60 and 90 holdings (65 recently) and concentrations in technology and health care (46.6% and 28.7% of assets, respectively).
The management team’s focus on quality firms have generally allowed the fund to hold up well in downturns. For 2020, a year-to-date return of 19.1% outpaces nearly 95% of its small growth peers. And for the trailing 3-, 5-, and 10-year periods, it bests more than 90% of its category.
