Artisan Tops Global Funds in 2008 Bet: Riskless Return | By: Charles Stein

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10/31/2012

Daniel O’Keefe and N. David Samra, managers of the Artisan International Value Fund, (ARTX) have beaten rivals and their famous ex-boss David Herro by buying companies with strong balance sheets that were dumped by nervous investors in the 2008 crisis and after.

The $6.6 billion Artisan fund had the best total return and below-average volatility in the five years through Oct. 26, giving it the top risk-adjusted performance among 35 international funds that buy stocks of all sizes, according to the BLOOMBERG RISKLESS RETURN RANKING. The Artisan International Value fund returned 0.5 percent when adjusting for price swings, beating Herro’s $9.5 billion Oakmark International Fund as well as global stocks, which declined over the period.

“The recession created a fantastic opportunity to buy some of the world’s best businesses at attractive prices,” said O’Keefe in a telephone interview from San Francisco.

O’Keefe and Samra snapped up high-quality stocks in 2008 when the benchmark MSCI EAFE Index of global equities plunged 45 percent, buying companies such as Signet Jewelers Ltd. (SIG) and Publicis Groupe at a fraction of their current price. Their strategy of focusing on enterprises with enough cash to ride out hard times has led them to hold 67 percent of assets in Europe as of Sept. 30, while shunning emerging market stocks.

Geographic Breakdown

The managers say where a business has its headquarters is of no interest to them in picking stocks. The fund had 21 percent of stock assets in the Americas, 12 percent in the Pacific Basin, and no holdings in developing markets as of Sept. 30, according to the Artisan website.

The Artisan team rank among the best managers in the international realm, said Steven Roge, a portfolio manager with Bohemia, New York-based R.W. Roge & Co, which oversees $200 million, including shares in the fund.

“It all comes down to their ability to pick individual stocks,” he said in a telephone interview.

The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.

Artisan International Value had the sixth-lowest volatility of the funds, at 23.5 compared with an average of 27.5 for the group, and the best total return of 12 percent. The group included funds with at least $500 million in assets.

Cash Focus

The $2.1 billion International Stock Fund (DISAX), sold by Bank of New York Mellon Corp.’s Dreyfus Corp. unit, had the second-best risk-adjusted return of 0.2 percent with a below-average volatility of 24.3. Herro’s Oakmark International and David Winters’ $1.6 billion Wintergreen Fund (WGRNX), two of the better-known funds in the group, ranked fourth and sixth.

The Artisan managers look for stocks that are undervalued based on future cash flows. The fund has an average price-to- earnings ratio of 15.1 times, compared with 16.9 times for the MSCI EAFE benchmark, according to data compiled by Bloomberg. The companies in the Artisan fund have boosted cash flow by an average of 62 percent over the past 12 months, more than triple the rate of the index.

The fund’s decision to avoid heavily indebted companies may explain its lower volatility, said O’Keefe, because leveraged businesses are vulnerable in difficult economic periods.

Avoiding Banks

“Investors often clamor for management teams to take on more debt when times are good, only to shun the same companies when the road gets bumpy,” the managers wrote in a report posted on their website.

The fund didn’t own any banks from 2004 to 2009 “because their balance sheets looked terrible,” O’Keefe said. “They had growing loan books on a skinny equity base. They scared us.”

The strategy paid off in 2008 as the Bloomberg World Banks Index (BWBANK) fell 55 percent. Artisan International Value lost 30 percent that year, better than 98 percent of rivals, according to data compiled by Bloomberg. The fund owned two banks, Amsterdam-based ING Groep NV (INGA) and London-based Lloyd’s Banking Group Plc (LLOY), as of June 30.

Oakmark Alumni

More recently, the fund has been doing more selling than buying, O’Keefe said, because there aren’t many bargains to scoop up. Cash rose to 10.7 percent of the portfolio as of Sept. 30, up from 6.5 percent Dec. 31, according to regulatory filings. The fund typically holds no more than 10 percent in cash, according to O’Keefe.

“Valuations have become less attractive,” he said.

The higher cash level hasn’t hurt the fund’s performance. This year, the fund returned (ARTKX) 15 percent, compared with 11 percent for the benchmark index, according to data compiled by Bloomberg.

O’Keefe, 42, and Samra, 48, spent five years early in their careers working for Oakmark Fund’s Herro, a value investor who was named Morningstar Inc. (MORN)’s top international fund manager in the last decade. O’Keefe and Samra met at Chicago-based Oakmark in 1997 and left together to start their Artisan fund in 2002.

“I think they are doing a great job,” Herro wrote in an e-mail.

O’Keefe and Samra were named Morningstar’s international managers of the year in 2008 and were nominated for the award again in 2011. They run $17 billion in assets, including a second mutual fund, the $230 million Artisan Global Value Fund. (ARTGX)

Stock Picking

O’Keefe has a bachelor’s degree from Northwestern University in Evanston, Illinois. Samra has a bachelor’s degree from Bentley College in Waltham, Massachusetts, and a master’s of business administration degree from Columbia University in New York.

O’Keefe and Samra also say they like companies with an enduring edge on competitors, high returns on capital and relatively little debt (ARTKX). The companies in the fund had an average debt-to-common equity ratio of 166.4, which is 47 percent lower than the 213.2 average for the MSCI EAFE Index.

The managers’ talent for finding the right stocks explains much of their success. In the five years ended Sept. 30, the fund’s returns in 10 out of 11 sectors beat the results in the MSCI EAFE Index, according to data compiled by Bloomberg (ARTKX). In consumer discretionary stocks, where the fund has the most money, the managers’ choices gained 32 percent compared to a loss of 20 percent for the stocks in the benchmark.

Signet Gains

Signet Jewelers (SIG), which became a top holding in 2008, made the biggest contribution to the fund’s performance over five years. The Hamilton, Bermuda-based firm, the world’s largest jewelry-store owner, operates the Kay and Jared chains. Shares fell 69 percent in 2008 as the weak global economy cut into luxury purchases.

“We didn’t know how long the recession would last,” said O’Keefe.

Still, he and Samra concluded that the company had a strong balance sheet and enough cash to survive the economic slowdown. The company’s cash reserves enabled it to spend more on advertising than weaker rivals and gain market share, said O’Keefe. Signet climbed more than eightfold since February 2009, according to data compiled by Bloomberg.

“Our long-term ownership view is designed to take advantage of those situations where the market is overreacting on the downside,” the managers wrote in an article about their investing philosophy posted on Artisan’s website.

‘Screwed Up’

Compass Group Plc (CPG), a Chertsey, U.K.-based caterer, and Publicis Groupe (PUB), a Paris-based advertising firm, were also among the largest contributors to the fund’s five-year performance, the data show. O’Keefe and Samra first bought Compass in 2009 and Publicis in 2008, according to regulatory filings.

Compass gained 79 percent since Sept. 30, 2009. Publicis more than doubled since Dec. 31, 2008.

Not every investment made during the credit crisis worked out. The managers bought Tokyo-based Daiwa Securities Group Inc., (8601) a Japanese brokerage, in the fourth quarter of 2008, according to regulatory filings.

Daiwa, in September 2009, spent $2.2 billion to buy out its partner in a 10-year-old investment banking venture. Daiwa management made the move for “empire reasons,” said O’Keefe, and “they screwed up badly.”

The fund sold its last shares of Daiwa in the fourth quarter of 2011, filings show. In the three years ended Dec. 31, 2011, the stock fell 54 percent. O’Keefe called the investment “a significant mistake.” Daiwa has gained 31 percent this year.

Diageo, Unilever

The managers in September sold Bangkok-based Thai Beverage Public Co., their only emerging market stock, according to a note on the Artisan website. Rival funds had an average of 8.2 percent of their money in emerging market stocks as of Sept. 30, Morningstar data show.

“We can’t find anything we like there,” O’Keefe said, referring to developing markets.

The portfolio has exposure to developing countries, he said, through holdings such as Diageo plc, a London-based spirits company and Rotterdam-based consumer products firm Unilever NV. (UNA)

The MSCI Emerging Markets Index rose 6.2 percent in the past year as the the Standard & Poor’s 500 Index climbed 16 percent, including reinvested dividends, and the MSCI EAFE Index rose 7 percent.

Gains in stock prices this year have been driven mainly by the actions of central banks, O’Keefe said, citing the U.S. Federal Reserve’s pledge to purchase $40 billion a month in mortgage-backed securities and the European Central Bank’s unlimited bond-purchase program. Both policies are aimed at reviving stalled economies.

“These actions won’t solve economic problems,” said O’Keefe. “They may make them worse.”

As the managers wait for opportunities to deploy money, they’re willing to sit tight.

“We have a high-quality portfolio,” said O’Keefe. “We are comfortable with what we own.”

 

 

Daniel O’Keefe and N. David Samra, managers of the Artisan International Value Fund, (ARTX) have beaten rivals and their famous ex-boss David Herro by buying companies with strong balance sheets that were dumped by nervous investors in the 2008 crisis and after.

The $6.6 billion Artisan fund had the best total return and below-average volatility in the five years through Oct. 26, giving it the top risk-adjusted performance among 35 international funds that buy stocks of all sizes, according to the BLOOMBERG RISKLESS RETURN RANKING. The Artisan International Value fund returned 0.5 percent when adjusting for price swings, beating Herro’s $9.5 billion Oakmark International Fund as well as global stocks, which declined over the period.

“The recession created a fantastic opportunity to buy some of the world’s best businesses at attractive prices,” said O’Keefe in a telephone interview from San Francisco.

O’Keefe and Samra snapped up high-quality stocks in 2008 when the benchmark MSCI EAFE Index of global equities plunged 45 percent, buying companies such as Signet Jewelers Ltd. (SIG) and Publicis Groupe at a fraction of their current price. Their strategy of focusing on enterprises with enough cash to ride out hard times has led them to hold 67 percent of assets in Europe as of Sept. 30, while shunning emerging market stocks.

Geographic Breakdown

The managers say where a business has its headquarters is of no interest to them in picking stocks. The fund had 21 percent of stock assets in the Americas, 12 percent in the Pacific Basin, and no holdings in developing markets as of Sept. 30, according to the Artisan website.

The Artisan team rank among the best managers in the international realm, said Steven Roge, a portfolio manager with Bohemia, New York-based R.W. Roge & Co, which oversees $200 million, including shares in the fund.

“It all comes down to their ability to pick individual stocks,” he said in a telephone interview.

The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.

Artisan International Value had the sixth-lowest volatility of the funds, at 23.5 compared with an average of 27.5 for the group, and the best total return of 12 percent. The group included funds with at least $500 million in assets.

Cash Focus

The $2.1 billion International Stock Fund (DISAX), sold by Bank of New York Mellon Corp.’s Dreyfus Corp. unit, had the second-best risk-adjusted return of 0.2 percent with a below-average volatility of 24.3. Herro’s Oakmark International and David Winters’ $1.6 billion Wintergreen Fund (WGRNX), two of the better-known funds in the group, ranked fourth and sixth.

The Artisan managers look for stocks that are undervalued based on future cash flows. The fund has an average price-to- earnings ratio of 15.1 times, compared with 16.9 times for the MSCI EAFE benchmark, according to data compiled by Bloomberg. The companies in the Artisan fund have boosted cash flow by an average of 62 percent over the past 12 months, more than triple the rate of the index.

The fund’s decision to avoid heavily indebted companies may explain its lower volatility, said O’Keefe, because leveraged businesses are vulnerable in difficult economic periods.

Avoiding Banks

“Investors often clamor for management teams to take on more debt when times are good, only to shun the same companies when the road gets bumpy,” the managers wrote in a report posted on their website.

The fund didn’t own any banks from 2004 to 2009 “because their balance sheets looked terrible,” O’Keefe said. “They had growing loan books on a skinny equity base. They scared us.”

The strategy paid off in 2008 as the Bloomberg World Banks Index (BWBANK) fell 55 percent. Artisan International Value lost 30 percent that year, better than 98 percent of rivals, according to data compiled by Bloomberg. The fund owned two banks, Amsterdam-based ING Groep NV (INGA) and London-based Lloyd’s Banking Group Plc (LLOY), as of June 30.

Oakmark Alumni

More recently, the fund has been doing more selling than buying, O’Keefe said, because there aren’t many bargains to scoop up. Cash rose to 10.7 percent of the portfolio as of Sept. 30, up from 6.5 percent Dec. 31, according to regulatory filings. The fund typically holds no more than 10 percent in cash, according to O’Keefe.

“Valuations have become less attractive,” he said.

The higher cash level hasn’t hurt the fund’s performance. This year, the fund returned (ARTKX) 15 percent, compared with 11 percent for the benchmark index, according to data compiled by Bloomberg.

O’Keefe, 42, and Samra, 48, spent five years early in their careers working for Oakmark Fund’s Herro, a value investor who was named Morningstar Inc. (MORN)’s top international fund manager in the last decade. O’Keefe and Samra met at Chicago-based Oakmark in 1997 and left together to start their Artisan fund in 2002.

“I think they are doing a great job,” Herro wrote in an e-mail.

O’Keefe and Samra were named Morningstar’s international managers of the year in 2008 and were nominated for the award again in 2011. They run $17 billion in assets, including a second mutual fund, the $230 million Artisan Global Value Fund. (ARTGX)

Stock Picking

O’Keefe has a bachelor’s degree from Northwestern University in Evanston, Illinois. Samra has a bachelor’s degree from Bentley College in Waltham, Massachusetts, and a master’s of business administration degree from Columbia University in New York.

O’Keefe and Samra also say they like companies with an enduring edge on competitors, high returns on capital and relatively little debt (ARTKX). The companies in the fund had an average debt-to-common equity ratio of 166.4, which is 47 percent lower than the 213.2 average for the MSCI EAFE Index.

The managers’ talent for finding the right stocks explains much of their success. In the five years ended Sept. 30, the fund’s returns in 10 out of 11 sectors beat the results in the MSCI EAFE Index, according to data compiled by Bloomberg (ARTKX). In consumer discretionary stocks, where the fund has the most money, the managers’ choices gained 32 percent compared to a loss of 20 percent for the stocks in the benchmark.

Signet Gains

Signet Jewelers (SIG), which became a top holding in 2008, made the biggest contribution to the fund’s performance over five years. The Hamilton, Bermuda-based firm, the world’s largest jewelry-store owner, operates the Kay and Jared chains. Shares fell 69 percent in 2008 as the weak global economy cut into luxury purchases.

“We didn’t know how long the recession would last,” said O’Keefe.

Still, he and Samra concluded that the company had a strong balance sheet and enough cash to survive the economic slowdown. The company’s cash reserves enabled it to spend more on advertising than weaker rivals and gain market share, said O’Keefe. Signet climbed more than eightfold since February 2009, according to data compiled by Bloomberg.

“Our long-term ownership view is designed to take advantage of those situations where the market is overreacting on the downside,” the managers wrote in an article about their investing philosophy posted on Artisan’s website.

‘Screwed Up’

Compass Group Plc (CPG), a Chertsey, U.K.-based caterer, and Publicis Groupe (PUB), a Paris-based advertising firm, were also among the largest contributors to the fund’s five-year performance, the data show. O’Keefe and Samra first bought Compass in 2009 and Publicis in 2008, according to regulatory filings.

Compass gained 79 percent since Sept. 30, 2009. Publicis more than doubled since Dec. 31, 2008.

Not every investment made during the credit crisis worked out. The managers bought Tokyo-based Daiwa Securities Group Inc., (8601) a Japanese brokerage, in the fourth quarter of 2008, according to regulatory filings.

Daiwa, in September 2009, spent $2.2 billion to buy out its partner in a 10-year-old investment banking venture. Daiwa management made the move for “empire reasons,” said O’Keefe, and “they screwed up badly.”

The fund sold its last shares of Daiwa in the fourth quarter of 2011, filings show. In the three years ended Dec. 31, 2011, the stock fell 54 percent. O’Keefe called the investment “a significant mistake.” Daiwa has gained 31 percent this year.

Diageo, Unilever

The managers in September sold Bangkok-based Thai Beverage Public Co., their only emerging market stock, according to a note on the Artisan website. Rival funds had an average of 8.2 percent of their money in emerging market stocks as of Sept. 30, Morningstar data show.

“We can’t find anything we like there,” O’Keefe said, referring to developing markets.

The portfolio has exposure to developing countries, he said, through holdings such as Diageo plc, a London-based spirits company and Rotterdam-based consumer products firm Unilever NV. (UNA)

The MSCI Emerging Markets Index rose 6.2 percent in the past year as the the Standard & Poor’s 500 Index climbed 16 percent, including reinvested dividends, and the MSCI EAFE Index rose 7 percent.

Gains in stock prices this year have been driven mainly by the actions of central banks, O’Keefe said, citing the U.S. Federal Reserve’s pledge to purchase $40 billion a month in mortgage-backed securities and the European Central Bank’s unlimited bond-purchase program. Both policies are aimed at reviving stalled economies.

“These actions won’t solve economic problems,” said O’Keefe. “They may make them worse.”

As the managers wait for opportunities to deploy money, they’re willing to sit tight.

“We have a high-quality portfolio,” said O’Keefe. “We are comfortable with what we own.”

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