We are replacing a fund in which 57% of assets are comprised of real estate with one that focuses on technology (36.54% of assets), industrials (23.91%) and healthcare (21.97%).
Artisan Mid Cap Fund Investor Class (ARTMX)
From Moneyletter
Artisan Mid Cap Fund Investor Class (ARTMX) is a new holding in the Moneyletter Venturesome model. It replaced Kinetics Paradigm No Load Class (WWNPX). The fund reopened to new investors on February 1, 2019, having been closed since 2002. The fund’s team of four managers is long-tenured, and has maintained the same strategy over time.
The managers consider a long-term time horizon in selecting investments. The goal is to find companies with franchise characteristics, benefitting from an accelerating profit cycle, and trading at a discount to private market value. (Franchise characteristics include low-cost production capability, possession of a proprietary asset, dominant market share, or sustainable brand name.)
The emphasis on profit cycle derives from the managers’ belief that over the long term stock prices tend to correlate with profit growth. So, they look for identifiable drivers of growth, such as secular and technological trends, or new products or strategies. They also want to balance strong business quality with the profit drivers.
Among the secular trends the team has identified as attractive is next generation data analytics: “proliferating sensors and mobile connectivity that are driving increasing demand for not just data, but also the capability to gather, understand, interpret, and then use those data to improve future business decisions.”
The team allocates the fund’s assets based on a fundamental analysis of each company’s profit cycle, with the portfolio divided into three parts. “Garden” investments include companies in the early part of their profit cycle. These are small positions that may grow larger as their profit cycle accelerates. “Crop” investments will constitute the largest portion of assets. These are the highest conviction and largest holdings, those which have demonstrated progress in the profit cycle. And finally, “Harvest” holdings are those positions that are being reduced or sold as the stocks approach full valuation or the profit cycle is decelerating.
Given its bottom-up stock selection strategy, the fund’s sector weightings can differ significantly from that of its benchmark, the Russell Midcap Growth Index. At the end of July, the fund was overweight in health care versus its benchmark and underweight in consumer discretionary. It had no exposure to a number of sectors, including consumer staples, energy, and materials. There were 62 stocks in the portfolio, with one-third of assets in the top ten.
Top holdings Global Payments and Atlassian have been top contributors to results this year. The former focuses on software-enabled payments. Quarterly results have been solid, and it is ahead of schedule in its acquisition of TSYS, a leading payments processing provider. The management team believes that Global Payments is benefiting from solid digital payments trends plus market share gains in its software business.
Atlassian, an enterprise software company that develops products for software developers and projects managers, is best known for its issue tracking application, Jira. Artisan’s managers state they have owned the stock for its “expanding product offerings and increasing adoption of its innovative, customizable team-collaboration software tools.” They view Atlassian’s plans to accelerate cloud delivery of their software as positive.
Veeva Systems, a provider of cloud-based software for the life sciences industry, has been another strong performer. Revenue growth has been robust as the firm continues to gain new customers, as well as sell additional software to existing customers.
Fund results this year have benefited from its exposure to the strong information technology and health care sectors, as well as merger and acquisition activity. Returns of negative -4.0% in 2018 and 33.5% in 2019 through August 29th outpaced about 70% and 95% of Morningstar’s Mid Cap Growth category, respectively. And while the fund did underperform its peers in 2016 and 2017, primarily due to stock selection, its longer-term record is solid. It has surpassed at least 75% of its category peers for the trailing 10- and 15-year periods.
Significantly, even during the down years, the management team maintained its historical emphasis on companies with accelerating profits, strong balance sheets, and reasonable valuations. At the end of the second quarter, the managers noted that any short-term market pullback would likely offer opportunities to add to some of their high-conviction holdings at more attractive prices.
Brian W. Kelly, Moneyletter, www.moneyletter.com, 800-890-9670, September 2019