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Artisan's Strong Investment Culture Trumps Fee Issues

Strong returns and a history of closing funds make this a topnotch firm.

Greg Carlson, 03/09/2011

Artisan Partners' structure is unusual and is a key to its corporate culture. As its name implies, the firm is a partnership, which is primarily composed of portfolio managers spread across the United States (as well as one manager in London). The company was founded in 1995 and has maintained a boutique nature all along; it has started new funds only after identifying skilled managers to run them and has kept its lineup relatively small--offering 12 funds in total. Managers join as partners and Artisan gives them the freedom to build their own investment teams as they see fit. Indeed, the team that runs the three domestic-value funds has five managers and analysts, while the domestic-growth team (which also manages three funds) has 12 members. Artisan also gives the managers a great deal of flexibility as to where they want to work. For example, the firm is based in Milwaukee, Wis., and the domestic-growth team is located there. Meanwhile, the domestic-value team is based in Atlanta, Ga. The two teams that manage its diversified foreign- and world-stock funds are located in San Francisco, Calif. (with a small office in London, too), and the emerging-markets team works out of New York.

Artisan has also tried to make managers' jobs easier (and protect fundholders' interests) by closing funds when capacity and liquidity issues loom on the horizon. Five of the 12 funds (International Small Cap ARTJX, Mid Cap ARTMX, Mid Cap Value ARTQX, Small Cap Value ARTVX and International Value ARTKX) are closed to new investors. International Value closed March 9, 2011, for the second time, because cash was pouring in and the managers run a concentrated, all-cap strategy. Thus, five of the seven Artisan funds with five-year track records have been closed to preserve managers' flexibility. Mid Cap arguably stayed open a bit too long and wasn't closed tightly enough; the number of holdings grew substantially and performance leveled off for a while (though management has since righted the ship). But the other closings have been handled quite well.

The Managers Have Delivered
The partnership structure and the freedom Artisan gives its managers have enabled the firm to attract talented, proven stock-pickers. For example, Mark Yockey amassed a strong five-year record at Waddell & Reed International Growth UNCGX before joining Artisan to start its second fund, Artisan International ARTIX, in 1995. Scott Satterwhite posted fine returns in a four-year stint at the former Wachovia Special Values (now a Wells Fargo Advantage fund), then founded Artisan Small Cap Value in 1997. He also brought with him key analyst Jim Keiffer, who has since become the comanager of that fund and the team's other two charges.

Artisan's approach has led to excellent long-term results. Of the firm's seven funds with five-year records, all but one land in the top half of their categories and four are in the top 15%. Furthermore, over the past decade, the four Artisan funds with track records are all in the top 55% of their categories and two are in the top 30% through the end of February 2011.PAGEBREAK

The funds also boast a great deal of continuity in terms of personnel (and as a result, strategy). True, there have been a half dozen departures due to retirement or for personal reasons during the firm's 15-year history. But the other dozen portfolio managers remain on board, and 10 of the 12 funds retain their original lead managers.

Artisan has demonstrated that investment merit and good stewardship have trumped marketing and asset-gathering concerns at the firm--not just by closing its funds, but in the way it's managed its fund lineup. No trendy funds here; all the offerings have fairly broad mandates, and have been launched only when Artisan has found an appropriate manager or team it wants to bring into the fold. True, the one fund that might be considered specialized, Artisan Emerging Markets ARTEX, was launched in 2006 when those markets were red-hot. But the firm rolled out only an institutional share class at that time precisely because it didn't want retail investors to get burned. Another share class was launched in 2008, but it's sold through advisors only.

Artisan's fund lineup has evolved over time, and the firm's philosophy regarding its lineup has changed somewhat, too. In its early years, Artisan positioned itself in part as a fund shop that invested primarily in arguably less-efficient corners of the market where it believed good managers could add more value, such as U.S. small- and mid-cap stocks and foreign stocks. However, four of its five newest funds (all launched within the past five years)--Artisan Global Value ARTGX, Artisan Value ARTLX, Artisan Growth Opportunities ARTRX, and Artisan Global Equity ARTHX--land in categories in which there's more competition (large-growth, large-value, and world-stock) and perhaps fewer inefficiencies to be exploited. Artisan executives contend that these newer funds are nevertheless distinctive within their categories. There's a lot of merit to their argument. For example, Global Value, Growth Opportunities, and Value sport concentrated portfolios (each recently held fewer than 45 stocks), and the managers have a lot of flexibility to own smaller firms--each of the three above-mentioned funds' average market capitalizations are well below their respective category norms. Finally, while the funds' records are on the short side (two of them are less than three years old), they're all off to strong starts, and the correlations of the funds' returns to their benchmarks are well below-average compared with peers'.

Fees Are Too High
The one area in which the firm could be considered less than shareholder friendly is fees. All but two of the funds sport an expense ratio that is above the norm for no-load funds in their respective categories--even the firm's largest funds. And one of the exceptions, Artisan International Value, would be pricier than average if it moved up to one of the foreign large-cap categories from foreign small/mid-value. (Its all-cap portfolio has lately ridden the line between mid-cap and large cap in the Morningstar Style Box.) That said, the only Artisan funds in which the expense ratios are substantially higher than average are the smaller, newer ones such as Artisan Growth Opportunities. Most of the other funds' price tags are within 10 basis points of the category norm, and the funds would likely be cheaper if they were allowed to grow larger instead of closing. Artisan argues that its fee levels allow the firm to better compensate and thus retain its talented managers and analysts. But investors would benefit if the firm shared economies of scale to a greater degree.

It's possible that Artisan's partnership structure has played a part in the funds' above-average fees. Portfolio managers who are partners have an incentive to boost the firm's profitability. Yet, other aspects of the firm's culture and behavior--such as its willingness to close funds and the fact that it hasn't offered hot products that could sell quickly--demonstrates that its partners have been responsible stewards of shareholders' capital. Furthermore, most of the managers have invested at least $1 million in the funds they manage (the top end of the disclosure range required by the SEC), which helps align their interests with those of fundholders.

Cost concerns aside, Artisan deserves a great deal of credit for maintaining an investment-focused culture and generally looking out for fundholders' interests.

Greg Carlson is a mutual fund analyst with Morningstar.

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