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By Greg Carlson | 01-04-2012 10:00 AM

Artisan: High-Quality Mega-Caps Look Attractive

Artisan's Scott Satterwhite, James Kieffer, and George Sertl, Morningstar's 2011 Domestic-Stock Managers of the Year, explain why they see the best risk/reward trade-off in large, high-quality companies.

Greg Carlson: Hi, I’m Greg Carlson, and I’m a fund analyst with Morningstar.

I’m joined today by the managers of Artisan Mid Cap Value, Artisan Small Cap Value, and Artisan Value. They are the winners of Morningstar's award for Domestic-Stock Fund Manager of the Year. They are Scott Satterwhite, Jim Kieffer, and George Sertl. Thanks for joining me today, gentlemen.

Now, I want to contrast the last couple of years with your funds. In 2010, they posted decent absolute gains, but they generally lagged their peers by a significant margin, which is pretty unusual for these funds since they have such great long-term records. 2011, on the other hand, Mid Cap Value and Value in particular did very well on a relative basis. I wonder if you could contrast those two years and talk about what drove the differences in performance--whether it was the market environment or changes that you made to those portfolios?

Jim Kieffer: I think it was more market environment than anything else, but part of the story you have to go back further in time. In 2008-2009 you had such a strong rally, and then as it led into 2010, the cyclicals really took life, continued to maintain life. We were selling off our cyclicals at that point. They were becoming very popular, so we were exiting away from those names, and a price momentum market really came into play. Price momentum is going to go exactly against our sort of theory. Again, we sell what they're buying and buy what they're selling. So we were going exact opposite course of the market. I think that led to us ultimately lagging during the 2010 time period.

As you came into 2011, there was concern, I suppose, that that market, that sort of behavior, could continue, but how long is that going to go on? You did see some shift ultimately towards quality and some movement away from that momentum--ideas, I think, concern about the economy came in, and higher-quality influence played to our favor ultimately in 2011.

Carlson: Now, I should note here that in general, you all tend to tilt towards higher-quality firms than perhaps most value investors, and we can talk more about that in a minute.

I want to touch for a second on Small Cap Value. In contrast to the other two funds, which had great years on a relative basis since 2011, this one landed around the middle of the pack. It didn't do quite as well on a relative basis.

I know that you all mentioned earlier in the year that, particularly within the small-cap space, you were having trouble finding enough higher-quality firms trading at attractive valuations. Was that part of the issue in 2011, do you think?

Scott Satterwhite: It was part of it. 2011, as you say, we kind of wound up in the middle of the pack in the blend category. In the value category, we were probably somewhere in the mid-30s, around in there, which is pretty typical, I guess, where we live. And it was a typical year also in terms of where we got our performance, traditionally, and really quite consistently. A lot of our outperformance in all three of these strategies, we have probably more statistical proof of it in small-cap because it’s a longer database, but a lot of that performance comes from having fewer offsets, fewer blowups, fewer problems in the portfolio that cost us less.

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