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By Greg Carlson | 01-15-2014 11:00 AM

Outperforming in Up and Down Markets

Morningstar's 2013 International-Stock Fund Managers of the Year Dan O'Keefe and David Samra explain what powered their funds' peer-beating returns in both 2008 and 2013.

Greg Carlson: Hi, I'm Greg Carlson. I'm a mutual fund analyst with Morningstar. I'm joined today by the two managers of Artisan International Value and Artisan Global Value, Dan O'Keefe and David Samra. Thanks for joining me today, gentlemen.

David Samra: Thank you for having us.

Daniel O'Keefe: Thank you. It's nice to be here.

Greg Carlson: You two won the International-Stock Fund Manager of the Year award for 2013 from Morningstar, and this is not your first award. You won for 2008. It's interesting that you've won in two very different environments. Obviously, in 2008, it was a terrible year for stocks. Your funds held up a lot better than the competition. Similarly, in 2013, the funds outperformed in a very strong year for stocks.

Before talk about the drivers of performance last year, maybe we can talk about the strategy for those folks who are less familiar with it.

Daniel O'Keefe: I think your observation about the strong performance in both the down market of 2008 and a strong market of 2013, for example, is an interesting way to approach how we think about investing and the characteristics we're looking for--because those characteristics really explain the strong performance in two very different market environments.

We're looking for four characteristics: We're looking for an undervalued business, something that's cheap relative to its long-term intrinsic value, but we're looking for that attached to a very high-quality business, a strong balance sheet, and a management team that allocates capital and works in the interest of building long-term shareholder value.

Those characteristics immediately can be thought of as being beneficial in tough market environments, because of the defensive qualities. A strong balance sheet protects a business in a weak economy. A good management team is building value. A defensive business, a high-quality business, is competitively advantaged. And an attractive price, of course, is probably the most important margin of safety and one that most value investors talk about. That helps explain why we outperformed so well in 2008--because of some of those defensive characteristics.

But in 2013, how were those characteristics able to help us participate and, in fact, outperform in a very strong market? I think the key to understanding that is the way that we use the discount to intrinsic value and how that lever of price-to-value is manipulated inside the portfolio.

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