Greg Carlson: Hi, my name is Greg Carlson. I am a fund analyst with Morningstar. I am joined today on the phone by Mark Yockey. He is the manager of Artisan International and Artisan International Small Cap, as well as the comanager of Artisan Global Equity.
Mark, thanks for joining me today.
Mark Yockey: Hi, Greg. Nice to be with you.
Carlson: Mark, I want to talk primarily about the international fund, since that's the largest fund. It's been around for 17 years now just about. I just want to hit on a couple of points about the fund that maybe folks can understand better. First, I would describe this as a growth fund at heart but it does land in Morningstar's foreign large-blend category. And that's because it's not simply made up of rapid growth stories, late-1990s-style investments. Can you talk a little bit about the mix of the portfolio?
Yockey: Sure. We look for traditional growth stocks, but also we look for companies that have undergone restructuring, where we expect the growth is going to accelerate in the future and where maybe the company hasn't been a growth company in the past. And we look at growth in different ways. Sometimes growth can come from an acquisition strategy or can come from organic growth, but we're quite flexible in how we look at growth, and that's probably why we show up in the blend category rather than growth.
Carlson: You do currently have a sizable stake in the international fund in China and Hong Kong; 19% of assets combined as compared with 5% for the category. Can you talk a little bit about the types of companies you hold that are domiciled in those countries? It's a fairly diverse mix I would say.
Yockey: Sure, I'm happy to. We've found some great stocks to invest in China and Hong Kong. There are 1.3 billion people in China and Hong Kong; 1.29 billion in China and about 6 million in Hong Kong, but they are very much tied at the hip. There is some, what we call, category killers that we've been able to invest in. One is Baidu, and that's the equivalent of the Google of China, where they're growing at around 30%-40%. The most recent quarter was at 50%, but we expect the growth to slow down to about 30%. The stock's been under a little pressure recently, but we think it's way undervalued and it's going to do really well.
We've invested significantly over the last several years in the casino stocks. The only place where you can legally gamble in China is in Macau, which formally was a Portuguese colony and reverted back to China several years ago. And the gaming stocks have been wonderful investments over the last three or four years. And basically, our investments in companies like Sands and Wynn, have doubled and tripled.
Carlson: Mark, can you expand on that point a little bit? I know you've mentioned in our conversations that an opportunity opened up there a few years ago to invest in there.
Yockey: Yes, it's quite a good story. When Las Vegas got into all kinds of trouble, the U.S. gaming companies were in the process of expanding in Macau, and they needed money because in 2008 and 2009 the business in Las Vegas collapsed. So they were forced to spin-off their businesses in Macau, and that was an opportunity for us to invest directly in the growth potential of Chinese gaming. And when they initially invested in Macau, Macau was doing around $4 billion in gaming revenues, and that was 10 years ago. Today Macau is doing $40 billion in the gaming revenues. And to give you some perspective, Las Vegas does around $6 billion, so it's around 7 times as big as Las Vegas right now. And we expect it to continue to grow. So, those stocks have done great.
And then another area where we like a lot is that we like the real estate sector and we like the insurance sector. Insurance all over Southeast Asia and in China are growing very fast, and AIA was a spin-off of AIG which was a U.S. company that got into trouble in 2008-09. And that stock in the two years since it was spun off was up around 35%, and the Hong Kong market is flat. And then the real estate stocks, companies like Sun Hung Kai, have wonderful positions in real estate in Hong Kong and then they are expanding on the mainland. And so we think they are going to have growth for years to come.
Carlson: Let's touch on perhaps the fund's large stake in what we call consumer defensive firms and a lot of consumer goods makers. The fund has 29% in that sector, and that's more than double the category average. It includes a number of makers of food and alcoholic beverages. Can you talk specifically about why you own these? Is this a bet on continued slow economic growth, or is it something more specific than that?
Yockey: You know, Greg, we like to consider them as consumer offensive stocks. The growth in the world economy in the next 20 years is largely going to come from emerging markets. And the companies in the consumer food and beverage, and the consumer sector in general, often times these companies are based in Europe, and some of the best ones we've been able to find are companies like Nestle and companies like Unilever. And they are highly leveraged to emerging markets, so over half their sales are coming from emerging markets and probably more than half of their profits.
If you look at the world going forward, in the next 20 years, there are going to be 2.5 billion people that are going to come into the consumer part of the world, and that's defined by economists as making more than $6,000 a year. And over 90% of these new consumers are going to be in emerging markets.
And you know, when you start to make some more money, the first thing you do is take care of your family, you eat better, you try to provide a better housing for your family. And companies that have products that offer quality at a reasonable price are companies like Nestle and Unilever and Henkel, and companies like this we think can grow for the next 20 to 30 years because of their exposure to emerging markets.
Carlson: And Japan Tobacco was recently your top holding. Is that going to benefit from emerging markets growth, as well?
Yockey: They have huge exposure in places like Russia where they are raising taxes on tobacco, but actually the cigarette companies are a beneficiary of raising taxes because they usually raise prices, along with the government getting more, the tobacco companies get more. So, they have significant exposure to emerging markets.
Carlson: All right. I want to turn for a minute though to Global Equity. Now that fund you comanage with Barry Dargan who joined your team in 2010. That fund has a much bigger stake in foreign-domiciled companies than the typical world-stock fund and less in the U.S. Is that a reflection of where your team sees more attractive valuations?
Yockey: No, I don’t think so, Greg. I think it's more a reflection of that we're all stock-pickers in the international-growth part of Artisan, and I think that's largely a true of Artisan as a whole. And the portfolios are reflections of where we find the best companies offering the highest growth and selling at the lowest price. And so, I think it's largely a reflection of where we've been able to find the best ideas.
Carlson: There are some differences, I think, in the foreign component of Global Equity and Artisan International. Can you discuss that a little bit?
Yockey: Yeah. The Global fund has around 40% exposure to the U.S. and the International fund has about 5% exposure to the United States, but you know, I think it's important to note that these distinctions over time are getting more and more blurred because a company like Coca-Cola is a U.S. company, but it makes 80% of its profits outside the U.S., and Nestle is a Swiss company and it makes 99% of their profits outside of Switzerland. They're both international companies. So, 20 years from now the distinction between these two is probably going to go away.
Carlson: Thank you, Mark, for your time. We really appreciate it.
Yockey: Greg, nice to talk to you. Thank you.