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A Newly Rated Emerging-Markets Fund

Newcomer Artisan Developing World earns a Bronze rating thanks to its seasoned manager, attractive approach, and good parent with a long record of success.

The following is our latest Fund Analyst Report for Artisan Developing World Fund Advisor Shares APDYX. Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Artisan Developing World Fund earns a Morningstar Analyst Rating of Bronze because it has a number of strengths, including a seasoned and skilled manager.

Lewis Kaufman, who has been at the helm of this fund since it opened in mid-2015, has a good resume. He has nearly two decades of relevant experience, including 10 years at Thornburg, where he ran a foreign-stock offering for roughly six years and a diversified emerging-markets fund, where he delivered excellent results for roughly five years. That fund, Thornburg Developing World THDAX, posted an annualized return of 8.5% and a Morningstar Risk-Adjusted Return of 4.9% on his watch versus 3.2% and negative 1.0% for the average diversified emerging-markets offering and 2.7% and negative 1.6% for the MSCI Emerging Markets Index.

The process that Kaufman employs here is essentially the same as the one he used at Thornburg Developing World. That strategy has an attractive combination of more reserved and aggressive characteristics. On the tamer side, Kaufman favors steady, high-quality firms with good business models as well as strong cash flows and balance sheets. He normally invests a significant portion of the portfolio in developed-markets companies with major economic ties to the developing world. Such companies, which the majority of this fund’s rivals and the MSCI Emerging Markets Index ignore, tend to hold up well in emerging-markets sell-offs. On the bolder side, he regularly allows his stock selection to drive portfolio construction, resulting in sizable country and sector overweightings, and he runs a relatively compact portfolio of roughly 45-50 names.

Kaufman has produced superior results with this approach thus far here, and Artisan is a good parent with a long record of success with its equity offerings. All 10 of the other stock funds in its lineup with Morningstar Analyst Ratings are Morningstar Medalists, in fact, including all six of the other international-equity funds.

For all these reasons, this fund is good emerging-markets vehicle for the long haul.

Process Pillar: Positive | William Samuel Rocco 07/18/2017 The process in place here has a healthy mix of tamer and bolder traits and earns a Positive Process rating.

The strategy Lewis Kaufman uses here is quite similar to the one he employed very successfully at Thornburg Developing World. Specifically he focuses on financially sound, free cash flow generative companies that don't use a lot of financial leverage and are less likely to impair capital during periods of duress. He favors high-quality companies with good business models. And he avoids companies that are vulnerable to abrupt, cyclical, or franchise changes.

Kaufman regularly invests in developed-markets companies with major economic ties to emerging markets, as well as those headquartered in emerging markets. He also frequently invests in firms based in frontier and small emerging markets. And he runs a relatively compact portfolio of roughly 45-50 names.

Kaufman makes full use of the market-cap spectrum at this fund as he did at his prior charge. That said, he does not venture as far down the market-cap ladder here as he did there and now prefers somewhat larger and more mature small-cap companies.

The end result is a fairly compact portfolio with atypical country and sector weightings, as well as relatively high growth rates, quality metrics, and price multiples.

This fund's portfolio stands out. Developed-markets companies with major economic ties to emerging markets are a significant component of this fund's strategy. It currently owns eight such firms, including top-25 holdings

This fund has much exposure to Brazilian and Russian stocks and much less exposure to South Africa, South Korea, and Taiwan equities than both the average diversified emerging-markets offering and the MSCI Emerging Markets Index at present. It also has far more exposure to consumer cyclical, consumer defensive, and healthcare stocks than both its typical rival and the index, as well as much less exposure to basic materials, communication services, energy, and utilities issues.

This fund owns 47 stocks versus 90-100 for its typical rival and more than 800 for the index. It has an average market cap $20.3 billion versus $25.8 billion for its typical rival and $27.9 billion for the index. And it has relatively high growth rates, quality metrics, and price multiples.

Performance Pillar: Neutral | William Samuel Rocco 07/18/2017 This fund has encountered choppy but generally favorable conditions since opening in mid-2015, and it has handled them very well. For starters, while the typical diversified emerging-markets fund dropped 13.9% and the MSCI Emerging Markets Index fell 16.2% in the second half of 2015, this fund declined 12.1%, as Facebook, Unilever, and some of its other developed-markets companies with major economic ties to emerging markets posted nice gains.

What's more, while its average rival returned 8.4% and the benchmark gained 11.2% in 2016, this fund returned 12.0%, thanks to superior performance from several of its consumer-cyclical, consumer-defensive, and other holdings. And it has handily outpaced its typical peer and the index for the year to date through June 30, as a number of its Chinese, U.S., and Brazilian picks have prospered.

All told, this fund has posted a 9.5% annualized return and a 6.2% Morningstar Risk-Adjusted Return from its mid-2015 inception through mid-2017 versus 5.1% and 1.5% for the typical diversified emerging-markets fund and 5.0% and 1.1% for the MSCI Emerging Markets Index. That's quite encouraging, but this fund is only two years old--and it has yet to encounter a prolonged emerging-markets downturn--so it earns a Neutral Performance rating for now.

People Pillar: Neutral | William Samuel Rocco 07/18/2017 This fund earns a Positive People rating thanks to its lead manager's experience and talent. Lewis Kaufman has been at the helm since this fund opened in June 2015. Before joining Artisan Partners in February 2015, Kaufman spent roughly a decade at Thornburg Investment Management, where he ran a foreign-stock separate account for approximately six years and a diversified emerging-markets mutual fund for about five years. Kaufman used essentially the same strategy at the latter fund, Thornburg Developing World, as he employs here, and he earned superior results during his tenure there. He worked in various investment-related positions at Morgan Stanley and Citigroup before joining Thornburg and has 18 years of investment experience.

Associate portfolio manager Michael Roberge served as an equity research analyst at Thornburg (where he worked on Thornburg Developing World) and as a research associate at Brandes Investment Partners before he joined Artisan in 2015. He has nine years of investment experience. Associate portfolio manager Edward Su worked as an associate portfolio manager and research analyst at Thornburg, a research analyst at Crystal Rock Capital, and an associate at Devon Value Advisers before joining Artisan in 2015. He has 12 years of investment experience. Research associate David Ng joined Artisan in 2016 and has five years of investment experience.

Parent Pillar: Positive | 02/05/2016 Artisan hires proven or promising managers and allows them to build and run their teams with a large degree of autonomy. Four of the teams employ investment strategies that are well-executed and have performed strongly over longer-term periods. The firm's emerging-markets team has generated mediocre results in its 8.5-year tenure, and two teams have launched since only early 2014. The firm tends to close funds to preserve their flexibility and increase the chances that they will continue to outperform. Indeed, seven of the firm's 15 funds are currently closed to new investors. The firm also has a clean regulatory history.

Artisan's board generally does a fine job, but it could push the advisor to pass on economies of scale through a more aggressive negotiation of fees or management-fee breakpoints. The firm's funds aren't often priced well for their size.

On a positive note, all but two of Artisan's funds have at least one manager with more than $1 million invested in fund shares, and seven have at least two managers who invest heavily in their funds. That's the highest level of manager investment disclosed to the SEC and an industry best practice.

The firm went public in March 2013. While this could pressure management into keeping popular funds open to boost revenue, it has thus far continued to close them. Also, its executives retain tight control of the firm.

Price Pillar: Neutral | William Samuel Rocco 07/18/2017 This fund earns a Neutral Price rating. The Advisor share class, which holds 44% of assets, earns a Morningstar Fee Level of Average with its Feb. 1, 2017, expense ratio. Its expense ratio is 5 basis points lower as of its March 31, 2017, annual report and ranks Average as well. The Institutional share class (28% of assets) ranks Below Average with its Feb. 1, 2017, prospectus expense ratio. Its expense ratio is 4 basis points lower as of its March 31, 2017, annual report and ranks Below Average as well. The Investor share class (28% of assets) ranks Above Average with its Feb. 1, 2017, prospectus expense ratio. Its expense ratio is 12 basis points lower as of its March 31, 2017, annual report and ranks Average.

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