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Artisan International Small-Mid Fund Is Actually Well Worth Checking Out

This restructured fund is far more appealing than is readily apparent.

Artisan International Small-Mid ARTJX, which reopened to new investors in October 2018, does not look very attractive at first glance. This foreign small/mid-growth fund has landed in its Morningstar Category’s bottom quartile three times in the past five calendar years, including the sideways market of 2016, when it lost 12.9% and finished behind every one of its rivals. Consequently, despite a solid showing in 2018’s challenging conditions and a nice start to this year, its three-year and five-year returns through March 31, 2019, are inferior to those of 75% and 93% of foreign small/mid-growth offerings, respectively. This fund’s marked underperformance in recent years has undermined the ample success it had earlier in the 2000s, and its 10-year record is now mediocre. (Its 15-year record is still good.)

But these issues are moot now, because Artisan restructured this fund in late 2018. For starters, Artisan brought on Rezo Kanovich from Oppenheimer in October to run this fund, replacing longtime lead manager Mark Yockey and comanager Charles-Henri Hamker. (Yockey and Hamker remain at Artisan and continue to manage Artisan International ARTIX together, and Artisan Global Equity ARTHX with a third manager.) Kanovich is seasoned and skilled. Indeed, he has 20 years of investment experience and served as the skipper of foreign small/mid-growth fund Oppenheimer International Small-Mid Company OSMAX from January 2012 to September 2018. That fund comfortably outgained the typical foreign small/mid-growth offering and its MSCI ACWI ex USA SMID Cap benchmark during his tenure. And the two analysts who worked with Kanovich on the Oppenheimer offering for several years--Andres Avalos Vitiello and Samir Mainthia--came with him to Artisan and have solid credentials themselves.

What’s more, Kanovich is using the same thematically driven, long-term-focused, bottom-up approach at Artisan International Small-Mid as he employed successfully at Oppenheimer International Small-Mid. In particular, he is investing in firms positioned to benefit from structural growth trends. These companies tend to have unique business models, high barriers to entry, the ability to self-finance growth, and strong management teams. He looks for names that he can hold for an average of five years and tries to make purchases when companies' shares look mispriced. He avoids buying names with "growth at any price" valuations and generally caps individual holdings around 2% to reduce single-stock risk. This approach is sound, distinctive, and attractive.

Meanwhile, Artisan reduced the management fee on this fund from 1.25% to 1.05% on Dec. 1, 2018, so the expense ratios for the no-load share class and institutional share classes declined from 1.55% to 1.36%, respectively, and from 1.35% to 1.15%, respectively, as of the Feb. 1, 2019, prospectus.

The restructured version of this fund is attractive and is well worth consideration from investors who are seeking a foreign small/mid-growth vehicle for the long haul. But interested investors should make sure they understand three facts about this fund now. First, Kanovich’s stock-selection strategy is quite different from his predecessors’ approach, so this fund’s portfolio has been completely made over. (Ninety-four of the 107 stocks in the portfolio as of Dec. 31 were purchased in the fourth quarter.) Second, Kanovich focuses further up the market-cap ladder than many foreign small/mid-cap managers do and his predecessors did. (This fund has an average market cap of $3.4 billion at present, versus $2.5 billion for its median rival and $2.2 billion for this fund when Kanovich took over.) Third, the no-load share class and institutional share classes remain a bit pricier than the relevant medians even though they are significantly less expensive than they used to be.

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