By David Snowball

Objective and strategy

The investment team seeks to invest in high-quality, undervalued businesses with the potential for superior risk/reward outcomes. The investment universe is generally non-US equities with market caps below $5 billion. The portfolio is typically 25-50 holdings, with individual holdings capped at about 10% and cash generally under 15%.

Adviser

Artisan Partners, L.P. Artisan is a remarkable operation. They advise the 21 Artisan funds, as well as a number of separate accounts. Artisan Partners is organized into eight autonomous investment teams, each responsible for a specific strategy (Growth, Global Equity, US Value, International Value, Global Value, Sustainable EM, Developing World, and Credit plus Antero Peak and EMsights Capital groups), and each is given logistical support from the central operations team. Their management teams are stable and invest heavily in their own funds. Artisan manages about $129 billion in assets for 272 clients, including $32 billion for non-US citizens (per Form ADV, 3/31/2023).

Morningstar considers them an “above average” advisor, with special recognition of the managers’ willingness to close funds to new investors in order to protect existing ones: “Capacity management has been a strong point here, with more than half the firm’s lineup having been closed to new investors when the managers deem fit.” Currently, four of 21 funds, including International Value, are closed to new investors.

Manager

Beini Zhou and Anand Vasagiri. Both Zhou and Vasagiri were trained as Artisan analysts on the International Value team by David Samra (2005-12 and 2007-10, respectively) before talent and ambition led them to leave the firm in order to lead their own portfolios. Both have 18 years of experience.

Beini Zhou, CFA, is a co-portfolio manager for the Artisan International Small Cap Value Strategy. Prior to returning to Artisan Partners in September 2020, Mr. Zhou was a portfolio manager at Matthews Asia, where he managed the Emerging Markets Equity and Asia Value Strategies.

Anand Vasagiri is a co-portfolio manager for the Artisan International Explorer Strategy. Prior to returning to Artisan Partners in September 2020, Mr. Vasagiri was co-head and portfolio manager of the Global Small Cap Strategy for Paradice Investment Management, an Australia-based adviser launched by another Artisan alumnus, from 2010 to 2019.

David Samra plays a supporting role as Managing Director; he has no day-to-day responsibilities but works with the team as a mentor, advisor, and sounding board. Mr. Samra leads Artisan’s International Value Team, manages the (closed) International Value Fund, and has 30 years of experience. Since its inception, Mr. Samra’s International Value Fund has trounced its peers.

Comparison of Lifetime Performance (Since 10/2002 – 07/2023)

Name	APR	MAXDD	Recvry mo	STDEV	DSDEV	Ulcer Index	Sharpe Ratio	Sortino Ratio	Martin Ratio
Artisan International Value	11.6	-47.0	38	15.8	10.2	10.4	0.65	1.01	0.99
International Large-Cap Value Category Average	7.3	-56.0	95	17.4	11.9	17.7	0.35	0.51	0.37
S&P 500	10.8	-51.0	53	14.8	9.9	12.0	0.64	0.96	0.79

The discipline that Mr. Samra practices is the one that he taught to Messrs. Vasagiri and Zhou and which is practiced across the International Value team.

Strategy capacity and closure

Artisan is very good at closing funds before they become unmanageably large. The managers view this as a capacity-constrained strategy but are understandably reluctant to get pinned down to a particular number.  

Management’s stake in the fund

Artisan reports that all three of the portfolio managers have seven-figure sums invested in the strategy, which translates to a material percentage of net wealth for Mr. Zhou and Mr. Vasagiri.

Opening date

May 16, 2022. The fund embodies a strategy that was launched on November 1, 2020.

Minimum investment

By prospectus, $250,000 for Advisor, $1 million for Institutional. At Schwab, Advisor shares are available for $2,500 in a regular account and $1,000 in a tax-advantaged one. Other online brokerages have similar arrangements for the fund.

Expense ratio

1.41% for Advisor and 1.36% for Institutional on fund assets of $80 million. The total AUM for the Artisan International Explorer strategy as of 7/31/23 was $213 million, including the fund plus a private fund and $101 million in separate accounts.

Comments

There are many reasons to distrust active fund management.

There are even more reasons to trust Artisan.

Most active managers pursue a losing strategy: they anxiously assemble sprawling portfolios of the same large cap US stocks as hundreds of their peers. By our count, 720 funds and ETFs are largely or entirely devoted to US large cap stocks. When 720 funds are all chasing the same 700 large cap stocks, you have “a crowded trade.” How crowded? By recent count, 1020 funds and 590 ETFs own Apple stock. It’s impossible to expect exceptional gains when a thousand analysts are dissecting, and a thousand managers are bidding upon, the same stock.

Artisan is doing the opposite. Managers Zhou and Vasagiri started with the question, “Where is there the opportunity for exceptional gains?” Their research led them to the world’s least crowded trades: international small- and micro-cap stocks. Their investable universe is the 52,000 or so companies with market caps under $5 billion. It is safe to say that more analysts follow Apple than all international small caps combined. When the team meets with company management, they are sometimes greeted with surprise; when they ask about the last time a stock analyst spoke with them, the answers range from “months ago” or “a year ago” to “I don’t recall one ever.” Even index funds don’t find them; by Mr. Vasagiri’s estimation, only about 8% of their investable universe makes it to the “all-world” index. That utter lack of coverage creates opportunities for mispricing.

The managers were both trained by David Samra, one of Artisan’s senior members, who they worked for as analysts in the 2005-2012 window. Young and ambitious, they left Artisan to take the discipline to their own funds (at Paradice and Matthews Asia), succeeded, and then returned in September 2020 to launch their own strategy. They launched this strategy within about eight weeks.

The strategy is straightforward: find a few high-quality firms that are substantially undervalued in light of their growth trajectories. Buy them. Engage regularly with management. Sell if conditions change; otherwise, hold on to them for the long term.

The distinctions in the strategy carry several implications:

1. It eschews traditional valuation metrics in favor of an intrinsic value of calculation, which means that it might look like a growth portfolio from the outside.
2. It is substantially more concentrated than its peers, so the importance of getting each individual position right is magnified.
3. It is sector, valuation metric, and region agnostic, so it might be substantially out-of-line with its peers. Its current portfolio, for instance, has a much lower market cap, much less exposure to Japan and utilities stocks than its peers, and no exposure to energy and banks, but much more exposure to Latin America, high-quality names.
4. It requires more human judgment and interaction than you might see in larger, larger cap sprawling portfolios. One challenge for the managers here is figuring out who really runs the businesses they’re investing in, which might be some combination of senior family members whose names are not necessarily on the door. Having identified them and their vision, the managers need to track management dynamics, understand them, and occasionally influence them.
5. It is substantially capacity constrained because returns are driven by the performance of small, and sometimes very small, companies. No matter how well the stock of your Indonesian department store chain or Indian credit ratings agency performs, they are too small to make a difference in a large fund’s performance, and they trade too lightly to make it past an index fund’s liquidity screens. In consequence, the gains in this mispriced corner of the market are best harvested by small, active funds.

All of which the managers are trained to handle and all of which they (and, famously, Mr. Samra) have handled. Short track records are deceptive, but readers should know that:

1. from inception through August 2023, the fund has outperformed its Morningstar international SMID blend peer group, with a lifetime gain of 8.9% against their peers 5.5%.
2. from inception through July 2023, the fund has underperformed its Lipper International Small / Mid-Cap Value peer group.
3. from inception through June 2023, the fund has roughly tripled the returns of its MSCI AC World ex-US Small Cap Index benchmark. That reflects both the strength of the strategy and the weakness in the index’s design.
4. from inception through June 2023, the strategy has more than doubled the returns of its MSCI AC World ex-US Small Cap Index benchmark. Remember, the “strategy,” offered in high minimum accounts, was launched about 18 months before the fund.

There are always reasons for investors to approach new options with curiosity and skepticism. Skeptics might reasonably note that the team has not managed together for a long period, and neither the fund nor the strategy has yet established a three-year record.

Bottom Line

Artisan International Value Strategy works. Demonstrably, repeatedly, over time, and across market cycles. Mr. Samra and his colleagues have demonstrated that at the huge, closed Artisan International Value Fund since 2002. In Artisan International Explorer, you get exposure to what International Value was in its first years: a small, agile portfolio that can benefit from positions in small, obscure, badly mispriced stocks.

The team here has a 50,000+ stock universe, but they do not need to assess 50,000 stocks. They need to find 25-50 stocks (o.05% of its universe) that are substantially mispriced, and they need to make ongoing, intelligent judgments about those few stocks. That seems a manageable challenge.

Artisan’s record in launching new funds is nearly unparalleled. The firm’s screening of teams interested in becoming Partners is rigorous, with the vast majority failing the firm’s “potential category-crusher” threshold. Of the 16 Artisan funds with a record of at least three years, 13 have outperformed their peers since inception (through July 2023) in total returns and 12 in risk-adjusted returns, as measured by the Sharpe ratio.

Investors looking for intelligent eclecticism and a strong family should add Artisan International Explorer to their due diligence list.

Fund website

Artisan International Explorer