The Search for Sustainable Growth Artisan Partners Global Equity Team ARTISAN PARTNERS. Insights

Transcription

1 The Search for Sustainable Growth Artisan Partners Global Equity Team ARTISAN PARTNERS Insights

2 The Search for Sustainable Growth After a slowdown in 2015 and 2016, global growth gained momentum in 2017 as growth broadened to more cyclical parts of the economy, such as manufacturing, as well as across geographies outside of the US. Improved economic growth coincided with the synchronized upswing in global corporate profits that powered equity markets higher. Broadening economic growth across geographies and faster inflation also pushed up bond yields and positioned central banks to normalize monetary policy after nearly a decade of extraordinary accommodation following the financial crisis. Although the general economic backdrop continues to remain supportive of equities, we re realistic about the potential for downside risk, especially at this later stage of the bull market. The geopolitical backdrop including the UK s path to Brexit and President Trump s agenda is ever-evolving and especially difficult to handicap. Markets, no doubt, will keep a close eye on worldwide central bank actions. How smoothly markets digest these policy transitions will likely be a focus of investors over the next year. Throughout our more than 20-year history at Artisan Partners, our team has navigated multiple cycles and a number of market shocks the Asian financial crisis of the late 1990s, the 2000 tech bubble bursting, the 2008 global recession and the ongoing European debt crisis but our philosophy and process has remained consistent. We seek to invest in companies demonstrating attributes that we believe will lead to sustainable growth and that are further advantageously exposed to global secular trends or themes. At the core, we are stock pickers. We believe that investing in high-quality companies with sustainable growth characteristics selling at attractive valuations not fully reflective of their long-term potential will lead to outperformance over a full market cycle. As part of our search for sustainable growth, we pursue companies possessing particular attributes, including industry leadership, offering of an essential product or service, provision of a differentiated solution or ownership of unique assets. We believe high-quality companies with one or more of these attributes enjoy sustainable competitive advantages, positioning them well to generate long-term earnings growth. Leaders Within Consolidated Industries Industry leaders can be defined in several ways. For example, a company can be recognized as an industry leader because it is considered the most effective in its industry, has the highest market share, sells more products, makes more profit or has a better-known brand than its competitors. A high-quality company possessing one or several of these traits can enjoy benefits including pricing power, economies of scale, distribution leverage and/or customer recognition. In our view, being a leader within a consolidated industry is considerably preferable, as the leadership advantages can be diluted in a fragmented industry. For example, bolstered by its early 2015 merger with Covidien, Medtronic has become a dominant global force in the medical devices industry. The company markets a diversified product portfolio including pacemakers, defibrillators, insulin pumps and surgical tools. Across a number of its product lines, Medtronic holds market-leading positions, and often competes in oligopolies supporting advantageous pricing power. Further, its size has afforded Medtronic significant economies of scale, allowing it to reinvest proceeds in accretive acquisitions and cutting-edge innovation in areas such as surgical robotics. As a result, Medtronic has successfully maintained its industry dominance and is often rewarded with a first-mover advantage, a particular leg up as it expands into high-growth emerging markets. Another leader, Nestle, is the world s largest food company with a portfolio of 34 billionaire brands across dairy, coffee, baby foods, cereals, chocolate and other categories. Strong brands, such as those Nestle owns, can often solidify a company s market dominance by attracting new customers, sustaining pricing premiums over competitors, creating barriers to entry for new competitors and generating customer loyalty capable of withstanding soft economic environments. As investors in the company for more than 15 years, we ve found that Nestle s continued brand leadership is partly attributed to its recognition of changing consumer preferences, for example, emphasizing health and nutritional considerations before competitors caught on to this trend. Exhibit 1: Examples of Leaders Within Consolidated Industries What We Seek in a Potential Investment: Attributes that Lead to Sustainable Growth Medtronic One of the world s largest medical technology companies Industry Leaders Unique Assets Essential Products or Services Differentiated Solution Providers Nestle Linde Alphabet The world s leading food company A leading global player in the industrial gases market Owner of Google, the world s largest Internet company and the global leader in search advertising AIA Group A leading insurance provider in the Asia-pacific region The Search for Sustainable Growth

3 Essential Products or Services In our view, essential products or services are ones that consumers deem must haves regardless of the macro environment. Often, companies offering essential products or services are afforded stable and growing end-user demand and advantageous pricing power, allowing them to raise customer prices without a meaningful impact on demand. For example, we ve identified companies offering high-speed internet and wireless services, including Deutsche Telekom and Liberty Global. We ve found that consumers have a seemingly insatiable appetite for faster Internet speeds. From consumption of video to social media and e-commerce, broadband is an essential service for quality of life. Even when times are tough, consumers are not likely to give up Internet access. Case in point: Global consumer spending on broadband Internet grew at a 14.2% CAGR from 2008 to 2013, despite a global recession during that period. Another example, Linde, is one of the world s largest industrial gas providers, operating in an oligopoly of just four companies with about 80% market share. The company has strong bargaining power given that it provides an essential product for the operation of its end users so essential that its major customers, ranging from steel makers to hospitals, require the company to build and operate large-scale gas units either adjacent to their facilities or directly connected via pipeline. In exchange, customers enter into long-term (e.g.,15- to 20-year) take-or-pay contracts. As a result, Linde enjoys the benefits of high switching costs for its major customers, as well as predictability of cash flow. Exhibit 2: Examples of Companies That Offer Essential Products or Services Deutsche Telekom Liberty Global Linde Medtronic A leading integrated telecom operator with a presence in more than 50 countries The largest cable company in Europe (operating in 12 countries) Supplies industrial gases to customers from hospitals to steel makers across more than 100 countries Develops, manufactures and distributes a diverse range of medical devices and supplies, diagnostic agents and other health care products Differentiated Solution Providers Providers of differentiated solutions are particularly well situated to deliver sustainable growth, in our view, as they offer something that other competitors do not. As such, they can exploit high barriers to entry, as new entrants would need to devote considerable time and capital to building a comparable solution. In addition, these providers can enjoy advantageous purchasing power. For example in exhibit 3, Amazon.com is often credited with leading a structural shift from brick-and-mortar retail to e-commerce a differentiated solution that has reordered consumption patterns globally. Amazon s massive scale and lack of physical store overhead costs allow it to competitively price its products versus traditional retailers, while also providing larger selection and the convenience of fast shipping times all effective drivers of customer traffic. In the retail space, Amazon has implemented a highly successful customer loyalty program in its Prime membership Prime customers typically spend 7.5 times more than non-prime customers. Customer loyalty not only increases purchase frequency, but also encourages cross-category shopping, affording Amazon a captive customer base for new product launches. Exhibit 3: Amazon Retail Business Active Retail Customers Millions Units Ordered Per Customer Source: Amazon.com/Artisan Partners estimates, as of March Outside of retail, Amazon is also a leader in the enterprise cloud business a rapidly growing, high-margin segment. Much like its disruptive transformation of the retail sector, Amazon is leading a widespread migration of company data storage to the cloud, already amassing more than 1 million customers. For the customer, cloud-based data storage solutions offer significant cost savings and efficiency gains. At the same time, customer switching costs are high, favoring first movers such as Amazon. Another holding, Wirecard, is a global payment processing company operating a technology-agnostic platform enabling merchants to accept and process debit and credit transactions on multiple formats online The Search for Sustainable Growth

4 and on mobile and in store. One of the company s main advantages is its unique vertical integration as a credit account issuer with a bank license as well as a technology company. Wirecard provides payment processing as well as numerous merchant support services, including fraud prevention and assistance in cross-border transactions. Its full-service platform offers convenience to its business customers while allowing the company to participate in the revenue opportunity across the financial supply chain. Exhibit 4: Examples of Differentiated Solution Providers Amazon.com Wirecard Unique Assets One of the world s largest online retailers and a leading provider of enterprise cloud services A leading global payment processing company ARTJX We also seek out companies possessing unique or hard-to-duplicate assets. We believe these companies are often able to leverage a dominant market position, high barriers to entry and pricing power, all of which lay a solid foundation for sustainable growth. About Artisan Partners Global Equity Team Seasoned Leadership, Dedicated Research, Global Perspectives Artisan Partners Global Equity Team has been investing in international markets at Artisan Partners for the past two decades. Across its three investment strategies, the team applies the same investment philosophy and process first established by team founder Mark Yockey in The team seeks industry-leading companies trading at sensible valuations with the competitive advantages necessary to sustain earnings growth over the long term. The team s portfolios leverage a deep and highly experienced team of research analysts led by three seasoned portfolio managers. All team members have significant experience within their sectors or regions of expertise, and travel frequently to research investment opportunities. Company visits are a key component of the team s process, providing an opportunity to develop an understanding of a company, its management and its current and future strategic plans. As such, we believe companies owning infrastructure (the pipes, networks and towers) carrying Internet traffic are strongly positioned for long-term growth. Companies in this category often benefit from high barriers to entry, as the capital requirements to build new infrastructure can deter new entrants. In many cases these companies operate in oligopolies or outright monopolies enabling them to increase prices without a meaningful impact on demand. Further, with their networks already built out, companies such as Deutsche Telekom and Liberty Global enjoy relatively minimal capex vis-à-vis competitors, allowing them to compete on pricing and supporting higher profit margins and stable cash flow growth. With data pointing to accelerating consumer demand for high-speed Internet and mobile data, we believe these companies will continue to benefit from their unique network advantages. Exhibit 5: Examples of Companies with Unique Assets Deutsche Telekom Liberty Global A leading integrated telecom operator with a presence in more than 50 countries The largest cable company in Europe (operating in 12 countries) The Search for Sustainable Growth

5 Artisan Partners Global Equity Team Management Mark L. Yockey, CFA Portfolio Manager 37 years of investment experience Charles-Henri Hamker Portfolio Manager 28 years of investment experience Andrew J. Euretig Portfolio Manager 14 years of investment experience Portfolio Managers average 26 years of investment experience Investment Results (%) Average Annual Total Returns As of 31 March 2018 QTD 1Yr 3Yr 5Yr 10Yr Inception 1 Expense Ratio 2 Artisan Global Equity Fund () MSCI ACWI Index Artisan International Fund () MSCI EAFE Index Artisan International Small Cap Fund (ARTJX) MSCI EAFE Small Cap Index Source: Artisan Partners/MSCI. Returns for periods less than one year are not annualized. 1 Fund inception dates: Artisan Global Equity Fund - 3/29/10, Artisan International Fund - 12/28/95 and Artisan International Small Cap Fund - 12/21/01. MSCI EAFE Index starts 31 Dec For the fiscal year ended 30 Sep Closed to most new investors. Past performance does not guarantee and is not a reliable indicator of future results. Investment returns and principal values will fluctuate so that an investor s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown. Call for current to most recent month-end performance. Performance may reflect agreements to limit a Fund s expenses, which would reduce performance if not in effect. Artisan Global Equity Fund s investments in initial public offerings (IPOs) made a material contribution to the Fund s performance. IPO investments are not an integral component of the Fund s investment process and may not be available in the future.

6 For more information: Visit Call Carefully consider the Fund s investment objective, risks and charges and expenses. This and other important information is contained in the Fund s prospectus and summary prospectus, which can be obtained by calling Read carefully before investing. International investments involve special risks, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Securities of small- and medium-sized companies tend to have a shorter history of operations, be more volatile and less liquid and may have underperformed securities of large companies during some periods. Growth securities may underperform other asset types during a given period. Portfolio Managers: Artisan International Fund Mark L. Yockey, Charles-Henri Hamker, Andrew J. Euretig; Artisan International Small Cap Fund Mark L. Yockey, Charles-Henri Hamker; Artisan Global Equity Fund Mark L. Yockey, Charles-Henri Hamker, Andrew J. Euretig. The views and opinions expressed are based on current market conditions as of 31 Dec 2017, which will fluctuate and those views are subject to change without notice. While the information contained herein is believed to be reliable, there is no guarantee to the accuracy or completeness of any statement in the discussion. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. This material is provided for informational purposes without regard to your particular investment needs. This material shall not be construed as investment or tax advice on which you may rely for your investment decisions. Investors should consult their financial and tax adviser before making investments in order to determine the appropriateness of any investment product discussed herein. We expressly confirm that neither Artisan Partners nor its affiliates have made or are making an investment recommendation, or have provided or are providing investment advice of any kind whatsoever (whether impartial or otherwise), in connection with any decision to hire Artisan Partners as an investment adviser, invest in or remain invested in any funds to which we serve as investment adviser or otherwise engage with Artisan Partners in a business relationship. For the purpose of determining the Funds holdings, securities of the same issuer are aggregated to determine the weight in the Funds. The discussion of portfolio holdings does not constitute a recommendation of any individual security. The holdings mentioned above comprised the following percentages of the Funds total net assets (including all share classes) as of 31 Mar 2018: Artisan Global Equity Fund AIA Group Ltd 0.8%; Alphabet Inc 2.3%; Amazon.com Inc 1.3%; Linde AG 3.2%; Nestle SA 1.1%; Wirecard AG 4.0%. Artisan International Fund AIA Group Ltd 2.7%; Amazon.com Inc 1.2%; Deutsche Telekom 1.2%; Liberty Global PLC 1.8%; Linde AG 4.6%; Medtronic PLC 2.5%; Nestle SA 3.0%; Wirecard AG 3.8%. Artisan International Small Cap Fund Wirecard AG 4.6%. MSCI All Country World Index measures the performance of developed and emerging markets. MSCI EAFE Index measures the performance of developed markets, excluding the US and Canada. MSCI All Country World Small Cap Index measures the performance of small-cap companies in developed and emerging markets. MSCI EAFE Small Cap Index measures the performance of small-cap companies in developed markets, excluding the US and Canada. The index(es) are unmanaged; include net reinvested dividends; do not reflect fees or expenses; and are not available for direct investment. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used to create indices or financial products. This report is not approved or produced by MSCI. Compound Annual Growth Rate (CAGR) is the year-over-year average growth rate of an investment over a period of time. It is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered. Artisan Partners Funds offered through Artisan Partners Distributors LLC (APDLLC), member FINRA. APDLLC is a wholly owned broker/dealer subsidiary of Artisan Partners Holdings LP. Artisan Partners Limited Partnership, an investment advisory firm and adviser to Artisan Partners Funds, is wholly owned by Artisan Partners Holdings LP Artisan Partners. All rights reserved. A R T I S A N P A R T N E R S 5/5/18 A18581L-vR