A Case for Global Mid-Cap Stocks

The Ideal Intersection of Quality and Growth

Jason L. White, Portfolio Manager

In this Q&A Jason White, Portfolio Manager for the Artisan Global Discovery Fund strategy, discusses the journey and approach of the investment team and highlights some exciting stock opportunities ahead. The Artisan Global Discovery Fund is a global small and mid cap equity strategy distributed by Copia Investment Partners.

Your team has historically had a preference for mid-cap stocks. Can you talk about the characteristics of companies in this segment of the market that you find compelling?

Jason: Our founders, Andy Stephens and Jim Hamel, were attracted to mid-cap equities when they launched Artisan’s U.S. Mid-Cap Growth Strategy in 1997. They correctly viewed mid cap as an investing sweet spot—a compelling intersection of quality, competitively advantaged businesses with long growth runways, in possession of experienced, savvy management teams and a tendency to be a purer profit cycle play. The proof is in the data—domestic mid cap equities have generated better absolute and risk-adjusted returns over the past three cycles (Exhibit 1).

The mid cap asset class is clearly an attractive one as you have laid out. What has been your approach to finding companies best positioned to deliver above-average returns in this area of

the market?

Jason: It is a combination of people, philosophy and a repeatable investment process. We believe we have assembled a team of profit cycle hunters. We have built this great group of minds one person at a time from two investment professionals in 1997 to 18 today. We have a team of people who we believe can find growth wherever it is occurring across the global economy. These individuals not only have years of investment experience, but several of them also bring prior industry experience in the sectors they cover which we believe enhances our investment judgement. In fact, we like to call this our judgment factory.

Our process is structured around a core belief: stocks follow profits over any reasonable period of time. We look for companies with durable competitive advantages, trading at valuations we can understand and benefiting from an acceleration in profit growth. We stage our clients’ capital across three phases based on our level of conviction: GardenSM, CropSM and HarvestSM.

Our approach has been consistent since we set out to exploit this segment of the market when we launched our mid-cap strategy in 1997 (Exhibit 2). It has withstood various market environments. Furthermore, our diverse talent pool has accumulated the scar tissue from the mistakes made during these periods.

The team launched the Global Discovery Strategy in 2017. How is this portfolio structured to enhance the team’s mid-cap investing capabilities?

Jason: Global Discovery adds further degrees of freedom to our mid-cap focus, and it primarily represents the team’s best 40-60 global small-and mid-cap ideas. We don’t have an upper limit on our market cap mandate—we can let our winners run—and we can add small cap franchises who possess the characteristics we tend to find among mid-cap companies. We also have a lot more leeway to hunt for profit growth internationally, providing us with a significantly larger opportunity set. We are returning to our roots with this mid-cap focus, though its important to note we are leveraging a much more experienced and globalized research platform.

You touched on the portfolio’s broad geographic reach. Looking at each of your holdings, there are several unique aspects of your portfolio relative to the broader global equity universe as measured by the MSCI AC World Index (the benchmark for the Artisan Global Discovery Fund is the MSCI All Country World SMID Cap Net Index in AUD). Can you expand upon this?

Jason: The MSCI AC World Index is a very broad benchmark mostly comprised of mid-and-large cap companies. Over time, the MSCI AC World Index has drifted toward mega-cap territory while Global Discovery continues to plot along the small- to mid-cap range for market capitalization (Exhibit 3). Our portfolio offers less volatility and more exposure to small- and mid-cap companies. By going down the market cap spectrum, we offer a portfolio with many unique holdings at an intersection of quality and growth. Lastly, our portfolio offers an attractive alternative to active global strategies populated with the US FAANG stocks (none of which we own), Chinese large tech platforms, large global financials, etc.

Our portfolio also has a high 98.5% active share, and the top 20 contributors to our performance since our inception are unique relative to the MSCI AC World Index. These same holdings have also driven the majority of our performance over this time period.

What are some of your top ideas in the portfolio today?

Jason: Foremost, we tend to gravitate toward businesses less dependent on the overall strength of the underlying global economy. We focus more on innovation and internal change (new management team, new product/ service, etc.). Areas of innovation prominent in our portfolio include:

• Health care companies with new drugs, diagnostics and/or solutions to make health care more effective and efficient

• Software solutions to facilitate a more collaborative, efficient, mobile and secure work environment

• New technologies and solutions that streamline manufacturing processes

• Companies driving the transition to a sustainable energy economy.

Valmont is a company we believe will benefit from internal change and several secular and cyclical tailwinds. The company is a leading designer and manufacturer of engineered metal products. Its portfolio includes metal and concrete poles for traffic lighting, cell towers and highway signs; utility support structures such as poles for transmission lines and a single-axis solar tracker for utility-scale solar installations; and electric-powered, center-pivot irrigation systems that efficiently irrigate fields ranging from 4 to 500 acres. The relatively new management team, who has changed the compensation system by rewarding improving ROIC, has done a nice job executing fundamentally. We believe the growth runway ahead is compelling given several secular and cyclical tailwinds: accelerating spending for solar and wind, grid hardening and renewed irrigation investments in international markets to ensure more efficient water usage. The company’s precision agriculture product—which uses a center-pivot machine versus drip or flood irrigation to improve application efficiency up to 90%—positions it particularly well for the renewed irrigation investments in the US and Internationally—the later of which has been underscored by the pandemic and war in Ukraine.

Lattice Semiconductor is another company not only benefiting from internal change and secular tailwinds, but also new product introductions. This semiconductor company is a fabless vendor of field programmable gate array (FPGA) chips, which customers can program and configure to their specifications. What makes Lattice a franchise is its leadership position and possession of intellectual property in the small, power efficient segment of the market. The company’s low-power FPGA chips serve multiple end markets well-suited for several long-term, sustainable secular growth tailwinds: data centers, 5G infrastructure, industrial Internet of Things devices, factory automation and automobiles.