Artisan Global Value Fund | Philosophy, process & the strategy’s portfolio characteristics

Ryan Wood from Artisan Partners explains the team's disciplined approach to identifying high-quality businesses trading below their intrinsic value, and the four key pillars that underpin their long-term investment process.

https://www.youtube.com/watch?v=QJLaPq5XJBQ

Chapters:

0:00 Defining Value Investing

1:05 Investment Philosophy: Why Value Is More Than Cheap Stocks

2:04 Long-term Ownership Approach

2:26 Managing Risk

3:54 The Four Pillars of our Investment Process

Transcript:

0:00 Defining Value Investing

I think it's really important first to just broadly define how we think about value investing, as there are many different definitions of it, flavors of it, approaches to it. We want to own businesses at an absolute discount to their cash flow-derived intrinsic worth. In our case, we're looking for at least a 25% discount. We are not deep value, we're not traditional value.

We aren't just simply seeking to own businesses at some arbitrarily cheap multiple of earnings. We're not seeking to own businesses at a relative discount to a basket of competitors or to the broader market. We're looking for that absolute discount to cash flow-derived intrinsic value. We don't even like stylistically the distinction between growth versus value. Growth is very simply a characteristic. Either a business is growing or it's not. That growth can be secular, it can be cyclical.

That is one of many different fundamental characteristics that ultimately you have to take into account in order to determine what is a business worth and then what is the appropriate price to pay for that business, which brings you to value.

01:05 Investment Philosophy: Why Value Is More Than Cheap Stocks

Value is very much a judgment, and in the eye of the beholder. In fact, you know, if you take a couple of different examples, you know, to take a business that trades at 15 times earnings that's worth 20 times earnings, that in our eyes oftentimes represents a more attractive value.

Then say buying a more statistically cheap business at nine times earnings that's worth 12. That business at 15 times earnings has is likely higher quality, it likely has a more defensible margin structure, it can grow. And so what that means is that ultimately we're looking for two sources of return. You know, we want that multiple re-rating from 15 to 20 times earnings, from nine to twelve times earnings, like most traditional or any approach to value investing, but we're also looking for a secondary source of return.

That being the compounding of the business value over time, whether that be through earnings growth, free cash flow growth, good capital allocation by a management team. And so that gives you a sense of how we think about and define value investing.

02:04 Long-term Ownership Approach

We're very long-term investors. Our typical investment horizon is three, five plus years, ideally. The best case is if we never have to sell a business, so long as that underlying value continues to compound time. We think of ourselves as owners of businesses. We don't view stocks simply as pieces of paper to be traded. We have an ownership mentality over the businesses that we are owning.

02:26 Managing Risk

Finally, from a risk standpoint, the way that we think about and approach risk management is also in an absolute sense. And what I mean by that is that we are simply seeking to avoid permanent capital impairment. We don't view risk through any sort of quantitative lens. We're not thinking about tracking error or standard deviation. We don't think about overweight, underweight, the benchmarks, certain sectors, industries, regions, or countries. But instead, you know, we are trying to avoid a couple of common risks that value investors are faced with through trying to buy businesses cheaply or at a discount. The first of those you can think of as your classic value trap, where there's a business that looks cheap. It is statistically cheap, but there might be a good reason for that. You know, that business might be in structural decline.

Where it looks cheap on a backwards-looking historical basis. But if those earnings are in decline or the businesses is in decline, then that is not going to end up being an attractive valuation as time passes on. So to help mitigate that risk of a value trap, we place a heavy emphasis on business quality. And then secondly, and similarly, those same statistically or optically cheap stocks can have high degrees of leverage on the balance sheet. Leverage can certainly be a good thing when there are economic tailwinds behind a business.

Value can obviously accrue very quickly to shareholders. It's also one of the quickest ways you can permanently impair capital. And we prefer risk-return scenarios that are asymmetric. And so therefore place a heavy emphasis on financial strength, balance sheet strength.

03:54 The Four Pillars of our Investment Process

Taking everything that I just said there from a very high-level philosophical standpoint, you know, our time horizon, how we define value, how we approach risk. And if you distill it down to four key characteristics that we're looking for, first and foremost is that undervaluation component.

That 25% discount to cash flow-derived intrinsic value. The next three are more risk management oriented. There are insurance policies. Again, we want to own high-quality businesses that have dominant market shares, strong competitive positions, healthy free cash flow generation, defensible margin structures. As Warren Buffett likes to say, there's a moat around the business. Third again is that financial strength component. We love net cash on the balance sheet, but at the very least, we want the balance sheet to be a resource rather than a restraint.

What brings me to my last point is in the hands of a great management team. A management team who thinks like we do, who think like long-term owners of a business, who are appropriately incentivized and compensated, who have good track records of capital allocation by making accretive acquisitions, reinvesting in the business, or in the absence of those opportunities, they're returning capital to us, ⁓ shareholders through dividends and buybacks. And so that is what we are seeking to do day in and day out is combine a portfolio typically of between 35 to 40 businesses from around the globe that have those characteristics in different shades of gray.

IMPORTANT INFORMATION

This video has been prepared by Copia Investment Partners Limited (AFSL 229316) (Copia) for general information purposes only. Copia is the issuer of the Artisan Global Value Fund (AGVF), an unregistered managed investment scheme available to wholesale clients only under an Information Memorandum (IM). The IM is available upon request to eligible wholesale investors. Interests in AGVF are not available to retail clients. The information contained in this video does not take into account the investment objectives, financial situation or particular needs of any person and is not intended to constitute financial product advice, investment advice, a recommendation or an offer or invitation to invest. Viewers should consider the appropriateness of the information having regard to their own objectives, financial situation and needs, and should seek professional advice before making any investment decision.

Any opinions, estimates, forecasts or recommendations contained in this video are subject to change without notice and may differ from subsequent views expressed by Copia or its related entities. Copia does not undertake any obligation to update the information contained in this video. While the information in this video has been prepared with reasonable care, neither Copia nor any of its related parties makes any representation or warranty as to the accuracy, completeness or reliability of the information. Past performance is not a reliable indicator of future performance. Total returns assume the reinvestment of all distributions. The performance is quoted net of all fees and expenses. The reference indices do not incur these costs. This information is provided for general comparative purposes. Positive returns, which the Funds are designed to provide, are different regarding risk and investment profile to index returns.