Portfolio Update: Artisan Global Discovery Fund
In the latest Artisan Global Discovery Fund portfolio update, Chip Ridley discusses recent performance, the outlook for global small and mid-cap equities, and three key areas of portfolio focus: AI, aerospace and defence, and healthcare.
He also looks at several portfolio holdings, including Lattice Semiconductor, Babcock International and Argenx.
Watch the video or read the full transcript below. CHAPTERS:
[0:00] Recent Fund performance
[01:16] The outlook for global smaller companies
[03:17] Aerospace, defence and healthcare innovation, AI-related opportunities beyond the largest names
[06:52] Stock examples across each of these themes
TRANSCRIPT:
Performance update
I'll begin by thanking everyone for their investments with us and the business that they've entrusted to us. I want to start by being very straightforward that we understand and acknowledge that our performance has fallen short of many of our clients' expectations.
We think that identifying companies with a pending profits catalyst, investing in a small way early, and then scaling those investments as those hypotheses are proven true is a great way to make money for clients. And we've got many examples where that has worked well in recent times. But, we haven't had enough of those, and in thinking about why that's the case, we've made the considered decision to make some changes in our investment team, broadly speaking, bringing on more experienced investors who can be impactful right away for us.
Now, some of those changes are relatively new, and it will take a little bit of time for those impacts to be felt. There is often a tension between stability and what we'll call complacency. We can't be complacent. We certainly prize stability, but we are highly confident that the team we've put in place will be able to deliver what clients expect in the future.
What are the long-term opportunities in global smaller companies?
We're quite excited about the long-term opportunity for investing actively in global smaller companies.
We've done a lot of research on the space, in addition to the fact that we've been managing in the space for nearly 30 years. And our beliefs are, and have always been, that by looking for companies with high quality businesses – with an edge in their particular offerings for clients, and a great management team – what we find is that by looking at those companies when they're smaller, we've been able to identify a high percentage of those who we can invest in as small-cap companies, and we can sell back into the market when they become large. We think that's really the essence of things.
What we get when we start with smaller companies are typically much purer plays on a single investment idea, a very long runway, and an opportunity to benefit from companies that are just less well researched in the market. And so, we're very excited about that. That hasn't changed.
The data shows us that over long periods of time small cap stocks outperform large cap stocks. It needs to be that way. Smaller cap stocks are less liquid, often they're more volatile, often they're not brand names that are well known in the marketplace. And so, investors need to be compensated for that with higher returns. over long periods of time, small cap stocks do better, and so we think it's a fruitful place to invest for clients.
The upshot of small cap stocks having performed less well than large cap stocks over the last decade is valuations look much more interesting. so, we think it's a good time to be looking at small cap stocks, particularly because we also find that even though we can't invest in the largest AI stocks that have been what have really driven the market conversation and big returns in the last few years, we can get plenty of access to the AI-related themes that are so powerful in today's markets. And so, we think that's another reason why this is an interesting time to look at investing in small and mid-sized companies.
Key Portfolio Themes: AI, Aerospace & Defence, and Healthcare
In thinking about some of the important areas of focus in the strategy, I would highlight three, in particular.
One would certainly be artificial intelligence, AI, another would be aerospace and defence, and a third would be healthcare. I don't think we can have a conversation about equities without talking about AI.
Now, in our focus on small and mid-sized companies, obviously we're not talking about the Nvidias, the Microsofts, the Alphabets of the world. Those are some of the world's largest cap businesses, and they wouldn't be relevant considerations for us in the global discovery strategy. But because AI has such a broad and deep supply chain and touches so many different industries, we find many opportunities to participate in the strong investor enthusiasm across the sector.
When we think about AI, we can invest in plenty of companies assisting in accelerating compute, from the companies who create the connectivity between stacks of GPUs, from the companies who are helping to construct the large facilities that contain data centres, and from companies who at the end are creating products that are benefiting from the inclusion of AI in those offerings.
It's an important and deep investment opportunity across the portfolio, not just from technology, but through industrials and into consumer companies. And we've got meaningful exposure there. And those have been very profitable investments by and large for the fund in the last few years. Secondly, and perhaps a little unusually for growth managers, we find aerospace and defence to have some very long runways in front of it.
Obviously, we're living in a period of time of meaningful conflict in the world. We've seen that cause dramatic improvements and enhancements to various different kinds of military technologies, and what we're seeing is lots of countries who are spending more on defence because they are acknowledging that we're in a dangerous world and it behoves them to pay more attention to their security. So, there's a long secular runway, we think, behind many defence stocks. With the rise in oil prices, given the conflict in the Middle East.
Efficiency when it comes to how airlines in particular, and aircraft use gas and jet fuel is ever more important and under the microscope. And so, we find many interesting opportunities to invest in the supply chain for ever more efficient jet engines. And there are numbers of companies that may not be well known to the broad audience, but that are incredibly important suppliers to the companies making jet engines that go on the wings of all the new aircraft out there.
So, aerospace and defence are another important part with many different dimensions to it. And then finally, and we always come back to this, healthcare is a part of the investable universe where we find tremendous opportunities to invest in innovation and long profit cycles. Biotechnology, the creation of new types of drugs that can be much more effective in solving diseases, is moving along at a very rapid pace.
It's being enhanced by technology. It's being enhanced by AI in the R&D aspects of those businesses. And we find tremendous opportunities to invest in healthcare. Delightfully, healthcare has been largely ignored from a valuation standpoint in this AI-focused world we've lived in for the last few years. So, we feel as though tremendous growth can be accessed without having to pay very high prices in healthcare these days.
Stock Examples: Lattice Semiconductor, Babcock & Argenx
So, I'll profile three stocks, one from each of those areas of emphasis I mentioned in my previous comments. One stock from AI, one stock from aerospace and defence, and another from healthcare, which I think speak to some of the opportunities we find.
In technology or artificial intelligence, one of our largest holdings is in Lattice Semiconductor. It's a company that makes a type of semiconductor chip called a field programmable gate array, or FPGA. That's not a terribly complex chip.
Related relative to, say, NVIDIA's GPUs or the ASICs that are used in the compute that is used to build large language models for AI. But as AI transitions into actual applications and devices that are powered using AI inputs, those devices and what we'll call the Internet of Things more broadly, particularly things like robots, make significant use of Lattice's chips.
They're also used in the data centre buildouts that are a byproduct of the compute that comes from AI. So, what we see is an expanding universe of opportunities for FPGAs where Lattice has a very, very strong market share to benefit from this ongoing growth in AI.
Transitioning over to aerospace and defence, I think the company I would mention is Babcock International in the United Kingdom. They're the second largest defence contractor in the United Kingdom. They work across a variety of different types of platforms, from aerospace to naval architecture. And what we see is an inevitable increase in defence spending coming from the UK as well as many other NATO nations responding to aggression on their eastern border. And while we acknowledge that defence is typically a more cyclical industry. We believe there's a ten-year tailwind of catch up that must be done in order for Europe to catch up to the defence posture they know that they need. And so, we've seen Babcock already respond quite well to that. It's been a good performing stock. In Canada at this point, we're managing the position size because it's done so well in the last couple of years, but we still think that there are several years to go of increased defence spending before reach something that we'll call a steady state for the long term.
And then finally, in healthcare, I'll mention Argenx, which is a biotech drug developer we've owned for a very long time. They have a drug called VYVGART (V-Y-V, G-A-R-T), that's been approved for a few years now, that continues to be trialled for additional indications that are allowing it to have a very, very long and fruitful run of continuous revenue growth, which is highly profitable for the company. This is a great example of the kind of platform that we seek to find in drug development, which is to say a company that's gotten a drug through the trials process that's been approved that looks like a great standard of care for its original indication and where we not only believe that that can be a very long runway for growth, but that there's more opportunities that come down the pike afterwards that can lead to a very, very long profit cycle if you have the vision to believe that what the company offers is something that's gonna create more opportunities as we go through time.
IMPORTANT INFORMATION
This information has been prepared by Copia Investment Partners Limited (AFSL 229316) the issuer, distributor and responsible entity of the Artisan Global Discovery Fund.
This information is provided for general comparison purposes only and is intended to assist investors and their advisers in evaluating financial products, including those offered by Copia Investment Partners Limited (AFSL 229316). It does not constitute personal financial advice; any advice provided is of a general nature. Before investing in any products or services mentioned, please review the relevant Product Disclosure Statements (disclosure statements) and seek professional financial advice to ensure suitability for your objectives, financial situation, or needs. Past performance is not necessarily indicative of future performance. Disclosure statements and Target Market Determinations for each fund are available at copiaartisan.com.au.
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