An interview with Lewis Kaufman, founding portfolio supervisor of the Artisan Growing World Fund
My major funding biases are two-fold. First, basically, I put money into public markets by low-cost, low-turnover passive autos. Second, basically, I put money into US equities. Each of these biases had been arrived at by a mixture of (painful) expertise and cautious analysis. That mentioned, none of us profit from being held hostage by our beliefs. In some ways, humility and self-doubt, curiosity, and the dedication to continue to learn are the hallmarks of our wisest residents. And I aspire to study from them. In consequence, I’ve spent an enormous period of time over the previous six months speaking with a cadre of the trade’s greatest rising markets managers.
Dwelling Bias
Buyers worldwide have a robust bias towards investing disproportionately of their residence nation. That’s true whether or not “residence” is the US, India, or France. A June 2022 analysis paper by Martin Wallmeier and Christoph Iseli within the Journal of Worldwide Cash and Finance titled “Dwelling Bias and Anticipated Returns: A structural method” reveals the extent of home securities owned by buyers in varied international locations world wide. As of 2020, US buyers held 81.63% of their property in US equities. This resonates with me as 85% of my fairness property are within the US.
Most of us are conscious of two essential issues – one, it will be good to be geographically diversified exterior the US for a better proportion of our investments. And two, it’s been a whole waste of time to attempt, because the returns exterior the US have merely not saved up with home returns. Loads of my columns on EM investing and funds (1), (2), (3), and (4) are my endeavor to unearth attention-grabbing fund managers and funds for me to diversify.
I’ve tried to share my discoveries over the months.
This month I’m delighted to proceed that journey with you by reviewing my dialog with Artisan’s Lewis Kaufman, demonstrably among the best of one of the best.
We’ll construction this travelogue round 5 subjects:
- Who’s the man?
- What does he do on the subject of managing?
- How does he do?
- What does he imagine in regards to the present state of EM investing?
- Lastly, what did I – and what would possibly you – take away from the trade?
Who ought to learn this text?
Everybody.
Who ought to put money into Artisan Growing World?
Not everybody.
That is an actively managed fund with a 1.3% expense ratio, focuses on rising markets, holds Chinese language shares, and regardless of its unbelievable cumulative returns, suffered a brutal drawdown within the 2021-2022 bear market. Even when all or any of these issues put you off, you need to nonetheless learn this text and observe the fund. You’ll stroll away with plenty of funding nuggets from understanding Kaufman’s perspective on rising markets and fairness investing basically. For the correct investor with a stable danger urge for food, this fund is likely to be very attention-grabbing. I believe Lewis Kaufman is a superb investor with a stable funding course of and calls for a really shut look.
Matter one: Who is that this man?
Artisan Companions and Lewis Kaufman
Artisan has a particular partnership mannequin. It begins by including companions, typically, whole administration groups, that Artisan believes are phenomenally proficient. MFO’s writer, David Snowball, has been following Artisan for 1 / 4 century and describes them as one in every of a tiny handful of persistently profitable boutiques. Artisan conducts due diligence on dozens of administration groups annually however would possibly discover just one group each two years that meets their commonplace. That commonplace isn’t that the group is excellent; it’s that the group has the capability to crush its class. They introduced in 10 groups since their founding in 1994 and provides every of them each assist and autonomy. Which means bringing in funding expertise at a considerate tempo. Extra data on their mannequin may be discovered right here.
Lewis Kaufman is likely one of the most distinguished rising market managers within the trade. He has been an funding skilled for greater than twenty years. He made his identify and got here to Artisan’s consideration as supervisor of Thornburg Growing World Fund from inception by early 2015. Throughout that point, he amassed a exceptional file for risk-sensitive efficiency. A $10,000 funding at inception would have grown to $15,700 on the day of Mr. Kaufman’s departure, whereas his friends would have earned $11,300. Morningstar’s solely Gold-rated rising markets fund (American Funds New World Fund NEWFX) would have clocked in at $13,300, a achieve about halfway between mediocre and Mr. Kaufmann.
Lewis Kaufman has been an investor for twenty-four years, has traded many market cycles, is very knowledgeable on macro and micro, speaks very quick, and ties in themes, tales, and shares from all around the EM world. He graduated cum laude with a bachelor’s diploma in English from Colgate College and holds a grasp’s diploma in enterprise administration from Duke. He has earned the ridiculously rigorous CFA Charterholder designation.
Matter Two: What does he do?
The Artisan Growing World Fund launched in June 2015 beneath Mr. Kaufman’s management. Mr. Kaufman pursues a compact, primarily large-cap portfolio. He’s prepared to put money into corporations tied to, however not domiciled in, the rising markets. And he has a particular curiosity in self-funding firms, that’s, corporations that generate free money movement enough to cowl their working and capital wants. That enables the corporations to insulate themselves from each the danger of worldwide capital flight and dysfunctional capital markets, that are virtually a defining characteristic of rising markets. The fund presently has over $3 billion in property.
The selecting of shares and the working of a portfolio is a extremely complicated course of for even a person. For an energetic supervisor, these challenges are compounded: which shares to personal, when to rebalance, when to exit, what makes a brand new inventory price proudly owning, the best way to fund it, the exterior macro dangers, portfolio drawdown issues, and most significantly – PROCESS CONSISTENCY.
For knowledgeable buyers and for individuals who want to turn out to be skilled, listening to Kaufman’s investor replace could be a great way to grasp the method.
“Course of Consistency permits worth creation in moments of chaos quite than impairing capital. It gives us endurance and a strategy to deal with a big selection of issues.”
The supervisor makes use of two foremost methods: Flexion and Correlation.
Correlation is less complicated to grasp. The fund seems for firms which have a return profile much like the opposite shares within the fund (that’s, the potential for extraordinary returns). Nevertheless, they search for these shares to be uncorrelated to the prevailing shares within the portfolio. The concept is for these correlation shares to supply a ballast to the remainder of the portfolio and permit the power to scale back capital in these Correlation shares in an effort to add to the Scalable shares. In impact, the higher time period is Uncorrelated Shares, however we get the purpose.
What’s Flexion? In response to Kaufman, it’s a strategy to protect the integrity of outcomes.
Take this instance he offers: “Suppose I’ve particular issues about danger in China. I personal a inventory that’s down 40% from the excessive. It’s presently 3% of the portfolio. Suppose I blow out of all the inventory. I’ve 300 bps of capital to resolve what to do with. I don’t need to abruptly blow out of a inventory, or a area, solely to then chase the inventory on the way in which up. My intuition is contrarian, not momentum. As a substitute, I may be extra gradual in my promoting method and watch for different, higher companies to turn out to be out there at good costs. Then, after I trim my current place, I can add to the opposite higher enterprise. And I additionally protect the optionality that my current place has an opportunity to reflate again. For instance, SE was down 70% final yr and is already up 65% in 2023.”
The fund needs to trim positions at moments of low reinvestment danger such that investor capital won’t be impaired. This, by the way in which, doesn’t imply there won’t be volatility. This fund isn’t a cash market or perhaps a bond fund! It clearly has much more volatility than most funds. However it’s considerate, preconceived, and anticipated volatility. It’s not just like the ARKK fund that hopes to trip momentum or some macro theme. The supervisor is offering capital to firms which might be attempting to run an funding program the place the method comes at the beginning else, and the objective is to generate disproportionate fairness outcomes. This doesn’t work properly in all types of markets and financial environments. In a particularly dangerous financial state of affairs, these firms and the fund will likely be harm. The interval from 2019 to 2023 is instructive within the giant rallies and sell-offs the fund endured. Kaufman’s religion and self-discipline in his course of have saved him steering the ship, however not with out stomach-churning durations.
Kaufman added, “In opposed durations, individuals are likely to lose their course of. Some managers went all into ESG, after which two years later, you have a look at the portfolio, and there’s Exxon and BP within the fund. I’m attempting to be very in step with my funding program. Traditionally, and I’ve invested for twenty-four years, the portfolio has a powerful monitor file and emerged very properly popping out of a disaster.”
Matter Three: How does he do?
Fairly properly. And for fairly an extended whereas.
By all the danger and danger/return measures we observe, he achieved these good points with decrease volatility than his friends. Right here’s Thornburg beneath his watch.
Mr. Kaufman’s efficiency at his earlier cost is exceptional: he posted returns that had been 370% of his common friends’ whereas having a decrease most drawdown, a decrease commonplace deviation, a decrease draw back deviation, and a vastly increased Sharpe ratio. We will evaluate that to the efficiency of his present cost.
Since its inception, Artisan Growing World has had returns which might be 570% of its common friends. The volatility benefit that Thornburg held over its friends has largely disappeared, however the distinction in returns is a lot better that Artisan’s Sharpe ratio is sort of eight instances increased than his friends.
Allow us to be clear about this: Mr. Kaufman has a 5:1 return benefit over his friends after two purely disastrous years. In 2021 he misplaced 10% and trailed 90% of his friends, and followers might need requested, “how a lot worse can it get?” They acquired their reply in 2022 when he misplaced 41% and trailed 100% of them.
Yikes.
At this level, dangerous buyers would declare, “properly, he’s misplaced it,” and would bail after struggling sufficient. Good buyers, contrarily, would ask, “how can we make sense of this? And the way can it assist us place our portfolios for the longer term quite than for the previous?” As a result of we think about you and we attempt to assist our readers turn out to be higher buyers, these are precisely the questions we explored in your behalf with Mr. Kaufman and his group.
We all know investing internationally has been a troublesome neighborhood, however the Artisan fund has produced wonderful absolute and relative outcomes. However how has it managed to take action, and why ought to we spend time on it? To grasp this, Mutual Fund Observer sat down with Lewis Kaufman and his group. By our Q&A and his deeply insightful This autumn 2022 Investor Replace, I’ve learnt so much. On this article, I hope to stipulate – Kaufman’s evolving thesis on rising markets, his funding PROCESS, his understanding of relative dangers in locations he’s NOT invested, and why he believes in his funding model and course of.
Matter 4: What does he imagine in regards to the present state of EM investing?
Among the questions from our prolonged interview observe.
Query: how would you place your self-discipline on the expansion – worth spectrum?
“My impulses are usually not momentum oriented. My impulses are contrarian in nature,” says Kaufman. “I’m working an funding program with a really constant course of with a portfolio of securities which have the potential of delivering disproportionate fairness outcomes. It baffles me that folks assume you may solely be worth oriented in worth shares. We have now a excessive progress, excessive valuation set of property which have skilled excessive valuation compression (ed. be aware: in 2021-2022). We don’t personal firms which might be ever going to be 10x earnings. Airbnb, Mercado libre, Crowdstrike, Nvidia, and Adyen are a few of our prime holdings. They commerce at 45x subsequent 12-month earnings vs. a median of 140x a yr in the past. The a number of compression got here from costs happening but additionally as a result of earnings are compounding. Is 45x the correct a number of? I don’t know, nevertheless it’s a complete lot decrease than 140. Due to our course of (ed. be aware: described beneath), now we have a historical past of popping out very strongly when the cycle turns.”
Returns of the Artisan Growing Fund chosen years.
| Life | 2019 | 2020 | 2021 | 2022 | 2023 Q1 |
| 8.31% | 41.89% | 81.52% | -9.7% | -41.27% | 21% |
“Relative to the previous, this bear market (2021-2022) has been concentrated in scalable property which might be most in step with long run worth creation. Up to now, a few of the greatest shares had been scalable shares like Mercado Libre. On this market drawdown, they’ve been the worst inventory. In earlier market cycles, they behaved otherwise. However perhaps sooner or later, these shares will likely be extra resilient,” says Kaufman.
Query: how have rising markets as an asset class advanced?
Early on, Kaufman believed that the demographic dividend plus excessive productiveness potential would possibly result in excessive potential GDP throughout EM international locations. China’s entry into the WTO and the commodity increase of the primary decade within the 21st century benefitted many EM international locations.
“Many buyers nonetheless consider EM as being a low penetration, excessive progress space, however since 2009, I’ve operated with a special thesis. Rising Markets are usually not progressing in an optimum approach, which is constraining the expansion and demand alternative. The international locations need to develop, however they’re unable to manifest this progress for a lot of causes.” Understanding these constraints has helped Kaufman resolve what to put money into and what to keep away from.
“Beginning the yr 2015, it was turning into apparent that potential GDP was falling. As a substitute of investing in human capital, many international locations had engaged in fiscal transfers and caged themselves within the middle-income lure.”
“Massive swimming pools of expert labor don’t exist, besides in China. Most rising markets wouldn’t have sufficient swimming pools of financial savings to encourage home capital formation (that’s, enable firms to boost cash from native buyers). They rely upon international capital. However to a big extent, international capital investments have slowed down. As productiveness and output are slowing, with restricted innovation taking place there, capital is averse to coming into rising markets.”
“Brazil was as soon as anticipated to develop at 4.5-5%, however now most economists put that quantity at 2.5%. India was anticipated to as soon as develop at 9-10%, and now 6-6.5%.”
Kaufman doesn’t see himself as a cheerleader for the rising market asset class. As a substitute, he now sees Rising Markets as giant latent swimming pools of home demand. He believes completely different instruments are wanted to take a position on this EM world, and for him, these instruments are to seek out Scalable Firms and Passport Firms. These firms have the “potential for disproportionate fairness outcomes,” a phrase he retains revisiting many instances. Scalable firms are in a position to transcend the constraints, and Passport firms are in a position to cross borders simply to satisfy buyer demand.
This thesis has led Kaufman to assemble a portfolio that appears very completely different than an MSCI EM Index and even the common EM actively managed fund. Whereas the MSCI EM Index has 1375 securities, the fund has 33 shares. 55% of the fund is invested in developed markets, in shares akin to Airbnb, NVIDIA, SEA Ltd, Visa, and Crowdstrike.
Assist us perceive why you will have such a excessive proportion of shares in developed markets, we requested: “The Passport firms (like Nvidia and Airbnb) are bringing the innovation and capital formation to the EM. In fact, within the case of Nvidia, they’ve a significant a part of their enterprise coming from the EM already. And Airbnb suits within the aspirational class because the EM inhabitants wishes journey and experiences in the identical approach that the developed market inhabitants does. With the prevalence of the financial constraints within the EM, we discover Passport Firms to be an essential software.
What about scalability and tapping giant swimming pools of latent demand? “We imagine that companies with scalability are uniquely in a position to transcend these constraints. So, within the case of Mercado Libre, Brazil and Argentina may not be progressing in an optimum approach. Nevertheless, MELI’s skill to generate revenues from a number of sources with favorable enterprise economics is permitting them to extract worth from that latent demand pool. Crowdstrike is a special case the place it actually has scalability, and it’s passporting – crossing borders simply to satisfy demand. It is usually offering a foundational functionality to the rising markets since safety software program merely isn’t as out there or superior within the rising markets.”
Most buyers know the final markets and a few mutual funds or ETFs properly. We actually don’t know particular person shares on the degree energetic fund managers and hedge fund managers would. I don’t drive myself loopy understanding the rationale on every place. Studying about particular person investments made by a fund supervisor is a part of the equation to investing in a fund however not the one motive to take a position or keep away from a fund. Inventory positions ought to supply a window of transparency, not a prediction of the longer term.
Query: how do you see the function of China in an EM portfolio?
China: It’s the one giant nation in EM distinctive within the degree of earnings achieved and structural drivers. In 2022, regardless of Zero Covid, Social Finance grew by double digits in China. It has extra capability for home capital formation (that’s, home firms can elevate cash from the locals) than another EM nation and is much less depending on international capital than others. Kaufman talks about his particular person Chinese language firm picks within the Investor name. He talks by why he believes firms like Meituan are scalable. They’ve 100s of tens of millions of rich customers throughout Tier 1 and Tier 2 cities throughout China. Once they order meals by Meituan’s meals supply app, the ticket sizes are greater, they order extra regularly, they usually order desserts. Meituan has an area service enterprise that serves as a YELP perform for its prospects. They obtain ads from the companies. Thus, the corporate is ready to monetize its mounted R&D in a number of income streams (very similar to Mercado Libre above).
Provides Kaufman, “Economically, for the explanations mentioned (expert labor and home capital formation), China is extra enticing than the opposite EM international locations. Nevertheless, exterior dangers have risen. Given this backdrop, now we have allowed our weights to come back down naturally, saved alignment to our highest conviction firms in China whereas utilizing the China discount so as to add to different alternatives (at durations of low reinvestment danger). Even with the decrease weight, our alignment to what we see as the higher alternatives has preserved the participation within the alternative and the correlation benefit, but now we have decreased the danger.”
Whereas they don’t measure their over/underweight to the benchmark, the fund is working about 10% underweight to China.
Associated query: what, then, is the function of India?
With a rustic of over a billion individuals, India would appear like a pure place for the fund to take a position. Nevertheless, HDFC Financial institution is the one funding the fund has there.
“We all know the businesses properly in India. We have now invested up to now. All these firms are sturdy, not scalable. Not conducive to disproportionate fairness outcomes. Outline all of them by constraints of affordability. Outline all of them as costly as a consequence of demand by international direct buyers and home mutual fund buyers.”
I pressed him for his supply of discomfort for getting greater on India. He mentioned he wish to present capital to Indian firms, however the alternative isn’t proper. India must create extra excessive worth jobs exterior of agriculture. Proper now, investible India is a inhabitants nearer to 200-300 million individuals for the companies that may be offered and for the corporate by which he can make investments that promote these companies. India wants extra capital formation and wishes firms to put money into jobs, which might create consumption, which creates the power to lever up. Apple and Foxconn are attempting however largely down the worth chain. Extra capital formation must occur increased on the worth chain.
“India isn’t China within the dimension of its rich shoppers. In addition to, the big mutual fund trade is captive for the inventory market there. And valuations aren’t low cost. Ten years in the past, I used to be invested in Asian Paints, Dabur, Titan. Revenues had been rising mid-teens and P/E multiples had been round 21-22 instances. At present, the businesses have matured. Revenues are rising excessive single digits and P/E are 45 instances. A lot of the overall returns in India in these shares has come from a number of growth over the time interval.”
For a particular inventory funding he averted, Kaufman offers the instance of Zomato, which got here public in 2021. In India, the shopper base of customers is nearer to 75mm, a lot smaller than in China. Ticket sizes are smaller, and folks order much less regularly. The Indian restaurant enterprise is unlikely to turn out to be formalized, which suggests much less organized service provider companions with budgets to convey on for advert {dollars}.
Kaufman additionally stayed away from Paytm, which had a public providing in 2021. “Turned out the enterprise has been disrupted by Indian direct cost programs.” In response to Kaufman, “India hasn’t been a reliable companion for international buyers. Typically, the goalpost strikes. Rules change and are altered to be favorable to home gamers. We need to be concerned in India, however we’d like shares and capital formation, and we aren’t going to put money into India simply to satisfy a benchmark quantity. We want firms to be aligned to what we are attempting to do.”
As I discussed final month, I’ve been invested in India by personal fairness and hedge fund, and they’re each doing simply positive. Not everyone seems to be seeking to put money into a scalable enterprise the way in which the Artisan Growing fund is seeking to do. There are lots of methods to pores and skin a cat. Seafarer’s Worldwide Worth fund, for instance, a subject of David Snowball’s column this month, whereas not invested in India, is usually a automobile the place Paul Espinosa seems at conventional worth, versus Kaufman’s progress worth.
Query: on the different finish of the spectrum are the frontier markets international locations. Do you will have a lot curiosity in them? If not, why not?
Within the Investor name, Kaufman lays out very clear explanation why he finds most of Africa uninvestable – the shortage of an institutional framework for FX in Nigeria, and corruption in S. Africa. In Latin America, the fund has investments in Mercado Libre and Nu Financial institution however not a lot else. The shift to the political left as a type of populism is leaving a lot of Latin America unfavorable for fairness investments. He doesn’t take into account Mexico’s AMLO reliable for enterprise, regardless of the potential for enormous pal shoring there. Many Center Jap international locations are too depending on commodities. In South-East Asia, the fund is invested in SEA Restricted, however not a lot else. Thailand can’t go up the worth chain. The Philippines can’t create jobs. Vietnam is a small market. Indonesia is attention-grabbing however wants extra firms. None of those can elevate giant home capital for his or her firms and are foreign-dependent. Much more depending on international capital are international locations which sporadically have big returns and in any other case crash – Turkey, Egypt, Colombia, Peru, Chile, and Poland. There are lots of exterior dangers, weak establishments, and political issues that make most of those international locations uninvestable.
Maybe I learnt probably the most from one sentence Lewis Kaufman mentioned, “There’s simply not so much happening.”
As buyers, now we have to pause and course of that sentence. What are we doing after we are being passive buyers in Rising Markets or in Worldwide Markets? We are attempting to extract danger premium as a result of that’s what we’ve been informed is smart. However does it at all times?
If international locations can’t elevate home capital, if their establishments are damaged, if they’ve giant populations however low earnings, and if the shoppers have inconsistent and tenuous consumption habits, then the businesses which might be attempting to construct capability there won’t be able to make use of working leverage to compound earnings. When there’s not so much happening, supplying capital as fairness holders makes little sense for us to do. Particularly if valuations are usually not tremendous low, like in India.
Possibly there are different methods to put money into these markets. FX or Bonds may very well be attention-grabbing in Brazil and Mexico, however equities are a special type of beast. The businesses should be fed lots of buyer transactions to monetize. It’s not simple to get repeat buyer enterprise. The Artisan Growing fund’s funding program is looking for and stick persistently with such scalable and aspirational firms that may determine it out. Lewis Kaufman doesn’t need to put money into firms until they’re aligned together with his course of.
Matter 5: What we’ve realized and what we would do
I now imagine this Artisan fund will quickly discover its approach into my portfolio, simply as Seafarer and Moerus have been added within the final six months. William Blair’s EM funds, run by Todd McClone, can be on my very quick checklist.
Each particular person investor has their very own danger parameters and private conditions. No fund is right for each investor. No author ought to advocate a fund for all buyers. Due to this fact, right here’s what I ask myself and encourage you to ask your self:
Am I a great investor within the type of firms this fund picks? I’m not. I can’t sustain with so many firms. And I don’t know which of them are good and that are dangerous. As a result of I do know this about myself, I need to complement my portfolio with the talents of somebody who does.
Do I should be in Rising Markets and worldwide shares? Chinese language shares? Effectively, I’d quite simply make some huge cash with out doing something too troublesome in life, watch PBS, and play some tennis. However I’m younger, have a younger household, and hope to stay round lengthy sufficient that I take into account each the holding of equities and the withstanding of volatility in equities an essential a part of my future expertise and return set. Returns in shares are usually not like incomes earnings in cash market funds. Inventory returns are lumpy. And passive has not labored internationally and in EM. I have a look at the Artisan fund with nice consideration to what it’s accomplished and to the seriousness of the method adopted by the fund supervisor.
Does the Artisan fund signify the correct manifestation of that worldwide funding? I can’t predict the longer term. Not the longer term returns, nor the volatility, nor the macro setting which we’re going into. I need a group of fund managers who’re every believers of their funding model, are invested of their cooking, and are prepared to put on the volatility of underperformance. Greater than something, I pray for every one in every of them to be fortunate.
The Artisan Growing World Fund warrants our consideration. Lewis Kaufman and his group have generated substantial complete returns in a posh market setting. After I hearken to him, I discover a rational, considerate, long-term investor who understands why individuals want to carry equities of their portfolios.
