Investment Strategy
We seek to pick winning funds with superior management and quantitative characteristics linked to strong performance. Our quantitative research uses the most comprehensive mutual fund database in the world to determine the best strategies for long-term investing success. We then supplement those studies with extensive qualitative research of portfolio managers, analysts, and traders through onsite visits and follow-up phone calls.
 
About the Editor
Russel Kinnel is director of mutual fund research for Morningstar, Inc. and editor of Morningstar FundInvestor, a monthly print newsletter for individual investors. He also writes the Fund Spy column for Morningstar.com, the company's investment Web site.

Since joining the company in 1994, Kinnel has covered the Fidelity, Janus, T. Rowe Price, and Vanguard mutual fund families. He helped develop the new Morningstar Rating for funds and the new Morningstar Style Box methodology. He also is co-author of the company's first book, The Morningstar Guide to Mutual Funds: 5-Star Strategies for Success, which was published in January 2003.

 
 
Oct 25, 2014
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About Russel Russ' Photo
Russel Kinnel,
Director of Fund Research and Editor, Morningstar FundInvestor
Russel Kinnel is director of mutual fund research for Morningstar, Inc. and editor of Morningstar FundInvestor, a monthly print newsletter for individual investors.
Featured Posts
Two Manager Changes and Our 529 Ratings

We have some manager changes to update you on at First Eagle and Artisan.

First Eagle
Comanager Abhay Deshpande has resigned after a seven-year stint at First Eagle Overseas SGOVX, First Eagle U.S. Value FEVAX, and First Eagle Global SGENX. Matthew McLennan and Kimball Brooker Jr. remain as comanagers. We've placed the funds under review as we examine the changes.

Artisan
Andy Stephens is stepping down as manager at Artisan funds, although he will remain at the firm. He had been a manager at Artisan Small Cap ARTSX, Artisan Mid Cap ARTMX, and Artisan Global Opportunities ARTRX. We are keeping our rating at Silver on all three funds. See below for Greg Carlson's analysis on Artisan Mid Cap.

Maryland, Arkansas, Nevada, and Utah Take Top 529 Ratings
Our annual review of 529 plans is out, and we've posted a bunch of articles and videos to walk you through the best ones and the way to make the most of 529 plans. Click here for our ranking of the plans.

David Giroux Talks About Defensive Stocks
We interviewed David Giroux of T. Rowe Price Capital Appreciation PRWCX. You can watch the video here.

Analysis of Artisan Mid Cap
Artisan Mid Cap's founder has reduced his role, but the fund remains solid.

As of Sept. 30, 2014, Andy Stephens, this closed fund's sole manager at its 1997 inception, is no longer a listed manager. He remains on the team and will focus on research and mentoring newer analysts. Stephens had been the de facto lead manager here as his team grew until September 2013, when the squad formally designated a lead manager on this fund for the first time. It wasn't Stephens who got the nod, but rather Matthew Kamm, who joined the team as an analyst in 2003, became an associate portfolio manager in 2010, and a full comanager in 2012. Fund performance issues or conflicts did not influence Stephens' decision, he wanted to take a step back, according to Artisan. Furthermore, he's expected to stick around: Artisan portfolio managers must give three years' notice before retiring and Stephens hasn't given such notice.

Despite the loss of Stephens as a manager, the team still inspires a great deal of confidence, and the fund retains its Silver Morningstar Analyst Rating. Besides Kamm, who has made great health-care picks over the years, Jim Hamel, who joined the team at its 1997 inception, remains on board. Hamel has comanaged the fund since 2006, serves as the lead on Artisan Global Opportunities ARTRX, and is the leader of that team. Craigh Cepukenas, who joined the firm in 1995 as an analyst and this team in 2009, serves as the lead on the team's other charge, Artisan Small Cap ARTSX (also closed to new investors). The team also includes associate manager Jason White and eight analysts.

The fund's results have been consistently strong, underlining the effectiveness of the valuation-sensitive growth strategy employed here. The fund's record since its inception is superb, but it's also been excellent since Hamel became a comanager in 2006. Kamm's tenure, meanwhile, is too short to assess. The fund lands just inside the bottom third of the mid-growth Morningstar Category in 2014 through Oct. 8, but that's due in part to the struggles of the higher-quality fare the team tends to favor.

Process Pillar: Positive | Greg Carlson 10/15/2014
The team looks for companies that are leaders in their industries, have profits that are accelerating (or that they expect will soon), and, on average, have healthy balance sheets. The 13-person team strives for a collaborative process, meeting twice a day to discuss current and prospective holdings. It scales purchases up in size as the team becomes more confident in their prospects and starts trimming holdings as they approach the team's estimate of private-market value. While the team takes a relatively long-term view, annual portfolio turnover tends to fall in the 60%-80% range (which is still below average in the mid-growth category), though it has dropped below 50% in the past two years.

The fund holds 60 to 90 stocks, and sector weightings can vary sharply from the category norm and those of the Russell Midcap Growth Index.

In the middle of the previous decade, as the fund's asset base approached $10 billion, the holdings list swelled to roughly 120 for a year or two. The fund initiated a soft close in 2002, but substantial assets kept coming in for a while through other channels such as retirement plans. The strategy has since been more tightly closed. It hasn't taken in more than $400 million in net inflows in a calendar year since 2003. The team ran $16.8 billion in the strategy as of September 2014, but the number of holdings has stayed stable.

As usual, the fund currently looks quite distinctive. The tech sector comprised 30% of assets in June 2014, nearly double the weighting of the Russell Midcap Growth Index and 12 percentage points above the mid-growth norm. As befits the team's strategy, though, the fund typically steers clear of the sector's most-cyclical firms. The top two tech holdings were semiconductor equipment maker Applied Materials AMAT and software maker Autodesk ADSK, which both earn wide Economic Moat Ratings from Morningstar's equity analysts. Conversely, the fund has tread somewhat lightly among financials, as the team doesn't care for the growth prospects or balance sheets of most firms in the sector.

The team is focused on two key themes right now. The first is innovative new medicines. Regeneron Pharmaceuticals REGN, the fund's second-largest holding, sells a popular drug to treat macular degeneration and exemplifies this theme. The second theme regards social media and e-commerce taking market share from traditional businesses. A prime example here is LinkedIn LNKD, which went public in 2011 and was purchased by the fund in early 2012. While the fund rarely buys companies so new to public markets, the managers say the firm has a growing, high-quality user base that can be monetized in a number of ways. They regard its current valuation as lofty, so the position was recently just 1% of assets.

Performance Pillar: Positive | Greg Carlson 10/15/2014
The fund's focus on relatively sturdy fare has served it well in troubled times and has resulted in excellent long-term returns. Over rolling five-year periods since its June 1997 inception, the fund has outpaced its typical mid-growth peer 84% of the time (avoiding the category's bottom quartile in the process) and the Russell Midcap Growth Index 80% of the time. Overall, the fund has racked up an annualized 14.1% return through Oct. 1, 2014--outpacing all but one of its peers over that span.

A rally by cyclical fare and a ballooning asset base and holdings list led to so-so returns from 2003 to 2005. But the fund has since beaten its typical peer in eight consecutive calendar years, though it modestly lags thus far in 2014.

The fund has performed particularly well around market inflection points, such as 1999-2000 and 2008-09. The team has owned enough of what's doing well in the latter stages of a market rally to generate solid absolute returns. Yet it's been cautious enough to hold up well (on a relative basis) in the ensuing sell-off. And the team has been sharp in its bargain-hunting in downturns. As a result, the fund posted fine relative results in the 2000-02 bear market, the October 2007-March 2009 bear market, and the rally from March 2009 onward. All told, it has captured 103% of the gains of the Russell Midcap Growth Index in rising markets while losing just 83% as much when stocks fall.

People Pillar: Positive | Greg Carlson 10/15/2014
This fund is run by a deep, experienced team. That depth is important, because team founder and de facto lead manager since the fund's 1997 inception Andy Stephens has substantially reduced his role in the decision-making process of late. In September 2013, a lead manager was formally named for the first time, and it was not Stephens--instead it was Matt Kamm, who joined the team in 2003 and became an associate manager in 2010 and comanager in 2012. In September 2014, Stephens relinquished the portfolio manager title altogether, though he will continue to conduct research and mentor newer analysts. Artisan portfolio managers must give three years' notice before retiring, so Stephens isn't expected to leave anytime soon.

In addition to Kamm, who has generated excellent results in health care over time, Jim Hamel (who joined the team in 1997) has served as a comanager since 2006 and is the lead on the team's world-stock charge, Artisan Global Opportunities. Craigh Cepukenas was named a comanager here and at Artisan Global Opportunities in September 2013. He's the lead manager on Artisan Small Cap and joined the firm as an analyst in 1995. Jason White (an analyst since 2003) was named an associate manager on all the funds in 2011. The team also includes six analysts with an average of 14 years of investing experience and two associate analysts. Thus, the fund still earns a Positive pillar rating for People.

Parent Pillar: Positive | Greg Carlson 08/28/2013
Artisan hires proven or very promising managers and allows them to build and run their teams with a large degree of autonomy. Four of the five teams employ investment strategies that are well-executed and have performed strongly over longer-term periods. (The exception is the emerging-markets team, which has generated mediocre results in its seven-year tenure.) The firm also closes funds to preserve their flexibility and increase the chances that these funds and managers will continue to outperform. Indeed, six of the firm's 13 funds are currently closed to new investors. The firm also has a clean regulatory history.

Artisan's board generally does a fine job, but it does get docked because the funds aren't priced for their size. It hasn't been as aggressive as it could be when negotiating fees on behalf of fund shareholders.

On a more positive note, all but one of the Artisan funds have at least one manager with more than $1 million invested in fund shares and eight have at least two managers that invest that heavily in their funds. That's the highest level of manager investment disclosed to the SEC and an industry best practice.

The firm went public in March 2013. While this move could pressure management into keeping popular funds open to boost revenue, it has thus far continued to close them. Also, its executives retain tight control of the firm.

Price Pillar: Neutral | Greg Carlson 10/15/2014
This $10 billion fund could better share economies of scale with fundholders. The Investor shares, which hold 56% of the assets, charge 1.22% and barely earn an Morningstar Fee Level of Average--that price tag is 11 basis points above the no-load mid-cap median. The Institutional shares hold the rest of the assets and carry a 0.96% expense ratio, which ranks about Average for similarly structured share classes, too.

The fund's brokerage commission costs provide a significant cost advantage versus peers, thanks in part to lower-than-average portfolio turnover. Commissions were equal to 0.04% of net assets in the most recent fiscal year, while the category average was 0.18%.


 

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