Degrees of freedom
It has been a busy Q1 for Artisan Partners. At the time of writing, the 19-year-old firm was on the brink of its IPO. Aiming to raise almost $330m with which to clear its loans, buy back shares and reward its pre-IPO partners, the event feels like the foundation for the firm’s next stage of growth.
Two months earlier, the firm announced its first new strategy in almost three years, Global Small-Cap Growth. There are surprisingly few global small-cap funds on the market – Artisan’s new strategy reinforces the rising share of its globally-managed assets as well as its push for what CEO Eric Colson calls ‘degrees of freedom’ for its portfolio managers.
“When I joined we really focused on globalising the organisation to build greater degrees of freedom into the strategies,” he recalls. “Our investment teams increasingly said that the source of a company’s revenues or its base of operations was what really mattered, not its domicile or listing. That led to more global equity products, but it wasn’t limited to that: in many instances, it was US companies looking for growth opportunities around the world that led us to go global.”
As this bottom-up development suggests, globalising the opportunity set fits naturally with a business model that was always about maximising ‘degrees of freedom’ for Artisan’s independent portfolio management teams. Its culture instinctively recoils from centralisation, which it fears as the short road to index-like performance.
“The teams certainly talk, and their intellectual property is logged into an IT system where it can be shared throughout the organisation,” says Colson. “We just don’t have the Monday morning strategy meeting, a CIO or a central research group covering the world.”
The job of Artisan and its senior management is to spot that talent and provide it with marketing, systems, resources and “like-minded people” to develop its processes.
The result is five teams with often overlapping markets but distinct styles: ‘growth’, focused on franchises with accelerating profit cycles; ‘global equity’, with a thematic approach to sustainable growth; ‘US value’ and ‘global value’, both with a tilt to quality; and ‘emerging markets’, also a ‘quality’ approach.
Take global equity and global value, for instance. The global value team is located entirely in San Francisco, and its ‘holistic’ approach to assessing value within the broader market means that its analysts work outside sector silos. The global equity team’s analysts are primarily sector specialists and scattered between San Francisco, New York, London and Singapore.
Artisan’s HQ is in Milwaukee, so you might imagine that the two teams share an office in San Francisco. But no – management wants to avoid any drift towards group-think. “We don’t even let them work in the same building,” says Colson. “We’re very uneconomical in that sense.”
All those new shareholders might balk at that, as they might when head of EMEA distribution Andrew Marks says that company management might see three different Artisan teams in a month. Is this not scale without the economies?
Performance justifies the structure – “purity of thought enhances alpha”, as Colson puts it. But the structure means that the ship is tight in other ways, too: there is little chance of two star analysts making everyone in this kind of firm look good, for example. Each team gets a share of gross revenue to disburse as bonus – but is autonomous in how it decides to allocate that budget. Again, that does not necessarily tip the economic balance in favour of the new shareholders and against the talent, but it arguably aligns it for the longer term by helping team leaders to nurture their individual boutique cultures most appropriately.
Nonetheless, there are clearly challenges associated with these ‘degrees of freedom’.
Most obviously, it requires something of a trade-off from its talent. They will shoulder much of the idiosyncratic risk of their strategies, as if they were standalone businesses, while giving up whatever satisfaction they might get from climbing the corporate ladder or building their own company – unlike many other ‘multi boutiques’, Artisan cedes no independent corporate identity for its teams. They could see it another way: they get to run a small business without the hassle, focusing on their first love – generating alpha. The fact that Artisan has only launched five teams in 20 years, despite considering hundreds, indicates how delicate the balance is.
“We are looking for decision-makers to head teams and grow with us, but some decision-markers want their name on the door,” says Colson. “We have to get these decisions right. It’s difficult to manage a people business: a lot of firms with great teams get dysfunctional very quickly.”
Artisan appears to have judged this well, so far. There was a wobble in January 2013, when Barry Dargan, who joined from MFS in 2010 to launch the global equity strategy, left (“effective immediately”) after a very successful tenure. Artisan declined to comment further on the reasons for Dargan’s departure. He was the first lead portfolio manager to leave since Artisan co-founder, Carlene Ziegler, retired in 2008 – but he had joined an existing team headed by Artisan veteran Mark Yockey, who co-manages global equity, so the impact may well be limited. The fund remains relatively small, at less than $45m.
The challenges of ‘degrees of freedom’ go beyond the culture question. Artisan’s focus has generally been on sourcing top talent, rather than complementary strategies, but this approach has perhaps not always served them well. An unwillingness to pioneer untried strategies kept it off the 130/30 bandwagon, but a similar reluctance to tackle new operational demands has kept it out of fixed income and credit, just as investors have clamoured for high-alpha bond products, for example. The instinct to globalise informed some scepticism about standalone emerging markets that kept them out of that game until well into 2006.
“We were late to that, which means that emerging markets is the only one of our teams that is not yet an independently-viable franchise,” Colson concedes. “Discussions with institutional clients eventually persuaded us that they weren’t going to give up on a standalone allocation.”
Artisan’s model can cause problems. Consultants more familiar with a centralised ‘house style’ are apt to request ‘the best global equity product’, but Artisan feels that its unconstrained strategies are each unique. And faced with the increasing tendency of institutions to ask for customised portfolios, Colson says: “We won’t customise because we feel that’s a dilutive approach.”
Sometimes, trends in investor demand do not click with asset managers’ long-term business strategies, which can test firms with such a distinct culture. Making them click more readily might assume greater importance now that the firm answers to public shareholders.
But these challenges should not be overstated, and Colson can also point to ways in which Artisan’s strategies key into important investor themes – sophisticated investors hunger for genuinely unconstrained equity alpha, for example, now that they get their beta cheap; globalising the offering opens the firm to a whole new set of eyes – who often then go for the excellent US equity expertise as well as the global; and even if Artisan won’t customise, the fact that it offers four different global funds, for example, increases the odds that it has the right one for each investor’s needs.
And if the model can strike some as idiosyncratic, it seems to work. Last year assets under management surged by 30%: great performance will solve a lot of challenges for you.