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Opportunistic But Risk Aware
Artisan Mid Cap Value Fund
Interview with: James Kieffer

Author: Ticker Magazine
Last Update: Aug 08, 10:09 AM ET
Disciplined investors can certainly profit from the herd mentality, which tends to be so pervasive in the market as sentiment oscillates between greed and fear. James Kieffer, portfolio manager of the Artisan Mid Cap Value Fund, utilizes a balanced approach to investing from a value perspective, weighing in the financial health of businesses and their valuation in different market conditions with the same level of risk awareness.


ďOur approach is opportunistic, but with a value mindset. We seek cash producing businesses in strong financial condition that are selling at undemanding valuations.Ē
Q: Can you give an example to illustrate your research process better?

A: AutoNation, the automotive retailer, would be a good example. It caught our attention because auto sales had been strong for a long time. The availability of financing and strong used car prices had driven a lot of car purchases.

We were approaching the point where car sales look like they were peaking, people financing these purchases were tightening their purse strings, and used car prices were weakening. All those elements created earnings pressure for AutoNation. That caught our attention. AutoNation is one of the best operators out there and they run their business with a keen focus on profitability and free cash flow.

They understand how to operate their business with efficiency and a focus on free cash flow generation and a discipline about running with profit metrics, but the stock was getting knocked down. Thatís when we got the opportunity to own the best operators in the business. The stock had been knocked down to near $40, in a tough environment they probably earn around $3 a share. So even in a tough market they are likely to generate healthy earnings.

On a normalized earnings perspective, we were looking at least $4 per share of earnings power. Because they acquired a number of operations over the past few years, and had been investing in some online operations, their near-term earnings power was increasing.

AutoNation is not going to instantly come back to life from an earnings growth perspective, but itís well positioned for a long run in its business and particularly its leadership.

Q: What other factors do you consider when making an investment?

A: One of the things that we think is most important when assessing investment is to think about multiple scenarios for the business. We try to take in as many different scenarios as possible that could happen with the business and thatís one of the reasons why we attempt to buy at lower valuation points to allow us to make money under more than one scenario.

As far as potential profitable points, they play into that multiple scenario idea and thatís one of our greatest responsibilities of having ownership in the name. Operating in a risk-aware manner we are always scouting out where we could be potentially wrong and seeking what we call disconfirming evidence about a name or business.

Q: Is diversification part of your portfolio construction process?

A: We tend to have 40 to 60 names in the portfolio and it is not an index-oriented fund. We donít manage it to the index. In other words, we are not macro, thematic, or sector weight-oriented investors. We donít have discussions about being overweight or underweight sectors. The portfolio comes together from a bottom-up basis as a result of stock picking and individual stock picks.

We do believe that diversification is important and so the portfolio does have exposure across a number of sectors and industries. But this is a stock pickerís portfolio, a stock pickerís portfolio that is mindful of what our risk exposure looks like.

If industries and sectors are not interesting from a valuation perspective, we are content with owning nothing in them; and there are lots of industries and sectors where we do own nothing.

Position sizing is determined by this margin of safety criteria I mentioned. In other words, large positions in the portfolio are going to be the ones that show the greatest strength in all three of those characteristics. The smaller positions in the portfolio are going to be names that still meet those criteria, but might be weaker in one of the three relative to the rest of the pack.

Position sizing in the strategy is going to be 1.5-2%. Positions across the portfolio typically range anywhere from 1% to 4%.

Q: How do you define and manage risk?

A: Valuation, balance sheet and business economics, but what we are thinking about is the risk of a permanent loss of capital. The way we donít define risk is with volatility.

We think volatility creates opportunity and is something we favor; however, sometimes the movement in a fund scares investors and gets them to do the wrong thing with their money. If weíve done our homework properly in focusing on key business risk elements when evaluating the intrinsic value of a stock, volatile time periods for us should not be as severe.

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