Quarterly Commentary—Artisan International
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QUARTERLY Artisan International Fund FactCommentary Sheet Investor Class: ARTIX | Advisor Class: APDIX As of 31 March 2016 Investment Process We seek to invest in companies, within our preferred themes, with sustainable growth characteristics at attractive valuations that do not fully reflect their long-term potential. Themes We identify long-term secular growth trends with the objective of investing in companies that have meaningful exposure to these trends. Our fundamental analysis focuses on those industry leaders with attractive growth and valuation characteristics that will be long-term beneficiaries of any structural change and/or trend. Sustainable Growth We apply a fundamental approach to identifying the long-term, sustainable growth characteristics of potential investments. We seek high-quality companies that typically have a sustainable competitive advantage, a superior business model and a high-quality management team. Valuation We use multiple valuation metrics to establish a target price range. We assess the relationship between our estimate of a company's sustainable growth prospects and its current valuation. Team Overview Our team approach combines the benefits of strong leadership with the creative ideas of a deep and highly experienced team of research analysts. We believe this approach allows us to leverage a broad set of perspectives into dynamic portfolios. Portfolio Management Mark L. Yockey, CFA Charles-Henri Hamker Andrew J. Euretig Portfolio Manager Associate Portfolio Manager Associate Portfolio Manager Investment Results (%) Average Annual Total Returns As of 31 March 2016 QTD1 YTD1 1 Yr 3 Yr 5 Yr 10 Yr Inception2 Investor Class: ARTIX -3.63 -3.63 -11.11 2.71 5.24 3.61 8.94 Advisor Class: APDIX -3.59 -3.59 -10.91 2.78 5.29 3.63 8.95 MSCI EAFE Index3 -3.01 -3.01 -8.27 2.23 2.29 1.80 4.21 MSCI All Country World ex USA Index3,4 -0.38 -0.38 -9.19 0.32 0.31 1.94 4.62 Source: Artisan Partners/MSCI. 1Returns for periods less than one year are not annualized. 2Investor Class inception: 28 December 1995. Advisor Class performance is that of the Investor Class from 28 December 1995 through the inception of the Advisor Class on 1 April 2015, and actual Advisor Class performance thereafter. Performance has not been adjusted to reflect the expenses of the Advisor Class for the period prior to the Class’s inception, and Advisor Class performance results would differ if such expenses were reflected. 3Inception 31 Dec 1995. 4Performance represents the MSCI ACWI ex USA (Gross) Index from inception to 31 Dec 2000 and the MSCI ACWI ex USA (Net) Index from 1 Jan 2001 forward. Expense Ratios (% Gross/Net) ARTIX APDIX Annual Report 30 Sep 2015 1.17/— 1.07/1.071,3 Prospectus 30 Sep 2015 1.17/— 1.022/— 1For the period from commencement of operations 1 Apr 2015 through 30 Sep 2015. 2Includes estimated expenses for the current fiscal year. 3Reflects a contractual Fund expense reimbursement agreement in effect through 1 Feb 2017. Past performance does not guarantee and is not a reliable indicator of future results. Investment returns and principal values will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown. Call 800.344.1770 for current to most recent month-end performance. Performance may reflect agreements to limit a Fund’s expenses, which would reduce performance if not in effect. Quarterly Commentary Artisan International Fund As of 31 March 2016 Investing Environment Performance Discussion The first quarter of 2016 was a tale of two halves. The volatility of late A commodities-led rally accompanied by a rotation out of secular 2015 extended into the quarter’s first half, with equities selling off on growth companies is not an environment that favors our emphasis on continued fears over China’s slowing growth and slumping oil prices. high-quality companies with sustainable growth characteristics. Our By mid-February the tide turned, and equities rallied through the end portfolio generally trailed developed world (ex-US) indices of March. Ultimately, global stocks posted mixed Q1 results. Europe moderately, and lagged indices with emerging markets exposure by a was down, and the US was relatively flat. In a reversal of last year’s wider margin. trends, emerging markets led the world, and Japan landed squarely in the red. We are skeptical of the recent commodities rally’s sustainability. Massive oil oversupply globally and an economic slowdown in Many of the quarter’s performance trends reflected commodities China—a major commodity consumer—lead us to believe that more prices, central bank activity and currency movements. In fact, global pain is on the horizon for commodity-price dependent areas of the equities’ mid-quarter turnaround almost directly mirrored a rally in oil market. We have no direct exposure to energy, typically viewing prices, which received a reprieve from steep declines since mid-2014. energy companies as pass-through structures lacking pricing power. Oil seemingly rose on the mere suggestion that some OPEC producers While we’ve missed out on some of the stronger-performing corners would consider limiting production (at already historically high levels), of the market in recent weeks, we are comfortable that our contingent on cooperation by their most resistant counterparts. The positioning will help our portfolio stand up to varied energy sector and other commodity-exposed companies and market environments. countries (e.g., Brazil and Canada) were among the strongest Q1 performers after selling off in 2015. Our currency exposures were also a hindrance on a relative basis in Q1. Although a depreciating US dollar serves as a tailwind for US Despite positive momentum in the US labor market and a higher investors in foreign securities, our portfolio benefited to a lesser revision to GDP, the Fed delayed hiking the target interest rate, citing extent given our relatively heavier dollar exposure. This largely stems overseas economic and market risks. It also signaled a slower pace of from our investments in non-US domiciled stocks trading on US rate normalization from what was previously expected. Prior to Q1, exchanges, such as Liberty Global, Aon and Delphi Automotive. the expectation of US rate increases (combined with more accommodative measures outside of the US) had helped push the US On an individual holdings basis, among our larger detractors was dollar higher for roughly 18 months. But with the US remaining Japanese company NGK Insulators, an industrial products exceptionally accommodative, the dollar reversed course and manufacturer that produces ceramic components widely used in depreciated in Q1, and capital flowed back into emerging markets in exhaust purification systems. In recent years, demand for these search of yield. Relative to the dollar, the newly appreciating yen and products has been driven by increasing environmental concerns and euro served as a headwind for exporters across Japan and more stringent auto emissions regulations globally. Yet as of late, NGK Europe (ex-UK). has faced new challenges—including the yen’s recent appreciation being a headwind for the Japanese exporter. Additionally, it appears While US rates stayed put, much of the rest of the world moved that certain of its auto end markets (particularly US heavy trucks and (further) into negative rate territory. The ECB lowered its deposit rate passenger vehicles) are entering a more mature phase of the cycle from -0.3% to -0.4%. The Bank of Japan followed suit, cutting its after a period of heavy expansion. Further, fears over slowing global benchmark interest rate below zero for the first time. The historically GDP have recently weighed on sentiment across the auto industry, unprecedented move toward negative rates at such a massive scale including industry suppliers. The combination of these headwinds has has sparked speculation over central bankers’ remaining ammunition dampened our growth outlook, and we reduced our exposure. for jumpstarting inflation. By late March, countries with negative short-term rates represented more than a quarter of global GDP, and Global vehicle components manufacturer Delphi Automotive was also countries with flat or negative y/y consumer prices represented nearly a larger detractor, after strong performance in 2015. Much like NGK, 40% of global GDP. Against a backdrop of falling deposit rates, Delphi was caught in the downdraft of weakening auto industry financials stocks—particularly European banks—posted some of the sentiment. Fundamentally, we see Delphi as distinct from other auto quarter’s worst losses. suppliers given its diverse product portfolio with rare combined exposure to the industry megatrends of autonomous driving, vehicle Health care was another noticeable laggard in Q1. After electrification and connectivity/infotainment. Given its breadth and outperforming in 2015, much of the health care sector pulled back on market positioning, the company has historically been successful increased political scrutiny over prescription drug pricing, fueled by expanding margins even through periods of end-market contraction. the US election campaign cycle. The announced CEO departure from In light of Delphi’s secular growth exposure, we’ve maintained our scandal-plagued Valeant Pharmaceuticals further added to the sector’s tumult in March. positioning despite our generally cautious outlook on the auto is submitted for approval across multiple cancer types and in industry at this late point in the cycle. combination with other therapies. Media company Liberty Global also detracted, pressured by Portfolio Positioning heightened competition and subscriber losses in the Netherlands In a market environment characterized by weak demand and low (or (where it purchased cable company Ziggo in late 2014). Shares even falling) inflation, growth has been more difficult to find recovered a portion of earlier-quarter losses after the company generally, and companies have been pressured to cut prices in order announced a joint venture with mobile operator Vodafone to to compete for market share.