Chris Smith oversees more than $500 million as the founding portfolio manager of the Artisan Thematic Fund.
Smith works to identify industries undergoing multiyear inflection points, then makes investments based on those trends. Themes from the past year included data monetization, cash-flow inflection, and video games, among others.
He achieves diversification by digging in on each of these identified themes and making portfolio selections that offer earnings power on a two- to five-year basis. He doesn’t own every company involved in a theme, just the very best, based on his models.
Smith also looks for stocks that carry high return on invested capital. He says that a company’s ROIC has historically been the biggest driver of its multiple.
Lastly, it’s important to mention that the Artisan Thematic Fund occasionally uses options to express investment ideas, a practice not regularly employed by fund managers. Smith says that those derivative contracts are used for both directional bets and downside protection. He says hedges in the portfolio kept his fund from getting hurt as badly during market downturns this year.
1-year return: 23.26%
Biggest holdings (as of 9/30): Equinix (6.2%), Treasury bill/bonds (5.1%), IHS Markit (4.9%), CME Group (4.8%), SBA Communications (4.4%)
What worked in 2018:
“Our names are very diversified in terms of our performance this year. Harris Corp. was one of our top five biggest winners on the defense team. We had a video-game theme that we expressed through Nintendo. We’ve since exited that position, but it was one of our top five winners.
“There’s our cash-flow-inflection theme, for which Lamb Weston was our largest winner on the year. That was another unique idea.
“In software, we owned Salesforce, which we’ve exited, but it was one of our big winners of the year.
“Primary themes this year were: software, cash-flow inflection, data monetization, video games, and defense. One name from each of those groups were our top five winners.”
What’s ahead in 2019:
“Our overall view is that economic growth peaked this year and has started to slow, and that slowing is more pronounced globally. That should continue through next year. At some point, by probably the end of next year, we might enter a recession, but that’s difficult to call.
“What that’s leading us to do is build a portfolio built on higher-quality, stable businesses that work better for the later cycle. And we’re focusing on themes that are less economically sensitive than may have been in the portfolio historically.
“One area we like are the tower companies in the US. We like SBA Communications (SBAC), American Tower (AMT), Crown Castle (CCI). They’re very high-recurring, long-term revenue-stream companies, and they own all the wireless towers in the US.
“Life-science companies — which are exposed to accelerating secular tailwinds in biopharma and precision medicine — are not as economically sensitive either. They include companies like Thermo Fisher (TMO) and Perk and Elmer (PKI) that we think are accelerating on the innovation scale over the next few years, and should be reasonably resilient in an economic slowdown.”
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