What makes $3 billion Artisan Small Cap Fund (ARTSX) one of the best mutual funds? One key reason is that lead manager Craigh Cepukenas’ team tries to fill the fund with future world-beating stocks. That’s how the managers see holdings like Chegg (CHGG), Lattice Semiconductor (LSCC) and Monolithic Power Systems (MPWR).
“We aim for franchise companies that have valuations we understand and an accelerating profit cycle,” Cepukenas said.
He added, “Our internal conversations all start with, ‘Is this a franchise company?’ If it isn’t a franchise company, we stop talking. We don’t even discuss valuation. And we don’t get to whether it has an accelerating profit cycle.”
What makes a company a franchise stock? One key trait: Companies that find a way to provide a disruptive product or service, which rapidly takes market share from legacy players.
Find enough of those, and your portfolio becomes one of the best mutual funds.
Best Mutual Funds: Looking For Leaders
Further, Cepukenas and co-managers Jim Hamel, Matt Kamm and Jason White practice patience. As small-cap managers, they know stocks they target are not yet likely to be industry leaders. But they want stocks capable of growing into leaders.
“I’m not sure I would call any of our stocks ‘world beaters,’ ” Cepukenas said. “But each has a business thesis that allows companies to become much bigger over time. Many of our holdings outgrow our small-cap mandate in time. That’s a good problem to have.”
How Chegg Helps Make This One Of The Best Mutual Funds
This is one of the best mutual funds. Take a look at some key holdings. Chegg was the fund’s top holding as of Sept. 30, with a nearly 5% weight in the portfolio. As of Wednesday, it also happened to be a member of the IBD 50, our flagship screen of leading growth stocks that show strong relative price strength and top-notch fundamentals.
“It’s a software name that used technology to digitize something that was analog, printed textbooks,” Cepukenas said. “Then it turned itself into a disruptive educational platform by leveraging its position in textbooks to cross-sell writing and test preparation services.”
Chegg began as a textbook rental business. Now it offers services like homework help and online tutoring. The company even offers services designed to help students transition from high school to college and then into careers.
“The coronavirus pandemic accelerated their three- to five- to 10-year outlook, as people went online more quickly than previously expected,” Cepukenas said.
Chegg was one of 13 names that the fund has added to amid the pandemic downturn. Chegg’s earnings per share fell 6% in the September quarter, but grew 40%, 47% and 61% the previous three quarters.
Monolithic Serves Niche Markets
Chipmaker Monolithic Power Systems is another stock that helps make Artisan Small Cap one of the best mutual funds.
And Cepukenas likes Monolithic despite its status as a small cap. “It’s hard to call either Lattice or Monolithic a dominating leader when we think of semiconductor companies,” Cepukenas said. “It doesn’t have huge scale like Intel (INTC) or AMD (AMD). But Monolithic dominates in a different way.”
Monolithic Power serves a large number of niche markets with a different approach. Typically, the company looks for customer companies that use multiple chips, which Monolithic can replace with a single chip.
“Their products are typically at a lower price point than peers’, which allows (customers to achieve) cost savings relative to alternatives,” Cepukenas said.
They go after end markets that have minimal financial impact on formidable chip suppliers. That enables Monolithic to avoid attracting more competition, he says.
He added, “They make high performance DC-to-DC converters, amplifiers — complex stuff. Their franchise is built around a lot of intellectual property (IP). Their IP is becoming more and more relevant as we go to the Internet of Things (IoT). As we continue to drive to the edge of computing, power efficiency is incredibly important. They’re the perfect example of a company that’s not a category killer, but perhaps could be one day.”
Cepukenas expects Monolithic’s profit cycle to speed up faster than most of the rest of the market expects. “They preannounced a surprise for the September quarter of a 25% upside to their numbers,” Cepunkenas said. “That surprise is not repeatable every quarter. But it’s a positive indicator.”
Lattice Semiconductor’s Turnaround
Cepukenas sees Lattice Semiconductor as an ongoing turnaround story. CEO Jim Anderson joined Lattice in late 2018, coming from AMD. Despite that turnaround, Lattice helps make this portfolio one of the best mutual funds.
“He quickly turned over five of nine board members,” Cepukenas said. He also likes Lattice’s new product launches. Some Lattice chips can be audited, which shows whether they’ve been reprogrammed by an unauthorized party or a hacker. “That prevents hacking and malicious backdoor installation of malware,” Cepukenas said.
As a result of such products, Lattice’s revenues have ramped up faster than expected, Cepukenas says.
What Makes Artisan Small Cap One Of The Best Mutual Funds
In what way is Artisan Small Cap one of the best mutual funds? The fund is a 2020 IBD Best Mutual Funds Award winner, having topped the S&P 500 in calendar 2019 as well as over the three, five and 10 years ended Dec. 31 on an average-annual-return basis.
Year to date going into Wednesday, the fund was on track to repeat as an IBD Best Mutual Funds Award winner with a return of 34.46% vs. the S&P 500’s 6.54%. The fund’s small-cap growth rivals tracked by Morningstar Direct are averaging 13.94%.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and active mutual fund managers who consistently outperform the market.
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