INTERVIEW
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ArtisanPartnersGrowthTeam’s
investment process includes
a three-stagecapital allocation
system, which it callsGarden,
Crop, Harvest.What are theorigins
of this approach?
When [managing director]Andrew
Stephens and I startedArtisan Partners
GrowthTeam in 1997, we were looking
for a simple way to explain our capital
allocation process – both internally, for our
team, and externally. I come from a small
farming community andAndy has a similar
background, so perhaps it was natural that
we should use our agrarian roots.
What are its advantages?
This approach is a very effective way
of communicating howwe view our
investments and where we believe
companies are in a profit cycle – whether
they are in the early stages or further along.
What are thekey features of a
Garden investment?
Garden investments are the seeds for
growth in the portfolio.The first thing we
look for is a high-quality company with
solid franchise characteristics that allow
it to fight off competitive pressures.We
then look for a reasonable valuation – the
difference between the market price and
what we think an outside buyer would
pay.We aim for between 60% and 85%
of what we would expect a strategic or
private equity buyer to pay to own the
entire company and its future cash flows.
Then we look for a catalyst that we believe
can accelerate profits.We would normally
start with a small position, typically
accounting for between 0.5% and 1.25%
of the total value of the portfolio.There
are usually between seven and 10 Garden
positions at any one time.
Whendoes aGarden investment
becomeaCrop?
We would normally expect the inflexion
point, when profits accelerate, to occur
within two to four quarters of the initial
investment. Some take longer, but
provided we still believe in the franchise
quality and the strength of the catalyst
for growth, we have the flexibility to be
patient.That said, we anticipate we will
initiate some Garden positions that fail to
play out as we expect – about a third or so
– and that never become a Crop holding.
Howlongwill theCropphase
last andwhat are the signs that a
holding shouldmove toHarvest?
It depends on our view of each stock’s
franchise strength, profit cycle and its
valuation. Some Crop investments stay
in the portfolio for a long time – we have
held some for five to six years.
What is the signal that youshould
start harvestingan investment?
There are a few factors we look for.
Perhaps the product or service we saw
as a profit catalyst has begun to mature.
It may be that competitive pressure
develops, or that the profit cycle begins
to deteriorate more quickly than we had
anticipated. Occasionally, the profit cycle
may be proceeding as we expect but the
shares simply become too expensive.
If we believe the valuation has become
unreasonable, we will trim our holdings.
Howlongdoes aharvesting
period last?
Sometimes selling will take place over a
long period. Sometimes it will be rapid
if, for example, a competitor comes
along and exerts pricing pressure on the
business. Sometimes a company we are
harvesting can go back into the Crop.
Starbucks is one example.We bought it
in November 2008 and quickly pushed
it into the Crop – we liked its North
American restructuring efforts and its
expansion plans inAsia.After a period of
solid appreciation we began harvesting
in Q3 2012.We felt the profit cycle had
matured and there were more interesting
opportunities elsewhere. However, we
began increasing exposure again in 2013,
putting it back into the Crop.Management
was reigniting growth with an improved
food menu and single-serve coffees.The
firm also acquired the tea brandTeavana,
providing another runway for growth.
Inwhat proportionsdoyouhold
the three stages?
Typically, we will have roughly 15% of the
portfolio in the Garden, 70% in the Crop
and 15% that we are harvesting. In general,
the top 20 to 25 positions will account for
between 60% and 70% of the capital.
Viewpoint
JamesHamel, ArtisanPartners
The Global Managed fundmanager onArtisan Partners GrowthTeam’s
Garden, Crop, Harvest capital allocation system
If we believe the
valuation has become
unreasonable, we will
trim our holdings
