Lewis Kaufman is, depending on who you ask, a phony or a genius.
First, the genius part. Kaufman has come up with a formula for generating double-digit annual returns in emerging-market stocks, a rare feat in a market that has gone nowhere for years.
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The phony critique: He’s done it largely by loading up the fund he manages at Artisan Partners — the Artisan Developing World Fund — with high-flying US tech stocks.
To his detractors, this is absurd. What do Nvidia and Snowflake and Crowdstrike have to do with emerging markets? He just jammed them into the fund, they contend, to goose returns and push his fund’s performance to No. 1 in emerging markets. “It’s disingenuous at best,” says Kevin Harper, chief investment officer at Almanack Investment Partners.
To Kaufman and his backers, this is merely the idle chatter of envious rivals and other industry types who haven’t spent enough time to understand what he’s doing. Nvidia and Snowflake and Crowdstrike are indeed emerging-market stocks, Kaufman argues, if you expand your definition to include those companies that get a chunk of their revenue in developing nations. Investing in only stocks that fit the classic, narrower definition of emerging-market companies, he says, has led to such poor returns — the benchmark MSCI index is essentially unchanged over the past 17 years — that a broader approach is needed.
“We’re not trying to avoid emerging markets,” Kaufman says. “We’re trying to embrace them, and we’re trying to do it in a thoughtful and creative way.”
Thoughtful and creative means that, as of the last public filing, more than 40% of the fund’s $3 billion was invested in US-based companies. It’s not just tech stocks. It’s also names like Coca-Cola and Visa and Estee Lauder. Throw in European stocks and the percent of Kaufman’s portfolio invested in companies based in developed nations comes to more than 50%. The median number for rival emerging-market funds is 5%, according to Morningstar Direct.
All of this underscores the hands-off approach that regulators have long taken when it comes to the selection of fund names. For years, asset managers could pretty much just choose whatever name they wanted, regardless of the makeup of the assets they held.
That began to change in 2001, when the SEC first rolled out guidelines on the use of names. Unsatisfied with industry compliance and concerned by the wave of funds purporting to be focused on ESG hitting the market, the SEC stiffened those rules last year. The changes will bolster requirements that mutual funds and ETFs put at least 80% of their money in the kind of assets suggested by their name.
A spokesman for Artisan said it’s too soon to gauge the impact the new rules will have on Kaufman’s fund.
Investors, in any event, have proven a bit cool to his approach. While his fund outperformed all other large emerging-market stock funds over the past five years, it lured almost no new money — on a net basis — during that time, according to data compiled by Bloomberg.
To Bill Rocco, a senior research analyst at Morningstar, the unusual nature of the fund is at least partially responsible for the lack of inflows. Rocco likes Kaufman as a stock picker — he’s a “good investor” — but finds the fund to be “a weird fit” for the category.
“This is not your grandmother’s emerging-market fund,” says Rocco. “Giving good managers a little more flexibility is good” but at some point “you cross a threshold where you’re not really that kind of fund anymore.”
Kaufman, 48, started on Wall Street in the 1990s. He did stints at Citigroup and Morgan Stanley before moving on to Thornburg Investment Management in Santa Fe, New Mexico, where in 2009, he launched his first emerging-markets fund. He quickly started loading it up with stocks based outside of the developing world, bringing the percentage at times to over 20%, data compiled by Bloomberg shows.
That move paid off as the economic boom that had swept across emerging markets in the 2000s fizzled. After five years, the Thornburg Developing World Fund was up 56% — compared with 9% for the benchmark emerging-market index — and Kaufman was attracting attention.
Among those watching: Eric Colson, the CEO of Artisan Partners, a boutique investment firm based in Milwaukee. In 2015, he hired Kaufman.
Colson says the “uniqueness” of Kaufman’s portfolio was a big lure back then and that he remains a firm believer in it today. “Lewis represents how creative perspective and degrees of freedom can have a positive impact on investment outcomes,” Colson said in a statement.
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Kaufman likes to refer to the non-emerging market companies in his portfolio as passport companies, a nod to how they’re able to set up operations in developing nations to tap into rising demand. “We just invest in companies that are economically tied to emerging markets,” he says. “Some of those are based in emerging markets and some of them aren’t.”
Devesh Shah is a big fan of this approach.
A retired partner at Goldman Sachs who now writes for the Mutual Fund Observer, Shah says investors have to choose whether they “want to be pure” about their definition of emerging-market stocks — and sacrifice potential returns in the process — or “trust the fund manager.” Shah’s chosen to trust Kaufman. He began investing in the Artisan fund last year.
Even by Kaufman’s standards, the current tilt in his portfolio to passport companies is pronounced. As recently as 2019, they had made up less than 25% of his holdings. That percentage soared during the pandemic as he tapped into the tech-stock rally. His fund gained 82% in 2020, sunk the next two years and then sharply rebounded over the past 15 months.
Among the criticisms lobbed at Kaufman is that it’s a stretch to think of the likes of Nvidia, Snowflake and Crowdstrike as plays on emerging-market growth. Each of the companies gets more than half of its revenue in the US alone. In Snowflake’s case, it’s almost 80%. Another chunk of their revenue then comes from Europe.
Harper, the CIO at Almanack, a wealth-management firm based outside Philadelphia, notes that most investors already have lots of exposure to tech stocks in their portfolios. So why give them even more of those stocks in their emerging-market fund, he asks.
Harper got worked up as he voiced publicly what many others in the industry whispered in private: Kaufman’s strategy, while perfectly legal, is misleading. “It’s insane,” he says. Everyone else in the market is trying to generate returns by picking the right developing-nation stocks, and Kaufman should do the same.
Kaufman’s volatile returns have actually been more correlated with MSCI’s global gauge of growth stocks than the emerging-market benchmark. When measured against growth funds, his returns look ordinary. Over the past five years, the fund would have ranked 202nd among the 323 biggest growth funds in the US, data compiled by Bloomberg shows.
Kaufman is unfazed by the volatility. It just comes with the territory, he says, when seeking outsize returns.
What’s more, he says all the focus on his tech-stock holdings ignores the fact that he’s been trimming those positions. He sold almost 80% of the Nvidia shares he held last year and more than 40% of both the Netflix and Airbnb shares. He plowed some of that cash into less volatile US stocks and some of it into shares in India, one of only five developing countries his fund is investing in. (The others are Argentina, Brazil, China and Singapore.)
His holdings of Indian stocks quadrupled to 12% of the portfolio in February from 3% at the end of 2022. And yet, in a sign of just how unconventional the fund is, that’s still well below the country’s 18% weighting in the MSCI benchmark index.
“Tracking a number doesn’t necessarily tell the story,” Kaufman says. “I run an emerging markets fund. I want stores of value for when times get tough.”
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