Any prudent investor recognizes the importance of maintaining a diversified portfolio. How one can best achieve that proper mix of holdings, however, is open to wide interpretation.
Some investors like to own a large number of stocks. Others try to balance broader sectors in a way that leaves no single industry exposed.
Chris Smith, who oversees more than $500 million as the founding portfolio manager of the Artisan Thematic Fund, prefers to look at themes.
His methodology involves finding industries undergoing multiyear inflection points, then loading up on the shares of companies that best represent those trends. Smith then makes portfolio selections that offer earnings power on a two- to five-year basis.
Smith doesn’t own every company involved in a theme, just the very best, based on his models. That often means foregoing exposure in more popular, crowded names and instead opting for companies that aren’t exactly in the mainstream.
Based on Smith’s performance over the past year, it’s safe to say his methods are working. The Artisan Thematic Fund returned 20.59% over the 12 months that ended in November, according to rankings compiled by Kiplinger. That puts it in the 99th percentile for the period, according to Bloomberg data.
Smith recently shared with Business Insider his top investment theme for 2019: data monetization. In a way, his actions within the theme perfectly encapsulate how he achieves diversification.
He also shared a pair of single stock picks. All quotes below attributable to Weaver, and emphasis ours.
On the stocks he likes to support the theme:
“The easiest way for managers to capture the data monetization theme is through well-known companies like Google or Facebook. They get a lot of data on people, they monetize it, and they create revenue streams through advertising and search. We don’t try to look at those — we look at the next level down.”
“CME Group (CME) and Intercontinental Exchange (ICE) are examples. ICE is a commodity and financial market exchange. They do a lot with energy, commodities, oil, and they own all the data behind the exchanges. Over half of their business now is selling data to other research firms that need all that information.”
On how the theme helps his portfolio achieve diversification:
“With data monetization, we were able to buy companies in the financial sector — the exchanges — consumer discretionary stocks, technology stocks. We were able to express that theme across a lot of different sectors in our coverage universe.”
“Because of that, those factors are actually not correlated with each other. They balance out the risk in the portfolio for that theme, which then allows it to get bigger. We work hard to spread our themes across different industries, so we can scale them. Otherwise, you just have too much of the same risk in your portfolio.”