Deep Due Diligence, Big Outperformance: Artisan Partners’ Approach to International Value Stocks

Investors are always advised to do their own due diligence, but it can be challenging for individuals to do everything they need to invest wisely in small caps. We caught up with Anand Vasagiri of Artisan Partners at the 2025 Value Invest New York Conference, and he shared some of his and co-portfolio manager Beini Zhou’s secrets for how they do due diligence on the world’s smaller companies.

Thus far, the returns of Vasagiri and Zhou's Artisan Partners’ International Explorer strategy demonstrate how well their due diligence process is working. The strategy generated impressive net returns of 20.33% in 2023 and 5.89% in 2024, versus the benchmark MSCI AC World ex-USA Small Cap Index's returns of 15.66% and 3.36%. The three-year net return is 4.83%, versus the benchmark's 0.99% return. Since inception in November 2020, the strategy has returned 11.98% net, versus the benchmark's 6.57% return.

International investing universe

For Artisan Partners’ International Explorer strategy, the investing universe consists of over 53,000 stocks outside the U.S. This universe is comprised of companies domiciled outside the U.S. with a market capitalization of around $5 billion or less.

“The funny part is, if you go to many parts of the world now and say, ‘We invest in small caps,’ and then clarify that we invest in companies with [a] market cap less than $5 billion, in some countries, they’ll smile and say, ‘That's our largest cap, so that's large cap for us.’”

Vasagiri noted that the markets he and Zhou invest in can vary significantly in terms of the opportunity set. He said they’re agnostic in terms of geographies — as long as it meets their four key investing criteria.

“If we look at companies in emerging markets, we are cognizant that the currency can depreciate about 2% to 5% a year roughly, and if our average holding period is four to five years, then we have a 20% headwind just from potential currency depreciation,” Vasagiri added. “So we have a higher hurdle for investing in emerging-market countries.”

Hedging

Artisan International Explorer typically doesn’t hedge, although in certain very rare scenarios, the portfolio hedges just enough for its strategy.

“We hedged once… the South African rand," Vasagiri explained. “So that was a sweet deal.”

On Japan

Japan was once a hot market for value investors because of the abundance of cheap stocks that were often cheap for a reason. However, in recent years, Japan has been enacting corporate governance and capital market reforms in an attempt to make its companies more globally competitive, unlocking new investment opportunities, especially for the more quality-minded investor. In fact, Vasagiri pitched Japanese paint company Kansai Paint at Value Invest New York 2025.

He noted that the reforms in Japan stemmed from Abenomics, or Shinzo Abe’s “three arrows.” Those arrows included monetary easing for the Bank of Japan, government spending to drive fiscal stimulus and structural reforms.

“Initially, most companies nodded, paid lip service, but didn't change their behavior very much,” Vasagiri explained. “About two-and-a-half years ago, the reform process was reinvigorated when the Tokyo Stock Exchange came out and said that they were going to delist any company trading under book value for a prolonged period of time. Suddenly everybody jumped to somehow get their price above book to avoid the threat of delisting.”

Reforms in Japan

He added that some companies tried to superficially inflate their price via buybacks, and a number of local activist investors began to push for changes.

“Some were genuine activist investors who tried to unlock value; others were just green mailers who would go in, threaten a company into initiating a share repurchase, then sell their stake to the company and move on,” he explained.

Another factor that helped reinvigorate Japanese markets around that time was when “… [Warren] Buffett went and bought the five Japanese holding companies, which got everybody's attention.”

Plenty of cheap stocks in Japan

Vasagiri emphasized that Japan never suffered from a lack of cheap stocks, so International Explorer focuses on looking for good management teams with the potential to eventually unlock value, which can be harder to find. He pointed out that companies with 20% or 30% of their market capitalization in cash have lazy balance sheets if management doesn’t do anything with it.

According to Vasagiri, holding cash is a margin of safety in most countries, but in Japan, the currency has massively depreciated against the dollar over the years.

“As investors, our capital, our performance, everything is measured in dollar terms,” he explained. “So if they have 30% or 40% of the market cap sitting in cash in Japanese yen and that has depreciated by 20%, 30%, 40%, that's a hit to our valuation. We want management teams who understand this and act accordingly.”