Even though stocks have rallied since March, David Samra says the international markets still have plenty of running room. "Valuations remain attractive for equities as a whole and even more attractive for equities we are involved with," says the 45-year-old Samra, who has run the Artisan International Value Fund with longtime associate Daniel O'Keefe from their San Francisco office for the past seven years.

By their definition, a company's value is pegged to what someone would pay to own its future cash flows. Part of their intrinsic value analysis, the focal point of their strategy, is to consider potential earnings in a "normal" economic environment. Right now, that would mean after the current struggling economy recovers.

"Usually we look for stocks selling at prices that are at least 30% below our intrinsic value estimates. Now, the stocks in the portfolio are priced at an aggregate of 40% to 45% below our estimate of intrinsic value."

Samra anticipates that the lion's share of his fund's returns will come not from higher levels of business growth but from the improving prices of his stocks as their discount value unwinds. As he waits for that to happen, he says, he finds "realistic causes for optimism" about the economy in general, such as restored order in the credit markets and the apparent end of the emergency in the financial system that began in the second half of 2008. "While the economy has not yet recovered, it appears to have stopped getting worse, and that has been enough to generate some optimism among many investors," he says.

One of his holdings is IGM Financial, a Canadian wealth management firm. Artisan bought the stock in February after it plummeted with the rest of the financial sector. But as investors later became more optimistic, the stock rebounded, rising 50% in the second quarter and reaching its fair value estimate. Its discount evaporated in just a couple of months, and at that point, Artisan sold most of the position.

Sometimes, however, an unexpected development prompts the managers to give one of their stocks a quick boot from the portfolio. For instance, Artisan bought Swiss private bank Julius Baer late last year, but dropped it when regulators in the U.S. and elsewhere cracked down on secrecy provisions in the private banking business.

Usually, however, the holdings in this compact all-cap fund remain in the portfolio for a year or more (it currently holds about 40 names). They are generally not the cheapest stocks by traditional statistical measures such as price-to-book or price-to-earnings estimates, which Samra believes are vulnerable to declining business values and stock prices. But they must fit the fund's desired investment profile of a better-than-average business within a group of undervalued stocks. The fund also looks for companies with sustainable competitive advantages, high returns on capital employed, proven management teams and low debt levels.

Once the managers have compiled a list of attractive businesses, they may follow a stock for months or even years waiting for the gap between their estimate of its intrinsic value and the public value to widen before they move in. That might happen when the stock price drops because of broad market or sector trends or because of a company-specific event such as a change in management.

For example, the fund recently purchased consulting and outsourcing company Accenture during the second quarter. The purchase followed a dip in the company's stock price spurred by concerns that Accenture would face a steep drop in demand for its services and increased competition from large Indian outsourcing firms such as Infosys. Samra says Accenture has successfully defended its turf in this country and maintains a large presence in India as well. Also, it has one of the better client lists in the business. And unlike competitors in the consulting business such as IBM and Hewlett-Packard, the company does not have its own hardware to promote, so it is free from any perceived conflicts of interest. The company has also moved to cut costs and take on projects that do not require heavy initial capital outlays. Although he anticipates a significant decline in the company's higher-end consulting business this year, Samra believes Accenture's revenues should start growing again in 2010 as companies continue to outsource their information technology function to help control costs.

Longtime fund holdings that have outperformed the market recently include U.K.-based Signet Jewelers, which has been able to grow profits and market share as its competitors struggle. Given Signet's healthy balance sheet and proven management team, Samra considers it one of the strongest operators in the industry and a worthy opponent to Zale Corp., its most visible competitor in this country.

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