ARTISAN INTERNATIONAL FUND
QUARTERLY UPDATE JULY 1997
Thank you for investing in the Artisan International Fund. We're happy to send
you this update for the second quarter of 1997, and hope you find it
informative.
The volatility which international markets experienced in the first quarter of
the year continued into the second quarter, although most of the world's markets
followed the U.S. to positive returns. After a difficult first quarter, the
Japanese market rallied strongly, while European small-caps and several small
Asian markets cooled dramatically. The Artisan International Fund gained 3.2%,
bringing its year-to-date return to 8.7% and its since inception return to
46.1%.<F1>
In this report, we'll briefly review the quarter, give you two examples of
investments owned by the Fund, and touch on recent world events and our view of
their investment implications.
<PAGE 1>
SECOND QUARTER OVERVIEW
-----------------------
The Artisan International Fund completed the second quarter of 1997 with a gain
of 3.2%, marking its sixth consecutive positive quarter and bringing its return
since inception to 46.1%. We believe this is excellent performance for an 18-
month period, and are very pleased with the Fund's returns.
The Fund's benchmarks, the Morgan Stanley EAFE Index and the Lipper
International Fund Index also had good quarters, gaining 13.0% and 11.2%,
respectively, and outperforming the Fund for the first time since its inception.
These indexes were helped substantially by the strong rally in the Japanese
market, which surged 23% in dollar terms following substantial losses in the
first quarter. The Fund's cautious approach to Japan limited our gains there,
although that caution clearly benefited the Fund in previous quarters. European
small-caps and the smaller Asian markets were weak during the
INVESTMENT RETURNS <F1>
Since Inception on 12/28/95
- -------------------------------
Artisan International 46.1%
EAFE Index 17.9%
Lipper Index 30.4%
<PAGE 2>
SECOND QUARTER OVERIVEW (continued)
-----------------------------------
quarter. Exposure to these areas has helped the Fund tremendously in the past
year, but also contributed to its muted returns this quarter.
Overall, however, the Fund remains substantially ahead of its benchmarks since
inception, gaining 46.1% in the year and a half versus 17.9% for EAFE and 30.4%
for the Lipper Index.<F1>
INVESTMENT PROFILE 1
-------------------------
SWIRE PACIFIC (HONG KONG)
SWIRE PACIFIC is a property-based conglomerate in Hong Kong. In addition to its
property interests, it also owns significant positions in two important Asian
airlines,
TOP 10 HOLDINGS<F3>
- ---------------
COMPANY %
- -------------------------------------------------------------------------------
CREDIT SUISSE...Financial service/bank holding company in Switzerland 3.6%
NOVARTIS...Pharmaceutical firm (world's largest) in Switzerland 3.6%
UNION BANK OF SWITZERLAND...Global bank in Switzerland 2.3%
TABACALERA...Tobacco distributor in Spain 2.1%
DEXIA FRANCE...Special purpose bank in France 2.1%
CREDITO ITALIANO SPA...Commercial bank in Italy 2.0%
SCHIBSTED...Newspaper publisher in Norway 2.0%
WHITBREAD...Brewer and restaurant firm in the United Kingdom 2.0%
SANKYO...Large pharmaceutical company in Japan 2.0%
GUANGZHOU INVESTMENT...Investment holding company in Hong Kong 2.0%
- -------------------------------------------------------------------------------
TOTAL 23.7%
- -------------------------------------------------------------------------------
<PAGE 3>
INVESTMENT PROFILE (continued)
------------------------------
SWIRE PACIFIC (HONG KONG)
Cathay Pacific and Dragonair. It also owns the main bottling franchise for Coca-
Cola in China.
Historically, Swire has been viewed by the markets as a conservatively managed,
British dominated hong (trading company), and its stock has been a laggard
as a result. The company's earnings growth has also been uneven lately, further
cheapening its shares. These factors created an opportunity for us to buy
the company's stock very inexpensively.
We think the prevailing perception of Swire is inaccurate, and that it will
continue to expand aggressively into China with a very strong Chinese partner.
We also like the company's strong cash flow, which gives us confidence that our
valuation analysis is right. Lastly, we believe the power of the Coca-Cola
bottling franchise can be enormous - remember, China is a country with 1.2
billion people and an expanding standard of living. When you combine our
optimism about the company with a very attractive stock price and our positive
views about the Hong Kong stock market generally, you have a potentially
exciting investment.<F2>
INVESTMENT PROFILE 2
--------------------
CRT (BRAZIL)
CRT (Compania Riogranderse de Telecommunicacoes) is a Brazilian telephone
company. It serves the large state of Rio Grande do Sul, and is the only state
telephone
<PAGE 4>
INVESTMENT PROFILE (continued)
- ------------------
CRT (BRAZIL)
company operating outside of Brazil's giant Telebras system. Our portfolio
management team met with CRT's management during a research trip to Brazil in
June and was very impressed with the company's potential.
In recent months, CRT has gone through a major restructuring, substantially
shrinking its work force and reducing costs. At the same time, its lines in
service are growing tremendously - its number of lines will double during 1997
and 1998. Moreover, there is terrific latent demand for service in CRT's area,
with a waiting list of 500,000 for conventional telephone lines and 350,000
for cellular phones. We believe CRT will be able to meet this pent-up demand and
achieve its growth objectives, and that the market will reward it
accordingly.<F2>
REGION/COUNTRY ALLOCATION <F3>
------------------------------
EUROPE 62.2% ASIA/PACIFIC 24.7%
---------------------------- ---------------------------
SWITZERLAND 12.1 HONG KONG 10.9
UNITED KINGDOM 9.4 JAPAN 8.1
NORWAY 7.6 INDONESIA 2.3
SWEDEN 5.3 PHILIPPINES 0.9
SPAIN 5.1 THAILAND 0.9
FRANCE 4.9 SINGAPORE 0.8
PORTUGAL 4.1 MALAYSIA 0.5
DENMARK 3.8 NEW ZEALAND 0.3
FINLAND 3.8
ITALY 2.8 LATIN AMERICA 10.8%
----------------------------
GERMANY 2.3 MEXICO 5.9
IRELAND 0.6 BRAZIL 4.9
HUNGARY 0.2
----------------------------
POLAND 0.2 CASH 2.3%
<PAGE 5>
OUR VIEW OF THE MARKET
----------------------
WORLD EVENTS
Interesting world events are unfolding as we write, and we thought you might
find our thoughts on their investment implications useful. Remember, however,
that we do run a broadly-diversified portfolio of international stocks. At June
30, for example, we owned stocks in 24 different countries. While single country
events can have broad ramifications on global markets, we believe that
geographic diversification is critical to successfully controlling risk long-
term and producing rewarding returns for you.
- The Hong Kong Hand-Over -
On July 1, China resumed sovereignty over Hong Kong after 156 years of British
colonial rule. China has pledged to maintain Hong Kong's way of life largely
unaltered, but there exists some uncertainty about whether China will honor that
pledge. The Artisan International Fund has about 10% of its assets invested in
Hong Kong, so we watch this issue carefully.
Our opinion is that the hand-over will be positive for Hong Kong's financial
markets. China appears to be very committed to liberalizing its economy and
improving living standards. The success of the Hong Kong hand-over is critical
to achieving these goals because Hong Kong is China's primary outlet to raising
capital on a global basis. Accordingly, we believe China will
continued on following panel
<PAGE 6>
OUR VIEW OF THE MARKET (continued)
----------------------------------
treat Hong Kong very carefully and that the Hong Kong market will benefit both
from the gradual decline of uncertainty about the hand-over and from its
connection to the enormous Chinese economy.
- European Monetary Unification -
The European countries are presently planning to adopt a single currency in
1999. Undertaking monetary unification without political unification is an
enormously complex task, and the prospects of success or failure
of the unification affects the European economies, currencies and markets on
almost a daily basis. A recent example was the volatility in the European
markets following France's election of a socialist government in June. This
development affected not only the French market, but also the other European
markets and currencies because it caused concern over the prospects for the
monetary unification.
Our view towards the monetary unification's prospects remains cautiously
optimistic. We think that the French government will remain pro-unification and
that the European countries will adopt a compromise solution to make it happen.
This should be positive for the markets, but we will have to live with some
volatility over the next year or two. Our plan is to try to `look through''
this short-term volatility and concentrate on companies that are good long-term
investments. We suggest you do the same.
<PAGE 7>
FOOTNOTES
---------
<F1> THE ARTISAN INTERNATIONAL FUND HAD AN AVERAGE ANNUAL TOTAL RETURN OF
20.9% FOR THE YEAR ENDED JUNE 30, 1997, AND 28.5% FOR THE
PERIOD FROM INCEPTION ON DECEMBER 28, 1995, THROUGH JUNE 30, 1997.
PERFORMANCE DATA CONTAINED HEREIN REPRESENT PAST PERFORMANCE AND DO
NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES IN THE FUND, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE
MORGAN STANLEY EAFE INDEX, GENERALLY REPRESENTATIVE OF DIVERSIFIED
INTERNATIONAL PORTFOLIOS, IS THE BENCHMARK AGAINST WHICH THE FUND'S
PERFORMANCE IS TYPICALLY MEASURED. THIS INDEX IS UNMANAGED AND
INCLUDES NET REINVESTED DIVIDENDS. THE LIPPER INTERNATIONAL FUND INDEX
REFLECTS THE NET ASSET VALUE WEIGHTED RETURN OF THE THIRTY LARGEST
INTERNATIONAL FUNDS. INTERNATIONAL INVESTMENTS INVOLVE SPECIAL RISK
CONSIDERATIONS, WHICH ARE DISCUSSED IN THE PROSPECTUS.
<F2> PORTFOLIO PROFILES ARE FOR ILLUSTRATION ONLY AND ARE NOT INTENDED AS
RECOMMENDATIONS OF INDIVIDUAL STOCKS. THE PROFILES PRESENT INFORMATION
ABOUT THE COMPANIES BELIEVED TO BE ACCURATE, AND THE VIEWS OF THE
PORTFOLIO MANAGER, AS OF JULY 1, 1997. THAT INFORMATION AND THOSE
VIEWS MAY CHANGE AND THE FUND DISCLAIMS ANY OBLIGATION TO ADVISE
SHAREHOLDERS OF ANY SUCH CHANGES.
<F3> AS A PERCENTAGE OF PORTFOLIO ASSETS AS OF JUNE 30, 1997.
ARTISAN FUNDS
C/O BOSTON FINANCIAL DATA SERVICES
P.O. BOX 8412
BOSTON, MA 02266-8412
1 800 344 1770
- ------------------------------------------------------------------------------
ARTISAN SMALL CAP FUND
QUARTERLY UPDATE JULY 1997
We are pleased to provide you with this second quarter update of the Artisan
Small Cap Fund. We thank you for your continued interest
and support.
The second quarter was a very profitable one for small-cap investors. The
Artisan Small Cap Fund rose 16.3% in the quarter, bringing the year-to-date
return up to 10.8%. Since inception, the Fund has gained 64.6%.<F1>
This report will provide a review of recent market activity, highlight a couple
of the stocks we added to the portfolio while the market was weak earlier in the
year, and present our thoughts on the economy and the market ahead.
<PAGE 1>
THE SECOND QUARTER OVERVIEW
---------------------------
The Artisan Small Cap Fund rose 16.3% during the second quarter of 1997. This
compares to a 16.2% gain for the Russell 2000 index and a 17.1% increase for the
Lipper Small Cap Fund index.1 After a difficult first quarter, it was especially
gratifying to see the rebound in small-cap stocks. It just goes to show, once
again, that investors shouldn't try to time the market, because they could have
missed a great upmove this quarter.
Small- and large-cap stocks gained about equally in the second quarter. The S&P
500 rose 17.4%, but that brings its year-to-date performance to 20.6%, still far
outpacing the 10.2% return for the Russell 2000, continuing the trend that began
last summer of large-cap outperformance.1 As we've mentioned before, the
earnings growth of the large companies has been well above-average lately, and
that has led to superb stock performance.
INVESTMENT RETURNS
SINCE INCEPTION ON 3/28/95
- -------------------------------
ARTISAN SMALL CAP FUND 64.6%
RUSSELL 2000 58.0%
LIPPER INDEX 50.7%
<PAGE 2>
SECOND QUARTER OVERVIEW (continued)
----------------------------------
We continue to believe, however, that over the long-run, small companies have
the potential to grow much faster than large companies, which will ultimately
lead to superior stock performance.
We had a number of outstanding stocks in the second quarter as the market
rallied, including many of the stocks we bought in the first quarter as part of
our "silver lining" strategy of buying attractive growth stocks at bargain
prices while the prices were temporarily depressed. We'll go into more detail on
a couple of those holdings later in this report. Two of our long-term, core
holdings were taken over in the quarter at nice gains - CommNet Cellular and
International Family Entertainment. We're sorry to see them go, but we were
pleased to know that strategic buyers saw the same intrinsic value in the
companies that we did.
TOP 10 HOLDINGS <F3>
--------------------
COMPANY %
- ------------------------------------------------------------------------------
K2...Recreational and industrial products 2.7%
LIBBEY...Market share leader in tabletop glassware 2.3%
ZALE...Fine jewelry retailer 2.2%
SHOWBIZ PIZZATIME...Chuck E. Cheese restaurants 2.1%
LITTLEFUSE...Circuit protection devices 2.1%
APTARGROUP...Manufacturer of dispensing systems 2.1%
PENN TREATY...Long-term care insurance 2.1%
LOMAK PETROLEUM...Oil and gas exploration 2.1%
DRESS BARN...Value-oriented chain of women's apparel 2.0%
ADVANCED TECHNOLOGY LABS...Ultrasound equipment 2.0%
- ------------------------------------------------------------------------------
TOTAL 21.7%
- ------------------------------------------------------------------------------
<PAGE 4>
INVESTMENT PROFILE 1
--------------------
EXPRESS SCRIPTS
EXPRESS SCRIPTS is the leading independent pharmacy benefit management company
in the country, serving over 10 million members through a network of 46,000
retail pharmacies and two mail order centers. A few years ago, many of Express
Scripts' competitors sold out to the big drug companies. Investor enthusiasm
waned as these drug companies began to cut prices to gain share for their drugs,
but Express Scripts has been able to grow steadily in the face of the increased
competition.
In fact, we believe the company's independence has now become a major
competitive advantage. During the second quarter, the stock traded down to a
valuation that represented a steep discount to the private transactions in the
industry, and we were able to purchase the stock at a very attractive level. It
has rebounded nicely in this small-cap market rally.<F2>
INVESTMENT PROFILE 2
--------------------
WHOLE FOODS MARKET
WHOLE FOODS MARKET is the leading chain of natural food grocery stores in the
country. Driven by consumer trends toward healthier lifestyles, Whole Foods has
grown at a very rapid rate and we believe it will continue to do so. It
currently operates 70 superstores, offering
<PAGE 4>
INVESTMENT PROFILE (continued)
-----------------------------
WHOLE FOODS MARKET
the natural foods shopper the greatest variety of products at better prices than
the competition. The company plans to expand to 100 stores by the year 2000.
This stock was a "darling" of the more aggressive growth-stock investors as
recently as last summer. At the first sign of a slowdown in the company's
Southern California stores, however, those investors rushed to sell, pushing the
stock down to a steep discount to its intrinsic value, at which point we
initiated a position. We've been handsomely rewarded already, as the slowdown
was temporary, and business is once again on target.<F2>
DIVERSIFICATION BY INDUSTRY<F3>
-------------------------------
INDUSTRY % INDUSTRY %
------------------------- -------------------------
CONSUMER STAPLES 9.2 HEALTHCARE SERVICES 3.5
CONSUMER CYCLICALS 4.3 MEDICAL DEVICES 4.4
CONSUMER SERVICES 6.0 BASIC INDUSTRY 1.7
RETAILING 7.4 BUSINESS SERVICES 7.0
RESTAURANTS 5.2 CAPITAL SPENDING 7.1
ENERGY 9.2 TRANSPORTATION 2.9
BANKS/S&Ls 3.0 COMPUTER RELATED 3.2
INSURANCE 6.3 ELECTRONICS 9.0
OTHER FINANCIAL 3.1 SOFTWARE/ 2.3
TELECOMMUNICATIONS
BIOTECH/ 1.3
PHARMACEUTICAL UTILITIES 1.6
PAPER/
PAPER PRODUCTS 2.3
-------------------------------------------------------
TOTAL 100.0%
-------------------------------------------------------
<PAGE 5>
OUR VIEW OF THE MARKET (continued)
----------------------------------
LOOKING FORWARD
We have long believed that we're in the midst of a long-term bull market driven
by the enhanced profitability of the US corporate sector, an improving national
balance sheet, steady economic growth and low inflation. These factors have led
to low interest rates and far above average earnings growth -
nirvana for the stock market.
We do have concerns, however, about the near-term outlook. We feel that most of
the good news about profitability and inflation has already been discounted by
the market. Earnings growth is likely to slow as further margin improvement will
be harder to come by. Furthermore, although inflation has remained in check,
unemployment is very, very low and wage pressure will begin to show through at
some point. We think the Fed remains committed to price stability and believe
they will raise interest rates again if they see signs of inflation on the
horizon. Either a slowing in earnings growth or an upward move in interest rates
could lead to a correction in the stock market, especially since in terms of
valuation measures such as price-to-book value or dividend yield, the
market is trading at very high levels.
While it is difficult to totally avoid a downturn in the broad market, we
believe that small-cap stocks are poised to outperform large-caps,
<PAGE 6>
OUR VIEW OF THE MARKET (continued)
----------------------------------
both because of their better growth prospects, and because they are not as high-
priced as the large-caps given their recent underperformance.
One of the beauties of investing in small companies is that you can find
situations where the internal dynamics of the company are powerful enough to
overcome general stock market trends. Catalysts such as new product launches or
new management leadership can often make for profitable investments even in
choppy markets.
We also believe that our attention to limiting downside risk by buying stocks
that sell at a significant discount to their intrinsic value should shelter us
to a certain extent in the event of a correction.
FUND STATISTICS <F4>
--------------------
NUMBER OF HOLDINGS 73
MEDIAN MARKET CAP $383 million
MEDIAN GROWTH RATE 23.6%
MEDIAN P/E 1997E 17.6X
1998E 14.6X
MEDIAN PRICE/INTRINSIC VALUE 1997E 79%
1998E 67%
EQUITY DIVIDEND YIELD 0.4%
<PAGE 7>
FOOTNOTES
---------
<F1> THE ARTISAN SMALL CAP FUND HAD AN AVERAGE ANNUAL TOTAL RETURN OF 11.3%
FOR THE YEAR ENDED JUNE 30, 1997, AND 24.6% FOR THE PERIOD FROM
INCEPTION ON MARCH 28,1995, THROUGH JUNE 30, 1997. PERFORMANCE DATA
CONTAINED HEREIN REPRESENT PAST PERFORMANCE AND DO NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE
SO THAT AN INVESTOR'S SHARES IN THE FUND, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. THE RUSSELL 2000 AND THE S&P
500 ARE UNMANAGED INDEXES OF COMMON STOCKS WITH DIVIDENDS REINVESTED.
THE S&P 500 IS A MARKET-WEIGHTED AVERAGE OF 500 LARGE COMPANIES. THE
RUSSELL 2000 IS AN UNWEIGHTED INDEX OF 2000 SMALL COMPANIES. THE
LIPPER SMALL CAP FUND INDEX REFLECTS THE NET ASSET VALUE WEIGHTED
RETURN OF THE 30 LARGEST SMALL-CAP FUNDS.
<F2> PORTFOLIO PROFILES ARE FOR ILLUSTRATION ONLY AND ARE NOT INTENDED AS
RECOMMENDATIONS OF INDIVIDUAL STOCKS. THE PROFILES PRESENT INFORMATION
ABOUT THE COMPANIES BELIEVED TO BE ACCURATE, AND THE VIEWS OF THE
PORTFOLIO MANAGERS, AS OF JULY 1, 1997. THAT INFORM ATION AND THOSE
VIEWS MAY CHANGE AND THE FUND DISCLAIMS ANY OBLIGATION TO ADVISE
SHAREHOLDERS OF ANY SUCH CHANGES.
<F3> AS A PERCENTAGE OF PORTFOLIO EQUITIES AS OF JUNE 30, 1997.
<F4> FUND STATISTICS ARE AS OF JUNE 30, 1997.
ARTISAN FUNDS
C/O BOSTON FINANCIAL DATA SERVICES
P.O. BOX 8412
BOSTON, MA 02266-8412
1 800 344 1770
