Breaking into the Consumer Class

Artisan Insights Insights

November 2012 August 2013

Artisan partners

Breaking into the Consumer Class

Almost three billion people are predicted to join the worlds middle classes over the next three decades, with most of that growth taking place almost exclusively in emerging markets. This boom in the middle classes is garnering extra attention from market participants, understandably so given that strong middle classes have historically acted as powerful engines for growth, providing a stable consumer foundation for economic progress by driving consumption and demand. It is important to note upfront that agreeing upon fixed definitions for socioeconomic classes is a tricky task. Middle class, upper class and lower class can mean different things to different people, yielding a wide range of often-conflicting definitions. Some economic and social observers take an absolute perspective, defining the middle class as individuals earning over a certain level while others take a relative approach, indicating particular percentile ranges as falling within the middle class. For the purposes of this piece, we are less concerned with defining the middle class and more interested in exploring the consumer behavior patterns associated with the middle classes. More specifically, we will examine the changes in spending patterns that take place when consumers move from the low income range into the lower-middle income bracket. When individuals make this leap, big changes in consumer behavior take place. These changes are seen in S-curve econometric findings which illustrate a threshold effect, showing demand changing quickly in the steep part of the curve and later slowing to a more incremental pace (see Exhibit 1). For many consumer services and products, the steepest part of the S-curve coincides with the jump in income levels from lower to lower-middle class. Depending on the particular economy or market, certain pockets of consumer products and services are expected to see substantial growth thanks to this sharp uptick in consumption driven by the newest members breaking into the middle class.
Exhibit 1: Example Product S Curve: Product Spending vs GNI per Capita

Acceleration
Product Spending 0

$2,000

$4,000

$6,000 GNI per capita

$8,000

$10,000

$12,000

Source: Artisan illustration

Though several economies are expected to experience the rapid changes in consumption associated with this threshold range, we will focus on changing consumer dynamics in China, India and Indonesia as they provide useful examples of these socioeconomic secular changes. These particular countries are set apart by the sheer volume of their populations. They are poised to begin or to continue their progress through the crucial threshold range in the coming years, and each occupy a different place along the spectrum of shifting consumption patterns. For demonstration purposes, we have chosen to illustrate economic classifications as per the World Banks main criterion, gross national income (GNI) per capita. GNI per capita is the dollar value of a countrys final income in a year divided by its population, reflecting the average income of a countrys citizens. Exhibit 2 below highlights India, Indonesia and China residing in the sweet spot of rapid acceleration in consumer

2011 Population (millions)

Exhibit 2: 2011 GNI per capita and 2011 Annual GDP Growth

12.0%

Lower Middle Class Countries

50M 100M 1,000M

10.0%

India
8.0%

China

Turkey

Indonesia GDP Growth (2011)

6.0%

Colombia Peru Malaysia South Africa

Uruguay Russia

Chile

Ukraine Vietnam
4.0%

Poland Philippines Mexico Brazil Venezuela

2.0%

Egypt Thailand
0.0%

Hungary

-2.0%

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

$11,000

$12,000

$13,000

$14,000

$15,000

Source: All World Bank

GNI per Capita

Breaking into the Consumer Class

behavior changes. Exhibit 3 emphasizes the rapid escalation of middle class consumption expected in these countries between 2009 and 2030. India and Indonesia failed to even make the Top Ten cut in 2009, only to rocket to the #1 and #4 spots by 2030. In Exhibit 2, India falls to the the left side of the sweet spot, with a 2011 population of 1.2 billion, 6.3% GDP (gross domestic product) growth rate and GNI per capita of $1,450. GDP is an indicator of the economic health of a country, comprised of the monetary value of all the finished goods and services produced within a countrys borders. Consumer products and services experiencing significant growth in India include food services, mobile banking and payments and consumer durables. Indonesia lands in the middle of our illustration (based on GNI per capita), with a 2011 population of 242 million, 6.5% GDP growth rate and GNI per capita of $2,930. In this particular economic cross-section, discretionary foods, car sales and retail banking are experiencing high growth. Lastly, China falls to right side of our illustration, having progressed further along the income spectrum. Chinas 2011 population measured 1.3 billion, with a GDP growth rate of 9.3% and GNI per capita of $4,940. Booming products and services in demand by Chinas developing middle class include tourism, Internet-related items and health care.
Exhibit 3: Middle Class Consumption: Top 10 Countries Billions of 2005 Purchasing Power Parity (PPP) USD and Global Share 2009
United States Japan German France United Kingdon Russia China Italy Mexico Brazil 4,337 21% 1,800 8% 1,219 6% 927 4% 889 4% 870 4% 859 4% 740 3% 715 3% 623 3%

2030 (Projected)
India China United States Indonesia Japan Russia Germany Mexico Brazil France
Source: Homi Kharas, Brookings Institution 2011

12,777 23% 9,985 18% 3,969 7% 2,474 4% 2,286 4% 1,448 3% 1,335 2% 1,239 2% 1,225 2% 1,119 2%

India: Food Services, Mobile Banking and Payments and Consumer Durables
India is poised to move from the low to lower-middle income bracket and the accompanying expansion of domestic consumption is predicted to make it one of the largest consumer markets in the world. Growth of the consumer class is expected to be driven by rising incomes. Global consulting firm McKinsey predicts that average real household disposable income is set to grow at a compounded annual growth rate (CAGR) of 5.3% between 2005 and 2025, helping to push the middle class from some 5% of the population in 2005 to 41% of the population in the coming decades.
Exhibit 4: Projected Consumer Spending Nominal Annual Growth Rate, (2010-2020) India 14% Worldwide Emerging Economies 5.5% 9%

Source: Boston Consulting Group, The Tiger Roars (Feb 2012)

2020 (Projected)
China United States India Japan Germany Russia France Indonesia Mexico United Kingdom 4,468 13% 4,270 12% 3,733 11% 2,203 6% 1,361 4% 1,189 3% 1,077 3% 1,020 3% 992 3% 976 3%

The three largest consumer spending categories in India are transportation and communication, food, and housing and durables (such as washing machines and refrigerators). These categories are expected to still be the leaders in 2020, but as increasing numbers of citizens make the jump into the middle class, the nature of the consumption within these categories will change.

Food Services
The food services sector in India has posted a meaningful 13% CAGR over the past ten years, but there is considerably more room for growth as the developing middle class quickly builds a taste for eating outside of the home. Rising disposable incomes, urbanization, younger consumers, strong acceptance of Western brands and increasingly busy lifestyles are converging to drive the massive growth in food services. The current market penetration data also highlights the significant long-term growth potential of the heavily populated Indian market: by the end of 2011, there were 51 restaurants per million people in the U.S. versus a population penetration of 0.25 in India. Within the broader food service industry,

Breaking into the Consumer Class

chained restaurants are an especially hot growth area: the National Restaurant Association of India expects the chained restaurant segment to post a 21% CAGR between 2013-2018, growing to represent roughly USD6.5 billion by 2018. Quick-service restaurants, known for fast, efficient, take-out-ready foods at affordable prices, are enjoying annualized growth rates of 25-30% even amidst choppy economic conditions and are forging ahead with plans to open new outlets.

electrification and low penetration rates: currently, the penetration rate for refrigerators in rural markets is only 2% and washing machines only 0.5%.
Exhibit 5: Share in the Indian Consumer Durables Market (2011)

Mobile Banking & Payments

A host of factors are coming together to create a take-off point for growth within the mobile payment industry. First, the penetration of mobile phones surpassed that of fixed land-lines nearly ten years ago. Meanwhile, the government has taken several steps which are supportive of the fledgling industry. In addition, critical technology has recently become available and the key consumer groups are ready to adopt the new services. Today, non-cash payment is in the very early stages of penetration in India. Most customers use bank cards for ATM cash withdrawals instead of actual card payments, and even fewer customers use mobile payments. With a mobile device essentially playing the same role as a traditional debit card, mobile payment systems would allow customers to utilize government disbursements, make peer-to-peer payments, pay bills, manage point-of-sale purchases and make business payments to employees and other businesses. The convenience advantage for consumers is evident. As for the companies providing the payment structure, the projected fee income in India from mobile payment and banking transactions could exceed USD4.5 billion by 2015, based on estimates from The Boston Consulting Group. Because the fees will be shared by several interested parties (banks, telecom operators, device makers, service providers, etc.), that figure may not move the needle much. However, customers using mobile payments provide other important benefits to the companies, in the form of lower costs and lower churn rates. Churn rates represent the proportion of service users that discontinue their subscription in a given time period.

Urban 65%

Rural 35%

Source: India Brand Equity Foundation, Electronic Industries Association of India, Corporate Catalyst India, Aranca Research

Exhibit 6: Growth in the Indian Consumer Durables Market 20102015 Overall Consumer Durables Sector CAGR 2010 Market Size: 2015 Estimated Market Size: 20102015 Rural and Semi-Urban Areas CAGR 2010 Market Size: 2015 Estimated Market Size: 14.8% USD6.3bn USD12.5bn 25% USD2.1bn USD6.4bn

Source: India Brand Equity Foundation, Electronic Industries Association of India, Corporate Catalyst India, Aranca Research

Indonesia: Discretionary Foods, Car Sales and Retail Banking

With a 2011 population of 242 million, Indonesia is the fourth most populous country in the world and over the coming years, is expected to become one of the worlds fastest-growing economies. Currently classified as a lower income economy, rapid expansion in the Indonesian middle class is on the horizon. The Boston Consulting Group estimates that by 2020, the number of middle-class and affluent consumers in Indonesia is expected to double from about 74 million (30% of the total population) to 141 million (over 50% of the population). During that time, roughly 8 million people will leave the lower class and enter the middle class each year.

Consumer Durables
Indias consumer durables sector, which includes items such as televisions, laptop computers, air conditioners and refrigerators, earned revenues worth USD7.3 billion in 2012. Growth has been healthy over recent years, enjoying a CAGR of nearly 11% between 2003-2012, and is expected to post a CAGR of nearly 15% over 2010-2015, reaching a market size of USD12.5 billion. Demand growth is expected to accelerate on the back of rising disposable incomes and easy access to credit for the middle class consumers. The increase in discretionary incomes and easy financing schemes have helped to shorten product replacement cycles, and changing lifestyles have changed the perception of durables to be utility items rather than luxury possessions. Rural and semi-urban markets represent an especially unique opportunity on the back of increasing

Changes in Food Consumption

Rising income and increasing discretionary spending fuels the consumption of processed foods sold at affordable prices, which is an important distinction between lower and upper middle class consumers. According to global advisory firm KPMG, value is especially important for new members of the middle class. Although disposable income is rising for those entering the ranks of the middle class, these consumers are likely to seek out the most economical option. Case in point, processed food consumption is estimated to be growing faster than the total expenditure for food as Indonesians breaking into the middle class begin buying more snack foods outside of their standard staple foods. Common processed foods that are poised to see rising demand from these consumers include snacks, instant noodles, coffee and tea, dairy items and candies.

Breaking into the Consumer Class

Diving more deeply into the world of candies, the Indonesian confectionary industry, which includes candies and chocolates, is currently worth USD1.6 billion. As youthful emerging middle class populations enjoy higher disposable income and spend more on non-essential food items, chocolates are predicted to experience 15-16% growth per annum, according to Bank of America Merrill Lynch.

China: Tourism, Internet and Health Care

No matter which way you look at it, China stands out among those countries with growing ranks in the consuming middle class. The Organisation for Economic Co-operation and Development (OECD) predicts that middle class spending in China will exceed the U.S. in 2020 and surpass the 27-nation European Union in 2027. The movement is partially driven by Chinas transition from an export-led economy to a consumer-focused economy, a move spelled out by the governments 12th Five-Year Plan in 2011. The resulting policy initiatives were meant to stimulate private consumption and many consider it to be a key catalyst for the growth of Chinas emerging middle-class population. The developing Chinese middle class is driving noteworthy growth rates across many sectors; here we will focus on three in particular tourism, Internet and health care.

Car Sales
Car sales in Indonesia have jumped significantly in the past few years, closely mirroring a pattern seen in China in 2009-2010 as the Chinese economy moved through a similar income threshold range. Indonesian auto sales increased by 17% in 2011, reaching 900,000 units and in 2012, sales rose to a record 1.1 million units. Multinational auto companies are working to design vehicles specifically for the Indonesian consumers, where low multi-purpose vehicles (LMPV) dominate the market. More than 70% of passenger cars sold in Indonesia are LMPV cars with prices below IDR200 million (about USD20,000).

Tourism
As Chinese consumers move along the income spectrum, straddling the border between the lower- and upper-middle classes, tourism, travel and leisure activities become more accessible. According to the World Tourism Organization, Chinas expenditure on travel abroad reached USD102 billion in 2012, making it the first tourism source market in the world in terms of spending. Growing disposable incomes, increasing urbanization, the appreciation of the renminbi and more relaxed foreign travel restrictions are driving up the volume of international trips taken by Chinese travelers. International trips have ballooned from 10 million in 2000 to 83 million in 2012, and expenditures by Chinese tourists abroad have increased nearly eightfold since 2000.

Retail Banking
Indonesias consumer and retail banking sector is also predicted to have high growth potential because bank account penetration rates are strongly influenced by income. Retail banking is geared primarily toward individual customers, offering services such as saving and checking accounts, ATMs, mortgages, personal and micro loans, along with debit and credit cards. The target market for financial services providers is upwards of 30 million potential new customers in Indonesia and serves as a significant growth driver for the sector. As individuals cross over to the middle class, the consumer financial services space is expected to see significant growth in categories such as housing loans, auto loans and credit cards. Exhibit 7 illustrates one measure of banking penetration. Relative to its peers, Indonesia has a relatively low proportion of adults with an account at a formal financial institution, leaving meaningful room for growth. The consumer segment is especially attractive to banks because products such as consumer loans produce higher yield and lower rates of non-performance versus other products, helping to bolster bank profitability.
Exhibit 7: Adults With an Account at a Formal Financial Institution
100% 90 80 70 60 50 40 30 20 10 Korea Taiwan Thailand Poland Malaysia China Turkey Brazil South Africa Russia Kazakhstan India Colombia Nigeria Mexico Indonesia Peru UAE Egypt United States Philippines Cambodia Chile 0

Internet
In 2012, China was home to 564 million Internet users. As impressive as that may seem, it is equal to only roughly 40% of the total population. In just two years from now, The Boston Consulting Group expects the penetration rate is expected to jump to exceed 50% of the population. As a point of comparison, 2015 penetration rates in developed markets such as the U.S. and Japan are forecasted to be 70-80%. In mature markets, consumers tend to access the Internet on personal computers (PCs) via dial-up or broadband connections. Among populations in developing markets, characterized by growing but relatively lower average disposable incomes, PCs are much less commonly owned than mobile devices. In China, nearly 70% of Internet users indicated that they utilized their phones to access the web in 2011. With the surge in Chinas middle class and the accompanying growth in Internet use, a few key consumer trends are noteworthy. Online shopping is the second fastest-growing Internet activity in China, after microblogging. According to Boston Consulting Group, more products in 2010 were purchased on Taobao, a major online marketplace, than at Chinas top five brick-and-mortar retailers combined. And when consumers arent actually shopping online, they are often researching products that they may eventually buy in standard stores. In fact, 25% of consumers research online before buying offline.

88%

64%

35%

20%

Source: World Bank Development Research Group, Policy Research Working Paper 6025, 2012

Breaking into the Consumer Class

Exhibit 8: China Internet User Growth

700 600 500 400 300 200 100 0
16% 23% 42%

Featured Opportunities in Artisan International Fund

As of 30-Jun-2013
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
38% 34%

Internet Users (millions) Online Penetration

29%

457 384

513

564

298 210
2007 2008 2009 2010 2011 2012

The growing universe of middle class consumers presents a compelling opportunity for both local and multinational businesses alike, creating a rich landscape for investors to navigate. We believe that our investment process has led us to attractive growth opportunities that successfully take advantage of the meaningful long-term secular trends and themes playing out emerging markets around the world. Though several specific pockets of growth are described in our broader commentary, our investment process is inherently bottom up and is based on a thorough analysis of a potential investments sustainable growth characteristics and valuation, in addition to its exposure to attractive long-term secular trends. As such, the portfolio may not simultaneously feature holdings in each and every one of the hotspots. We believe our portfolio currently holds high-quality companies with several key attributes, positioning them well to sustain earnings growth over the long term.

Source:CNNIC (China Internet Network Information Center)

Health Care
A potent combination of ongoing urbanization, a rising middle class, increasing disease burdens and a governmental focus on health care is driving an explosion in Chinese health care, pushing it to be one of the highest projected areas of growth in the country. As incomes grow, citizens awareness of personal health grows along with access to treatments. New members of the Chinese middle class bring with them more modern perspectives, leaving behind the traditional conservatism in personal finance driven by a collectivist mentality, and instead turning to a self-satisfaction mindset, which helps to grow health care expenditures. From 2006 to 2011, health care spending doubled to reach USD357 billion and is estimated to hit USD1 trillion by 2020, accounting for nearly 5% of Chinas GDP. Key hot spots within the health care arena include insurance, medical devices and pharmaceuticals. Between 2005 and 2011, Chinas pharmaceutical industry sales grew at a 23% CAGR while the highly correlated pharma distribution industry has seen revenue growing at double-digit rates for the last several years. Basic health care insurance coverage has also jumped significantly, increasing from 25% of the population in 2005 to 97% in 2011.
Exhibit 9: China Health Expenditure Per Capita (current USD)
250 200 150 100 50

Indonesia: Discretionary Foods

As incomes rise, tastes change along with food consumption patterns. New entrants to the middle class begin buying more snack foods outside of their standard staple foods, increasing demand for items such as snacks, instant noodles, coffee and tea, dairy items and candy.

Nestle
Multinational giant Nestle is the largest food and beverage company in the world. Via a subsidiary, Nestle has been operating in Indonesia since 1971 where it currently employs more than 2,600 employees and operates three factories. In 2012, Nestle achieved double-digit growth in Indonesia with strong contributions from chocolate, ice cream and ready-to-drink beverages. We think Nestles exposure to emerging markets such as Indonesia will be a key driver of growth as consumers have an increasingly strong preference for branded products.

20002010 CAGR: 16%

Indonesia: Car Sales

Indonesian auto sales increased by 17% in 2011, reaching 900,000 units. In 2012, sales climbed to a record 1.1 million units, putting the Indonesian market on a trajectory to surpass the car markets in Italy and the United Kingdom in 2015.

Honda
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: World Bank

Opportunity
The growing universe of middle class consumers presents a compelling opportunity for both multinational corporations and local businesses. Companies looking to thrive in emerging markets must understand these new consumers and their rapidly evolving lifestyles.

We believe Japan-based Honda is poised to generate strong top-line growth on the back of impressive volumes in car and motorcycle sales. We are attracted to Hondas advantageous regional exposure, including its strong presence in the Indonesian car market. Hondas City and Civic models are leaders in the sedan segment, combining to take more than 60% in market share. Its hatchback Jazz model is also a top seller. The low multi-purpose vehicle (LMPV) market is Indonesias largest but also most competitive car segment, and Honda is currently designing a car specifically for this pocket of Indonesian demand.

Breaking into the Consumer Class

Indonesia: Consumer and Retail Banking

Indonesias consumer and retail banking sector is predicted to have high growth potential thanks to the ongoing surge in its middle class ranks. The target market for financial services providers is upwards of 30 million new customers in Indonesia.

China: Internet
Chinas current 564m Internet users are equal to only roughly 40% of the total population. In just two years from now, the penetration rate is expected to jump to exceed 50% of the population. We have identified two attractive investments which we believe will benefit from the surge in Chinas middle class and the accompanying growth in Internet use.

Bank Rakyat Indonesia

Bank Rakyat is a domestically focused retail bank. We are attracted to Bank Rakyats emphasis on micro loans, a segment which has proved to be profitable. Bank Rakyat is the dominant player in the Indonesian micro loan space and boasts a portfolio five to six times bigger than its peers. Its extensive network of branches and outlets is also advantageous, providing a deep foundation of deposits to support loan growth. We believe the company is well positioned to leverage its unique assets and leadership position to produce sustainable long-term earnings growth.

Baidu
Founded in 2000, Baidu is a Chinese language Internet search provider with a dominant market share. Baidu also has an expanding online video operation called iQiyi. In China, the convergence of affordable smartphones, better network connections and greater access to apps is fueling rapid adoption of mobile Internet usage. As Baidu works to develop and monetize new products designed to attract and retain mobile users, the company has entered into a substantial investment phase. We believe the company has the potential to successfully monetize its mobile search platform and that its ongoing investment will create a considerable competitive advantage.

China: Tourism
Growing disposable incomes, increasing urbanization, the appreciation of the renminbi and more relaxed foreign travel restrictions are driving up the volume of international trips taken by Chinese travelers. We have identified several air travel-related companies which we believe will benefit from the 6.6% annual growth rate of air traffic in emerging economies over the next 20 years, as forecasted by Airbus. In our view, these aerospace companies will also benefit from other growth drivers such as a structural shift to more fuel-efficient planes and record order backlogs at major aircraft producers Boeing and Airbus.

Tencent
Tencent is Chinas largest listed Internet company by market value. The web conglomerate offers a diverse assortment of web services including online games and an e-commerce business. Beyond Tencents core gaming revenue, the company is working to capture space on mobile devices with its WeChat instant messaging program. Tencent is also seeking to launch entertainment services for smartphone and tablet users. We are attracted to Tencents diversified revenue streams and proven ability to monetize its significant user base.

Zodiac Aerospace
Zodiac manufactures and sells high-technology equipment as well as safety systems, flight-deck controls and cabin interiors. Zodiac is the global leader in commercial aircraft seats.

Meggitt
Meggitt specializes in engineering components and systems for aerospace, defense and energy customers. Its products include braking, sensory and control systems.

Rolls-Royce
Rolls-Royce manufactures engine products. In 2012, 73% of revenues came from the combined civil and defense aerospace segments.

IHI Corp
23% of IHIs net sales and 30%+ of its profits are generated in its aero and engine division, which produces jet engines, space-related equipment and defense machinery.

Breaking into the Consumer Class

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Carefully consider the Funds investment objective, risks and charges and expenses. This and other important information is contained in the Funds prospectus and summary prospectus, which can be obtained by calling 800.344.1770. Read carefully before investing.
International investments involve special risks, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Securities of small- and medium-sized companies tend to have a shorter history of operations, be more volatile and less liquid and may have underperformed securities of large companies during some periods. Growth securities may underperform other asset types during a given period. The views and opinions expressed are based on current market conditions at the time of publication, which will fluctuate and those views are subject to change without notice. While the information contained herein is believed to be reliable, there no guarantee to the accuracy or completeness of any statement in the discussion. This material is for informational purposes only and should not be considered as investment advice or a recommendation of any investment service, product or individual security. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. For the purpose of determining the Funds holdings, securities of the same issuer are aggregated to determine the weight in the Fund. The holdings mentioned above comprise the following percentages of the Funds total net assets (including all share classes) as of 30-Jun-13: Baidu Inc 2.8%; Bank Rakyat Indonesia Persero Tbk PT 0.6%; Honda Motor Co Ltd 3.3%; IHI Corp 0.7%; Meggitt PLC 1.0%; Nestle SA 3.2%; Rolls-Royce Holdings PLC 1.4%; Tencent Holdings Ltd 1.4%; Zodiac Aerospace 1.74%. Securities named in the Commentary, but not listed here are not held in the Fund as of the date of this report. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual securities. All information in this report includes all classes of shares and is as of 30-Jun-13 unless otherwise indicated. Definitions and Clarifications: CAGR represents compound annual growth rate, the year-over-year growth rate over a specified period of time. GDP growth (annual %), according to the World Bank: Annual percentage rate of GDP at market prices based on constant local currency. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degredation of natural resources. GNI per capita, according to the World Bank: GNI per capita is the gross national income, converted to U.S. dollars using the World Bank Atlas method, divided by the midyear population. GNI is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. GNI, calculated in national currency, is usually converted to U.S. dollars at official exchange rates for comparisons across economies, although an alternative rate is used when the official exchange rate is judged to diverge by an exceptionally large margin from the rate actually applied in international transactions. To smooth fluctuations in prices and exchange rates, a special Atlas method of conversion is used by the World Bank. This applies a conversion factor that averages the exchange rate for a given year and the two preceding years, adjusted for differences in rates of inflation between the country, and through 2000, the G-5 countries (France, Germany, Japan, the United Kingdom, and the United States). From 2001, these countries include the Euro area, Japan, the United Kingdom, and the United States. PPP stands for purchasing power parity, an economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currencys purchasing power. In short, the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency. Artisan Funds offered through Artisan Partners Distributors LLC (APDLLC), member FINRA. APDLLC is a wholly owned broker/dealer subsidiary of Artisan Partners Holdings LP. Artisan Partners Limited Partnership, an investment advisory firm and advisor to Artisan Funds, is wholly owned by Artisan Partners Holdings LP. Copyright 2013 Artisan Partners. All rights reserved.

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