Baron Focused Growth Fund (BFGFX)
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Baron Focused Growth Fund invests in a focused portfolio of small and mid-size growth companies.
Review and Outlook
Last year’s volatility continued into 2016, with the U.S. equity markets plunging dramatically during the first six weeks of 2016 before executing an about-face to recover much of their losses, although small cap stocks fared worse than their larger cap counterparts. Concerns around the implications of a tightening credit market in the face of a possible U.S. recession, signs of slowing global growth, China and the RMB, and continued low oil prices drove the U.S. equity markets into correction territory by early February. During the quarter, oil prices declined at one point to near 15-year lows of $26/barrel, before rebounding to near $40/barrel by quarter end. In addition, slowed global growth and deflationary pressure early in the quarter prompted the central banks in Europe and Japan to ease monetary policy, including several that pushed interest rates into negative territory. As global concerns subsided, oil prices ticked up, and domestic job numbers improved, stock markets rallied strongly. In March, the U.S. Federal Reserve boosted equity markets even further with its suggestion that it would defer interest rate hikes that it earlier had been contemplating for 2016.
Baron Focused Growth Fund declined in the first quarter. Investments in the Consumer Discretionary, Health Care, and Consumer Staples sectors contributed to performance. Information Technology (IT) and Financials were sector detractors. Consumer Discretionary had a solid quarter, with the top three contributors all within the sector. Top five contributor Choice Hotels International, Inc. also added to sector performance. Shares of this hotel franchisor rose as its recurring revenue and earnings from franchise fees attracted investors seeking safe havens in a volatile quarter. Health Care advanced on an increase in the share price of Inovalon Holdings, Inc., the portfolio’s only sector holding. The stock price of this health care data and analytics vendor advanced as investors purchased shares at a discounted valuation. The Fund’s sole Consumer Staples investment, consumer products company Church & Dwight Co., Inc., benefited from an investor shift to this defensive sector in the first half of the quarter. The IT sector experienced losses in all four Fund holdings, as high-growth, high-multiple stocks sold off in the volatile market. FactSet Research Systems, Inc., a leading provider of investment management tools led the retreat in the Financials sector, as investors contemplated headcount reductions in its sell side business.
Overall, we think the U.S. economy is doing well. Wages have increased somewhat. Income growth and low prices at the gas pump are providing consumers with more money for discretionary spending. Until now, much of the savings from low energy prices was being used to pay down debt, as consumers and businesses were not convinced that prices would stay low. With the extended low oil price environment, we believe assets previously allocated to energy costs will soon start to be redeployed to other parts of the economy.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending March 31, 2016 is not yet available
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The prospective performance of the companies discussed herein is based on our internal analysis and reflect our opinions only. We cannot promise future returns and our opinions are a reflection of our best judgement at the time of publication. Our views are not intended as recommendations or investment advice to any person and are subject to change at any time based on market and other conditions and Baron has no obligation to update them. Investing in the stock market is always risky. Current and future portfolio holdings in the Fund are subject to risk.
Source: FactSet PA.