Baron Asset Fund (BARAX)
Portfolio Management
Andrew Peck
Fund Manager since 2003
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Baron Asset Fund invests primarily in mid-sized growth companies.
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Portfolio Commentary
Retail PerformanceReview and Outlook (for quarter ended 3/31/2013)
Several of the major U.S. market indexes reached all-time highs during the first quarter. Investors appeared to shrug off concerns about the impact of the ongoing budgetary disagreements on the broader U.S. economy. Instead, they focused on generally positive fourth quarter earnings results and continued signs that the U.S. economy is improving, notably the rise in existing home prices and new home construction activity. In addition, positive money flows continued into equity mutual funds, indicating that investors’ long-awaited shift away from cash may have finally begun.
Nearly all the Fund’s holdings rose during the quarter. Its best performers included companies in the Information Technology and Industrials sectors that own proprietary databases sold largely through recurring annual subscriptions. These businesses benefited from high incremental margins, their ability to raise prices, and generally improved global end markets. The Fund’s Financials sector investments also performed well. The rising stock market and investors’ increased allocations to equities benefited asset managers and brokerages, and firming prices on insurance policy renewals benefited insurers. Companies with exposure to the recovering housing and commercial real estate markets also performed well. Finally, travel and leisure companies in the Consumer Discretionary sector rose, including hotels, resorts, cruise lines and Internet-based travel agents. We believe that continued improvement in global travel demand will lead to a meaningful increase in profitability for these companies, stemming from higher occupancy levels and increased pricing. Holdings that lagged included a genetic sequencing company that might face near-term headwinds from the sequester and its impact on the budget for the National Institute of Health.
During the quarter, the Fund sold three positions and added seven new investments, a few of which are longtime holdings of the Firm. The new positions include Pall Corp., a leading supplier of filtration, separation, and purification technologies for the industrial and biotechnology industries, and VeriSign, Inc, which oversees the global registration of all .com and .net Internet domains.
We continue to believe that stock market valuations are attractive. U.S. interest rates remain near historically low levels, and the fixed income markets offer limited inflation-adjusted returns. Although investors have begun to deploy some funds back into equities, they continue to hold substantial sums on the sidelines. We believe that the Fund will continue to benefit in a market environment that rewards high-quality companies with predictable and fast-growing earnings streams.
Top Contributors/Detractors to Performance
Contributors (for quarter ended 3/31/2013)
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FleetCor Technologies, Inc. provides payment processing services to the vehicle fleet industry. The stock rose during Q1 due to better than expected earnings results and guidance. Organic growth continues to be strong, and management is aggressively seeking to grow outside the U.S. through acquisitions.
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Shares of Verisk Analytics, Inc., which provides information about risk to companies in the insurance, health care, and mortgage industries, outperformed the market as the company announced better than expected earnings for Q4. For Q1, the company grew earnings 26%, with particularly robust results from the company’s expanding portfolio of health care-related analytical and fraud prevention tools. We believe that increasing insurance rates, coupled with product enhancements and extensions, will help to accelerate revenue growth from Verisk’s insurance customers over the next few years.
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Shares of Gartner, Inc., the leading independent provider of research and analysis on the information technology industry, outperformed in Q1, driven by solid financial results among uneven end markets. The company continued to generate record bookings in its research business, with contract value trending up 14%.
Detractors (for quarter ended 3/31/2013)
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Shares of Illumina, Inc. underperformed in Q1. Illumina is a leading provider of genetic analysis tools, including DNA sequencing instruments and consumables. The stock increased in December on press reports that Roche was in discussions with Illumina about a potential takeover. In early January, Roche’s CEO was quoted in the press as saying that the companies could not reach an agreement on price and Roche was abandoning its efforts to acquire Illumina. Our investment thesis is not contingent upon Illumina being acquired.
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Shares of the leading U.S. truck broker, C.H. Robinson Worldwide, Inc., detracted from performance during Q1, declining 5.4% after reporting disappointing earnings. Although truckload freight volumes are improving, C.H. Robinson is experiencing temporary margin pressure as cost of capacity increases faster than its ability to pass pricing to shippers. We believe this issue will be resolved as 2013 unfolds and gross volumes accelerate.
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Shares of United Natural Foods, Inc., the largest distributor of natural and organic products in North America, detracted from Q1 performance despite continued strong fundamentals. The company’s largest customer is Whole Foods, which is experiencing robust, though moderating, growth in the face of tough comparisons. We believe United Natural Foods will continue to benefit from a greater focus on health, growth of organics from less than 10% of grocery today, and conventional supermarkets devoting more space to the category.
Quarterly Attribution Analysis (for quarter ended 3/31/2013)
When reviewing performance attribution on our portfolio, please be aware that we construct the portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio if it meets our rigorous investment criteria. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to achieve a target sector allocation or to approximate an index. Our exposure to any given sector is purely a result of our stock selection process.
The Baron Asset Fund (Retail Shares) gained 14.20% in the first quarter, outperforming the Russell Midcap Growth Index by 269 basis points, primarily as a result of favorable stock selection.
The Fund’s investments within the Information Technology (IT), Consumer Discretionary, and Financials sectors outperformed, contributing the most to relative performance in the quarter. Favorable stock selection within the IT sector was mainly the result of outperformance of FleetCor Technologies, Inc., a payment processing provider to the vehicle fleet industry. Strong organic growth and higher earnings drove the stock higher. Other contributors in the sector were LinkedIn Corp., the #1 professional networking platform with over 200 million registered members, and Gartner, Inc., the leading independent provider of research and analysis on the IT industry. Shares of LinkedIn rose sharply in the quarter due to strong quarterly results, in which the company beat expectations and issued strong 2013 guidance. The company also showed encouraging improvement in its engagement metrics. Within Consumer Discretionary, the majority of the Fund's investments outperformed, led by HomeAway, Inc. and Discovery Communications, Inc. Shares of HomeAway, the #1 firm in online vacation rentals with over 700,000 paid listings, increased 47.7%, buoyed by strong quarterly results in which the company beat expectations and showed an acceleration in its revenue-per-listing metric. Shares of Discovery, a leading global cable network programming operator, performed well in the quarter as the company benefited from continued strong ratings and growth in its U.S. and international audience share. These results have led to higher advertising rates and affiliate fees. Strength in Financials was largely attributable to outperformance of the Fund’s three largest holdings in the sector, The Charles Schwab Corp., a premier discount brokerage firm, CBRE Group, Inc., a leading commercial real estate services company, and Arch Capital Group Ltd., a specialty insurance and reinsurance company.
The Fund’s lower exposure to Consumer Staples, one of the better performing sectors in the benchmark, and underperformance of the Fund’s investments within the Health Care sector were the largest detractors from relative performance. Weakness within Health Care was mainly attributable to underperformance of the Fund’s two health care equipment investments, IDEXX Laboratories, Inc. and Intuitive Surgical, Inc. Shares of IDEXX, the leading provider of diagnostics to the veterinary industry, retreated from their all-time highs reached late last year as investors analyzed the impact of a change in relationship with one of the company’s distributors.
Invest In Baron Funds TodayThe 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 judgment 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 Baron Funds are subject to risk.