Review and Outlook
Market indexes experienced substantial volatility in the first quarter, dropping approximately 10% through mid-February and then rebounding. The Russell Midcap Growth Index ended the quarter modestly higher. The market downdraft was driven by several factors, including data points signaling a slowdown in the Chinese economy, the continued drop in energy prices, widespread dislocation in the credit markets, and general fears of global political instability. Later in the quarter, oil prices rebounded, credit spreads narrowed, positive data points emerged concerning U.S. employment and housing trends, and the equity markets recovered.
Against this backdrop, investors sought a “flight to safety” early in the quarter. Companies that suffered included those with outsized exposure to China, exposure to commodity end-markets, reliance on credit markets for access to capital, or leverage on their balance sheet. Defensive areas generally did best, and Utilities was the best-performing sector in the Index. Many higher growth stocks fared poorly in this environment, and “value” indexes generally outpaced “growth” indexes – this was most pronounced in the mid-cap space, where the Russell Midcap Value Index outperformed the Russell Midcap Growth Index by 334 basis points.
Industrials and Health Care were the top sector contributors to performance of Baron Asset Fund. The Information Technology (IT) and Financials sectors were the top detractors. Performance of the Industrials sector was led by Fastenal Company, the third largest contributor to performance. Although Health Care investments had a mixed quarter, contributors outweighed detractors. The sector included the top two contributors, IDEXX Laboratories, Inc. and West Pharmaceutical Services, Inc., respectively. Other notable contributors included Henry Schein, Inc. and Cooper Companies, Inc. Shares of Henry Schein, a distributor of dental, medical and animal health products, rose on business strength and earnings outperformance. Shares of soft contact lens manufacturer Cooper rose after a reported beat and raise in its fiscal Q2, including strong ex-U.S. sales driven by its silicon hydrogel portfolio. Top detractor LinkedIn Corp. was the main driver of weak performance of the IT sector. Guidewire Software, Inc. also weighed on performance. Shares of this property and casualty insurance software vendor fell as high-growth, high-multiple technology stocks sold off. The third largest detractor in the quarter, The Charles Schwab Corp., led the decline of the Financials sector.
Despite the ongoing volatility, we continue to believe high-quality, mid-sized growth stocks represent an attractive long-term investment opportunity. The U.S. economy is among the world’s healthiest, and its equity market multiples are within the range of their long-term averages. Employment and housing trends continue to improve, and energy prices – even after their two month jump - remain meaningfully below recent levels. We think our portfolio of what we believe are well-managed, competitively advantaged, fast growing companies will perform well in this environment, although we cannot guarantee that it will.
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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