Baron Asset Fund (BARAX)

Portfolio Management

Andrew Peck

Fund Manager since 2003

View All Commentary by Andrew

Fund Description

Baron Asset Fund invests primarily in mid-sized growth companies.


Portfolio Commentary

Retail Performance

Review and Outlook (for quarter ended 9/30/2015)

During the three-month period ended September 30, 2015, most market indexes dropped sharply.  Stocks began their decline in late August, before partly recovering, and then falling sharply again in late-September. Baron Asset Fund fell 8.25%; the Russell Midcap Growth Index declined 7.99%, and the S&P 500 Index declined 6.44%. The reasons for the market decline included increased uncertainty about the health of the Chinese economy, and the potential ramifications this might have on global growth; the continued decline in energy and commodity prices; and the shockwaves from a rapid decline in biotechnology shares, driven by concerns about that industry’s pricing trends. Although we believe the Fund had limited direct exposure to these developments, many of our investments suffered over these concerns, nonetheless.

The investments that performed best against this challenging backdrop included Health Care companies that lacked even tangential exposure to the drug pricing concerns that affected many important participants in the sector, including IDEXX Laboratories, Inc., a veterinary diagnostic firm. Several Information Technology businesses reported good results, indicating that they were insulated against these issues, including VeriSign, Inc., SS&C Technologies, Inc. and Equinix Inc. (a data center and co-locator provider that is classified by GICs as a REIT). Finally, companies with proprietary data and analytics, characterized by highly-recurring, largely subscription-based revenues, also performed relatively well, including Verisk Analytics, Inc., Nielsen Holdings Plc and Gartner, Inc.

The worst performers included DNA sequencer manufacturer Illumina, Inc., which suffered from company-specific issues and fall-out from the sell-off in biotechnology shares. China-related concerns affected Mettler-Toledo, Inc., a weighing device manufacturer with an important presence in that market. The continued drop in energy prices hurt midstream energy master limited partnerships Shell Midstream Partners LP and Tallgrass Energy GP LP, as well as FleetCor Technologies, Inc., which provides credit card processing services for large oil companies.

Nothing has changed our longstanding view that high-quality, mid-sized growth stocks represent an attractive long-term investment opportunity. The U.S. economy is among the world’s healthiest, and, particularly after this quarter’s stock market correction, its equity market multiples are within the range of their long-term historic averages. Interest rates remain at historic lows, and although past performance is not indicative of future performance, we believe history demonstrates that equity markets often perform well even after rates increase. Employment and housing trends continue to improve, and energy prices remain meaningfully below their recent levels. We believe that our portfolio of well-managed, competitively advantaged, fast growing companies will have the potential to perform well in this environment.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 9/30/2015)
  • Shares of veterinary diagnostics manufacturer IDEXX Laboratories, Inc. contributed to Q3 performance. The company reported strong Q2 results that demonstrated share gains in instruments and reference labs, and assuaged concerns regarding its competitive position in rapid assays. Catalyst placements grew 44% in the quarter, driven by the launch of CatalystOne in the U.S. and Europe. Premium hematology placements grew 30% in Q3, a meaningful increase from 14% last quarter. Reference lab results were also strong, growing 12.1% in Q3.

  • Arch Capital Group Ltd. is a Bermuda-based specialty insurance and reinsurance company. Shares rose on reports of good quarterly financial results with 9% growth in book value per share. Despite soft industry pricing conditions, Arch continues to generate above-average returns due to profitable underwriting, benign catastrophe losses, and favorable reserve development. The recently acquired mortgage insurance business is scaling up. M&A activity in the property & casualty insurance industry has also helped boost share prices.

  • Verisign, Inc. provides Internet infrastructure services worldwide. Shares of Verisign were up in Q3 due to better-than-expected financials results on both revenue and margins. Verisign’s contract with the Internet Corporation for Assigned Names and Numbers (ICANN) creates high barriers to entry for competitors. We believe the company stands to benefit from the global expansion for .com domains along with the global demand for additional top level domains.

Detractors (for quarter ended 9/30/2015)
  • Shares of Illumina, Inc. detracted from performance in Q3. Illumina is the leading provider of next generation DNA sequencing instruments and consumables. During Q3, the company reported financial results that missed the Street’s revenue estimate. Although revenue increased 25% year-over-year and management reiterated full-year guidance, expectations had risen too high. We believe Illumina has a dominant position in DNA sequencing at a time when demand is accelerating, driven by expansion of the company’s technology into clinical markets.

  • TerraForm Power, Inc. is a dividend growth-oriented company (a yieldco) focused on solar power. The stock dropped after the acquisition of residential solar developer Vivint Solar by parent SunEdison, Inc. Investors questioned aspects of the deal, including its $2.2 billion price tag. We believe in the secular renewable energy story and that SunEdison’s large development pipeline will benefit its yieldcos. We think the market dislocation is technical and temporary and that TerraForm Power will resume future growth.

  • Shares of Mettler-Toledo International, Inc. detracted from performance in Q3. Mettler is the world’s largest provider of weighing instruments for use in laboratory, industrial, and food retailing applications. The company reported good results, but weakness in China resulted in a slight lowering of its constant currency revenue growth forecast for the year. We continue to believe Mettler is an exceptional business with an outstanding management team and our long-term investment thesis is unchanged.

Quarterly Attribution Analysis (for quarter ended 9/30/2015)

The Quarterly Attribution Analysis for period ending September 30, 2015 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 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.