Baron Asset Fund (BARAX)

Portfolio Management

AndrewPeck
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 6/30/2016)

During the quarter ended June 30, 2016, equity markets increased before falling suddenly on June 24, when British voters unexpectedly voted in favor of leaving the European Union, the so-called Brexit. After digesting the likely implications of Brexit, U.S. investors appeared to change their view, and the markets rose sharply during the last few days of June and through early July.

Baron Asset Fund increased in the quarter. The top sector contributors to performance were Health Care, Information Technology (IT), and Financials. Industrials and Consumer Discretionary detracted. While results were mixed, contributors among Health Care holdings outweighed detractors. The sector benefited in particular from the strong performance of top contributor IDEXX Laboratories, Inc. Positive performance of the IT sector was largely driven by Gartner, Inc. and Zillow Group, Inc., the second and third largest contributors to performance respectively. A strong showing by property and casualty insurance software vendor Guidewire Software, Inc.  also helped boost performance. Contribution of the Financials sector was led by specialized REIT Equinix, Inc. Weakness in the Industrials sector was driven primarily by holdings in the construction machinery & heavy trucks and trading companies & distributors sub-industries, including top five detractor Westinghouse Air Brake Technologies Corp., which manufactures safety equipment for the rail industry. Consumer Discretionary detracted primarily due to the weak performance of investments in the hotels, resorts & cruise lines and specialty stores sub-industries.

Despite the near-term uncertainty created by various global events, most notably Brexit, we continue to believe that high-quality, mid-sized growth stocks represent an attractive long-term investment opportunity. During the past 30 years, mid-cap growth stocks, as a category, have outperformed small-cap and large-cap growth stocks. We believe that this trend will continue.

The U.S. economy continues to rank among the world’s healthiest, and its equity market multiples are within the range of their long-term averages. Although interest rates declined again during the quarter, perhaps the most prevalent concern among equity investors is uncertainty about what will happen to stocks when interest rates finally begin to increase. We believe that equity markets often perform well during a rising rate environment. Separately, employment and housing trends continue to improve, and energy prices still remain meaningfully below recent levels. We think that our portfolio of what we believe are well-managed, competitively advantaged, fast growing companies will continue to perform well in this environment, although we cannot guarantee that they will.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 6/30/2016)
  • Shares of veterinary diagnostics leader IDEXX Laboratories, Inc. rallied in Q2 on strong financial results and multiple expansion. Competitive trends are strong and improving, highlighted by instrument placement growth of almost 25%, domestic lab growth more than twice that of its main competitor, rising sales productivity, and stability in rapid assays. We think that IDEXX’s direct go-to-market model coupled with meaningful R&D-driven product enhancements will boost revenue and earnings growth over time.

  • Shares of Gartner, Inc., a provider of syndicated IT research, increased in Q2 on strong financial results. We believe that key forward-looking metrics continue to look strong. Contract value growth and productivity trends are approaching levels sufficient to drive margin expansion, retention rates are at all-time highs, and the company has significant financial flexibility. We believe that Gartner will generate accelerating top line growth, significant growth in earnings and free cash flow and persistent return of capital.

  • Zillow Group, Inc. is the leading real estate website in the U.S. In addition to information on rentals and homes for sale, the company owns the Zillow Mortgage Marketplace and Street Easy, New York City’s leading real estate site. Zillow continues to invest in its brand as the leader in an $8 billion real estate advertising market. Shares were up in Q2, based on improving fundamentals and the favorable settlement of a lawsuit with Move, Inc. We think Zillow is well positioned to grow its share of the real estate advertising market.

Detractors (for quarter ended 6/30/2016)
  • Shares of DNA sequencing company Illumina, Inc. fell in Q2 on first quarter revenue that missed Street expectations and a lowered forecast for 2016 due to weak first quarter sales of its HiSeq instrument line and a lower forecast for Europe. Management believes the issues are short-term, fixable, and unrelated to fundamental market demand. We continue to believe Illumina has a long runway for growth driven by increasing adoption of DNA sequencing in clinical markets such as cancer screening, diagnosis, and treatment.

  • Shares of The Charles Schwab Corp., a brokerage business, fell due to the steep market decline and volatility in the wake of “Brexit.” Investors appeared concerned that higher volatility would cut into trading revenue, lower market values would pressure asset-based revenue generation, and interest rate hikes will be paused (or reversed), causing net interest margins to remain low and money market fee waivers to persist. We believe Schwab will continue to experience growth in accounts as brokers leave traditional wirehouses.

  • Shares of financial technology vendor SS&C Technologies Holdings, Inc. detracted from second quarter performance. We attribute the decline to concerns that lackluster hedge fund performance will impact SS&C’s growth. We believe a low single digit percentage of the company’s revenue is directly correlated to equity markets, far less than investors feared. We believe the company will continue to generate attractive revenue growth through market share gains, cross-sales of its expanded services portfolio into the Advent installed base, new product introductions, and share gains in the admin market.

Quarterly Attribution Analysis (for quarter ended 6/30/2016)

The Quarterly Attribution Analysis for period ending June 30, 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 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.