Baron Discovery Fund (BDFFX)
Review and Outlook
U.S. stock markets were unusually volatile during the three months ended September 30, 2015. Most indexes fell sharply, with small caps performing worse than large and mid cap stocks. The small cap Russell 2000 Growth Index lost 13.06% in the third quarter.
Baron Discovery Fund declined by 19.80% in the third quarter. Materials was the only sector to contribute to performance. Health Care, Information Technology (IT), and Industrials were the largest detracting sectors in the quarter. Materials gained on an increase in the share price of Flotek Industries, Inc., which was the Fund’s top contributor in the quarter. The Health Care sector experienced a broad-based decline late in the quarter, led by the health care supplies and biotech sub-industries. Biotech plunged after Hillary Clinton released a proposal to lower drug costs. Comments from the Federal Reserve suggesting it would raise interest rates by year end and concerns over possible cuts or delays in government spending on health care also negatively impacted the sector. IT also experienced a broad-based decline as investors exited high-growth, high-multiple stocks for more defensive sectors and asset classes. The decline of the Industrials sector was led by the third biggest detractor from performance, CaesarStone Sdot-Yam Ltd.
We continue to see a choppy macro environment which is something we have been calling out since Q3 of last year. While we had hoped to see more improvement in the economy by this point, the reality is that the economic data has not meaningfully improved. That being said, while we are mindful of the macro-economic landscape, we are primarily driven by the prospects of the individual companies that we own in the portfolio. On that front, we remain more upbeat based on the conversations we have had with our companies. We believe that many of our companies have the potential to grow through economic choppiness.
While the year-to-date performance has been disappointing, we continue to stay focused on “discovering” the next great growth company. We do not think that the more recent performance of the Fund is indicative of our potential to accomplish that goal over the longer term.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
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 judgement at the time of publication. Our views are not intended as recommendations or investment advise to any person and are subject to chage 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.