Review and Outlook
We were pleased with the increase in our performance this quarter. Of course this is only a short sliver of time, and we strive to earn our returns over the long term in the context of a multi-year investment horizon. In our opinion, it is only through a strategic longer-term view that we can have the key variant opinions that give us a potential investment edge.
Health Care, Industrials, and Consumer Discretionary were the top contributing sectors. Consumer Staples detracted. Health Care performance was led by the health care services, health care technology, and health care equipment sub-industries. The sector included top contributor, Press Ganey Holdings, Inc. Top five contributor ExamWorks Group, Inc. was another notable performer. Industrials benefited from positive performance of the Fund’s aerospace & defense investments, including The KEYW Holding Corporation and Mercury Systems, Inc., two of the top three contributors in the period. Investments in the restaurants and casino & gaming sub-industries boosted results of the Consumer Discretionary sector, including fast food restaurant chain Wingstop, Inc., a top five contributor to performance. Consumer Staples was the only sector to detract in the quarter, due to the weak performance of the third biggest detractor Barfresh Food Group, Inc.
Any number of factors can affect shorter-term performance, including style (growth, value, momentum), industry type (defensive, cyclical, etc.), market capitalization size, technical factors and even reflexivity (where a feedback loop is effectively created that creates virtuous or destructive cycles that perpetuate themselves). Of course, macroeconomic shocks, like the recent Brexit vote, can also cause massive market dislocations. The relative weighting of any of these given factors and/or exogenous shocks or stimulants versus our portfolio can vary radically in a short period of time. We are not market timers because we do not believe that we can accurately predict and modify the portfolio to respond constantly to the vagaries of such changes in these multiple variables. Most of the time, the overall market in the short term is affected by the story of the day. But often times, that story turns out to be not very meaningful on an ex-post basis (remember Y2K?). Generally it is uncertainty, rather than an actual known bad event, that causes the biggest market dislocations. Uncertainty dramatically affects the style factor of the day, and can cause wide variations in actual versus expected performance given a set of fundamentals for a particular company or portfolio.
We are excited about the prospects of the companies in which we invest. Our perspective is that the innovation being driven by these companies will lead to strong revenue and cash flow growth for years into the future. We believe our investors will be rewarded as these plans are realized. While we cannot guarantee results, we strive to earn compounded annual returns of at least 15% by targeting companies that can grow cash flows at these rates with a high probability of conviction. This has been particularly difficult in the current markets. However, we continue to believe this is possible.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending June 30, 2016 is not yet available
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