Baron Discovery Fund (BDFFX)
Review and Outlook
The first quarter of 2016 was marked by heightened volatility. From the start of the new year, the Russell 2000 Growth Index went in one direction – straight down. By the time the index bottomed on February 11, it had vaporized 18.92% of its value. The rebound that followed left the index down “only” 4.68%. Our portfolio of smaller, earlier stage companies, with a weighted average market capitalization of about $1.4 billion, modestly outperformed the benchmark, with a weighted average market capitalization of about $2.0 billion. We believe this result is a testament to the portfolio’s reconfiguration last year, including larger position sizes geared to more established companies with higher cash flow and less revenue volatility balanced against positions in exciting earlier stage growth companies. We think this is the right mix in the current environment.
Baron Discovery Fund declined in the first quarter. Information Technology (IT) and Financials contributed to performance. Health Care, Materials, and Consumer Discretionary were the top detracting sectors. Contribution of the IT sector was driven primarily by semiconductor companies Mellanox Technologies, Ltd. and M/A-COM Technology Solutions Holdings, Inc., as well as electronic manufacturing services company Mercury Systems, Inc. Mercury, Mellanox and M/A COM were the second, third, and fourth largest contributors, respectively. College housing REIT Education Realty Trust, Inc. was the primary driver of positive performance of the Financials sector. The Health Care sector detracted due to sharp declines among the Fund’s investments in the pharmaceuticals and biotechnology sub-industries, including Pacira Pharmaceuticals, Inc., the second largest detractor in the quarter. Materials lost ground due to a sharp decline in the Fund’s only sector holding, Flotek Industries, Inc., which supplies chemical additives to the oil & gas industry. The Consumer Discretionary sector had a mixed quarter, although detractors outweighed contributors. ClubCorp Holdings, Inc., the third largest detractor in the quarter, led the decline in the sector.
We believe that going forward, we will be able to continue to perform well against the index in most environments, though our smaller capitalization bias favors up markets versus severe down markets. We continue to target companies that we believe can provide at least a 15% annualized return over time. Of course, there are no guarantees.
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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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.