Baron Discovery Fund (BDFIX)
Review and Outlook
The Review and Outlook for period ending March 31, 2015 is not yet available
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
When reviewing performance attribution on our portfolio, please be aware that we construct the portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio if it meets our rigorous investment criteria. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to achieve a target sector allocation or to approximate an index. Our exposure to any given sector is purely a result of our stock selection process.
The Baron Discovery Fund (Institutional Shares) gained 6.78% in the first quarter and performed in line with the Russell 2000 Growth Index.
The Fund’s investments within Health Care and Consumer Discretionary and its lower exposure to the lagging Consumer Staples and Industrials sectors were the largest contributors to relative performance. Strength in Health Care was mostly attributable to the outperformance of the Fund’s biotechnology holdings, led by Foundation Medicine, Inc. and Esperion Therapeutics, Inc. These companies were also the Fund’s largest contributors on an absolute basis after their shares more than doubled in the period. The Fund’s larger exposure to pharmaceutical stocks, which rose 14.9% as a group within the index, and outperformance of its investments in this sub-industry also added value. Among the largest contributors to relative performance in pharmaceuticals were Intersect ENT, Inc., which sells a device that is implanted in patients who have had surgery for chronic sinusitis, and TherapeuticsMD, Inc., which is focused on the hormone replacement therapy market. Shares of Intersect ENT increased after the company beat earnings expectations and noted that product development is advancing on schedule, while TherapeuticsMD’s shares rose in anticipation of the company reporting drug trial results in third quarter of 2015. Within Consumer Discretionary, the Fund’s larger exposure to casinos & gaming through its investment in top performing Pinnacle Entertainment, Inc. and the outperformance of apparel retailer Boot Barn Holdings, Inc. contributed the most to relative results. Pinnacle was the Fund’s third largest contributor to absolute performance, while shares of Boot Barn were up after the company reported better than expected quarterly results and raised guidance for its first fiscal year as a public company.
Underperformance of the Fund’s investments within the Information Technology (IT), Financials, and Materials sectors and its average cash exposure of 5.7% in a favorable period for small-cap stocks detracted the most from relative performance. Weakness in IT was mainly due to the underperformance of Varonis Systems, Inc. and Coupons.com, Incorporated, two of the Fund’s largest detractors on an absolute basis. The Fund’s limited exposure to semiconductors and its lack of exposure to application software, which were two of the best performing IT sub-industries in the index, also hampered relative results. Within Financials, underperformance of hotel & resort REITs Strategic Hotels & Resorts, Inc. and Chesapeake Lodging Trust detracted the most from relative results. The Fund’s larger exposure to the lagging industrial REITs sub-industry through its investment in Rexford Industrial Realty, Inc. also weighed on relative performance. The Fund’s Materials investments trailed their counterparts in the index after falling 7.5% as a group, with Flotek Industries, Inc. and Westlake Chemical Partners LP driving the decline. Shares of Flotek, a leading supplier of specialized chemicals to the oil & gas industry, fell as the sharper-than-expected decline in U.S. drilling and completion activity has taken a toll on its earnings outlook.
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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.