Baron Emerging Markets Fund (BEXFX)

Portfolio Management

MichaelKass
Michael Kass

Fund Manager since 2010

View All Commentary by Michael

Fund Description

Baron Emerging Markets Fund invests primarily in growth companies in developing countries.

   

Portfolio Commentary

Retail Performance

Review and Outlook (for quarter ended 3/31/2016)

The first quarter or 2016 witnessed a sharp selloff and recovery across the emerging and global capital markets. We believe this market behavior reflects the fragility of confidence in forward-looking economic and financial conditions in an era of increasing policy intervention. The global markets have exhibited a high correlation, often reacting in unison to events in the U.S., Europe, Japan, and particularly China. We believe the interconnectedness of global markets is likely to remain high while global growth remains subpar and stimulative policy intervention in one jurisdiction often triggers unintended consequences in another.

While we were pleased to see the equity, credit and commodities markets strengthen through the end of the first quarter, we would prefer to see convincing evidence of underlying fundamental strength and an improvement in global imbalances rather than what appears to be ongoing aggressive monetary and fiscal policy tweaks. In our opinion, the most important such tweak was the shift in rhetoric suggesting the deferral of interest rate hikes by the U.S. Federal Reserve. The good news here is that if the Fed can deliver on recent communications, we are likely seeing a re-synchronization of global monetary policy, which would significantly reduce the short-term pressure on the Chinese currency, commodity prices, and the emerging markets. Indeed, the commodity and emerging markets took a leadership role in the rally which began in mid-February. In addition to the revised Fed communique, the European Central Bank, Bank of Japan and People’s Bank of China, as well as Chinese fiscal policymakers, all appeared to accelerate easing measures during the quarter. While measures of coincident and leading economic indicators have recently responded in kind with fairly broad-based improvement, it is difficult to distinguish cause and effect. Are improving economic indicators driving the rally in capital and commodities markets, or are policy-driven markets leading to improved economic indicators via the channels of rising confidence and recovering financial conditions? We believe that fundamental, lasting confidence in the global economy and global and emerging markets would be inspired by a successful normalization of interest rates, while confidence driven by ever more unconventional measures, such as the recently launched negative interest rate policies in Europe and Japan, will likely remain fragile.

We reiterate the view expressed last quarter that we are likely in the late stages of a relative and absolute bear market in the emerging markets, where much damage and currency adjustment has already occurred. We believe recent emerging market leadership confirms our view that a bottoming process is underway, and while we would not be surprised by a return of volatility later this year, we would likely view such an event as an opportunity to increase our exposure to high quality growth businesses in industries and countries where risk premium has been high and investor sentiment weak. We sense substantial investment opportunities ahead, and believe we are strategically and tactically prepared to take advantage.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 3/31/2016)
  • BM&FBOVESPA SA operates financial exchanges in Brazil. The stock increased during Q1 along with the broader Brazilian equity market and currency due to increased optimism that political changes will lead to structural improvements in the Brazilian economy. Shares also benefited from a proposed merger with Cetip that would create a unified financial clearinghouse for the Brazilian capital markets. We continue to own the stock because we expect the acquisition of Cetip will create significant shareholder value.

  • Shares of Steinhoff International Holdings N.V., the second largest European furniture retailer (behind Ikea), rose in Q1, driven by strong financial performance. Steinhoff also announced its intent to acquire London-based Darty PLC to expand its product offering into electronic and white goods. The acquisition is a good strategic fit for Steinhoff and was well received by investors. We retain conviction in Steinhoff as we believe it is well managed by an excellent executive team and remains a beneficiary of accelerated industry consolidation in Europe.

  • Taiwan Semiconductor Manufacturing Company Ltd. is the world’s leading semiconductor foundry, supplying many of the world’s leading fabless semiconductor design companies in the computing, communication, automotive and other end markets. The shares advanced during Q1 on perceived strength in order visibility and market share, as concerns over a slowdown in mobile communications chips receded. We maintain a core holding in this highly profitable and competitively advantaged business.

Detractors (for quarter ended 3/31/2016)
  • Shares of Kingdee International Software Group Co. Ltd. declined during Q1 after it reported unexpectedly weak 4Q earnings results. Kingdee is a software vendor to small and medium-sized businesses in China. Its legacy software business, which funds the development costs for the fast-growing Cloud business, was weak due to delays in IT spending by Chinese enterprise clients. We believe Kingdee is well funded and can make the necessary Cloud investment despite the current slowdown in China.

  • Shares of TerraForm Global, Inc., an owner of renewable energy power plants in emerging markets, fell during Q1 due to uncertainty related to the implications of a potential bankruptcy of parent company SunEdison. In addition, TerraForm Global was unable to execute on transactions to create its formation portfolio. These factors make the company difficult to value, and the stock sold off as a result. We continue to hold the stock as we believe the company is solvent and has enough liquidity to continue.

  • Shares of Ginko International Co., Ltd., a leading Taiwan-based contact lens manufacturer principally serving the mainland China market, retreated during Q1, reversing the prior quarter’s solid advance. We are not concerned over the short-term revenue deceleration in January and February, and maintain our position and optimism of Ginko’s long-term prospects.

Quarterly Attribution Analysis (for quarter ended 3/31/2016)

The Quarterly Attribution Analysis for period ending March 31, 2016 is not yet available

Back to Top

Invest In Baron Funds Today
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 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 Fund are subject to risk.

Source: FactSet PA.