Baron Emerging Markets Fund (BEXIX)
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Baron Emerging Markets Fund invests primarily in growth companies in developing countries.
Review and Outlook
The fourth quarter largely brought “more of the same” for most global markets: more signs of modest but improving economic conditions, more concern over the tapering of quantitative easing in the U.S., more enthusiasm over the prospects for “Abenomics” in Japan, more improvement in European financial conditions, and, of course, more of global equities continuing to ascend.
The fourth quarter also saw continued underperformance by emerging market equities relative to global equities. We are not surprised by this underperformance and suspect it may well continue for a bit longer, due to deteriorating fundamentals and a rising cost of capital. However, we believe our approach is particularly well suited for the current environment. By design, we limit our exposure to the pro-cyclical, capital intensive, and commodity-sensitive companies that are well represented in the broad emerging market indices, focusing instead on bottom-up stock selection and investable themes. As we believe is demonstrated by our performance since inception, many opportunities exist for bottom-up, developing world investors, even during periods marked by strong macro headwinds. That said, we also think our approach would not be disadvantaged by improving conditions. This is important, because, long term, we think the developing world, and particularly local consumption in such countries, will likely lead to global growth and value creation.
While we did not make any notable adjustments to our exposures in the fourth quarter, we continue to favor investing in companies and countries such as China, Taiwan and Korea that are generally shielded from the impacts of rising interest rates, shrinking liquidity, and lower commodity prices. We also favor countries contemplating investor-friendly reforms, such as China and Mexico. We note a recent favorable shift in the political environment in India, which, given upcoming elections, has the potential to notably improve intermediate to longer-term investment prospects in the country. Finally, we are increasingly seeking opportunities in Central and Eastern Europe, given an improving outlook and sensitivity to the strengthening core European economies.
Ultimately, our performance is driven by our fundamental bottom-up stock selection and related process of theme identification. As we embark on a new year, we maintain conviction in our principal investment themes and diversified portfolio of investments. These themes, many of which were notable contributors to our success in the past year, include: mobile broadband, eCommerce & Internet, China economic and financial reform, Brazil post-secondary education, digitization of India cable and media, emerging markets consumer, and supply chain logistics and distribution.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
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Yearly Attribution Analysis
The Yearly Attribution Analysis for period ending December 31, 2013 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 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.