Review and Outlook
Since we are primarily an energy fund, our performance is influenced by a number of macro factors, such as the prices of commodities, interest rates, economic growth rates, and, of course, our favorite – regional and geo-politics. Each of these factors has its own set of dynamics and can be significantly influenced by the others. During the third quarter, we clearly saw quite a bit of that at work. For example, the quarter started out with the second phase of the Egyptian revolution leading to the toppling of another government and causing concerns of greater regional instability among oil market investors. This was followed up by the sabre rattling in the U.S. and Europe following the use of chemical weapons in the Syrian Civil War. Both of these incidences contributed to the rise in oil prices but perhaps not as much as one might think.
International oil prices, as represented by Brent Crude, rose 6.3% in the third quarter, but U.S. oil prices, represented by West Texas Intermediate Crude, rose by almost 11%. Typically, geopolitical tensions caused by Middle Eastern instability concerns will have a larger impact on international prices. However, the fact that U.S. prices rose more than international prices indicates to us that the global shift in supply and demand was more significant than fear.
Rising oil prices provided a nice tailwind for the Fund. Four out of our top five contributors in the quarter were oil and gas producers, the cash flows of which would have clearly benefited from higher oil price realizations. However, in our view, the bigger factor in the performance of these companies has been the increasing confidence that investors have gained in the long-term prospects and productivity of these companies’ asset bases.
Industrial companies made up only about 7% of the Fund, but two of our Industrial stocks that are benefiting from the U.S. shale revolution and rising global investment in energy infrastructure had standout results.
We made several new purchases in the quarter as we continue to look for companies with strong growth potential at good valuations that are benefiting from our key themes: unconventional oil and gas resource development; deepwater exploration and development; and infrastructure investment for energy processing and transportation. Our biggest new position was Frank’s International N.V., which went public in August. The company is a leading provider of mission critical installation services for oil country tubular goods. Another new position was Athlon Energy, Inc., which is a small-cap exploration & production company with assets solely in the Permian Basin in West Texas. Athlon was also a third quarter IPO, and there are several reasons we like this company: we have invested in other businesses operating in the Permian Basin, we know the management team well from an earlier investment, and the company is in the early stages of transition from vertical to horizontal drilling.
We continue to be constructive about the outlook for investing in the Energy sector and Industrial businesses that are largely related to the key themes driving the Energy sector. We think that the themes that we have been emphasizing for several years are major structural changes for the industry and for the world. These themes should lead to many years of sustained growth for those companies that are best positioned and equipped to take advantage of these changes, and we believe the Fund is set up to capture that growth in many different ways.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
This Fund does not have a Quarterly Attribution Analysis for period ending September 30, 2013
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