Baron Energy and Resources Fund (BENIX)

Portfolio Management

James H. Stone

Fund Manager since 2011

View All Commentary by James

Fund Description

Baron Energy and Resources Fund invests in securities of energy and resources companies and related companies of all sizes.


Portfolio Commentary

Institutional Performance

Review and Outlook (for quarter ended 9/30/2015)

The Review and Outlook for period ending September 30, 2015 is not yet available

Top Contributors/Detractors to Performance

Contributors (for quarter ended 9/30/2015)
  • Flotek Industries, Inc. supplies chemical additives to the oil & gas industry. Flotek has a proprietary product that is proving to be extremely effective at increasing oil & gas shale well productivity. Shares rebounded sharply in Q3 following much stronger-than-expected Q2 results, principally driven by stronger-than-expected sales and margins. Complex nano-Fluid technology sales growth is outpacing industry activity levels by a wide margin as customers seek to optimize production in the most capitally efficient manner. Flotek’s strategy of marketing and selling its core product directly to end-users is also gaining traction.

Detractors (for quarter ended 9/30/2015)
  • Shares of SunEdison, Inc., the world’s largest renewable energy developer, declined in the wake of its acquisition of U.S. residential solar developer Vivint Solar, with plans to drop down its solar portfolio to its yieldco TerraForm Power, Inc. Investors questioned aspects of the deal, including its $2.2 billion cost. We believe in the secular renewable energy story and that SunEdison’s large development pipeline will benefit it and its yieldcos. We think the market dislocation is technical and temporary and that SunEdison will resume future growth.

  • Bonanza Creek Energy, Inc. is an independent exploration and production company operating primarily in Northeast Colorado. Shares were pressured during Q3 as balance sheet concerns were magnified by the nearly 24% decline in oil prices and anticipated cash flows. While our analysis has led us to conclude that Bonanza Creek has ample access to cash flow and liquidity to support its operations and survive through this period, the judgment of the market has been quite the opposite. During Q3 the number of shares sold short in Bonanza Creek increased by over 33%, putting additional pressure on the stock. Our valuation for the company remains significantly above current share prices.

  • TerraForm Global, Inc. is a dividend growth-oriented renewable energy company (a yieldco) focused on emerging markets. The company went public in Q3 at a lower-than-expected valuation. Its debt capital raise was also more expensive than anticipated, given difficult conditions in high yield and emerging markets. We believe in the secular renewable energy story and that parent SunEdison, Inc.’s large development pipeline will benefit its yieldcos. We think the market dislocation is technical and temporary and that TerraForm Global will resume future growth.

Quarterly Attribution Analysis (for quarter ended 9/30/2015)

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.

Baron Energy and Resources Fund fell 30.57% in the third quarter and underperformed the S&P North American Natural Resources Sector Index by 11.02%, partly due to stock selection. Small cap energy companies suffered disproportionally compared to large-cap energy companies, such as integrated oils and refiners, and the Fund’s bias towards the former also weighed on relative performance.

Outperformance of the Fund’s Materials and Industrials investments and its average cash exposure of 5.8% in a dismal environment for energy and energy-related equities contributed to relative performance. Strength in Materials was largely attributable to the outperformance of Flotek Industries, Inc., the Fund’s only contributor on an absolute basis. Within Industrials, outperformance of Primoris Services Corp., a specialty construction and infrastructure company, added value. Shares of Primoris outperformed as continued contract announcements across multiple business lines provided a visible backlog of growth.

Underperformance of the Fund’s Energy and Renewable Energy investments detracted the most from relative results. Within Energy, underperformance of and larger exposure to oil & gas storage & transportation, which declined 27.2% in the index, weighed the most on relative results. This sub-industry, which consists mostly of master limited partnerships (MLPs) and general partnerships (GPs), experienced significant selling pressure as the slide in oil prices during the quarter led investors to question growth expectations and caused tax-loss selling. Columbia Pipeline Partners LP, SemGroup Corporation, and Tallgrass Energy GP, LP were among the largest detractors on a relative basis in the sub-industry. The Fund’s lower exposure to outperforming large-cap stocks in the integrated oil & gas sub-industry also hampered relative performance in the Energy sector. Within Renewable Energy, underperformance of SunEdison, Inc. – which is classified by GICS under Information Technology – and its yieldco subsidiaries TerraForm Global, Inc. and TerraForm Power, Inc. detracted considerably from relative results. SunEdison and TerraForm Global were two of the largest detractors on an absolute basis, while TerraForm Power’s shares fell sharply when investors reacted negatively to SunEdison’s acquisition of residential solar developer Vivint Solar. The Fund continues to hold SunEdison and its subsidiaries because we believe there is still significant opportunity for long-term investors like ourselves to benefit as these companies create value form the substantial growth in renewable energy demand that we foresee over the next 5 to 10 years.

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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 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.