Baron Fifth Avenue Growth Fund (BFTIX)

Portfolio Management

AlexUmansky
Alex Umansky

Fund Manager since 2011

View All Commentary by Alex

Fund Description

Baron Fifth Avenue Growth Fund invests in large growth companies.

    

Portfolio Commentary

Institutional Performance

Review and Outlook (for quarter ended 9/30/2016)

Baron Fifth Avenue Growth Fund increased 10.2% in the third quarter. In a complete reversal from the first half of the year, where the Fund plainly lacked sizable winners, the Fund saw broad-based strength across the entire portfolio, with 21 of our 36 investments rising double digits, and 12 of them appreciating over 15%.

Investments in Information Technology (IT), Consumer Discretionary, and Health Care were the top contributors. IT advanced on the strength of double-digit increases in 10 out of 13 sector investments. Performance was led by Alibaba Group Holding Ltd., the Fund’s second largest contributor in the quarter. Alphabet, Inc., the world’s largest search and online advertising company, was another significant IT contributor after its share price increased on the strength of quarterly results that surpassed Street expectations. With five investments posting double-digit share price increases, Consumer Discretionary appreciated in the third quarter, led by top contributor Amazon.com, Inc. Also within the sector, shares of leading online travel agency The Priceline Group, Inc. rose after reporting strong Q2 results and a robust outlook for Q3. While Health Care investments posted somewhat mixed performance, contributors outweighed detractors. Life sciences tools & services company Illumina, Inc. was the Fund’s third largest contributor. Holdings in the Real Estate sector lost some ground in the quarter due to a decline in the share price of Equinix, Inc., which was the second largest detractor from performance. The Materials sector was a minor detractor after the share price of the Fund’s sole holding within the sector, Monsanto Company, fell modestly in the period.

Our goal is to maximize long-term returns without taking significant risks of permanent loss of capital. We continue to focus on identifying and investing in what we believe are unique companies with sustainable competitive advantages and the ability to redeploy capital at high rates of return. We are optimistic about the long-term prospects of the companies in which we are invested and continue to search for new ideas and investment opportunities.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 9/30/2016)
  • Shares of Amazon.com, Inc., the world’s largest retailer and cloud services provider, rose in Q3 after reporting strong revenue growth and improving margins in its core business. Amazon’s other major business segment, Amazon Web Services (AWS), continues to gain traction with enterprise customers, and had another strong quarter of growth. Over time, we expect AWS to be the larger contributor to value creation. The company continues to invest in new and potentially large business segments such as e-finance, business supplies and apparel.

  • Shares of Alibaba Group Holding Limited, the largest e-commerce company in China, performed well in Q3 following strong quarterly results. Enhanced financial disclosure helped investors to understand better the profitability of the core commerce business and thereby attribute a higher value to it. We expect that mobile monetization will continue to improve through 2016 and beyond as the company invests in new areas such as online grocery and cloud computing.

  • Shares of Illumina, Inc., the leading provider of DNA sequencing technology to academic and commercial laboratories, contributed to performance in Q3. The company reported financial results that beat Street expectations and reiterated guidance for the year. We continue to believe Illumina has a long runway for growth, driven by increasing adoption of DNA sequencing in clinical markets such as cancer screening, diagnosis, and treatment.

Detractors (for quarter ended 9/30/2016)
  • Bristol-Myers Squibb Company is a large diversified pharmaceutical leading the development of immune stimulating therapies for oncology. These efforts are spearheaded by its product Opdivo, now approved to treat several types of cancer. After positive data was released on a rival drug to treat first-line advanced non-small-cell lung cancer, Bristol-Myers revealed that Opdivo did not meet the primary endpoint in a Phase III trial in the same indication, and shares fell. We are analyzing the competitor’s trial results and Bristol-Myers data sets.

  • This quarter saw pressure in the data center segment, and Equinix, Inc. was no exception. Slowing industry activity and cautious management commentary spurred some profit taking ahead of Q3 earnings. We like the growth prospects for Equinix and think management has a clear and sensible plan to keep growing at a relatively higher pace while improving efficiencies and demonstrating margin leverage. We view 2016 as a digestion year, with two acquisitions and a divestiture, and expect 2017 to show significant leverage to shareholder profitability.

  • Shares of cybersecurity software vendor FireEye, Inc. fell in Q3 on disappointing guidance as new management reset expectations for 2016 in an effort to build a solid base for 2017. We believe management is building a strong foundation for future growth. The organization has been right-sized, mid-market and new subscription products are being launched, and go-to-market partnerships have been fine tuned. FireEye has best-in-class technology and is improving its delivery methodology in products (subscriptions) and go-to-market design.

Quarterly Attribution Analysis (for quarter ended 9/30/2016)

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 Fifth Avenue Growth Fund increased 10.16% in the third quarter and outperformed the Russell 1000 Growth Index by 558 basis points. During the quarter, stock selection and, to a lesser extent, relative sector weights lifted relative results.

Consumer Discretionary, Health Care, and Information Technology (IT) investments and lack of exposure to the lagging Consumer Staples sector, which fell 4.9% in the index, contributed the most to relative results. Within Consumer Discretionary, outperformance of internet & direct marketing retail holdings Amazon.com, Inc. and The Priceline Group, Inc. and larger exposure to this strong performing sub-industry added the most value. Amazon was the largest contributor to absolute results, while shares of leading online travel agency Priceline rose on strong Q2 results and a robust outlook for Q3. Naspers Limited, a South Africa-based internet and media platform operator, also contributed to relative performance due to its large ownership position in Tencent Holdings Limited, whose stock price rose more than 20% in the quarter. Strength in Health Care was mostly attributable to the outperformance of Illumina, Inc., the third largest contributor on an absolute basis, and biotechnology holdings Biogen, Inc. and Regeneron Pharmaceuticals, Inc. Within IT, outperformance of internet software & services holdings, led by Alibaba Group Holding Limited and Alphabet Inc., and significantly larger exposure to this better performing sub-industry contributed the most to relative results. Alibaba was the second largest contributor to absolute performance, while shares of leading search and online advertising company Alphabet were up in the quarter, driven by quarterly results that surpassed Street expectations. Payment networks Mastercard Incorporated and Visa, Inc. also aided relative performance.

Larger exposure to the underperforming Real Estate sector, which was hurt by the poor performance of REITs, detracted the most from relative performance.

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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. Investing in the stock market is always risky. Current and future portfolio holdings in the Fund are subject to risk.

Source: FactSet PA.