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 6/30/2016)

The Review and Outlook for period ending June 30, 2016 is not yet available

Top Contributors/Detractors to Performance

Contributors (for quarter ended 6/30/2016)
  • Shares of Amazon.com, Inc., the world’s largest retailer and cloud services provider, rose in Q2 on strong revenue growth and improving margins in the 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. Amazon continues to invest in new and potentially large business segments such as e-finance, business supplies, and apparel.

  • Shares of global colocation REIT Equinix, Inc. increased on strong demand, driven by accelerating cloud adoption. Meanwhile, consolidation trends in the data center industry have kept supply in check. Together, these trends have created a strong growth and pricing environment that has benefited all players. In another positive, Equinix  closed on its acquisition of European data center company Telecity. We see these trends and others converging and benefiting this well-managed company with solid competitive moats.

  • Mobileye N.V.  is a vision-based advanced driver assistance systems (ADAS) software company. After a rough start, Mobileye recovered all of its year-to-date losses in Q2. Management announced two autonomous programs wins and continued dominance of the ADAS market. While a growing pool of capital is being deployed in building the next Mobileye competitor, we believe Mobileye has a first mover advantage and a strategic position with leading players in the industry that will allow it to become significantly bigger in a short period of time.

Detractors (for quarter ended 6/30/2016)
  • Alphabet Inc. is the world’s largest search and online advertising-related company. Shares of Alphabet were driven down by Q1 results that missed Street expectations. We believe that while desktop search is becoming a more mature business for the company, Alphabet is well positioned to benefit from substantial growth in mobile and online video advertising.

  • Shares of DNA sequencing company Illumina, Inc. fell in Q2 on first quarter revenue that missed Street expectations and a lowered forecast for 2016 due to weak first quarter sales of its HiSeq instrument line and a lower forecast for Europe. Management believes the issues are short-term, fixable, and unrelated to fundamental market demand. 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.

  • Shares of Apple, Inc. fell in Q2 as it became apparent that the success of the iPhone 6 may have reduced demand for forward versions and produced a difficult result level to compare against. Slowing growth in China and a maturing market have prompted Apple to seek growth in less mature areas. Rumors of a lack of new features for the iPhone 7 has tempered expectations around its release. We believe it will be challenging for Apple to invent a business comparable to the iPhone. We will be closely watching the results of its investments in new projects.

Quarterly Attribution Analysis (for quarter ended 6/30/2016)

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 finished roughly unchanged in the second quarter and trailed the Russell 1000 Growth Index by 50 basis points. During the quarter, stock selection added value, but was overshadowed by the negative effect of the Fund’s relative sector weights.

Outperformance of Consumer Discretionary and Materials investments and larger exposure to the strong performing Financials sector contributed the most to relative performance. Strength in Consumer Discretionary was mainly due to the outperformance of the Fund’s largest holding, Amazon.com, Inc., and Naspers Limited, a South Africa-based Internet and media platform operator. Amazon was the largest contributor on an absolute basis while Naspers shares rose due to its large ownership position in Tencent Holdings Limited, whose share price increased sharply in the quarter. Within Materials, outperformance of the Fund’s only holding in the sector, Monsanto Co., added value. Shares of Monsanto, which produces agricultural products for farmers that include genetically modified seeds and crop protection chemicals, rose sharply after Bayer AG made a $62 billion bid for the company.

Underperformance of the Fund’s Health Care holdings, its lower exposure to the outperforming Consumer Staples sector, and its significantly larger exposure to lagging Internet software & services stocks within the Information Technology (IT) sector detracted the most from relative results. Weakness in Health Care was partly attributable to the underperformance of Illumina, Inc., the second largest detractor from absolute results, and Allergan plc, the manufacturer of wrinkle reducer Botox. Allergan’s shares fell after the U.S. Treasury disallowed the Pfizer-Allergan inversion. The company responded with a strong message for growth and a planned $10 billion share buyback, which helped stabilize shares off their lows. Biotechnology holdings also underperformed after falling 10.1% as a group, with Alexion Pharmaceuticals, Inc. driving the decline. Aside from being hurt by the sell-off in high-multiple biotechnology stocks, shares of Alexion, which serves the orphan disease markets, declined due to slowing Soliris (lead product) growth and a light launch for new drug Kanuma. We retain conviction. Recent test results from the closest potential Soliris competitor pointed to its use only as a backup rather than an alternative to Soliris, and we expect four to five years of potentially monopolistic sales for the drug.

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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.