Baron Global Advantage Fund (BGAFX)

Portfolio Management

AlexUmansky
Alex Umansky

Fund Manager since 2012

View All Commentary by Alex

Fund Description

Baron Global Advantage Fund invests in growth companies of all sizes anywhere.

  

Portfolio Commentary

Retail Performance

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

Baron Global Advantage Fund was up 11.1% in the third quarter of 2016. We saw broad-based strength across the portfolio with 22 of our 39 investments rising over 10%.

Our core holdings performed well. This time we also received significant contributions from smaller investments with ARM Holdings rising 45% after being acquired by Softbank, and our two lesser known health care investments in Glaukos (up 29%) and Aerie Pharmaceuticals (up 115%) working out nicely as well. The third quarter was a favorable investment environment, as we undoubtedly benefited from rising tides lifting all boats, and from playing a bit of catchup after falling behind earlier in the year.

Information Technology (IT), Consumer Discretionary, and Health Care holdings were the top contributing sectors in the period. IT performance was led by second largest contributor Alibaba Group Holding Ltd.  Online food delivery marketplace JUST EAT plc also contributed to sector performance as a result of an increase in share price following the release of financial results for the first half of 2016 that exceeded Street estimates. Consumer Discretionary advanced on double digit share price increases in all five Fund holdings, led by top contributor Amazon.com, Inc. Health Care benefited from strong performance of third largest contributor Illumina, Inc., as well as the aforementioned Aerie and Glaukos. Telecommunication Services was the only sector to detract in the period, as the Fund’s two sector holdings, both of which are Indonesian tower companies, fell as telcos continued to defer network equipment upgrades.

While we expect the markets to remain volatile, we remain positive on the overall environment. Over the last 50 years, despite the doubling of the population, average global income per capita has tripled, life expectancy has risen by a third, and child mortality is down 70%. Literacy rates are up meaningfully, and average IQs are considerably higher even after adjusting for inflation and better nutrition. People are healthier, smarter, and more prosperous than they have ever been. All predictions of doom have repeatedly proved wrong. Despite disasters and reverses, quality of life, material wealth, and prosperity have continued to increase everywhere in the world, and we think that’s unlikely to change.

Our goal remains to maximize long-term returns without taking significant risks of permanent loss of capital. We believe the best strategy for long-term capital appreciation is to collect a mix of unique companies that sell into different end markets and different geographies. We will continue to focus on identifying and investing in companies that we believe have sustainable competitive advantages and the ability to reinvest excess capital at high rates of return.

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)
  • Shares of semiconductor company Mellanox Technologies Ltd. fell on disappointing Q2 results, including a slowdown in the company’s InfiniBand business and heightened competitive concerns around a new product from Intel Corp. We expect Mellanox to be a share leader at the high end of the InfiniBand business and protect its high margin business model with strong innovation and product leadership. We view Mellanox’s Ethernet business as an open-ended opportunity that is potentially much bigger than its InfiniBand business.

  • 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.

  • Shares of PT Sarana Menara Nusantara Tbk., the largest independent owner of wireless telecommunication towers in Indonesia, declined in Q3 as telcos continued to defer network equipment upgrades. We believe that wireless network spending in Indonesia will eventually climb as operators contend with significant growth in wireless data consumption. Over time, we believe Sarana Menara will build a significant number of new towers for these telco tenants and have the opportunity to acquire peer tower companies as well.

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

The Quarterly Attribution Analysis for period ending September 30, 2016 is not yet available

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