Baron Growth Fund (BGRFX)

Portfolio Management

Ron Baron

Fund Manager since 1994

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Fund Description

Baron Growth Fund invests primarily in small growth companies.



Fund Resources

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Ron Baron on investing in small companies.

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Baron Growth Fund Risk Return Profile

Portfolio Commentary

Retail Performance

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

U.S. stock markets were unusually volatile during the three months ended September 30, 2015.  Most indexes fell sharply, with small and mid-cap stocks performing worse than large caps. The small cap Russell 2000 Growth Index lost 13.06% in the third quarter.

The markets were pressured by several disruptive events in the period. China growth slowed, and the China A shares market fell sharply. Oil prices remained depressed, and the share prices of energy businesses and companies that supply or service the energy industry fell sharply in the quarter. High yield spreads increased by almost 200 basis points. This market was negatively impacted by impending financial problems of leveraged energy companies and downgrades of Volkswagen and Glencore debt. Interest rates, however, did not change. It is now nine years since the last time the Fed raised rates. This decision was attributed to slower-than-expected growth, market turmoil, and lower-than-desired inflation. The Fed also considered developments in China and economies overseas.

Baron Growth Fund declined by 8.66% in the quarter. Utilities was a modest contributor. Sub-industries that materially contributed to performance included apparel accessories & luxury goods, property & casualty insurance, and health care equipment. Industrials, Health Care, and Financials were the top detracting sectors to performance.

Utilities contributed on a stock rise by electric transmission company ITC Holdings Corp., which benefited from risk-off investment into the defensive Utilities sector. Apparel accessories & luxury goods was boosted by the strong performance of top contributor Under Armour, Inc. The second biggest contributor, Arch Capital Group, Inc., added to performance of the property & casualty insurance sub-industry. Gains by veterinary diagnostics company IDEXX Laboratories, Inc. drove contribution of the health care equipment sub-industry. Industrials had a challenging quarter with declines in 13 of 14 holdings led by top detractor CaesarStone Sdot-Yam Ltd. Health Care detracted as investors exited higher growth stocks for presumed safer havens. Financials was negatively impacted by weak performance among the Fund’s asset management & custody banks holdings.

The decline in the profitability of oil companies and their industrial suppliers has resulted in slower-than-desired economic growth and subdued inflation. We think the short-term slowdown caused by the decline in the profits of energy businesses will soon be offset by faster growth in the rest of the economy in part spurred by the lower cost of energy.

The U.S. stock market is closely aligned with GDP. Median stock values are presently 15X earnings, below the median for the last 55 years. Individual stock prices reflect growth of value in business. When earnings grow significantly and stock prices decline or remain steady, we think this creates investment opportunities. This is presently the case.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 9/30/2015)
  • Shares of Under Armour, Inc. a manufacturer of athletic apparel, increased in Q3. The company reported another period of strong financial results due to continued revenue growth and impressive cost management. Under Armour appears to be capitalizing on its brand momentum and positioning the business for future growth as it continues to execute on its goal to become the second largest global sporting goods brand. Additionally, Under Armour expressed confidence in its ability to accelerate its growth as it plans to double in size over the next few years.

  • Arch Capital Group Ltd. is a Bermuda-based specialty insurance and reinsurance company. Shares rose on reports of good quarterly financial results with 9% growth in book value per share. Despite soft industry pricing conditions, Arch continues to generate above-average returns due to profitable underwriting, benign catastrophe losses, and favorable reserve development. The recently acquired mortgage insurance business is scaling up. M&A activity in the property & casualty insurance industry has also helped boost share prices.

  • Shares of financial technology vendor SS&C Technologies Holdings, Inc. performed well in Q3. The company closed the acquisition of Advent Software and announced the acquisition of Citi Alternative Investor Services. We expect both acquisitions to enhance SS&C’s competitive positioning and be meaningfully accretive to financial performance. We believe SS&C’s management team has an outstanding track record of value creation through M&A, and believe that Advent could be its most important acquisition to date.

Detractors (for quarter ended 9/30/2015)
  • CaesarStone Sdot-Yam Ltd. is a leading global manufacturer of quartz surfaces for kitchens and bathrooms. Shares fell sharply in August after the company reduced its full-year revenue guidance on the second quarter earnings call. A negative report by a short seller of the stock also weighed on the stock price. We believe investors overreacted to both events and remain positive on our investment in CaesarStone, as earnings growth accelerates from successful new product launches and quartz market share gains vs. other countertop materials.

  • Community Health Systems, Inc. is one of the country’s largest hospital operators, with 31,000 beds in 29 states, primarily located in small and mid-sized markets. Shares were weak on concerns that Affordable Care Act tailwinds are largely over and that comps will be more difficult going forward. We maintain a positive view as we believe the spinoff of Quorum Health will create shareholder value, synergies from the merger with HMA will exceed initial guidance, more states will expand Medicaid, and deleveraging will accelerate.

  • Shares of United Natural Food, Inc., the leader in healthy foods distribution to North American supermarkets, declined during Q3 due to a contract loss representing 5% of sales that occurred after a change in ownership with a specific customer. We view United Natural’s leading scale, national coverage, and high service levels as key competitive advantages. It has the strongest supply chain infrastructure in the industry and we think it is well-positioned for share gains over the next several years.

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

The Quarterly Attribution Analysis for period ending September 30, 2015 is not yet available

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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 chage 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 PA2.0 Performance Analytics Software.