Review and Outlook
After the initial shock of the Brexit vote in late June, the U.S. stock markets settled down in the third quarter, experiencing significantly less volatility than in the first half of 2016. Stable economic data, monetary policy rates that remained relatively unchanged, and the lack of a major disruptive event allayed investor concerns and drove a broad-based rebound during the three-month period ended September 30, 2016.
Investor appetite for risk increased, and stocks (particularly small-cap stocks) rose more or less steadily throughout the quarter. Lower quality stocks outperformed their higher quality counterparts. After mostly underperforming in the first half of the year, risk-on categories such as biotechnology and semiconductors outperformed. On the other hand, defensive sectors retreated after strong performance in the first half of 2016.
Baron Growth Fund increased in the quarter. Holdings in Consumer Discretionary, Financials, and Industrials were the top contributors. Consumer Discretionary had a somewhat mixed quarter, with both top contributor Vail Resorts, Inc. and third largest detractor Under Armour, Inc. within the sector. Financials advanced primarily on the strength of third largest contributor Arch Capital Group Ltd. Performance of the Industrials sector was led by composite decking manufacturer Trex Company, Inc. The company’s share price advanced on the strength of Q2 results and Q3 guidance that beat Street estimates.
Consumer Staples and Telecommunication Services investments detracted as investors shifted out of defensive sectors. All four Consumer Staples holdings fell, led by private-label food company TreeHouse Foods, Inc., which gave up some gains as a result of concerns regarding the integration of the Conagra private label food business. We believe TreeHouse, as a pure private-label company, is well-positioned to take advantage of secular growth in this market. Telecommunication Services detracted somewhat due to weak performance of the Fund’s only sector holding, Iridium Communications Inc. Despite strong Q2 financial results, delays in payments from a customer raised concerns. In addition, the SpaceX explosion of a Falcon 9 missile increased the risk of a delayed launch schedule. We see potentially significant cash flow yields for the NEXT constellation launch in 2018 and beyond and look forward to launches later this year.
The U.S. economy showed signs of acceleration in the third quarter. Historically, the U.S. stock market has been closely aligned with GDP. In 1960, GDP was $520 billion and the Dow Jones Industrial Average was 600. In 2007, GDP was $14 trillion and the Dow was 14,000. In 2015, GDP was $17.9 trillion and the Dow was 17,000. We think the U.S. economy and the stock market are closely intertwined. Over the past half century or so, our economy and stock market have grown at a compound annual rate between 6-7% in nominal terms. Factoring in annual dividends of about 2-3%, stock prices have approximately doubled every 10 years during the same period. We think our nation’s economy and stock markets will continue to achieve similarly strong results over the long term.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending September 30, 2016 is not yet available
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