Baron International Growth Fund (BINIX)

Portfolio Management

Michael Kass

Fund Manager since 2008

View All Commentary by Michael

Fund Description

Baron International Growth Fund invests primarily in non-U.S. growth companies.



Fund Resources

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Michael Kass sees growth opportunities overseas.

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Quarterly Letter 4Q15


Portfolio Commentary

Institutional Performance

Review and Outlook (for quarter ended 12/31/2015)

After a marked decline in the third quarter, the fourth quarter of 2015 began with an abrupt and powerful rally in international equities, commodities and credit. Coincident with the Fed’s deferral of an October rate hike, indicators began to suggest improving economic growth, global trade, and stabilization in China and the RMB. Such stability inspired the Fed to signal the start of a rate hike cycle in December, which seemed to act as an immediate financial tightening and stunted the rally. An increase in terrorism and rising Middle East tensions exacerbated the mid-quarter rise in risk premium, leading international equities to fade into year end.

For the year ahead, we expect further volatility. In our view, the key variables are the Chinese economy, policy and the RMB; the slope and duration of Fed tightening; commodity and oil prices; and increasing Middle East hostilities. We see the first two as directly related; any increase in the market-discounted rate of Fed tightening will force a more aggressive response from China and increase the risk of a more material RMB depreciation. This phenomenon was on display in the second half of 2015. RMB depreciation acts as a safety valve for China and deflects the deflationary pressure being absorbed back at the rest of the world. In the zero-sum world of subpar global economic growth and credit saturation, we continue to expect the “whac-a-(deflation) mole” policy response initiated by the Fed in 2009 and carried on by the Bank of Japan and the European Central Bank; in our view, it is now simply China’s “whac.”

The silver lining is that much of the developed world continues to exhibit reasonable economic growth and momentum while much damage has already been done in the emerging and commodity-sensitive markets. To us, the key question is whether the current tightening of financial conditions triggers an international credit event or enough RMB depreciation to suggest global contagion and the risk of recession. Should this occur, we believe associated volatility would likely force the Fed to reverse course, with the most likely result an abrupt and sustainable market recovery. It is also possible that global growth and leading economic indicators continue to improve upon what appeared a bottoming in early October; in effect, the Fed would now be appropriately hiking into a global re-acceleration, reducing the odds of a credit incident.

Over the past 18 months, we have maintained below-market exposure to emerging market equities given prevailing headwinds, while we have increased our investments in what we believe are well-positioned and high-quality domestic European and U.K.-based companies. While we remain comfortable that our current positioning is well aligned given the existing environment, we believe there are substantial investment opportunities ahead, and are identifying specific candidates, as well as a strategy to take advantage.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 12/31/2015)
  • Domino’s Pizza Enterprises Ltd. is the largest master franchiser of Domino’s Pizza, with operations in Australia/New Zealand, certain European countries, and Japan. The share price has performed well during Q4 as the company has been executing exceptionally well in its existing markets by expanding stores, and improving store productivity and margins. Additionally, Domino’s Pizza Enterprises announced entry into a new market, Germany, a strategic and synergistic market for the company and another avenue for long-term growth.

  • TAL Education Group was a leading contributor to performance for Q4. The education services provider reported favorable earnings during Q4, as enrollment growth reached 50% and revenue and operating earnings exceeded Street expectations. We continue to believe the investments TAL Education is currently making suggest sustainable long-term growth with attractive margins.

  • Shares of Qihoo 360 Technology Co. Ltd., the leading online security provider in China, rose during Q4 in concert with a broad rally in Chinese Internet services and software stocks. Late in Q4, Qihoo confirmed earlier-announced plans to go private in one of the largest such transactions announced to date involving a U.S. ADR-listed Chinese company.

Detractors (for quarter ended 12/31/2015)
  • RIB Software AG is a German software company with a 5D modeling capability for the construction industry. With construction highly prone to inefficiencies and grossly underutilizing technology, we think RIB’s innovative software can bring significant value to projects. While RIB is quickly becoming the new standard and share price has risen in concert, the company remains beholden to contract wins, which can be lumpy. As a result, RIB is likely to come one project short in 2015, which resulted in share weakness during Q4.

  • Golar LNG Ltd. is a liquefied natural gas (LNG) shipping, regasification and liquefaction company. During 2015, Golar worked on a gas liquefaction project in Cameroon. While we think this project represents a great long-term investment opportunity, declining oil prices made LNG less attractive. In addition, LNG carriers have been trading at day rates that do not cover operational expenses. As a result, Golar’s stock price fell. Long term, we think progress in floating LNG projects and focus around midstream rather than shipping will create value.

  • Nomad Foods Limited is an acquisition-driven frozen food business in Europe. Its stock price fell as the rising cost of capital resulted in a difficult acquisition environment. Macroeconomic and competitive headwinds in the U.K., Germany, and Italy also spurred discounting and consumer preference for private label (cheaper) brands. We remain invested based on Nomad’s strong management and solid fundamentals, while we evaluate whether its growth strategy remains viable in light of current capital market conditions.

Quarterly Attribution Analysis (for quarter ended 12/31/2015)

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 International Growth Fund rose 4.66% in the fourth quarter, yet modestly trailed the MSCI ACWI ex USA IMI Growth Index by 59 basis points.

Emerging market investments outperformed their index counterparts after increasing 12.8%, led by holdings in China. This positive effect was overshadowed by underperformance of developed market holdings in Japan, Germany, Norway, and the U.S.

On a sector basis, outperformance of Consumer Discretionary and Health Care investments and meaningfully larger exposure to the top performing Information Technology (IT) sector contributed the most to relative results. Within Consumer Discretionary, outperformance of restaurant holdings Domino's Pizza Enterprises Ltd. of Australia and Domino's Pizza Group plc of the U.K. added the most value. The two companies formed a joint venture to acquire the largest pizza retailer in Germany and consolidate the German business of Domino's Pizza Group. Investments in TAL Education Group and International Ltd. of China also aided relative performance after their shares rose 44.4% and 27.8%, respectively. TAL was the second largest contributor on an absolute basis, while shares of Chinese online travel agency Ctrip rose after the company consolidated its leadership position with its acquisition of a stake in number two player Qunar. Strength in Health Care was mostly attributable to the outperformance of Eurofins Scientific SE of France, Agilent Technologies, Inc. of the U.S., and Abcam plc of the U.K. In particular, shares of Eurofins, which provides analytical testing services to clients in the food, pharmaceutical and environmental industries, performed well on solid organic revenue growth and enhanced mid-term financial objectives. Lack of exposure to the lagging pharmaceutical sub-industry also lifted relative performance.

Financials, Energy, and Consumer Staples investments were the primary detractors from relative results. Weakness in Financials was partly due to the underperformance of property & casualty insurance holdings Arch Capital Group Ltd. of the U.S. and Lancashire Holdings Limited of the U.K. Arch’s shares gave back some gains following a period of a significant outperformance, while shares of Lancashire declined for no fundamental reason. Mitsui Fudosan Co. Ltd. and Daiwa Securities Group, Inc. of Japan and BM&FBOVESPA SA of Brazil also hurt relative performance. Energy holdings trailed their index counterparts after falling 18.3%, with Golar LNG Ltd. of Norway and Petroleo Brasileiro SA of Brazil leading the decline. Golar was the second largest detractor from absolute performance, while shares of Petroleo Brasileiro fell sharply as the rout in oil prices and weakness of the Brazilian Real magnified balance sheet concerns. We exited our position due to concerns about company’s ability to monetize non-core assets and fix the balance sheet. Within Consumer Staples, underperformance of the Fund’s only sector holding, Nomad Foods Ltd., weighed on relative results. Nomad was the third largest detractor on an absolute basis.

Yearly Attribution Analysis (for year ended 12/31/2015)

Baron International Growth Fund increased 1.48% for the year and outperformed the MSCI ACWI ex USA IMI Growth Index by 174 basis points, due to stock selection.

Stock selection in developed markets added the most value, driven mostly by investments in Canada, Australia, the U.K., Spain, and France. Emerging markets investments detracted from relative results as underperformance of investments in Brazil and Indonesia and larger exposure to these lagging countries outweighed double-digit gains from holdings in China.

On a sector basis, IT, Industrials, Materials, and Health Care investments were the largest contributors to relative results. Within IT, outperformance was broad-based across software, Internet, and payment services, led by application software holdings Constellation Software, Inc. of Canada and Kingdee International Software Group Co. Ltd. of China. Constellation Software was the third largest contributor to absolute performance, while shares of Kingdee rose on reports of improvements in gross profit generation. JUST EAT plc and Worldpay Group plc of the U.K. and Ingenico Group of France also added value. Strength in Industrials was mainly due to the outperformance of MonotaRO Co., Ltd. of Japan and Aena SA of Spain. MonotaRO was the second largest contributor on an absolute basis, while shares of Spanish airport operator Aena benefited from growing air traffic and the renegotiation of several vendor contracts in its favor. Budget airline Ryanair Holdings plc of Ireland also aided relative results after reporting guidance that beat Street expectations. Within Materials, outperformance of Symrise AG of Germany and Syngenta AG of Switzerland and lower exposure to this lagging sector contributed to relative results. Shares of Symrise, a flavor and fragrance producer for food, home and personal care companies, were up on reports of above-market growth and margin expansion. Shares of crop chemical and biotech seed company Syngenta were sold after rising sharply following several acquisition attempts by Monsanto. Within Health Care, outperformance of Eurofins Scientific SE of France and Abcam plc and EMIS Group plc of the U.K. was somewhat offset by lack of exposure to outperforming pharmaceutical stocks, which make up nearly 10% of the index.

Lower exposure to the outperforming Consumer Staples sector and underperformance of Utilities and Telecommunication Services holdings detracted the most from relative results. Within Utilities, underperformance of TerraForm Global, Inc. hurt relative results. The company was the largest detractor on an absolute basis. Weakness in Telecommunication Services was mostly attributable to the underperformance of Tower Bersama Infrastructure Tbk PT, the second largest independent owner and operator of wireless telecommunication towers in Indonesia. Tower Bersama’s shares fell sharply due to a weakened demand environment from carrier customers, a cancellation of the Mitratel acquisition, and rupiah depreciation.

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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. Current and future portfolio holdings in the Fund are subject to risk.

Source: FactSet PA