Review and Outlook
The Review and Outlook for period ending December 31, 2015 is not yet available
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
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 Opportunity Fund gained 7.72% in the fourth quarter and outperformed the Russell 3000 Growth Index by 63 basis points. During the quarter, stock selection added value and outweighed the negative effect of lower exposure to top performing large cap stocks when compared to the all-cap growth index.
Information Technology (IT), Financials, and Industrials investments contributed to relative results. Within IT, significantly larger exposure to Internet software & services stocks, which rose 16.8% within the index, and outperformance of holdings in this sub-industry added the most value. Among the largest contributors to relative results in Internet software & services were CoStar Group, Inc., a real estate information and marketing services company, Alphabet, Inc., the second largest contributor on an absolute basis, and Alibaba Group Holding Ltd., the largest e-commerce company in China. CoStar’s shares increased after reporting solid financial results driven by strong bookings growth, while shares of Alibaba rose on positive momentum in monetization of mobile customers, the increasing majority of its customer base. Lack of exposure to Apple, Inc., which had an average weight of 5.8% in the index and declined 4.2% in the quarter, and outperformance of application software holding Guidewire Software, Inc. also aided relative results. Guidewire was the third largest contributor to absolute performance. All three of the Fund’s Financials holdings outperformed, led by specialized REIT Equinix, Inc. and investment brokerage firm The Charles Schwab Corp. Shares of Equinix rose after the company announced the closing of its acquisition in Japan and the approval of its Telecity acquisition in Europe, while Schwab’s shares benefited from favorable investor reaction to pending interest rate increases and the prospect of asset yield improvements. Strength in Industrials was mostly attributable to outperformance of quartz countertop manufacturer CaesarStone Sdot-Yam Ltd. and HR consultant Towers Watson & Co. Shares of CaesarStone rebounded more than 33% before being sold in early November, while Tower’s shares rose after proposed merger partner Willis Group Holdings plc more than doubled the special dividend payable to Towers Watson shareholders to $10/share. This was sufficient to achieve shareholder approval for the merger of equals, which was completed in early 2016. Lower exposure to this lagging sector also helped relative performance.
Health Care investments and larger exposure to the underperforming Energy sector, which was pressured by falling oil prices, detracted the most from relative performance. Within Health Care, underperformance of biotechnology holding Cepheid and lower exposure to this strong performing sub-industry detracted 54 basis points from relative results. Cepheid was the third largest detractor from absolute performance before being sold in early December. Lack of exposure to outperforming pharmaceutical stocks and underperformance of Inovalon Holdings, Inc. and HealthEquity, Inc. also hampered relative performance. Both companies were hurt by financial results that missed Street expectations.
Yearly Attribution Analysis
Baron Opportunity Fund increased 1.45% for the year, yet trailed the Russell 3000 Growth Index by 364 basis points, partly due to stock selection. Larger exposure to poor performing volatility and growth style factors when compared to the all-cap growth index also hurt relative performance.
Financials and Consumer Discretionary investments and lower exposure to the lagging Industrials and Materials sectors contributed to relative performance. Within Financials, outperformance of Equinix, Inc. and The Charles Schwab Corp. and lack of exposure to the poor performing consumer finance sub-industry, which declined 29.9% in the index, contributed the most to relative results. Equinix was the third largest contributor to absolute performance, while shares of investment brokerage firm Schwab performed well despite market volatility and low interest rates. Strength in Consumer Discretionary was mainly due to outperformance of Internet retailers Amazon.com, Inc. and Netflix, Inc., and larger exposure to this top performing sub-industry, which rose 77.4% in the index. Amazon and Netflix were the two largest contributors on an absolute basis. Professional sports team Manchester United plc and athletic apparel company Under Armour, Inc. also added value in the sector. Manchester United performed well in the English Premiere League and rolled out its Adidas partnership. Under Armour reported strong financial results driven by revenue growth and impressive cost management.
Underperformance of Health Care, Utilities, and Information Technology (IT) investments and lack of exposure to the top performing Consumer Staples sector detracted the most from relative performance. Most Health Care holdings underperformed, detracting 344 basis points from relative performance, led by health care supplies, pharmaceuticals, and biotechnology holdings. Detractors in these sub-industries included The Spectranetics Corporation, Aerie Pharmaceuticals, Inc., and Cepheid, all of which were sold. Weakness in Utilities was mostly attributable to the underperformance of renewable energy yieldcos TerraForm Power, Inc. and TerraForm Global, Inc. TerraForm Global was the second largest detractor from absolute performance, while TerraForm Power’s shares were sold after an increase in the cost of capital for yieldcos raised concerns regarding TerraForm Power’s ability to grow and, subsequently, the entire business model. Management credibility and governance concerns also weighed on the stock price. Within IT, underperformance of Internet software & services holdings, led by Shutterstock, Inc. and Alibaba Group Holding Ltd., and renewable energy company SunEdison, Inc., classified as semiconductor equipment by GICS, detracted the most from relative results. Shutterstock and SunEdison were the first and third largest detractors on an absolute basis, while shares of Alibaba, the largest e-commerce company in China, declined after consumers transitioned from desktop to mobile faster than expected. These negative effects were somewhat offset by larger exposure to strong performing application software stocks and lack of exposure to underperforming Apple, Inc.
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