Review and Outlook
Baron Opportunity Fund performed well in the quarter and year-to-date. The market environment has been more favorable than last year for the higher growth, innovative businesses in which we invest – not yet a tailwind, but no longer a headwind. While there are always exceptions, the majority of our companies have continued to show solid operating progress and the innovative themes we focus on have continued to cement themselves even further into the fabric of our business and consumer lives.
- Netflix continued to add subscribers at a fast clip as Internet-delivered, on demand, ad free TV provides a superior consumer experience to traditional, ad supported TV.
- Tesla continues to lead innovation in electric drive vehicles and energy storage. The latest version of the Model S goes from 0 to 60 MPH in 2.8 seconds, and is widely recognized as not just the world’s best electric car, but the world’s best car period.
- Benefitfocus' cloud-delivered software enables its enterprise customers to provide employees with better and more diversified benefits packages by providing education and tools for choosing the right set of benefits for themselves and their families.
- Illumina’s DNA sequencing platform – instruments, test kits, sample prep, informatics, test services, etc. – has helped usher in a new age of personalized medicine where genetic information is utilized to diagnose, treat and prevent disease and to develop a new generation of targeted drugs and therapies.
- Through organic development and accretive M&A, SunEdison is trying to become the first of the renewable energy “majors.” Solar and wind are the fastest growing sources of electricity generation in many regions of the world.
- Facebook is pioneering a new age of people-based advertising – targeting relevant ads to actual people or audiences, not content. Last year, in the U.S., mobile accounted for 24% of time spent but only 8% of advertising spend. The “catch up” of ad spend to media time provides a powerful tailwind to Facebook and other mobile-centric ad platforms.
The Fund’s consistent aim has been to give our investors something different from passive indexes or generalized growth funds by investing in a portfolio of competitively advantaged, higher growth, innovative businesses. We focus on long-term secular trends that span industries and represent the world’s future. These trends are visible, impactful, persistent, and long-term. They will likely create significant growth opportunities by disrupting existing industry dynamics and capturing large profit pools from the legacy way of doing things. The most significant of these trends represent paradigm shifts or generational changes, such as gas to electric, on premise to cloud, desktop to mobile, coal to the sun, and treat the disease to treat the patient, to highlight just a few.
We remain steadfast in our view that a portfolio of well-managed, higher-growth businesses capitalizing on innovative and longer-term secular growth themes will outperform the broader market and passive indexes across market cycles. Of course, there are no guarantees.
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 2.90% in the second quarter and meaningfully outperformed the Russell 3000 Growth Index by 263 basis points, primarily due to stock selection.
Consumer Discretionary, Information Technology (IT), Energy, and Industrials investments were the primary contributors to relative results. Within Consumer Discretionary, outperformance of Internet retail holding Netflix, Inc. and larger exposure to this strong performing sub-industry, which increased 14.6% in the index, contributed the most to relative results. Netflix was the largest contributor to absolute performance after shares increased nearly 60%. Tesla Motors, Inc., the second largest contributor on an absolute basis, and Manchester United plc, an English Premier League professional sports team, also aided relative performance. Shares of Manchester United increased after its fourth place finish made qualification to the Champions League a possibility. Within IT, outperformance of Benefitfocus, Inc., the third largest contributor on an absolute basis, and SunEdison, Inc., the world’s largest renewable energy developer, and meaningfully larger exposure to the top performing application software sub-industry added the most value. Shares of SunEdison rose on the announcement of several acquisitions and an IPO filing for TerraForm Global, its emerging market “yieldco.” Other meaningful contributors to relative performance in IT were FireEye, Inc. and Equinix, Inc. Shares of network security company FireEye increased on solid financial results, and shares of data center operator Equinix rose after beating quarterly expectations and raising annual guidance. Strength in Energy was mainly due to the outperformance of Golar LNG Ltd., a liquefied natural gas midstream services company, whose shares rebounded on news of progress in its liquefaction projects. Within Industrials, outperformance of CaesarStone Sdot-Yam Ltd. and lack of exposure to lagging airline and railroad stocks were the largest contributors to relative results. Shares of CaesarStone, a quartz countertop manufacturer, outperformed due to better-than-expected quarterly results and management’s rosy outlook.
Investments within Health Care were the only meaningful detractors from relative performance. Sector weakness was mostly attributable to the underperformance of pharmaceuticals and health care supplies holdings, led by Aerie Pharmaceuticals, Inc. and The Spectranetics Corporation, respectively. These companies were also the two largest detractors on an absolute basis. Unilife Corporation, a pharmaceutical company focused on improving the delivery of injectable drugs, also detracted from relative performance before being sold late in the quarter. Lower exposure to biotechnology stocks, which rose 6.5% within the index, and underperformance of Foundation Medicine, Inc. also hurt relative results. The Fund exited its position in Foundation Medicine, a cancer testing and information services company, after it announced test volumes slightly lower than consensus estimates.
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