Baron Partners Fund (BPTIX)

Portfolio Management

RonBaron
Ron Baron

Fund Manager since 1992

View All Commentary by Ron

Fund Description

Baron Partners Fund invests in all-cap companies with significant growth opportunities.

   

   

Portfolio Commentary

Institutional Performance

Review and Outlook (for quarter ended 3/31/2016)

Last year’s volatility continued into 2016, with the U.S. equity markets plunging dramatically during the first six weeks of 2016 before executing an about-face to recover much of their losses, although small cap stocks fared worse than their larger cap counterparts. Concerns around the implications of a tightening credit market in the face of a possible U.S. recession, signs of slowing global growth, China and the RMB, and continued low oil prices drove the U.S. equity markets into correction territory by early February. During the quarter, oil prices declined at one point to near 15-year lows of $26/barrel, before rebounding to near $40/barrel by quarter end. In addition, slowed global growth and deflationary pressure early in the quarter prompted the central banks in Europe and Japan to ease monetary policy, including several that pushed interest rates into negative territory. As global concerns subsided, oil prices ticked up, and domestic job numbers improved, stock markets rallied strongly. In March, the U.S. Federal Reserve boosted equity markets even further with its suggestion that it would defer interest rate hikes that it earlier had been contemplating for 2016.

Baron Partners Fund declined in the first quarter. Investments in the Consumer Discretionary and Industrials sectors contributed to performance. Information Technology (IT), Financials, and Utilities were the top sector detractors. Consumer Discretionary had a solid quarter, with the top two contributors within the sector. Top five contributor Vail Resorts, Inc. also added to sector performance. Shares rose on strong earnings results as good ski conditions drove visitation to, and increased spend at, its resorts. Gains in the Industrials sector were driven primarily by Fastenal Company, the third largest contributor to performance. The IT sector experienced losses in all five of the portfolio’s sector holdings, led by third largest detractor CoStar Group, Inc., as high-growth, high-multiple stocks sold off in the volatile market. Top detractor The Charles Schwab Corp. was the primary driver behind the weak performance of the Financials sector. Utilities lost ground as a result of a sharp decline in the stock price of TerraForm Global, Inc., an owner of renewable energy plants in emerging markets, due to uncertainty related to the implications of a potential bankruptcy of parent company SunEdison. We exited our position.

Overall, we think the U.S. economy is doing well. Wages have increased somewhat. Income growth and low prices at the gas pump are providing consumers with more money for discretionary spending. Until now, much of the savings from low energy prices was being used to pay down debt, as consumers and businesses were not convinced that prices would stay low. With the extended low oil price environment, we believe assets previously allocated to energy costs will soon start to be redeployed to other parts of the economy.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 3/31/2016)
  • Dick's Sporting Goods, Inc. is the country’s largest sporting goods retailer. After a major competitor revealed it was filing for bankruptcy and closing a third of its stores, shares of Dick’s increased on expectations that the competitor’s exit will result in increased sales at Dick’s. While the space is facing increased competition from e-commerce sellers, we think Dick’s is better positioned among traditional sporting goods retailers as an omni-channel retailer, and is improving the management of its online channel.

  • Shares of global hotelier Hyatt Hotels Corp. increased in Q1 on revenue per available room (RevPAR) and margins that beat analyst predictions and 2016 RevPAR guidance of 3-5%. The company continues to generate strong free cash flow that it is using to buy back its stock and invest in its hotels. In our opinion, Hyatt still has one of the strongest balance sheets in the industry. We think it will continue to buy strategic assets as they become available. We also think Hyatt is well positioned to weather a downturn should we enter one.

  • Shares of Fastenal Co., a leading distributor of industrial supplies, rose during Q1 after reporting improving sales trends to start the year. We view the sequential strengthening of sales as evidence of abating energy and F/X headwinds as well as share gains in manufacturing and construction end markets. Based on several growth initiatives, including Vending and On-Site programs, we believe Fastenal is poised to deliver outstanding customer service to its key accounts and generate accelerating earnings growth over the next two years.

Detractors (for quarter ended 3/31/2016)
  • Shares of The Charles Schwab Corp., an investment brokerage firm, declined in Q1 due to the extreme downward pressure on the equity markets to start the year as a result of signs of a slowing Chinese economy and falling energy prices. Higher market volatility also led to a decline in trading activity. Finally, shares were pressured by investor concerns that interest rate hikes will be paused (or reversed), causing net interest margins to remain low and money market fee waivers to persist. We believe Schwab will continue to experience growth in accounts as brokers leave traditional wirehouses.

  • Manchester United plc is an English Premier League professional sports team that generates revenue from broadcasting, sponsorship, and licensing. Shares declined in Q1 over concerns that Manchester United will not qualify for the Champions League next year. We believe the team still has a chance to qualify, and even if it does not, the financial impact will be modest. We expect the company to continue to benefit from future sponsorship deals, the roll-out of new merchandise agreements, and a new digital offering under development.

  • Shares of CoStar Group, Inc., a real estate data and marketing services company, fell in Q1 as high-growth, high-multiple technology stocks sold off. The company reported financial results that were ahead of Street expectations, particularly on margin expansion. Bookings growth was strong. We believe that CoStar has potential to generate accelerating organic revenue growth and significant margin expansion as it leverages the multifamily marketing investments it has made over the last 18 months.

Quarterly Attribution Analysis (for quarter ended 3/31/2016)

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 Partners Fund decreased 2.66% in the first quarter and trailed the Russell Midcap Growth Index by 324 basis points. During the quarter, the Fund’s relative sector weights added value, but were outweighed the negative effect of stock selection.

The Fund may use leverage and is especially likely to do so when we believe prospects for businesses are favorable and stock prices of those businesses do not reflect those prospects. As of March 31, 2016, Baron Partners Fund had 125.2% of its net assets invested in securities, and this use of leverage in a volatile market detracted 86 basis points to relative performance.

Utilities and Health Care investments contributed the most to relative results. Within Utilities, outperformance of, and larger exposure to, ITC Holdings Corp. during the period held added the most value. ITC was sold in mid-February after Fortis, Inc. announced it would acquire the company. Strength in Health Care was partly due to the outperformance of veterinary diagnostics leader IDEXX Laboratories, Inc. and health care data and analytics vendor Inovalon Holdings, Inc. IDEXX’s shares rallied on strong financial results, while Inovalon’s shares rebounded as investors purchased shares at a discounted valuation. Lack of exposure to lagging biotechnology and pharmaceutical stocks, which declined 28.4% and 15.1%, respectively, within the index, contributed 125 basis points to relative performance.

Aside from leverage, investments in the Information Technology (IT), Consumer Discretionary, and Financials sectors were the primary detractors from relative results. Within IT, underperformance of CoStar Group, Inc., the third largest detractor on an absolute basis, and Mobileye N.V., which develops vision-based advanced driver assistance systems, detracted the most from relative results. Mobileye’s shares declined on short seller allegations that its high valuation and competitive position are unsustainable. We believe Mobileye has a dominant market position due to its solid technology and evidenced by its wins with top car manufacturers. Meaningfully larger exposure to Internet software & services, the poorest performing sub-industry in the benchmark’s IT sector, also detracted from relative results. Weakness in Consumer Discretionary was mostly attributable to the underperformance of Manchester United plc and Tesla Motors, Inc., although this was somewhat offset by meaningfully larger exposure to this strong performing sector. Manchester United was the second largest detractor from absolute results, while shares of electric vehicle company Tesla fell due to concerns around the impact of a possible recession on sales and the potential need for more financing. Within Financials, underperformance of The Charles Schwab Corp. and FactSet Research Systems, Inc. weighed the most on relative results. Schwab was the largest detractor from absolute performance, while shares of FactSet, a leading provider of investment management tools, fell as investors contemplated headcount reductions in its sell side business. Significantly larger exposure to this lagging sector, which fell slightly in the index, also hurt relative performance.

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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.