Review and Outlook
U.S. stock markets were unusually volatile during the three months ended September 30, 2015. Most indexes fell sharply, with small and mid-cap stocks performing worse than large caps. The Russell Midcap Growth Index lost 7.99% in the third quarter.
The markets were pressured by several disruptive events in the period. China growth slowed, and the China A shares market fell sharply. Oil prices remained depressed, and the share prices of energy businesses and companies that supply or service the energy industry fell sharply in the quarter. High yield spreads increased by almost 200 basis points. This market was negatively impacted by impending financial problems of leveraged energy companies and downgrades of Volkswagen and Glencore debt. Interest rates, however, did not change. It is now nine years since the last time the Fed raised rates. This decision was attributed to slower-than-expected growth, market turmoil, and lower-than-desired inflation. The Fed also considered developments in China and economies overseas.
Baron Partners Fund declined by 10.51% in the quarter. No sectors contributed. Sub-industries that materially contributed to performance included property & casualty insurance, health care equipment, and electric utilities. Consumer Discretionary, Information Technology (IT), and Financials were the top detracting sectors to performance.
Top contributor Arch Capital Group, Inc. drove performance of the property & casualty insurance sub-industry. Gains by veterinary diagnostics company IDEXX Laboratories, Inc., which was the second largest contributor to the portfolio, helped boost performance of the health care equipment sub-industry. Electric utilities gained on a stock rise by electric transmission company ITC Holdings Corp., the third largest contributor to performance in the quarter. The weak performance of Hyatt Hotels Corp. negatively impacted the Consumer Discretionary sector. The Fund’s five IT holdings fell, led by CoStar Group, Inc., which was the second largest detractor in the quarter. While Financials had a mixed quarter, contributors were outweighed by detractors, led by top detractor The Carlyle Group L.P.
The decline in the profitability of oil companies and their industrial suppliers has resulted in slower-than-desired economic growth and subdued inflation. We think the short-term slowdown caused by the decline in the profits of energy businesses will soon be offset by faster growth in the rest of the economy in part spurred by the lower cost of energy.
The U.S. stock market is closely aligned with GDP. Median stock values are presently 15X earnings, below the median for the last 55 years. Individual stock prices reflect growth of value in business. When earnings grow significantly and stock prices decline or remain steady, we think this creates investment opportunities. This is presently the case.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending September 30, 2015 is not yet available
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