Baron Partners Fund (BPTRX)

Portfolio Management

RonBaron
Ron Baron

Fund Manager since 1992

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Fund Description

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

   

   

Fund Resources

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Attribution Analysis 1Q15
Attribution Analysis 1Q15

Portfolio Commentary

Retail Performance

Review and Outlook (for quarter ended 3/31/2015)

U.S. stock markets experienced significant volatility in the first quarter, driven by concerns over the potential for increased interest rates, declining oil prices, the strong dollar, mixed domestic economic data, and corporate earnings disappointments. While overall gains were moderate, small and mid caps did better than large caps. The Russell Midcap Growth Index gained 5.38%, while large cap indexes were flat to slightly up.

After declining more than 40% in the fourth quarter, oil prices dipped another 11%, ending the first quarter at $48 per barrel. The decline in the price of oil since June 2014 translates to savings of close to $1 billion per day for U.S. oil consumers.

On March 18, the Federal Open Market Committee removed forward guidance that they would be “patient” on hiking rates. Analysts are now predicting the first rate hike sometime later this year. Elsewhere, banks moved in the opposite direction. This divergence caused the U.S. dollar to surge.

Domestic economic reports were mixed. The unemployment rate dropped to 5.5%, a post-recession low. GDP growth remained subdued at 2.2% in the fourth quarter. Corporate profits were also mixed. While foreign profits declined 5.3% in 2014, domestic profits rose slightly, reaching a record high in the fourth quarter. This trend favored domestically focused smaller cap companies.

Baron Partners Fund increased in the first quarter. Financials, Information Technology (IT), and Industrials contributed the most. Utilities, Consumer Discretionary, and Energy detracted. Performance of the Financials sector was driven by the Fund’s top contributor, Gaming and Leisure Properties, Inc. IT contributed on strong performances by CoStar Group, Inc. and FactSet Research Systems Inc., which were the third and fourth biggest contributors, respectively. Shares of FactSet, a market data vendor, rose on reports of  accelerated organic revenue growth, enhanced seat count additions, and meaningful earnings growth. Performance of the Industrials sector was driven by analytics vendor Verisk Analytics, Inc. and aircraft leasing company Air Lease Corp. Utilities detracted due to a stock drop in ITC Holdings Corp., which fell as investors exited utilities and other yield-oriented investments. With three of the top five detractors, including top detractor Tesla Motors, Inc., the Consumer Discretionary sector weighed on Fund performance. Energy lost ground due to sinking oil prices, and we exited our two sector investments.

We think the trend in the past two quarters favoring small and mid cap companies will continue, in part due to the persistence of low oil prices and a strong dollar. We believe conditions will also favor our style of fundamental investing, as well as companies in sectors and sub-industries such as airlines, cruise lines, automotive companies, hotels & resorts, and health care.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 3/31/2015)
  • Shares of gaming REIT Gaming and Leisure Properties, Inc. increased in Q1 on speculation that it would buy the real estate assets of Pinnacle Entertainment and spin off the operating company. We think the deal as currently structured is highly accretive for Gaming and Leisure and gives Pinnacle a higher pro-forma valuation than if Pinnacle converted to a REIT itself. We think the deal will eventually go through at a higher price, although still accretive for Gaming and Leisure.

  • Shares of sporting goods retailer Dick’s Sporting Goods, Inc. increased in Q1. Dick’s performed well in a difficult environment. It reported a solid increase in same store sales and continued to open stores at high productivity levels, making it a positive outlier for the retail sector. We think inventory is at appropriate levels, which should result in improving profitability throughout 2015. We also think the company is a candidate for private equity investors who would likely pay a premium over current levels.

  • Shares of CoStar Group, Inc., an information and marketing services provider to the commercial real estate industry, rose in Q1, as a result of robust revenue and earnings results, strong synergy potential from the acquisition of Apartments.com, and better relative performance from higher multiple growth stocks. We believe investments in R&D and a doubling of the sales force will help increase customer penetration, while investments in Apartments.com will accelerate CoStar’s growth in the vast multi-family market.

Detractors (for quarter ended 3/31/2015)
  • Shares of electric vehicle (EV) company Tesla Motors Inc. fell during the first quarter. Lower gas prices presumably raised concerns that EV demand would drop. In addition, the launch of the Model X SUV has been delayed. We believe that Tesla’s talent pool, first mover advantage, scale, and brand will result in market share gains for years to come.

  • Shares of industrial supplies distributor Fastenal Co. fell in Q1. Sales growth moderated due to slowing demand in oil and gas regions and the impact of a stronger U.S. dollar on customers with large export divisions. Current growth rates of about 10%, while industry-leading, represent a deceleration from last year’s 15-20% runrate and are impacting Fastenal’s ability to leverage earnings faster than sales growth. We still see a path to double digit growth over the next several years, as well as an attractive valuation and debt-free balance sheet.

  • The stock of ITC Holdings Corp., the nation’s largest independent transmission company, fell in Q1. An expected increase in interest rates contributed to overall sector weakness as investors exited utilities and other yield-oriented investments. The primary drivers for transmission investment – reliability and connection of new generation (including renewables)  – remain intact, and we believe ITC has robust prospects for growth and will execute on its growth strategy and concurrent five-year capital plan.

Quarterly Attribution Analysis (for quarter ended 3/31/2015)

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.

The Baron Partners Fund (Retail Shares) increased 2.56% in the first quarter, yet underperformed the Russell Midcap Growth Index by 282 basis points, due to a combination of relative sector weights and stock selection.

The Fund may use leverage and is 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, 2015, Baron Partners Fund had 114.8% of its net assets invested in securities, and the use of leverage in favorable market conditions during the quarter contributed 88 basis points to relative results.

Outperformance of the Fund’s investments within the Financials and Industrials sectors contributed the most to relative performance. Strength in Financials was mostly attributable to the outperformance of Gaming and Leisure Properties, Inc. (a REIT), which was also the Fund’s largest contributor on an absolute basis in the quarter. Within Industrials, outperformance of the Fund’s two largest holdings in the sector, Air Lease Corp. and Verisk Analytics, Inc., added the most value. Shares of Air Lease, which leases aircraft to commercial airlines, rose on solid quarterly results as the company continues to benefit from strong demand for replacement of older aircraft and for more lift in Asia. Shares of Verisk, which provides information about risk to companies in the insurance, health care, and mortgage industries, increased on reports of stellar financial results. Verisk’s core Insurance businesses grew by roughly 12%, while its newer Financial Services and Health Care business units grew 25% and 22%, respectively.

The Fund’s investments within Consumer Discretionary and Health Care and its larger exposure to the lagging Utilities sector through its investment in ITC Holdings Corp. detracted the most from relative results. Within Consumer Discretionary, stock selection and, to a lesser extent, the Fund’s meaningfully larger exposure to this underperforming sector weighed on relative performance. Weakness in the sector was mainly due to the underperformance of Tesla Motors, Inc., which was also the Fund’s largest detractor on an absolute basis during the quarter. Global lodging company Hyatt Hotels Corp. and casino operator Wynn Resorts Ltd. also hurt relative performance in the sector. Hyatt’s shares fell slightly after the company generated slightly lower-than-expected unit growth in its fiscal fourth quarter, while Wynn’s shares declined due to the Chinese government’s anti-corruption campaign, which has resulted in a slowdown in Macau and lower spending at casinos there. Within Health Care, the Fund’s lack of exposure to the outperforming biotechnology and pharmaceutical sub-industries detracted 75 basis points from relative performance. Additionally, the Fund’s largest holdings in the sector, IDEXX Laboratories, Inc. and Illumina, Inc., struggled to keep pace with their index counterparts after significantly outperforming last year.

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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.