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.

   

   

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Attribution Analysis 1Q15
Attribution Analysis 1Q15

Portfolio Commentary

Retail Performance

Review and Outlook (for quarter ended 6/30/2015)

U.S. stock markets made little progress during the three months ended June 30, 2015. Most indexes achieved modest gains. The Russell Mid Cap Growth Index lost 1.14% and the S&P 500 Index gained 0.28%.

Numerous cross currents impacted the economy and markets during the second quarter of 2015. The U.S. economy continued to steadily improve. Consumer and business confidence rose, unemployment fell, wages increased at an accelerating pace, housing prices continued to rise, automobile sales remained strong, and central banks worldwide implemented “easy” monetary policies to stimulate their economies. With our economy growing and reported inflation increasing in the U.S., interest rates, while still quite low, began to increase. This impacted interest-sensitive stocks, including REITs, MLPs and utilities. Continued strength in the dollar negatively impacted U.S. industrial and export-dependent businesses, whose stocks lagged in the period. Stocks in transport companies, whose results are closely correlated to industrial businesses, also lagged. Energy prices stayed low, to the benefit of consumers and energy-dependent businesses. A cutback in capital expenditures by energy companies partially offset the favorable impact of lower energy prices.

Baron Partners Fund increased in the second quarter. Consumer Discretionary, Financials and Information Technology (IT) contributed. Utilities, Health Care, and Industrials detracted. A strong performance by top contributor Tesla Motors, Inc., whose stock rose more than 40% in the quarter, drove contribution of the Consumer Discretionary sector. Professional sports team Manchester United plc and ski resort owner Vail Resorts, Inc. also showed strength. These positive results more than outweighed declines elsewhere in Consumer Discretionary, including the specialty stores, hotels, resorts & cruise lines, and automotive retail sub-industries. Four of the Fund’s five Financials holdings increased in the quarter, led by the third largest contributor, Arch Capital Group Ltd. IT advanced primarily on the strength of application software company Mobileye N.V., a maker of automated driver assistance technology. Rising interest rates weighed on the Utilities sector, including the Fund’s only sector holding, top detractor ITC Holdings Corp. Health Care had mixed results in the quarter. The sector included the second biggest detractor, IDEXX Laboratories, Inc., and the second biggest contributor, Illumina, Inc. Industrials detracted on weakness in Air Lease Corp., a global aircraft leasing company.

While it is not possible to predict stock markets over the short term, over the long term, stock prices and our economy are inextricably linked. For the past 55 years, GDP has grown 6.6% a year and stock prices have grown 6.6% a year. Taking dividends into account, stocks have doubled every 10 years. We have every reason to believe that our economy and stock markets will continue to achieve these historic results over the long term. We see many opportunities.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 6/30/2015)
  • Shares of electric vehicle company Tesla Motors, Inc. rose on an upbeat Q1 earnings call that included strong early results from the launch of Tesla Energy, its new commercial battery business. The early success of the entry level 70D model launch also helped boost share price. As a higher performing vehicle versus the lower-priced 60 model, which it replaced, we believe the 70D significantly expands Tesla's addressable market. We also look forward to Tesla’s upcoming launch of the Model-X SUV.

  • Illumina, Inc. is the leading provider of next generation DNA sequencing instruments and consumables. Shares rose on reports of better-than-expected revenue and earnings driven by strong sales of sequencing instruments. We maintain conviction because we believe Illumina holds a monopoly on DNA sequencing at a time when DNA sequencing is increasingly being used in cancer research and diagnosis and reproductive health.

  • Arch Capital Group Ltd. is a specialty insurance and reinsurance company based in Bermuda. The company reported solid Q1 financial results with 15% growth in book value per share. Despite a soft reinsurance pricing environment, underwriting profitability remains strong, catastrophe losses remain benign, and the company continues to experience favorable reserve development. The share price has also benefited from M&A activity and speculation in the P&C insurance industry.

Detractors (for quarter ended 6/30/2015)
  • Shares of ITC Holdings Corp., the nation’s largest independent transmission company, fell in Q2 along with most of the utility sector over interest rate concerns. Company-specific issues, including a potential regulatory cut to the allowed return on equity and questions around ITC’s ability to execute on the development portion of its five-year capital expenditure plan, also weighed on the stock. We continue to hold the stock as we believe ITC has robust growth prospects and will execute on its growth strategy and capital expenditure plan.

  • After several quarters of strong performance, shares of veterinary diagnostics leader IDEXX Laboratories, Inc. fell in Q2. We attribute a portion of the stock’s decline to greater-than-expected foreign exchange headwinds. Separately, the company noted increased competition and lower prices, impacting around 3% of revenue. We believe management will respond successfully with pricing programs, creative diagnostic bundles, and an expanded inside sales force to better serve its customers.

  • Shares of Dick’s Sporting Goods, Inc., the largest sporting goods retailer in the U.S., fell in Q2. Growth in same stores sales was dragged down by the golf segment, a trend many had expected to reverse. We believe any turnaround in the golf business will be a huge help in improving the business and stock price. The segment has already improved its inventory positioning and lowered the amount of discounting, which we think is a move in the right direction. Other segments remain strong, and we retain conviction in Dick’s long-term prospects.

Quarterly Attribution Analysis (for quarter ended 6/30/2015)

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.

Baron Partners Fund increased 3.21% in the second quarter, outperforming the Russell Midcap Growth Index by 435 basis points due to 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 June 30, 2015, Baron Partners Fund had 119.0% of its net assets invested in securities, and this use of leverage in a down market detracted approximately 20 basis points from relative performance.

Outperformance of investments within the Consumer Discretionary, Financials and Information Technology (IT) sectors contributed the most to relative performance. Strength in Consumer Discretionary was mainly due to the outperformance of Tesla Motors, Inc., the largest contributor on an absolute basis. Outperformance of Manchester United plc and Vail Resorts, Inc. and lower exposure to the lagging apparel accessories & luxury goods sub-industry, which fell 8.9% in the index, also lifted relative results. Shares of English Premier League soccer team Manchester United increased after its fourth place finish made qualification to the Champions League a possibility. Shares of ski resort operator Vail rose due to stronger-than-expected season pass sales for the upcoming season. Financials investments outperformed their index counterparts, gaining 6.1%, led by Arch Capital Group Ltd. and The Charles Schwab Corp. Arch was the third largest contributor to absolute performance, while shares of brokerage firm Schwab increased despite headwinds related to lower trading volume and relatively low interest rates. Most IT holdings outperformed, led by application software companies Mobileye N.V. and FactSet Research Systems, Inc. Shares of Mobileye, a designer of advanced driver assistance systems software, rose on a strong start to 2015 and an upbeat earnings call. Another contributor to relative performance was CoStar Group, Inc., an information and marketing services provider to the commercial real estate industry. CoStar’s shares rose on robust revenue and earnings results, strong sales momentum in Apartments.com, and the acquisition of ApartmentFinder.

Larger exposure to the lagging Utilities sector through ITC Holdings Corp. and underperformance of Health Care holdings detracted the most from relative results. Within Health Care, underperformance of IDEXX Laboratories, Inc. and Inovalon Holdings, Inc. and lack of exposure to biotechnology stocks, which rose 6.4% in the index, hurt relative results. IDEXX was the second largest detractor on an absolute basis, while shares of health care data and analytics company Inovalon were negatively impacted by M&A activity in the managed care space, which creates the risk of customer consolidation. We view Inovalon as a unique business built on a proprietary data set. It addresses a $14 billion annual opportunity, and we believe logical adjacencies can increase the total addressable market by three to four times.

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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.