Review and Outlook
After the initial shock of the Brexit vote in late June, the U.S. stock markets settled down in the third quarter, experiencing significantly less volatility than in the first half of 2016. Stable economic data, monetary policy rates that remained relatively unchanged, and the lack of a major disruptive event allayed investor concerns and drove a broad-based rebound during the three-month period ending September 30, 2016.
Investor appetite for risk increased, and stocks (particularly small-cap stocks) rose more or less steadily throughout the quarter. Lower quality stocks outperformed their higher quality counterparts. After mostly underperforming in the first half of the year, risk-on categories such as biotechnology and semiconductors outperformed. On the other hand, defensive sectors retreated after strong performance in the first half of 2016.
Baron Partners Fund increased in the quarter. Holdings in Financials, Consumer Discretionary, and Health Care were the top contributors. Financials advanced primarily on the strength of contributor The Charles Schwab Corp. Arch Capital Group Ltd. also added to sector performance. The share price of this specialty insurance and reinsurance company performed well during Q3 on solid quarterly results, with profitable underwriting, modest catastrophe losses, and favorable reserve development. Although the Consumer Discretionary sector had a somewhat mixed quarter, contributors outweighed detractors. Positive performance was led by third largest contributor Vail Resorts, Inc. Health Care advanced primarily on the strength of top contributor IDEXX Laboratories, Inc.
Information Technology investments detracted. Zillow Group, Inc. and Gartner, Inc., respectively the third and fourth largest detractors from Fund performance, led the decline in the sector. Shares of Gartner, a provider of syndicated IT research, relinquished some gains due to tougher comparisons and slightly more challenging macro conditions. We believe Gartner’s key metrics are solid and that, over time, the company will generate accelerating top-line growth, significant growth in earnings and free cash flow, and persistent return of capital.
The U.S. economy showed signs of acceleration in the third quarter. Historically, the U.S. stock market has been closely aligned with GDP. In 1960, GDP was $520 billion and the Dow Jones Industrial Average was 600. In 2007, GDP was $14 trillion and the Dow was 14,000. In 2015, GDP was $17.9 trillion and the Dow was 17,000. We think the U.S. economy and the stock market are closely intertwined. Over the past half century or so, our economy and stock market have grown at a compound annual rate between 6-7% in nominal terms. Factoring in annual dividends of about 2-3%, stock prices have approximately doubled every 10 years during the same period. We think our nation’s economy and stock markets will continue to achieve similarly strong results over the long term.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending September 30, 2016 is not yet available
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