Review and Outlook
Baron Real Estate Fund gained in the third quarter of 2016. Real estate service companies, casinos & gaming operators, and infrastructure-related & MLPs were the top contributing sub-industries to performance. Real estate service companies rebounded strongly in the third quarter, led by third largest contributor Kennedy-Wilson Holdings, Inc. Casinos & gaming operators benefited from a double-digit share price increase in the Fund’s sole sub-industry holding, top contributor MGM Resorts International. The second largest contributor, Macquarie Infrastructure Corp., drove performance of the infrastructure-related & MLPs sub-industry.
REITs, building products/services, and data centers led detractors in the quarter. The two biggest detractors, Equinix, Inc., and Digital Realty Trust, Inc., led the decline in REITS. These two data centers, along with data center Interxion Holding N.V., all gave up some gains after strong runs in the first half of the year. The third largest detractor from Fund performance, Lowe’s Companies, Inc., led the decline in building products/services.
Looking forward, we remain optimistic that we are “righting the ship,” and hope to improve our recent performance. Our bullish view is due to the following:
1) We expect the highly unusual environment of the last few years (most notably the collapse in interest rates to all-time low levels) will slowly begin to “normalize.” We think an eventual “reversion to the mean” and return to a somewhat more normal interest rate and economic environment should bode well for the Fund.
2) Dividend-yield securities such as REITs have benefited significantly from the unprecedented declines in interest rates. We believe these outsized gains for REITs are unlikely to be repeated, which should potentially benefit the Fund, given our broader real estate categories, and more balanced approach to real estate-related investing.
3) The Fund is comprised of “best-in-class” companies that we believe (a) are well-managed, (b) are market leaders, (c) generally possess quality balance sheets, (d) own well-located real estate, and (e) grow cash flow at a faster rate than most peers. Our view is that these companies should generate superior returns over the long term.
4) The Fund’s holdings are attractively valued, in our view. Examples include Mohawk Industries, Inc., InterXion Holding N.V., Gaming and Leisure Properties, Inc., CBRE Group, Inc., Brookfield Asset Management, Inc., Hilton Worldwide Holdings, Inc., Jones Lang LaSalle, Inc., and Toll Brothers, Inc.
We continue to believe that the Fund, with its expansive, balanced, and differentiated approach to investing in real estate, provides the potential to perform well over the long term in several different market environments.
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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