Baron Real Estate Fund (BREFX)

Portfolio Management

JeffreyKolitch
Jeffrey Kolitch

Fund Manager since 2009

View All Commentary by Jeffrey

Fund Description

Baron Real Estate Fund invests in securities of real estate and real estate related companies of all sizes.

  

Fund Resources

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Jeff Kolitch on his approach to investing in real estate.

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Latest Fact Sheets

Standard Fact Sheet

Expanded Fact Sheet - Institutional Shares

Baron Real Estate Attribution - Quarterly

1Q16 Quarterly Letter

Portfolio Commentary

Retail Performance

Review and Outlook (for quarter ended 3/31/2016)

The first quarter of 2016 was among the most challenging periods in recent memory. In the first six weeks of the year, the S&P 500 Index fell 10.5%. In the second half of the quarter, the market stabilized and recovered all of its losses from the beginning of the year. We took advantage of the largely indiscriminate market sell-off in the first half of the quarter to continue to execute on strategic initiatives regarding portfolio positioning and structure of Baron Real Estate Fund:

  • We purchased a number of “best in class” companies that have been “on sale.”
  • We lowered overall leverage of the Fund’s holdings by trimming or exiting our positions in companies with more highly leveraged balance sheets.
  • We decreased our exposure to smaller and less liquid companies.
  • We continue to de-emphasize complex companies that may have a narrower investor audience and are less likely to receive full credit for the company’s intrinsic value.
  • We trimmed exposure to geographic markets that may face headwinds due to low oil prices (e.g., Houston), elevated real estate construction activity (e.g., New York City hotels), or unfavorable international exposure (e.g., Brazil).
  • We increased exposure to REITs to 34.2%.  We did so because we believe the near-term prospects for REITs appear relatively attractive.

We recognize that the broad stock market, including many real estate stocks, has been on a steady upward climb since the global financial crisis. We therefore anticipate that there may be periods of market weakness in the years ahead. Nevertheless, we maintain a favorable outlook for real estate. The factors that have fueled the resurgence in real estate largely remain in place. Demand persists, and continues to outstrip supply in most markets. Balance sheets of real estate-related companies are generally in solid shape. Credit remains available at low interest rates. Finally, the overall performance of our real estate companies, and our discussions with various top management teams, does not, in our view, portend an imminent recession.

We believe that the Fund, with its differentiated approach to investing in real estate, is well suited for the twists and turns of the market that may lie ahead. The Fund’s expansive, balanced, and more diversified approach to investing in broader real estate categories – not a REIT-only approach – provides the flexibility and dimension to perform well in several different market environments. As such, we maintain that the overall prospects for real estate and the Fund remain promising.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 3/31/2016)
  • Shares of InterXion Holding N.V. added to performance during Q1. Interxion provides network-dense, carrier-neutral colocation data center services across Europe. Performance was driven by strong secular tailwinds in cloud adoption and outsourcing, improving pricing and utilization trends, and continued strong customer demand as evidenced by the company’s announced 2016 expansion plan. Rumors that InterXion was an acquisition target given ongoing industry consolidation also helped boost the share price.

  • Shares of Digital Realty Trust Inc. added to performance during Q1. Digital Realty is a global provider of large-scale data center services. Performance was driven by strong leasing and occupancy trends, stable pricing, and robust demand as a result of increasing cloud adoption and IT outsourcing. In addition, Digital Realty’s integration of recent acquisition Telx is progressing well with cost synergies fully realized. Telx further differentiates Digital Realty from its competitors by offering colocation and interconnection services.

  • Martin Marietta Materials, Inc. saw its stock price rise during Q1. The company is a leading supplier of aggregate products for the construction industry. Strong performance resulted from Q4 results that were better than consensus estimates and upbeat 2016 guidance. We remain excited about the company's long-term prospects, as we believe it should benefit from a continued cyclical recovery across its end markets, coupled with an accretive acquisition strategy.

Detractors (for quarter ended 3/31/2016)
  • Jones Lang LaSalle, Inc. is a commercial real estate (CRE) services company with leading positions in all of its major businesses – leasing, investment sales, outsourcing, project and development services, advisory services, and CRE investment management. Shares fell as a result of disappointing Q4 earnings results. Concerns that capital markets activity would slow dramatically and the CRE cycle is nearing its peak also pressured shares. We believe the outlook for CRE is attractive and remain optimistic on the company’s long-term prospects.

  • CBRE Group, Inc. is a commercial real estate (CRE) services company with leading positions in all of its major businesses – leasing, investment sales, outsourcing, project and development services, advisory services, and CRE investment management. The stock price fell during Q1 over concerns that capital markets activity would slow dramatically and that the commercial real estate cycle is nearing its peak. We believe the outlook for CRE is attractive and remain optimistic on the long-term prospects for CBRE.

  • Shares of cruise ship operator Royal Caribbean Cruises, Ltd. fell in Q1 due to investor concerns over ongoing challenges with foreign exchange rates, higher interest rates, and the possibility of the U.S. going into a recession, which could potentially hurt pricing power on its ships. However, the company is not losing pricing power. While its bookings were flat versus this time last year, prices were up. Royal Caribbean continues to generate strong cash flow which it is using to pay down debt and buy back shares.

Quarterly Attribution Analysis (for quarter ended 3/31/2016)

The Quarterly Attribution Analysis for period ending March 31, 2016 is not yet available

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Invest In Baron Funds Today

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.