Review and Outlook
The Review and Outlook for period ending December 31, 2014 is not yet available
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
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 Real Estate Fund (Institutional Shares) increased 9.41% in the fourth quarter, yet modestly underperformed the MSCI USA IMI Extended Real Estate Index by 76 basis points. During the quarter, stock selection added value, but this positive effect was more than offset by the effect of relative real estate category weights.
The Fund’s investments in electric utilities, senior housing/health care services, and real estate services were the largest contributors to relative performance. Two electric utilities holdings that are not in the benchmark, ITC Holdings Corp. and Brookfield Infrastructure Partners L.P., outperformed. Within senior housing/health care services, the outperformance of Brookdale Senior Living, Inc. and Capital Senior Living Corp. added value, but this positive effect was partly offset by the Fund's larger exposure to this lagging real estate category. Brookdale was the Fund’s largest contributor to absolute performance in the quarter, while shares of Capital Senior Living increased due to investor expectations of improving business conditions and the company’s attractive valuation. Strength in real estate services was mostly attributable to the outperformance of the world’s two largest commercial real estate services firms, Jones Lang LaSalle, Inc. and CBRE Group, Inc. Both companies benefited from strong quarterly results across geographies and business lines. Another contributor to relative performance in real estate services was Essent Group Ltd., a mortgage insurance company that provides credit protection on residential mortgages. Shares of Essent rose more than 20% after market share gains and growth in the private mortgage insurance industry led to earnings results that exceeded expectations.
Underperformance of the Fund’s hotels & leisure and casinos & gaming investments, and its significantly lower exposure to REITs and building products/services, which were the two best performing real estate categories in the index during the quarter, detracted the most from relative results. Weakness in hotels & leisure was mainly due to the underperformance of Starwood Hotels & Resorts Worldwide, Inc., Hyatt Hotels Corp., and Extended Stay America, Inc. Starwood and Extended Stay were two of the Fund’s largest detractors from absolute performance during the quarter, while shares of Hyatt declined slightly due to lower margins at two Asian properties. The Fund’s casinos & gaming holdings fell 16.0% as a group with Wynn Resorts Ltd. and Pinnacle Entertainment, Inc. leading the decline. Wynn was the Fund’s largest detractor on an absolute basis in the quarter, and we exited our position in Pinnacle when the company decided to separate its operating assets and its real estate assets into two publicly traded companies. The Fund’s slightly larger exposure to underperforming casinos & gaming stocks also hurt relative performance.
Yearly Attribution Analysis
The Baron Real Estate Fund (Institutional Shares) gained 16.93% for the year, yet trailed the MSCI USA IMI Extended Real Estate Index by 103 basis points. During the year, the negative effect of the Fund’s relative real estate category weights and average cash exposure of 3.6% in an up market overshadowed favorable stock selection.
Outperformance of the Fund’s tower operators & wireless communications, infrastructure related & MLPs, real estate services investments, and its larger exposure to the top performing senior housing/health care services category, contributed the most to relative results. The Fund’s Indonesian tower investments, Tower Bersama Infrastructure Tbk PT and Sarana Menara Nusantara Tbk PT, posted significant gains. Shares of Tower Bersama rose sharply during the year, reflecting strong colocation demand and the announcement of a major acquisition agreement with Telkom. Sarana Menara’s shares increased nearly 50% as the company executed its new tower build strategy. Strength in infrastructure related & MLPs was largely attributable to the Fund’s lack of exposure to construction & engineering stocks, which fell 21.1% as a group within the index, and the outperformance of ITC Holdings Corp. Shares of ITC, the nation’s largest independent transmission company, were boosted by the strong performance of utilities stocks during the year, which, in our opinion, was driven by low interest rates and investor rotation to safety. Additionally, ITC’s five-year plan update, which included a 11-13% earnings growth estimate, gave investors confidence in the company’s long-term earnings trajectory. Within real estate services, outperformance of the Fund’s largest holdings in the category, Jones Lang LaSalle, Inc. and CBRE Group, Inc., added the most value.
The Fund’s significantly lower exposure to REITs, its larger exposure to the lagging casinos & gaming category, and underperformance of its hotels & leisure investments, were the primary detractors from relative results. The Fund’s REIT investments, which performed exceptionally well during the year due to declining interest rates, outperformed their counterparts in the index by 369 basis points, driven by gains of more than 40% each from Strategic Hotels & Resorts, Inc. and Education Realty Trust, Inc. However, this positive effect was more than offset by the Fund’s meaningfully lower exposure to retail and residential REITs, which were the index’s two best performing sub-industries within the REIT category. Within hotels & leisure, the underperformance of Extended Stay America, Inc. and Starwood Hotels & Resorts Worldwide, Inc. detracted the most from relative results. We exited our position in Extended Stay following a series of earnings disappointments, and reduced our investment in Starwood because we saw better growth potential in other hotel-related holdings. Weakness in hotels & leisure was somewhat offset by the Fund’s larger exposure to this outperforming real estate category.
Back to Top
Invest In Baron Funds Today