Review and Outlook
The market trended higher for most of the quarter as fear of a slump in global growth abated. Oil held to around $50 a barrel, stabilizing international economies. The U.S. economy chugged along, with statistics supporting 2% domestic growth. A surprisingly weak employment report for May stirred worries about the health of the seven-year expansion. However, it backed off expectations for a Federal Reserve rate increase, which the market favored. At the end of the quarter the market suffered a sudden drop when British citizens voted to leave the European Union.
The market has acted more normal this year, meaning stocks have broadly reacted to earnings results, news flows and valuation considerations, as opposed to momentum, sector rotation/factors and speculation. Our best performing stocks were companies who announced strong results and incrementally positive outlooks.
The U.S. and global economies have proven to be resilient, though we are not sure what will come of Brexit. Leading indicators in the U.S. have improved; and risk, measured by credit spreads and financial conditions, has moderated.
A good portion of our holdings are seeing growth accelerate; are growing earnings by double digits organically; and are increasing shareholder value through acquisitions, debt paydown, and/or share buy backs. After an exceptionally strong 2013, Baron Small Cap Fund has been marking time, but our holdings have been constantly growing their earnings and value. We believe valuations, which were high in retrospect, are now reasonable and are either stable or rising, especially for the visible and consistent growth that our “high quality” holdings are providing.
We believe a market environment that is so skittish is good for stocks. The Fund’s strong second quarter performance underscores just how hard it is to time when we will make our returns, which often come when least expected. It also highlights the futility of trying to predict the unpredictable and the virtue of ignoring the noise and focusing on business fundamentals. Our goal is to build and invest in a winning portfolio and “be in it to win it.”
We continue to focus on investing in a diversified portfolio of what we consider to be well-managed special growth businesses that can continue to compound growth at high rates for an extended period. This is what we have always done. We are heartened by the fact that our approach is coming back into favor after what we believe was an abnormal period where momentum, volatility, and high-multiple stocks outperformed.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending June 30, 2016 is not yet available
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