Review and Outlook
Stock markets around the world fell sharply at the beginning of the year based on a variety of factors, most important being the continued drop in the price of oil, fears that the Chinese economy would suffer a hard landing and further devalue its currency, and concern that U.S. interest rates would be rising in the face of economic uncertainty. Oil bottomed, the dollar declined, high yield bonds recovered, emerging markets turned and U.S. stocks acted strong in the back half of the quarter. The Federal Reserve also waved a cautious flag and set a more patient course on raising interest rates, which was positively received by investors.
When we spoke to our companies, we heard that business was solid and on course and the outlook for future growth was fine. This reinforced our confidence and confirmed our belief that, especially these days, the market is simply a barometer of investor sentiment and does not know more than fundamental investors who are close to their companies.
Baron Small Cap Growth Fund declined in the first quarter. Investments in Consumer Discretionary and Consumer Staples contributed to performance. Materials, Health Care, and Energy were the top detracting sectors from performance. While Consumer Discretionary holdings had mixed performance, contributors outweighed detractors. Positive performance was led by restaurants holding Cheesecake Factory Inc., whose stock rose on reported Q4 earnings that beat Street forecasts. Consumer Staples had a relatively solid quarter, as investors sought the perceived safe haven of this defensive sector in a volatile market. Materials lost ground mainly as a result of weak performance of specialty chemicals holdings, led by Flotek Industries, Inc., a supplier of chemical additives to the oil & gas industry whose shares fell due to the sharp decline in drilling and completion activity. Health Care was hurt by poor performance across a number of sector holdings, led by DexCom, Inc., the second largest detractor from performance in the quarter. Energy’s weak performance was a result primarily of stock price drops in oil & gas storage & transportation investments, including Scorpio Tankers Inc., a leading owner and operator of product tankers, which move refined products from refineries to consuming markets.
The market has recovered as the causes for despair have dissipated. Oil and commodity prices have firmed, the dollar has declined, China has not suffered a hard landing, and the Federal Reserve has delayed increasing rates. Though the U.S. GDP is expected to grow only about 1% in the first quarter, we expect growth to pick up, and we view the U.S. economy as relatively healthy. Global growth appears to be improving aided by the monetary easing that has been going on for the last year.
Stocks have rebounded from being inexpensive mid-quarter to being reasonably valued now. We are heartened by the market action, which was led by quality companies and oversold stocks at the expense of highly valued momentum stocks. As we enter earnings season, we believe that particular results of individual companies will be most important to future price action.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending March 31, 2016 is not yet available
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