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 Small Cap Fund (Institutional Shares) gained 5.12% in the fourth quarter, yet underperformed the Russell 2000 Growth Index by 494 basis points. During the quarter, the Fund’s relative sector weights detracted approximately 300 basis points from relative performance and, to a lesser extent, stock selection also detracted.
The Fund’s investments within the Consumer Staples sector were the largest contributors to relative results. Strength in the sector was attributable to the outperformance of The Chefs' Warehouse, Inc., a food-service distributor of specialty products, and United Natural Foods, Inc., one of the Fund’s largest contributors on an absolute basis. Chefs’ Warehouse’s shares rebounded during the quarter after reporting improved sales and announcing an acquisition.
Underperformance of the Fund’s investments within the Information Technology (IT), Industrials, and Consumer Discretionary sectors, and its lower exposure to outperforming biotechnology stocks in the Health Care sector, detracted the most from relative performance. Within IT, underperformance of the Fund’s data processing & outsourced services holdings, WEX, Inc. and FleetCor Technologies, Inc., and its lack of exposure to outperforming semiconductor stocks were the largest detractors from relative results. Shares of WEX and FleetCor, which are both providers of payment products and services to vehicle fleets, lagged due to investor concerns that lower oil prices would negatively impact future earnings. The Fund’s application software holdings also underperformed their counterparts in the index, led by Advent Software, Inc. Weakness in Industrials was mainly due to the underperformance of the Fund’s environmental & facilities services holdings, Waste Connections, Inc. and Clean Harbors, Inc. Shares of Waste Connections, an integrated solid-waste services company, were hurt by reduced expectations for the company’s R360 Environmental Solutions business. Clean Harbors, a leading provider of environmental and hazardous waste management services, underperformed due to its exposure to the oil and gas industry. Another detractor from relative performance in the sector was short-line railroad Genesee & Wyoming, Inc. This stock came under pressure due to commodity-related issues and rail congestion across the U.S. rail network, both of which we believe will be temporary. As a group, the Fund’s investments in the Consumer Discretionary sector increased 7.6%, yet trailed their counterparts in the index by 610 basis points. Among the largest detractors from relative performance in the sector were Iconix Brand Group, Inc., a brand management company, and Mattress Firm Holding Corp., a retailer of mattresses and related products in the U.S. We believe shares of Iconix, which has grown by acquisitions in the past, declined due to investor concern about the lack of recent acquisitions. Shares of Mattress Firm, which has a large presence in Texas, fell as investors became nervous that lower oil prices and layoffs at energy-related businesses could lead to a localized recession.
Yearly Attribution Analysis
The Baron Small Cap Fund (Institutional Shares) increased 1.95% for the year, yet trailed the Russell 2000 Growth Index by 365 basis points. During the year, stock selection added value, but this positive effect was more than offset by the effect of the Fund’s relative sector weights.
The Fund’s investments within the Energy, Materials, and Telecommunication Services sectors were the largest contributors to relative results. The Fund’s exposure to Energy is mostly concentrated in MLPs, and most of these investments outperformed, led by Phillips 66 Partners LP and Sunoco, LP (formerly Susser Petroleum Partners LP). Shares of Phillips 66 Partners increased as the company continued to grow significantly faster than its peers. Shares of Sunoco rose sharply in late April after Energy Transfer Partners L.P. bought its general partner and announced its plan to make Sunoco its primary home for its retail and gas distribution assets. The Fund exited its position in Sunoco as the stock moved higher in the months following this announcement. Strength in Materials was mainly due to the outperformance of Platform Specialty Products Corp., a global specialty chemical company, and Berry Plastics Group, Inc., one of the Fund’s largest contributors on an absolute basis. Platform Specialty Products’ shares rose after the company invested roughly $5 billion in three acquisitions to establish itself as a leader in assisting growers to protect and enhance crop yields. Within Telecommunication Services, outperformance of the Fund’s two holdings in the sector, SBA Communications Corp. and Sarana Menara Nusantara Tbk PT, added value. SBA was the Fund’s second largest contributor to absolute performance, while shares of Indonesian tower operator Sarana Menara benefited from the execution on its new tower build strategy.
Underperformance of the Fund’s investments within the Information Technology (IT), Consumer Discretionary, and Consumer Staples sectors, and its lower exposure to outperforming pharmaceuticals and biotechnology stocks detracted the most from relative results. Within IT, the Fund’s lack of exposure to semiconductor stocks and underperformance of its application software holdings hurt relative results. The Fund’s application software holdings were down 7.4% for the year, with RealPage, Inc. leading the decline. The Fund exited its position in RealPage after the company reported disappointing results that showed a dramatic deceleration in revenue growth. The largest individual detractor from relative results in the sector was Acxiom Corp., which develops application lifecycle software for agile software developers. Shares of Acxiom declined as a result of disappointing results in the first half of the year and a high-priced acquisition. Within Consumer Discretionary, the Fund’s larger exposure to the apparel, accessories & luxury goods sub-industry and the underperformance of The Container Store Group, Inc. and Lumber Liquidators Holdings, Inc. detracted the most from relative results. The Container Store was one of the Fund’s largest detractors on an absolute basis during the year and Lumber Liquidators declined sharply during 2014, driven down by disappointing results due to weaker demand and supply chain disruptions caused by the company’s stringent new compliance standards.Weakness in Consumer Staples was mostly attributable to the underperformance of Fairway Group Holdings Corp., a New York specialty food retailer. Fairway’s shares dropped sharply due to heightened competition, aggressive store growth, and executive turnover.
Back to Top
Invest In Baron Funds Today