Review and Outlook
The Review and Outlook for period ending March 31, 2015 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) increased 5.70% in the first quarter, yet trailed the Russell 2000 Growth Index by 93 basis points. During the quarter, value added from stock selection was more than offset by the negative effect of differences in sector weights relative to the index.
Outperformance of the Fund’s investments within the Industrials and Materials sectors contributed the most to relative results. Within Industrials, outperformance of Acuity Brands, Inc., the Fund’s third largest contributor on an absolute basis, and its lack of exposure to lagging trucking stocks added the most value. Outperformance of the Fund’s holdings within the environmental & facilities services and aerospace & defense sub-industries, led by Clean Harbors, Inc. and TransDigm Group, Inc., respectively, also aided relative results. Shares of Clean Harbors rose after the company reported better-than-expected quarterly results and reaffirmed 2015 EBITDA guidance, while TransDigm’s shares increased after the company reported solid quarterly results and announced a large acquisition, which we believe fits well within the company's current product mix. Strength in Materials was mainly due to the outperformance of Berry Plastics Group, Inc., a leading plastic packaging company. The company’s shares rose on strong quarterly results and management’s reiteration of 2015 free cash flow guidance. We think lower resin costs (an oil derivative) will help boost Berry Plastic’s margins and working capital management, and accelerate the shift to plastic containers. Dunkin Donuts, among others, is considering a large-scale roll-out of the company’s Versalite cup, which is a replacement for Styrofoam cups.
The Fund’s investments within the Health Care, Consumer Discretionary, and Energy sectors and its larger exposure to the Telecommunication Services sector, the worst performing sector in the index, were the primary detractors from relative results. Within Health Care, the Fund’s meaningfully lower exposure to biotechnology and pharmaceutical stocks, which rose 16.0% and 14.9%, respectively, within the index, detracted approximately 116 basis points from relative performance. Weakness in Consumer Discretionary was mostly attributable to the underperformance of Fossil Group, Inc., Lumber Liquidators Holdings, Inc., and Del Frisco's Restaurant Group, Inc. Lumber Liquidators and Fossil were the Fund’s two largest detractors on an absolute basis, while shares of restaurant chain Del Frisco's Restaurant fell more than 15% after the company lowered earnings guidance as near-term margins were pressured by one-off sales shortfalls. Within Energy, underperformance of the Fund’s oil & gas storage & transportation investments, led by Targa Resources Corp., was partly offset by its larger exposure to this sub-industry, which rose 18.2% in the index. Targa Resources’ acquisition of Atlas Pipeline in the first quarter, while helping to grow and diversify Targa’s onshore U.S. presence, increased Targa’s sensitivity to commodity prices and caused the stock to drop. The Fund’s larger exposure to the lagging oil & gas equipment & services sub-industry, led by its investments in Core Laboratories N.V., also hurt relative results. Shares of Core Labs declined in the quarter as the rapid decline in oil prices caused a sharp decrease in capital investment and oilfield activity.
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