Review and Outlook
After the initial shock of the Brexit vote in late June, the U.S. stock markets settled down in the third quarter, experiencing significantly less volatility than in the first half of 2016. Stable economic data, monetary policy rates that remained relatively unchanged, and the lack of a major disruptive event allayed investor concerns and drove a broad-based rebound during the three-month period ended September 30, 2016.
Investor appetite for risk increased, and stocks (particularly small-cap stocks) rose more or less steadily throughout the quarter. Lower quality stocks outperformed their higher quality counterparts. After mostly underperforming in the first half of the year, risk-on categories such as biotechnology and semiconductors outperformed. On the other hand, defensive sectors retreated after strong performance in the first half of 2016.
Baron Focused Growth Fund increased in the quarter. Holdings in Consumer Discretionary, Financials, and Industrials were the top contributors. Although Consumer Discretionary had a somewhat mixed quarter, contributors outweighed detractors. Positive performance was led by top contributor Vail Resorts, Inc. Professional sports team Manchester United plc also boosted sector performance after shares rose on enthusiasm over the hiring of a new coach and addition of marquee players to the roster. Financials advanced on the strength of second largest contributor Arch Capital Group Ltd. Financial Engines, Inc. also added to sector performance. Shares of this retirement account manager increased on reports of improving metrics across all categories. The Industrials sector benefited from a strong showing by quartz countertop manufacturer Caesarstone Ltd.
Health Care, Telecommunication Services, and Consumer Staples investments detracted. Health Care performance was hampered by top detractor Inovalon Holdings, Inc. Telecommunication Services and Consumer Staples lost ground as investors exited defensive stocks. The Fund’s sole Telecommunication Services investment, Iridium Communications, Inc., was the third largest detractor. Shares of the Fund’s only Consumer Staples company, consumer products company Church & Dwight Co., Inc., fell on reports of decelerations in certain key categories. We believe in the company’s steady growth, cash flow generation, and ability to make accretive acquisitions in new business lines with higher margins and growth rates.
The U.S. economy showed signs of acceleration in the third quarter. Historically, the U.S. stock market has been closely aligned with GDP. In 1960, GDP was $520 billion and the Dow Jones Industrial Average was 600. In 2007, GDP was $14 trillion and the Dow was 14,000. In 2015, GDP was $17.9 trillion and the Dow was 17,000. We think the U.S. economy and the stock market are closely intertwined. Over the past half century or so, our economy and stock market have grown at a compound annual rate between 6-7% in nominal terms. Factoring in annual dividends of about 2-3%, stock prices have approximately doubled every 10 years during the same period. We think our nation’s economy and stock markets will continue to achieve similarly strong results over the long term.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending September 30, 2016 is not yet available
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