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 Focused Growth Fund (Retail Shares) gained 4.51% in the fourth quarter, yet trailed the Russell 2500 Growth Index by 298 basis points due to stock selection.
Outperformance of the Fund’s investments within Information Technology (IT) and Materials, and its lower exposure to the lagging Energy sector, which tumbled 29.1% in the index amid declining oil prices, contributed the most to relative performance. The Fund’s IT holdings are exclusively invested in the Internet software & services and application software sub-industries; and these positions meaningfully outperformed in the quarter, led by CoStar Group, Inc., FactSet Research Systems, Inc., Benefitfocus, Inc., and Guidewire Software, Inc. CoStar and FactSet were two of the Fund’s largest contributors on an absolute basis. Shares of Benefitfocus, the leading provider of cloud-based benefits software, increased on strong financial results, confidence around the company’s cash requirements, and, we believe, recognition that its shares were undervalued. Shares of Guidewire, the gold standard of property & casualty systems, rose in the quarter, helped by strong financial performance and wins at top insurers. Within Materials, outperformance of the Fund’s largest holding in the sector, CaesarStone Sdot-Yam Ltd., added the most value. Shares of CaesarStone, a leading manufacturer of engineered quartz surfaces used for kitchen and bathroom countertops, increased by over 16%, driven by strong quarterly earnings that beat Street expectations and management’s positive outlook.
Underperformance of the Fund’s investments within the Consumer Discretionary, Industrials, and Financials sectors and its lack exposure to Health Care, which was the best performing sector in the index during the quarter, detracted the most from relative results. Tesla Motors, Inc. and Hyatt Hotels Corp detracted the most from relative results in the Consumer Discretionary. Tesla was also the largest detractor on an absolute basis. Hyatt’s shares fell slightly in the quarter due to lower margins at two Asian properties. Other detractors from relative performance in the sector were Pinnacle Entertainment, Inc., a regional casino company, and Manchester United plc, an English Premier League professional sports team. We believe shares of Pinnacle declined due to a proposed equity offering, the proceeds of which would be used to pay down debt, while shares of Manchester United were down due to a secondary offering. The Fund exited its position in Pinnacle during the quarter. Weakness in the Industrials sector was largely attributable to the underperformance of Colfax Corp., one of the Fund’s largest detractors on an absolute basis, and Genesee & Wyoming, Inc., a leading short-line railroad. Shares of Genesee & Wyoming were hurt by commodity-related issues and rail congestion, both of which we believe will be temporary. Within Financials, the underperformance of The Carlyle Group, an alternative asset manager, hurt relative results. Carlyle’s shares fell after lower investment realizations resulted in a lower dividend payout, and lower performance fees caused a sharp drop in distributable earnings.
Yearly Attribution Analysis
The Baron Focused Growth Fund (Retail Shares) increased 2.35% for the year, yet underperformed the Russell 2500 Growth Index by 470 basis points, due to a combination of stock selection and sector weightings.
The Fund’s lower exposure to the Energy sector, which dropped 25.7% in the index, and outperformance of its investments within Information Technology (IT) and Telecommunication Services contributed the most to relative results. Strength in IT was mostly attributable to the outperformance of the Fund’s application software holdings, which increased 31.1% as a group, led by Concur Technologies, Inc. and FactSet Research Systems, Inc. Concur’s shares rose sharply after SAP announced an agreement to acquire the company, and shares of FactSet increased after the company’s organic growth rate and customer and seat count additions accelerated. Another contributor to relative performance in the sector was Zillow, Inc., the leading U.S. online real estate site. Zillow’s shares were up as the company beat expectations each quarter, and spent more on building brand awareness. Within Telecommunication Services, outperformance of the Fund’s only holding in the sector, Iridium Communications, Inc., added value. The company was also one of the Fund’s largest contributors to absolute performance.
The Fund’s lower exposure to the top performing Health Care sector and underperformance of its investments within the Industrials, Consumer Discretionary, and Financials sectors detracted the most from relative results. Each of the Fund’s Industrial investments underperformed, led by Colfax Corp, which had a weak second half, and Genesee & Wyoming, Inc. Within Consumer Discretionary, a combination of stock selection and the Fund’s significantly larger exposure to this lagging sector hampered relative performance. The Fund’s Consumer Discretionary holdings trailed their counterparts in the index by 327 basis points, led by declines in the shares of Tesla Motors, Inc., AO World plc, and Dick's Sporting Goods, Inc. The Fund purchased shares of electric vehicle (EV) manufacturer Tesla late in the third quarter, and we believe the stock declined subsequently on investor views that significantly lower oil prices would make EVs less attractive. AO World was one of the Fund’s largest detractors from absolute performance during the year. Shares of Dick’s, a sporting goods retailer, declined as a result of weakness in its hunting and golf businesses. Within Financials, underperformance of the Fund’s largest holding in the sector, The Carlyle Group, detracted the most from relative results.
Back to Top
Invest In Baron Funds Today