Baron Asset Fund (BARAX)

Portfolio Management

AndrewPeck
Andrew Peck

Fund Manager since 2003

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Fund Description

Baron Asset Fund invests primarily in mid-sized growth companies.

    

Portfolio Commentary

Retail Performance

Review and Outlook (for quarter ended 12/31/2015)

During the three-month period ended December 31, 2015, market indexes rebounded sharply from their retreat during the previous quarter to end the year in modestly positive territory. The biggest news during the quarter was the Federal Reserve’s decision to increase short-term interest rates for the first time since the financial crisis. Although widely expected, the stock market appeared to accept the Fed’s view that the economy was now strong enough to continue growing in the face of moderately increasing rates.

Baron Asset Fund increased in the period. The Information Technology (IT), Financials, and Consumer Discretionary sectors were the top three contributors to performance. Consumer Staples was a material detractor in the quarter.  IT’s gains were led by syndicated IT research provider Gartner, Inc. and Internet infrastructure service provider VeriSign, Inc. Financials benefited from strong performances by Willis Towers Watson Plc, the third largest contributor in the period, and brokerage firm Charles Schwab Corp. Performance of the Consumer Discretionary sector was driven in large part by Vail Resorts, Inc., which was the top contributor in the quarter. Both of the Fund’s Consumer Staples investments lost ground in the quarter, led by United Natural Foods, Inc. Shares of this leading natural foods distributor declined after the company reported disappointing financial results.

Despite the recent stock market volatility, we continue to believe that high-quality, mid-sized growth stocks represent an attractive long-term investment opportunity. The U.S. economy is among the world’s healthiest, and, particularly after the recent stock market correction, its equity market multiples are within the range of their long-term averages.  Interest rates remain at historic lows, and we believe that equity markets often perform well, even after rates begin to increase.  Employment and housing trends continue to improve, and energy prices remain meaningfully below their recent levels. We think that our portfolio of what we believe are well-managed, competitively advantaged, fast growing companies will continue to perform well in this environment, although we cannot guarantee that they will.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 12/31/2015)
  • Shares of Vail Resorts, Inc., an operator of ski resorts across the U.S. and Australia, increased in Q4 as the company generated strong results from its first season at Perisher in Australia, as well as robust pass sales for the current ski season in the U.S. In addition, snow storms across Tahoe, Colorado, and Utah resulted in positive sentiment on the stock. The company continued to generate significant cash flow, and it has started to use it to repurchase stock.

  • Shares of Mettler-Toledo International, Inc. rose in Q4. Mettler is the leading provider of weighing instruments for laboratory, industrial and food retailing applications. Although its Brazil, Russia and China divisions faced pressure in Q4, the rest of the business grew 7% and earnings beat Street estimates. Management also provided solid guidance for 2016 despite expected softer results in Brazil, Russia and China. We think Mettler-Toledo’s diversified, stable business can generate solid growth despite isolated areas of geographic weakness.

  • Shares of HR consultant Towers Watson & Co., contributed to Q4 performance. In late November, proposed merger partner Willis Group Holdings plc more than doubled the special dividend payable to Towers Watson shareholders to $10/share. This was sufficient to achieve shareholder approval for the merger of equals, which was completed in early 2016. We believe the merger will create significant revenue and cost synergies, accelerate growth, increase free cash flow generation, and drive modest multiple expansion.

Detractors (for quarter ended 12/31/2015)
  • Westinghouse Air Brake Technologies Corporation, the leading rail components supplier, reported a mixed Q4. Although management reaffirmed guidance for 2015, volatility in the global rail market, which is being impacted by the swift and significant decline in industrial commodities, weighed on the stock. With about half of its revenues generated outside the U.S., the company also faced foreign currency headwinds. It remains the market leader in products that improve rail safety and productivity.

  • Shares of health care data and analytics vendor Inovalon Holdings, Inc., fell in Q4. Organic financial results were slightly below Street expectations, although we were encouraged by Inovalon’s 18% organic revenue growth. While recent financial performance has been disappointing, we remain optimistic about the company’s ability to compound revenue at mid-to-high-teens rates and drive sustained margin expansion. We believe if the company can achieve these financial targets, the stock will also benefit from meaningful multiple expansion.

  • The Cooper Companies, Inc., a global maker of contact lenses, missed Street expectations in Q4 as Sauflon integration missteps and a tougher competitive environment prompted below-consensus fiscal 2016 revenue and earnings revision just one quarter after its original issuance. Management projected moderating share gains, and lowered CooperVision’s five-year growth rate. We remain cautiously optimistic given its valuation and our belief that revised guidance is achievable and the market shift to silicon hydrogels will continue.

Quarterly Attribution Analysis (for quarter ended 12/31/2015)

The Quarterly Attribution Analysis for period ending December 31, 2015 is not yet available

Yearly Attribution Analysis (for year ended 12/31/2015)

The Yearly Attribution Analysis for period ending December 31, 2015 is not yet available

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The prospective performance of the companies discussed herein is based on our internal analysis and reflect our opinions only. We cannot promise future returns and our opinions are a reflection of our best judgment at the time of publication. Our views are not intended as recommendations or investment advice to any person and are subject to change at any time based on market and other conditions and Baron has no obligation to update them. Investing in the stock market is always risky. Current and future portfolio holdings in the Baron Funds are subject to risk.