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.
Lower quality stocks outperformed their higher quality counterparts during the quarter. Investor appetite for risk increased, and, 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 Asset Fund gained in the quarter. Investments in Health Care, Financials, and Industrials were the top contributors during the three-month period. Health Care included the top two contributors to Fund performance: IDEXX Laboratories, Inc. and Illumina, Inc. Rising equity markets and increased speculation that the Federal Reserve would raise interest rates provided a tailwind for most of the Fund’s Financials sector investments. These included brokerage firm The Charles Schwab Corp., which was the third largest contributor. Insurer Arch Capital Group Ltd. also performed well during Q3 on solid quarterly results, with profitable underwriting, modest catastrophe losses, and favorable reserve development. The market also reacted favorably to Arch’s agreement to acquire mortgage insurance company United Guaranty from AIG. Industrials advanced on the strength of share price gains in eight of nine Fund holdings in the sector. Contribution within the sector was led by Westinghouse Air Brake Technologies Corp., which provides technology-based components to the rail industry, and IDEX Corp., which supplies highly engineered industrial and technology solutions across an array of end markets.
Information Technology (IT) was the only sector with negative performance, with detractors slightly outweighing contributors. IT research firm Gartner, Inc. and Guidewire Software, Inc., which sells various solutions to the global insurance industry, both gave up ground on earnings reports that Wall Street perceived to be disappointing. The share price of Verisign, Inc., which operates internet domain name registries, fell on fears of adverse regulatory changes.
The U.S. economy continues to rank among the world’s healthiest, and its equity market multiples are within the range of their long-term averages. Perhaps the most prevalent concern among equity investors is uncertainty about what will happen to stocks when interest rates finally begin to increase. We believe that equity markets often perform well during a rising rate environment. Separately, employment and housing trends have improved throughout 2016, and energy prices remain meaningfully below recent levels. We think 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
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending September 30, 2016 is not yet available
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