Baron Asset Fund (BARAX)

Portfolio Management

AndrewPeck
Andrew Peck

Fund Manager since 2003

View All Commentary by Andrew

Fund Description

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

    

Portfolio Commentary

Retail Performance

Review and Outlook (for quarter ended 3/31/2015)

U.S. stock markets experienced significant volatility in the first quarter, driven by concerns over the potential for increased interest rates, declining oil prices, the strong dollar, mixed domestic economic data, and corporate earnings disappointments. While overall gains were moderate, mid caps did better than large caps. The Russell Midcap Growth Index gained 5.38%, while large cap indexes were flat to slightly up.

Performance of Baron Asset Fund in the quarter was driven more by stock-specific earnings results than by broader industry trends. The best-performing stocks generally included companies with predominantly domestic businesses, and modest exposure to weaker foreign economies and the strengthening U.S. dollar. Several of the Fund’s investments in companies that sell proprietary data and analytics, such as Verisk Analytics, Inc. and FactSet Research Systems, Inc., performed particularly well. Travel-related companies with a largely domestic focus, including holdings Vail Resorts, Inc. and Choice Hotels International, Inc., benefited from improved travel spending. Towers Watson & Co. demonstrated its long-term opportunity to build a large business helping corporations create private healthcare exchanges for their employees and retirees.

Although energy prices stabilized at their recent, much lower levels during the quarter, several companies that sell products to energy end-markets fell after reporting disappointing results. These included pump manufacturer Colfax Corporation, and industrial distributors MRC Global, Inc. and Fastenal Company. Luxury retailers Ralph Lauren Corp. and Tiffany & Co. both suffered from the impact of the rising U.S. dollar, which led to reduced spending by foreign tourists in their U.S. stores, as well as the negative impact that foreign exchange had on their earnings results.

We believe that mid-sized growth stocks continue to represent an attractive investment opportunity. The U.S. economy remains among the world’s healthiest, its equity market multiples remain within the range of their long-term historic averages, and interest rates continue to be quite low by historic standards. The recent drop in energy prices should generate ongoing corollary benefits for many domestic companies. We believe that our portfolio of well-managed, competitively advantaged, fast growing companies will continue to perform well in this environment.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 3/31/2015)
  • Shares of Vail Resorts, Inc., the largest U.S. ski resort operator, rose in Q1 on strong earnings during the 2014-15 ski season despite poor snow at its Tahoe properties. Vail’s recent acquisition of Park City has improved the diversification of its resorts. Vail has also been able to operate Park City without a significant increase in selling, general and administrative expenses due to improved scale, which in turn, helped margins. Vail generated strong cash flow in Q1 and increased its dividend 50%.

  • Shares of analytics vendor Verisk Analytics, Inc. rose in Q1 on reports of stellar financial results for its fiscal fourth quarter, with organic revenue growth improving 2.5% sequentially to 11.4%. Verisk’s core Insurance businesses grew by roughly 12%, while its newer Financial Services and Health care business units grew 25% and 22%, respectively. Stock performance was also driven by Verisk’s enhanced return of capital, as it repurchased 7.8 million shares, or more than 4.5% of total outstanding shares.

  • Shares of market data vendor FactSet Research Systems, Inc. rose in response to accelerated organic revenue growth, enhanced seat count additions, and meaningful earnings growth. We believe FactSet is continuing to take share across all markets, generate strong cash flow, and return it aggressively to shareholders. We see continued strength in the company’s buy side customer base and improving conditions on the sell side, which we believe will be an added tailwind to growth.

Detractors (for quarter ended 3/31/2015)
  • Shares of Ralph Lauren Corp. declined significantly during Q1 after the company reported disappointing holiday sales results and offered a lukewarm outlook for 2015. Investors see several challenges impacting global consumer companies, including a more promotional competitive environment and significant foreign currency headwinds. We remain positive on Ralph Lauren, based on significant growth in its global e-commerce division, southeast Asia region, and accessories platform. The company is investing heavily in these initiatives with an eye toward growth.

  • Recent results at the venerable jeweler Tiffany & Co. have been disappointing, owing to difficult year-over-year comparisons, a slowdown in certain regions, and a high degree of foreign exchange volatility which has weighed on tourist spending in the Americas market. We continue to look favorably on Tiffany’s long-term growth prospects and margin expansion opportunity as emerging market stores, particularly in China, begin to ramp, new merchandising hires start to have impact, and low precious metal costs continue to benefit gross margins.

  • Shares of industrial supplies distributor Fastenal Co. fell in Q1. Sales growth moderated due to slowing demand in oil and gas regions and the impact of a stronger U.S. dollar on customers with large export divisions. Current growth rates of about 10%, while industry-leading, represent a deceleration from last year’s 15-20% runrate and are impacting Fastenal’s ability to leverage earnings faster than sales growth. We still see a path to double digit growth over the next several years, as well as an attractive valuation and debt-free balance sheet.

Quarterly Attribution Analysis (for quarter ended 3/31/2015)

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 Asset Fund (Retail Shares) increased 3.44% in the first quarter, yet trailed the Russell Midcap Growth Index by 194 basis points due to stock selection.

Outperformance of the Fund’s only holding in the Utilities sector, solar power company TerraForm Power, Inc., and its Industrials investments contributed the most to relative results. Shares of TerraForm increased more than 20% on news that the company and its parent, SunEdison, had closed a transformational acquisition of First Wind Energy for $2.4 billion. The news provided confidence that TerraForm would meet its dividend-per-share growth rate of 24% through 2019. Strength in Industrials was mostly attributable to the outperformance of Towers Watson & Co., an employee benefits consultant, and Verisk Analytics, Inc., two of the Fund’s largest contributors on an absolute basis. Shares of Towers Watson rose on robust results, including 10% growth in its core Benefits segment and 40% growth in Exchanges.

The Fund’s investments within the Health Care, Information Technology (IT), and Consumer Discretionary sectors were the primary detractors from relative performance. Within Health Care, the Fund’s meaningfully lower exposure to biotechnology and pharmaceutical stocks, which rose 23.9% and 14.1%, respectively, within the index, detracted the most from relative results. Additionally, the Fund’s largest holdings in the sector, Illumina, Inc. and IDEXX Laboratories, Inc., struggled to keep pace with their index counterparts after significantly outperforming last year. Within IT, the Fund’s lack of exposure to strong performing semiconductor stocks and underperformance of its largest holding in the sector, Gartner, Inc., weighed the most on relative results. Shares of IT research firm Gartner fell after management lowered guidance for 2015 due to foreign currency headwinds. We remain encouraged by Gartner’s performance on a constant currency basis, as growth in Research contract value, the company’s key long-term value driver, continues to improve. Weakness in Consumer Discretionary was mostly due to the underperformance of Ralph Lauren Corp. and Tiffany & Co., which were also the Fund’s two largest detractors on an absolute basis. Casino operator Wynn Resorts Ltd. and global lodging company Hyatt Hotels Corp. also hurt relative performance in the sector. Shares of Wynn declined as a result of the Chinese government’s anti-corruption campaign, which has resulted in a slowdown in Macau and lower spending at casinos there. We believe increased hotel capacity will eventually draw visitors back to Macau. Wynn continues to generate strong cash flow which, in our view, supports its 5% dividend yield. Hyatt’s shares fell slightly as the company generated lower-than-expected unit growth in its fiscal fourth quarter. Supply concerns at two of its international hotels also hurt margins and EBITDA at its owned properties. We believe Hyatt will benefit from its strong pipeline of new hotel room growth and increases in revenue per available room given the low supply growth in many of its markets. We think these factors, combined with its strong balance sheet, will result in solid long-term growth for the company.

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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.