Baron Asset Fund (BARIX)

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

Institutional Performance

Review and Outlook (for quarter ended 6/30/2016)

The Review and Outlook for period ending June 30, 2016 is not yet available

Top Contributors/Detractors to Performance

Contributors (for quarter ended 6/30/2016)
  • Shares of veterinary diagnostics leader IDEXX Laboratories, Inc. rallied in Q2 on strong financial results and multiple expansion. Competitive trends are strong and improving, highlighted by instrument placement growth of almost 25%, domestic lab growth more than twice that of its main competitor, rising sales productivity, and stability in rapid assays. We think that IDEXX’s direct go-to-market model coupled with meaningful R&D-driven product enhancements will boost revenue and earnings growth over time.

  • Shares of Gartner, Inc., a provider of syndicated IT research, increased in Q2 on strong financial results. We believe that key forward-looking metrics continue to look strong. Contract value growth and productivity trends are approaching levels sufficient to drive margin expansion, retention rates are at all-time highs, and the company has significant financial flexibility. We believe that Gartner will generate accelerating top line growth, significant growth in earnings and free cash flow and persistent return of capital.

  • Zillow Group, Inc. is the leading real estate website in the U.S. In addition to information on rentals and homes for sale, the company owns the Zillow Mortgage Marketplace and Street Easy, New York City’s leading real estate site. Zillow continues to invest in its brand as the leader in an $8 billion real estate advertising market. Shares were up in Q2, based on improving fundamentals and the favorable settlement of a lawsuit with Move, Inc. We think Zillow is well positioned to grow its share of the real estate advertising market.

Detractors (for quarter ended 6/30/2016)
  • Shares of DNA sequencing company Illumina, Inc. fell in Q2 on first quarter revenue that missed Street expectations and a lowered forecast for 2016 due to weak first quarter sales of its HiSeq instrument line and a lower forecast for Europe. Management believes the issues are short-term, fixable, and unrelated to fundamental market demand. We continue to believe Illumina has a long runway for growth driven by increasing adoption of DNA sequencing in clinical markets such as cancer screening, diagnosis, and treatment.

  • Shares of The Charles Schwab Corp., a brokerage business, fell due to the steep market decline and volatility in the wake of “Brexit.” Investors appeared concerned that higher volatility would cut into trading revenue, lower market values would pressure asset-based revenue generation, and interest rate hikes will be paused (or reversed), causing net interest margins to remain low and money market fee waivers to persist. We believe Schwab will continue to experience growth in accounts as brokers leave traditional wirehouses.

  • Shares of financial technology vendor SS&C Technologies Holdings, Inc. detracted from second quarter performance. We attribute the decline to concerns that lackluster hedge fund performance will impact SS&C’s growth. We believe a low single digit percentage of the company’s revenue is directly correlated to equity markets, far less than investors feared. We believe the company will continue to generate attractive revenue growth through market share gains, cross-sales of its expanded services portfolio into the Advent installed base, new product introductions, and share gains in the admin market.

Quarterly Attribution Analysis (for quarter ended 6/30/2016)

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.

Baron Asset Fund increased 2.79% in the second quarter and outperformed the Russell Midcap Growth Index by 123 basis points. Relative sector weights and, to a lesser extent, stock selection contributed to relative performance.

Consumer Discretionary and Information Technology (IT) investments and larger exposure to the strong performing Health Care sector contributed the most to relative results. Within Consumer Discretionary, lower exposure to lagging apparel retail and apparel accessories & luxury goods sub-industries and outperformance of ski resort operator Vail Resorts, Inc. added the most value. Vail’s stock price rose on reports of a strong 2015/2016 ski season, with increased visitation and spend across its resorts. Management also indicated that 2016/2017 season pass sales were off to a robust start as units were up 29% over last year. Strength in IT was partly due to the outperformance of Gartner, Inc. and Zillow Group, Inc., which were the second and third largest contributors on an absolute basis. Investments in application software, led by Guidewire Software, Inc. and Mobileye N.V., also aided relative performance. Shares of property and casualty insurance software vendor Guidewire increased on reports of near-perfect retention rates, a growing installed base, and accelerating adoption. Guidewire is early in its core system replacement cycle, and is expanding its addressable market through persistent innovation. Mobileye recouped losses suffered in the first quarter after management allayed investor concerns regarding competitive threats by announcing two autonomous program wins. The Fund’s investment in real estate information and marketing services company CoStar Group, Inc. also lifted relative performance after the company reported outstanding financial results.

Lack of exposure to the outperforming Consumer Staples sector and underperformance of Industrials investments detracted the most from relative performance. The Fund’s Industrials holdings trailed their counterparts in the index after falling 2.8%, with Westinghouse Air Brake Technologies Corporation, Roper Technologies, Inc., and Fastenal Co. driving the decline. Shares of Westinghouse, the market leader in transportation products that improve railroad safety and productivity, declined due to uncertainty around global freight volumes, continued volatility in commodities and the potential impact of “Brexit” on foreign operations. Shares of Roper, which manufactures industrials controls, fluid handling, and analytical instrumentation products, fell after a short report expressed concerns about second half growth and the company’s acquisition-driven growth strategy. The concerns were fairly general in nature and not necessarily specific to Roper in our view. Roper’s strategy has consistently generated value over time, and we believe it has the potential to outperform as it completes additional deals.

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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.