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 9/30/2014)

After reaching new highs in early September, most market indexes contracted somewhat sharply during the last two weeks of the quarter. The reasons for the sell-off remain unclear. The Federal Reserve issued a mid-September statement that was more dovish than many expected and reiterated that it will not raise interest rates for some time. Consumer confidence reached a seven-year high in August, leading economic indicators remain healthy, and lower oil prices bode well for the U.S. consumer. Within equities, larger-capitalization indexes continued to perform better than mid-capitalization indexes, which, in turn, surpassed smaller-capitalization indexes.  Within the Russell Midcap Growth Index, stocks in the largest market cap quartile outperformed stocks in the smallest market cap quartile by approximately 400 basis points.

The Information Technology (IT) sector was among the best-performing for the Fund during this quarter. Too much pessimism had taken hold, and valuations across the Fund’s IT holdings rebounded. Fleetcor Technologies, Inc., which provides payment processing services and fuel cards to gas station owners and business fleets, rose after announcing a large, accretive acquisition. Guidewire Software, Inc., a software as a service (SaaS) company focused on the insurance space, also rose as M&A activity highlighted some attractive valuations within the sector. A few travel-related holdings in the Consumer Discretionary sector also had positive moves. Vail Resorts, Inc. acquired Park City, the Utah ski resort, paving the way for Vail to integrate Park City into its existing resort network profitably. Choice Hotels International, Inc. continued to experience a rebound in its mid-priced hotel business. Falling commodity prices led to weakness across the Fund’s Energy holdings, with driller Helmerich & Payne, Inc., distributor MRC Global, Inc. (an Industrials company that services the Energy industry), and E&P firm Concho Resources, Inc. all declining. The Fund established a position in West Pharmaceutical Services, Inc., a leading manufacturer of components and systems for the packaging and delivery of injectable drugs.

Despite the recent market volatility, we continue to believe that mid-sized growth stocks represent an attractive investment opportunity. The U.S. economy is among the world’s healthiest, its equity market multiples remain in-line with their long-term historic averages, and interest rates continue to remain low by historic standards. We believe that our portfolio of well-managed, competitively advantaged, fast growing companies will perform well in this environment.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 9/30/2014)
  • Mobileye N.V. is a software and systems design leader for camera-based advanced driver assistance systems (ADAS). The share price increased after we participated in Mobileye's IPO in the quarter. We believe the company has the potential to become a multi-decade leader in the race to autonomous driving, a trend that we believe will improve transportation safety and efficiencies.

  • Shares of Vail Resorts, Inc., the largest ski resort operator in the U.S., increased in Q3 as the company resolved its litigation with the owners of Park City and bought the resort from them at what we believe is an attractive price. The resort gives Vail access to two adjacent resorts in Utah which, when combined, will make it the largest ski resort in the U.S. The company believes that by adding Park City to its season pass, it should be able to increase sales, which should help to insulate it from weather abnormalities.

  • Shares of wireless tower company SBA Communications Corp. rose in Q3 after the company reported strong Q2 results that showcased cash flow growth above consensus expectation. We have long believed that SBA’s U.S. contract structure, coupled with its commitment to invest abroad (especially in Brazil), will allow it to grow faster than its U.S. competitors. With all four major U.S. telecommunications companies building 4G networks, we believe strong cash flow growth should continue for SBA in both the U.S. and abroad.

Detractors (for quarter ended 9/30/2014)
  • Shares of industrial machinery company Colfax Corporation fell in the wake of weaker-than-expected Q2 results. Strong margins in welding were offset by operational missteps in the legacy fluid handling business combined with a weak macro environment. Colfax recently announced a new president for the fluid handling business, and we expect this business to get back on track soon. We believe that Colfax will continue to use its proven business strategy to improve operations at acquired companies, generating substantial shareholder value over time.

  • Shares of IDEXX Laboratories, Inc., the leader in veterinary diagnostics, declined in Q3 off all-time highs. IDEXX's fundamentals continue to improve, with organic growth in its core business reaching 10%. In July, management announced its intention to migrate its U.S. commercial operations from a hybrid to a direct sales model, which some investors used as an opportunity to take profits. We believe that this will prove to be a highly accretive change, as it will free up resources for IDEXX to grow its field sales force by 40% while also enhancing margins.

  • Shares of Illumina, Inc. declined in Q3. Illumina is the leading provider of next generation DNA sequencing instruments and consumables. There was no specific reason for the decline. The shares are up significantly over the past year, driven by strong momentum following the announcement of multiple new product introductions. We believe Illumina has further distanced itself from its competitors and holds an effective monopoly on DNA sequencing at a time when demand is accelerating, and our conviction in the long-term investment thesis remains unchanged.

Quarterly Attribution Analysis (for quarter ended 9/30/2014)

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 (Institutional Shares) declined 1.40% in the third quarter and modestly underperformed the Russell Midcap Growth Index by 67 basis points, mainly due to stock selection.

Outperformance of the Fund’s investments within Information Technology (IT) and Consumer Discretionary, and its larger exposure to the defensive Telecommunication Services sector, which was the best performing sector in the index, contributed the most to relative results. Strength in the IT sector was mostly attributable to the outperformance of FleetCor Technologies, Inc., which provides payment processing services to vehicle fleets around the world, and Gartner, Inc., the leading independent provider of research and analysis on the IT industry. Shares of FleetCor rose on news of the company’s acquisition of competitor Comdata, Inc. We believe the acquisition provides FleetCor with greater scale in the domestic fuel card market, gives it an entry into the attractive virtual card business, and will be accretive to next year’s earnings. The company also reported solid Q2 results and raised full-year guidance. Shares of Gartner increased on better-than-expected financial results and continued share repurchases. The Fund’s larger exposure to application software stocks, which rose 4.1% as a group within the index, also aided relative performance in the IT sector. Within Consumer Discretionary, the outperformance of Mobileye N.V. and Vail Resorts, Inc., which were the Fund’s two largest contributors on an absolute basis, added the most value.

The Fund’s investments within the Industrials and Health Care sectors were the largest detractors from relative performance. As a group, the Fund’s Industrials holdings fell 6.7% and trailed their counterparts in the index by 381 basis points. Colfax Corp. was the Fund’s largest detractor from absolute and relative performance during the quarter. The Fund’s two trading company & distributor holdings, MRC Global, Inc., the largest North American distributor of pipes, valves and fittings to the energy industry, and Fastenal Co., a leading distributor of industrial supplies, also underperformed. MRC’s shares struggled due to the company’s cyclical and currently underperforming end market, while shares of Fastenal fell due to depressed gross margins from higher sales to larger accounts and a shift in sales to lower margin products. Within Health Care, underperformance of the Fund’s two largest holdings in the sector, IDEXX Laboratories, Inc. and Illumina, Inc., and its lack of exposure to outperforming biotechnology and pharmaceuticals stocks, detracted the most from relative results. IDEXX and Illumina were also two of the Fund’s largest detractors from absolute performance.

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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.