Baron Discovery Fund (BDFFX)
Review and Outlook
We were pleased with the performance of Baron Discovery Fund in the third quarter and year to date. We have been pleased with our performance during both up and down markets, although we still believe our smaller cap bias will tend to perform relatively better in up markets versus severe down markets. We balance the portfolio between higher growth, earlier-stage businesses and companies that are more established, predictable, and stable, with solid cash flow.
We saw some trends that carried over from the prior quarter. First the merger and acquisition environment has picked up. Three of the Fund’s companies agreed to be acquired in the quarter: Press Ganey, Cepheid, and Isle of Capri Casinos. We believe many of our companies make ideal acquisition targets for the same reasons we invest in them – they are fast growing companies with long-term competitive advantages. Second, multiples for the Fund’s faster growing companies have remained at the upper end of historical norms due to the scarcity of growth in a stagnant U.S. economy. Finally, we are still benefiting from the salutary effects of balancing the portfolio with a combination of established but still growing businesses with cash flow and exciting, earlier stage, high growth companies with large opportunities.
Information Technology (IT), Health Care, and Consumer Discretionary were the top sector contributors. Consumer Staples was a minor detractor as investors exited defensive sectors in the quarter. IT had a strong quarter. The sector included the top three contributors to Fund performance: Impinj, Inc.; MACOM Technology Solutions Holdings, Inc.; and Qualys, Inc. Ten IT holdings experienced double-digit increases in share price and one holding (Impinj) increased by triple digits in the quarter. Despite having the top three detractors in the quarter, Health Care contributed as double-digit increases in 14 holdings significantly outweighed declines elsewhere within the sector. Positive performance was led by Cepheid, which agreed to be acquired by Danaher in early September. With share prices increases in 10 out of 13 investments, Consumer Discretionary contributed in the quarter. Wingstop Inc., operator and franchisor of the Wingstop chain of fast casual restaurants, led positive performance. Shares rose on an earnings beat, an increase in full-year guidance, and operating outperformance relative to most peers experiencing declines in traffic.
September 30 marked the Fund’s three-year anniversary. We would like to reiterate the core principles as set out when we first launched the Fund and continue to guide and inform us in managing the Fund: We use the investment process used in all Baron Funds – we seek high growth companies with terrific managers and long-term competitive advantages. We also seek to purchase these companies at what we believe are reasonable stock prices. We also take a longer-term view than most other investment managers. We believe that by analyzing the investment over a longer term horizon, we can gain an advantage over most market participants who are focused only on the short term.
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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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 judgement at the time of publication. Our views are not intended as recommendations or investment advise to any person and are subject to chage 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 Fund are subject to risk.