Baron Discovery Fund (BDFIX)
Review and Outlook
Baron Discovery Fund is the latest addition to our family of funds. The Fund gained 16.70% in its inaugural fourth quarter of 2013, outpacing the Russell 2000 Growth Index.
The Fund seeks to invest in companies with market capitalizations typically below $1.5 billion. It fills what we believe was an under-covered area at Baron. Roughly 3,300 listed U.S. stocks fall under the $1.5 billion capitalization level (excluding “penny stocks”), which means there are a lot of young, interesting companies to analyze. Over the years, we came to realize that there were some great companies either in earlier stages of development or in market capitalizations below where our other small cap funds typically invest. We felt that many of these companies would become pioneers in their industries and would have long runways of growth.
We have worked hard for a long time on this strategy in preparation for the launch of the Fund, and with one quarter of performance under our belt, we are very excited about the companies that the Fund presently owns. About half of the portfolio is comprised of companies that we consider to be highly innovative. Some of the themes that run through this portion of the portfolio include: (1) the trend toward moving health care benefits to defined contribution payments by employers, (2) health care product innovation that leads to better outcomes at lower cost, (3) the movement of critical operational software to the cloud, (4) energy efficiency and green technology, including LED lighting, ecologically sensitive oilfield services and pollution control, (5) innovation in the semiconductor industry, (6) network security, and (7) financial companies that are disintermediating traditional models.
The other half of the portfolio consists of growth companies that also adhere to the Fund’s principles, but which are in more traditional segments. Examples include (1) retailers and restaurants with high growth and low market penetration, (2) an alarm monitoring company with low market penetration and high cash flow growth, (3) MLPs with solid dividends and solid growth provided from “drop downs” of assets from parent companies, (4) industrial services companies that benefit from the continuing need to build and maintain utility and energy infrastructure, and (5) regional gaming companies that will benefit from industry consolidation.
Our different growth categories are like two sides of a coin. While they are typically different in terms of their risk profile and the maturity of their business plans, they are necessary to balance out the portfolio. And they are each special in their own right. We expect that the two sides of the portfolio will continue to balance each other out over time, as they will each behave differently during changing phases of the market cycle. Nevertheless, we choose each company individually based on the Baron investment process.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending December 31, 2013 is not yet available
Yearly Attribution Analysis
The Yearly Attribution Analysis for period ending December 31, 2013 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.