Review and Outlook
The Review and Outlook for period ending December 31, 2014 is not yet available
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
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 Emerging Markets Fund (Retail Shares) increased 0.25% in the fourth quarter and outperformed the MSCI EM IMI Growth Index by 336 basis points, largely due to stock selection and country weightings.
For the quarter, the outperformance of the Fund’s investments in India and, to a lesser extent, its meaningfully larger exposure to India added the most value. Indian equities rose sharply in the index as investors anticipated market friendly reforms following Narendra Modi’s landslide victory in India’s general election this past Spring. The Fund’s lower exposure to Russian equities, which declined sharply due to tensions in the Ukraine and the steep drop in oil prices, as well as the outperformance of its investments in Brazil also aided relative results.
On a sector basis, the Fund's investments within the Financials, Industrials, and Telecommunication Services sectors were the largest contributors to relative results. Within Financials, Haitong Securities Co., Ltd., a leading Chinese securities and brokerage firm, contributed the most as results from financial reform emerged and China announced new stimulus measures. The Fund’s investments in diversified banks also aided relative results, led by Axis Bank Ltd., which is India’s leading private sector bank. Axis Bank shares benefited from strong earnings growth and a broad re-rating of the Indian banking sector in anticipation of a long-awaited economic recovery. Strength in Industrials was mostly attributable to the outperformance of Indian car battery manufacturer Amara Raja Batteries Ltd. and low-cost Brazilian airline GOL Linhas Aéreas Inteligentes SA as strong fundamentals drove significant gains. Within Telecommunication Services, the outperformance of Tower Bersama Infrastructure Tbk PT of Indonesia and Far EastTone Telecommunications Co., Ltd. of Taiwan added the most value. Shares of Tower Bersama rose on news of its significant acquisition of Mitratel. We believe this transaction will be cash flow positive, will improve the creditworthiness of the company’s customer mix, and will help deleverage its balance sheet. Shares of Far EasTone, which is Taiwan's third largest telecom provider, increased due to market share gains and improvement in its average revenue per user following the launch of its 4G services.
The Fund’s investments within the Information Technology (IT) sector were the largest detractors from relative performance. Samsung Electronics Co., Ltd. accounts for more than 20% of the index’s exposure to the IT sector and the Fund’s lower exposure to this stock, which increased 8.5% during the quarter, detracted the most from relative results. Underperformance of the Fund’s home entertainment software holdings, WeMade Entertainment Co., Ltd. and Perfect World Co., Ltd., and its lower exposure to semiconductor stocks also hurt relative results. Shares of WeMade, a leading game developer in Korea, declined following weak performance of new games in its mobile game business.
Yearly Attribution Analysis
The Baron Emerging Markets Fund (Retail Shares) gained 3.47% for the year and outperformed the MSCI EM IMI Growth Index by 362 basis points. During the year, the Fund’s stock selection and, to a lesser extent, sector weightings contributed to relative performance.
The drivers of performance on a country basis for the fourth quarter - the Fund’s exposure to and stock selection in India - were also the main drivers of performance for the year.
On a sector basis, the Fund's investments within the Financials, Health Care, and Industrials sectors were the largest contributors to relative results. Strength in Financials was mainly due to the outperformance of the Fund’s diversified banks, which rose 59.8% as a group, led by Axis Bank Ltd. and Bank Rakyat Indonesia (Persero) Tbk PT. Shares of Axis Bank, the leading private sector bank in India, benefited from growing demand for consumer and corporate loans and strong earnings growth. These company-specific developments, along with a broad re-rating of the banking sector, lifted the company’s stock price. Another contributor to relative performance in the sector was Haitong Securities Co., Ltd., a leading Chinese securities and brokerage firm. Haitong Securities’ shares rose as ongoing reforms in China’s financial sector favor the securities and brokerage industry. Within Health Care, the performance of the Fund’s pharmaceutical holdings and its meaningfully larger exposure to this outperformaning sub-industry added the most value. Among the largest contributors to relative performance in pharmaceuticals were Torrent Pharmaceuticals Ltd. and CFR Pharmaceuticals SA. Torrent was the Fund’s largest contributor on an absolute basis for the year, while shares of Chilean company CFR spiked in mid-May after Abbott Laboratories agreed to acquire the company. The Fund’s larger exposure to the outperforming life sciences, tools & services sub-industry also aided relative performance. As a group, the Fund’s Industrials holdings outperformed their counterparts in the index by 33.2% due, in large part, to Amara Raja Batteries Ltd., whose shares more than doubled during the year. The company was also one of the Fund’s largest contributors to absolute performance during the year. Indian holdings Larsen & Toubro Ltd. and Crompton Greaves Ltd. also lifted relative performance in the sector, on expectations that India’s new government will implement policies to stimulate infrastructure investment.
The Fund’s investments within the Information Technology (IT) and Consumer Staples sectors were the largest detractors from relative performance. Within IT, underperformance of the Fund’s Internet software & services holdings, led by Sina Corp. and Yandex N.V., detracted the most from relative results. Sina was one of the Fund’s largest detractors on an absolute basis during the year, while shares of Russian search engine Yandex fell sharply driven by depreciation of the Russian Ruble and a challenging macroeconomic environment. The Fund exited both positions late in the year. The Fund’s lower exposure to outperforming semiconductor stocks also hampered relative performance. Weakness in Consumer Staples was largely due to the underperformance of Biostime International Holdings Ltd.’s stock, which was sold in the fourth quarter.
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