Baron Emerging Markets Fund (BEXFX)
Fund Manager since 2010View All Commentary by Michael
Portfolio CommentaryRetail Performance
Review and Outlook (for quarter ended 3/31/2013)
Last quarter, we remarked on the positive effects of various important international developments: progress towards fiscal and banking union in Europe and the related stabilization of the European Union’s (EU’s) financial system; clear signs of a bottoming in China’s economic cycle; and the likely impact of a greater level of developed world quantitative easing, particularly in Japan subsequent to an abrupt shift in political leadership. These trends, which support international equities, remained largely in place through much of the first quarter of 2013. Late in the quarter, however, international markets, particularly emerging markets, began to underperform as signs of policy backtracking emerged.
In particular, Chinese authorities introduced several measures designed to curb speculation in real estate and slow lending in the lightly regulated “wealth management” markets. India’s finance minister disappointed market expectations for business-friendly fundamental reforms in unveiling a populist-leaning fiscal budget, leading to a complete reversal of the stock market’s fourth quarter gains. We fully expect India’s complex political fabric to drive this sort of “two steps forward, one step back” progress, and we remain enthusiastic towards our varied investments in unique and entrepreneurial Indian companies.
In Europe, the bailout of Cyprus bears mentioning given the precedent set regarding uninsured bank deposits. While Cyprus is indeed a special case and the financial impact itself is not significant, we will monitor the potential resumption of deposit and capital flight, as greater stress in the EU financial system would ultimately impact emerging market economies and capital flows.
Japan was the standout international equity market during the first quarter, as a new head of the Bank of Japan was confirmed and expectations for aggressive quantitative easing and a weaker yen continued to build. While this policy shift has benefited Japanese equities, Japan's gain represents a loss of export competitiveness for many neighboring Asian countries and companies, particularly in a relatively slow growth global economy. We believe recent events in Japan are at least partially responsible for the relative weakness in certain emerging market equities, though our relative performance has benefited, as we favor companies driven by local consumption rather than export-driven businesses. A good example is our significant exposure to consumer and domestically-driven companies in the ASEAN countries of Indonesia, Thailand, and the Philippines. These companies are largely insulated from Japanese yen depreciation, Chinese economic volatility or weak European demand, and as a group were strong performers in the first quarter.
We note the unusual divergence between global equity and commodity prices. This trend, if sustained, signals a multi-year downturn in the global commodity cycle, which would have lasting implications for future value creation. Such an outcome would favor commodity consuming countries (and industries), such as the U.S., China, India, and Japan, while creating headwinds for exporters such as Australia, Brazil/Latin America, and Russia. We believe the shift in China from an investment-led to a consumption-led economy, as well as the firming U.S. dollar, support such a phenomenon; given our general lack of exposure to commodity driven or cyclical businesses, we further believe the Fund is well positioned over the long term for such a scenario.
Top Contributors/Detractors to Performance
Contributors (for quarter ended 3/31/2013)
Detractors (for quarter ended 3/31/2013)
Quarterly Attribution Analysis (for quarter ended 3/31/2013)
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) gained 2.29% in the first quarter, outperforming the MSCI EM IMI Growth Index, which finished the period down 0.17%, by 246 basis points.
While emerging market equities overall were roughly flat for the quarter, the Fund generated a modest gain and meaningfully outperformed its benchmark. This was primarily the result of favorable stock selection. Stock selection was positive across a number of countries within Asia-Pacific (ex-Japan), led by China, overshadowing weakness from investments in India, which is also part of this region. The Fund’s significant exposure to companies in the ASEAN countries of Indonesia, Thailand, and the Philippines, which were the standout emerging markets countries in the quarter, also added to relative results.
On a sector basis, the Fund's investments within the Financials, Consumer Staples, and Telecommunication Services sectors were the largest contributors to relative results for the quarter. Strength within the Financials sector was largely attributable to outperformance of the Fund’s two real estate development investments, L.P.N. Development PCL and Lippo Karawaci Tbk PT. L.P.N. Development PCL is a leading homebuilder and condominium developer in Thailand with an impressive track record of growth, profitability, cash generation, and return on capital, while Lippo Karawaci Tbk PT is a real estate developer based in Indonesia. Another relative contributor in the sector was Bank Rakyat Indonesia (Persero) Tbk PT, a leading commercial bank in Indonesia. Within Consumer Staples, all but one of the Fund’s investments in the sector outperformed, led by Biostime International Holdings Ltd., a leading Chinese infant formula distributor. Shares of Biostime outperformed in the quarter driven by above-consensus financial performance as well as speculation regarding the easing of China’s one child policy. Another relative contributor in the sector was Universal Robina Corp., a leading packaged food and beverage company based in the Philippines. Favorable stock selection within Telecommunication Services was attributable to the outperformance of the Fund’s two investments in the sector, Sarana Menara Nusantara Tbk PT and Tower Bersama Infrastructure Tbk PT, the two largest independent owners of wireless towers in Indonesia. These companies have experienced increased leasing revenue and cash flow from colocation activity as a result of the high growth of data traffic in Indonesia.
Underperformance of the Fund’s investments within the Information Technology (IT) sector, and the Fund’s lower exposure to Utilities, the best performing sector in the benchmark, detracted from relative performance. Weakness in IT was mostly due to underperformance of Financial Technologies Ltd. which operates financial exchanges and owns 26% of the Multi Commodity Exchange of India Ltd. (MCX), the largest commodity exchange in India. The company’s shares suffered a meaningful correction in response to the surprise imposition of a new commodity trading tax by India’s government. Additionally, underperformance of Ireland-based Velti plc, a leading global mobile marketing company, detracted from relative results. Shares of Velti declined sharply in the period after the company missed quarterly expectations and lowered its 2013 outlook. The Fund exited its position due to the lack of cash flow visibility.Invest In Baron Funds Today
Source: FactSet PA.