Baron Energy and Resources Fund (BENFX)
Fund Manager since
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Baron Energy and Resources Fund invests in securities of energy and resources companies and related companies of all sizes.
Review and Outlook
The first quarter of 2016 marked another period of volatility for the market sectors in which we invest and, consequently, Baron Energy and Resources Fund. During the quarter, we witnessed another 20% decline in the average price for a barrel of oil, seeing oil prices declining at one point to near 15-year lows of $26/barrel before rebounding to near $40/barrel by quarter end. Significantly warmer than normal weather in the U.S. also led to natural gas prices declining to their lowest level since the mid-late 1990s, averaging nearly 30% less than the year-ago quarter. The stress that these lower prices put on energy equity and credit markets was significant early in the quarter and was particularly acute on small and mid-cap companies. While energy prices were suffering, metals prices, particularly for gold and iron ore, staged a quite unexpected recovery, catching the Fund a bit flat footed, as we had not been invested in these areas for some time. The challenge of investing amidst this period of heightened volatility has been quite severe; but despite the disappointing performance, we believe that the portfolio is well positioned to show improved performance in the upcoming quarters and years.
It is our view that energy markets have bottomed, and while we expect ongoing volatility in the commodities and stocks, we are more convinced that the current industry setup is going to lead to a more sustained business recovery over the next three to five years as hydrocarbon demand grows faster than supply.
Our focus remains on owning companies that we believe have the wherewithal to survive the current environment and thrive as prices recover. With our investments in conventional energy companies, we remain focused on those that have 1) low cost assets and high relative margins, 2) significant resource development potential, 3) strong balance sheets, 4) entrepreneurial management teams, and 5) advantaged competitive positioning. We have also been interested and willing to take on a bit more risk in the portfolio as demonstrated with some of our recent purchases, but even in these cases we have no concerns about financial viability or financial stability and believe that the markets are significantly undervaluing the assets and growth potential of these companies.
Over the long term, we see continued growth and return opportunities for oil & gas companies that have competitively advantaged access to lower cost, long-lived resources. At the same time, as a result of climate change regulation, public policy changes, and technology development, we remain aware of the long-term challenges that the energy industry may face in terms of altering our assumptions about future energy supply/demand, the value of resources and the costs of adapting. We continue to remind ourselves that we run an “energy fund not a hydrocarbon fund” and therefore continue to look for investments that can also capitalize on these regulatory and technology changes. However, we are also mindful of the fact that the real world needs a stable and functioning oil & gas industry to bring increasing growth and prosperity to more parts of the world today and for the future.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending March 31, 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 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 Fund are subject to risk.
Source: FactSet PA.