Baron Energy and Resources Fund (BENFX)
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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 second quarter was much improved for Baron Energy & Resources Fund, as commodity prices continued the strengthening trend that emerged in the latter half of the first quarter. This strengthening was largely a function of improving supply/demand fundamentals in energy commodities and low to negative interest rates driving up demand for precious metals. The key events/developments were 1) accelerating U.S. oil production declines; 2) fires in Canada that negatively impacted oil production; 3) political unrest in Nigeria, Libya, and Venezuela that also impacted production levels; 4) the failure of OPEC and non-OPEC producers to reach an agreement to “freeze” production, let alone cut it; 5) the ongoing saga regarding the potential for additional U.S. interest rate hikes this year; and 6) the surprising vote in the U.K. to exit the European Union.
Our outlook for investing in the Energy and Resources sectors remains positive. The trends leading toward a rebalancing in the energy markets remain in place and leave us confident that the energy industry recession of the past two years is coming to an end. The key drivers of this rebalancing are:
- declining non-OPEC production resulting from a sharp and prolonged reduction in capital investment;
- relatively flat OPEC production for the past year despite a sharp rise in Iranian volumes;
- continued growth in global oil demand despite the sluggish global economy;
- barring a recession, longer-term growth in global oil demand that could outpace supply growth;
- excess inventory that in the near-to-medium term will likely provide a headwind and perhaps a ceiling for prices until they are closer to normal; and
- a recent rebalancing of the U.S. natural gas markets as low investment and drilling activity leads to small declines in production following years of rampant growth.
Given our constructive outlook for the rebalancing of the oil and gas market, we continue to focus our holdings among mostly domestically oriented exploration & production companies and oilfield service and midstream companies, as we believe these are the businesses best positioned to benefit from the long-term need for additional oil supply over the next five years. U.S. and Canada-based companies are driving down costs and driving up operating efficiencies and taking a more disciplined approach to capital investment, which we believe will yield better shareholder returns over the long-term. In addition, M&A activity has become meaningfully more active in the last several months at both the corporate and asset level. We think this consolidation will result in additional capital efficiency gains through concentration, scale and competitive advantage and historically is a sign of a more healthy investment environment in the sector.
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Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending June 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 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.