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
Baron Energy and Resources Fund posted strong performance again during the third quarter. Following the greater than 17% gain in the second quarter, the Fund rose by another 9.9% and outpaced its benchmark – the S&P North American Natural Resources Sector Index – by 566 basis points. Following the Fund’s gains for the quarter, we are now within less than 100 basis points of our benchmark on a year-to-date basis, a big change from the Fund’s greater than 1,000 basis point relative deficit that we had at the end of the first quarter of this year.
Through the second quarter, the recovery in the Fund’s performance had largely coincided with the recovery in oil prices. However, in the third quarter, oil prices were essentially flat and yet the Fund’s Energy holdings generated a total return of 11.24% and outperformed the Energy holdings in our benchmark by 644 basis points. It is our view that because of our focus on growth oriented small-cap and mid-cap energy and resource companies, our Fund is structured to perform better in flat or rising oil and gas price environments than falling price environments, and this has clearly been borne out over the past several years. This is what we saw in the third quarter as it became increasingly clear that Energy’s two-year long recession had come to an end. While sharply rising oil prices in the second quarter provided a tailwind for the Fund, prices were flat in the third quarter and our Energy investments still posted solid gains and outperformed the benchmark as noted above.
Based on a combination of industry indicators such as oil and gas inventories, oil and gas supply and demand trends, commodity prices, and drilling rig and well completion activity, we believe that the first half of 2016 will be seen as the bottom of the recession for this industry, and that conditions are in place for fundamental longer-term recovery. We believe that such a recovery will result in a return to more normalized oil and gas prices, which we view as the price level necessary for industry participants to earn returns that are close to the cost of capital and are higher than current futures prices. A return toward normalized price levels should allow many of the companies in our portfolio to realize both cyclical and secular growth in earnings and cash flows over the next several years.
Despite the clear signs that the Energy sector’s recession has come to an end, investor surveys continue to show that institutional investors remain underweight relative to historical norms. We think this means that there is still a significant amount of capital remaining on the sidelines that could be put to work in the areas in which the Fund invests.
We continue to be positive on the outlook for investing in the Energy sector, which is the dominant portion of the Fund’s holdings (80.5% at quarter end).
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending September 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.