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
During the second quarter, oil prices rebounded sharply. While the recovery in price is encouraging as it appears to confirm our views that the worst of the supply/demand imbalance plaguing the oil market for the past 12 months is behind us and in the process of improving, it still was not enough to shift investor sentiment from negative to positive during the quarter. As a result, energy equity performance lagged the recovery in the commodity, and the S&P North American Natural Resources Sector Index declined by 2.67%. Investor sentiment toward the energy industry remained historically low as investors seemed to lack confidence in the forward outlook for a strong and sustained recovery in energy prices amid the current period of oversupply of oil and natural gas.
Despite the difficulty of the investment environment that we faced in the second quarter, which really materialized over the last four to six weeks of the quarter, we still managed to produce modestly positive results on an absolute basis and strengthened our results on a relative basis. In the second quarter, Baron Energy and Resources Fund managed a gain of 0.19% while our benchmark fell 2.67%. Year-to-date, the Fund is up 1.92% compared to a loss of 4.14% for the benchmark. Furthermore, we have seen our three-year and since-inception results move to a premium relative to our benchmark and peer funds. We believe that the performance on a year-to-date and three year basis are positive reflections of our investment strategy and our research and stock selection process. In fact, about 85% of our year-to-date relative outperformance can be attributed to stock selections rather than portfolio allocation effects.
While the outlook for oil markets continues to dominate the conversation around investing in the energy and resources sectors, it is not the only thing on which we are focused in terms of our investment strategy. We have increased our exposure to the renewable energy sector with additional investments in existing positions as well as a new position in the sector and we continue to look for more opportunities. As the levelized cost of electricity from renewable power technologies such as solar and wind continue to decline to or below the costs for conventional power sources, the need for government subsidies and interventions decreases and economic decisions are in sync with policy decisions. This is happening in many parts of the U.S. and the rest of the world and as such is increasing the total addressable market for renewable energy and increasing the investment opportunity.
As we look into the second half of the year, we expect that volatility will continue to be a big part of the landscape but we also anticipate that industry fundamentals are bottoming and should show improvement heading toward and into 2016. The energy and resource sectors remain as out of favor with investors as at any time in the past decade and perhaps longer and we think this creates an opportunity to take a contrarian approach. We believe that valuations are attractive and we are looking to deploy capital to take advantage of this opportunity and these values.
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Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending June 30, 2015 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.