Baron Energy and Resources Fund (BENIX)

Portfolio Management

James H. Stone

Fund Manager since 2011

View All Commentary by James

Fund Description

Baron Energy and Resources Fund invests in securities of energy and resources companies and related companies of all sizes.


Portfolio Commentary

Institutional Performance

Review and Outlook (for quarter ended 9/30/2016)

The Review and Outlook for period ending September 30, 2016 is not yet available

Top Contributors/Detractors to Performance

Contributors (for quarter ended 9/30/2016)
  • Encana Corp. is an exploration and production company with primary operations in Western Canada and Texas. Shares rose in Q3 on raised production guidance, lowered cash costs, and significantly increased drilling activity in its highest return area. Encana has strong positions in two of the more attractive oil resource plays in the Permian and Eagle Ford basins and two of the lowest cost natural gas resource basins in Western Canada. Given its long-term growth potential, we think Encana is one of the most attractively valued E&Ps in the industry.

  • Concho Resources, Inc. is an independent oil and gas exploration and production company focused on the Permian basin in West Texas and New Mexico. Shares rose in Q3 on increased production guidance, lowered cash costs, and a solid operations update, as well as strong M&A activity in the Delaware Basin, which highlighted the value of its holdings in the basin. As one of the best run mid-cap E&P companies, in our view, we believe Concho is well positioned to exploit the deep economic inventory of drilling locations where it operates.

Detractors (for quarter ended 9/30/2016)
  • Shares of SolarEdge Technologies, Inc., a leading maker of inverters for solar energy systems, detracted in Q3 as changes in the U.S. market appeared to dampen growth prospects of large installers. As the business model shifts from lease to own, the U.S. solar market is shifting from large installers to smaller, local vendors. Fears around pricing pressure due to increased competition also hurt the stock price. Although we believe this is a temporary structural adjustment, we decided to reduce our position as the market transitions.

  • Core Laboratories N.V. is a leading provider of core and fluid analysis to the oil and gas industry. Shares fell on moderated short-term growth and margin recovery estimates and reduced revenue guidance. Core Labs dominates its niche, has limited competition, provides value added, non-commoditized services, and generates the highest returns on equity and capital in the industry. We believe strong secular growth drivers in each of its three businesses will allow it to outgrow other oilfield service companies while generating premium returns.

  • Shares of gold mining company Barrick Gold Corporation fell during Q3 in concert with a decline in gold prices. Gold prices surged following the Brexit vote in late June. As equity markets recovered, concerns over Brexit eased, and concerns regarding less accommodative monetary policies rose, gold and gold equities weakened. We believe it is prudent to maintain a modest exposure to gold at this time. We think the shares are attractively valued based on our outlook for gold pricing, Barrick’s growing gold volumes, and falling cost structure.

Quarterly Attribution Analysis (for quarter ended 9/30/2016)

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.

Baron Energy and Resources Fund rose 9.89% in the third quarter and outperformed the S&P North American Natural Resources Sector Index by 566 basis points, due to a combination of stock selection and relative sector/sub-industry weights. Smaller cap energy stocks outperformed for a second consecutive quarter, and the Fund’s bias towards these companies also aided relative performance.

Energy and Materials investments added the most value, while no sectors materially detracted from relative performance. Within Energy, outperformance of oil & gas exploration & production (E&P) holdings, led by Parsley Energy, Inc., Encana Corp., Concho Resources, Inc., and Rice Energy Inc., and larger exposure to this strong performing sub-industry contributed 309 basis points to relative results. Parsley, Encana, and Concho were the three largest contributors to absolute results, while shares of Rice, an independent E&P company focused on the Marcellus and Utica shales in Pennsylvania and Ohio, rose after the company raised production guidance, significantly lowered cash costs, and increased drilling activity without changing its capital budget. Lack of exposure to poor performing large-cap stocks in the integrated oil & gas sub-industry and outperformance of U.S. Silica Holdings, Inc. in the oil & gas equipment & services sub-industry also added value in the Energy sector. Shares of U.S. Silica, one of the largest low-cost suppliers of sand used as a proppant for the hydraulic fracturing of oil and gas wells, outperformed following the announcement of two strategic acquisitions. The overall uptick in drilling activity during the quarter also bolstered U.S. Silica’s stock price. Within Materials, outperformance of specialty chemicals holdings Flotek Industries, Inc. and Kraton Corporation and lower exposure to lagging gold stocks, which fell 8.4% as a group within the index, lifted relative results. Flotek’s shares rallied sharply following strong sales of the company’s proprietary product, complex nano-fluid, while shares of Kraton rose after investors reacted favorably to management’s long-term plan to achieve cost reductions and synergies from the Arizona Chemical acquisition.

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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.