Baron Fifth Avenue Growth Fund (BFTHX)

Portfolio Management

Alex Umansky

Fund Manager since 2011

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Fund Description

Baron Fifth Avenue Growth Fund invests in large growth companies.


Fund Resources

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Illumina Update       

Portfolio Commentary

Retail Performance

Review and Outlook (for quarter ended 9/30/2015)

The third quarter of 2015 was a challenging one for equity investors. Baron Fifth Avenue Growth Fund declined 10.42% compared to the 5.29% and 6.44% declines for the Russell 1000 Growth and S&P 500 Indexes, respectively.

It was an unusual quarter. Amazon, Google, Starbucks, Facebook, Priceline, Equinix and Visa – seven of the Fund’s top 10 holdings – were up during the quarter, with Amazon and Google, our two largest investments, posting double-digit returns. These gains, however, were not enough to offset the extreme share price dislocations for the companies that have suddenly lost the market’s favor. After three years of materially better-than-expected growth, Illumina reported a modest deceleration and the shares declined 20%. A presidential candidate railed on Twitter against a ridiculous 5,000% price hike on a 62-year-old drug and the Fund’s biotech investments, which we believe have always acted in a responsible manner, suffered double-digit declines. The drug maker backed down from the price increase and, naturally, the shares of the biotech companies declined even further. Alibaba continued its freefall, down 28%, as the growth of the Chinese economy came under further scrutiny and the Chinese Central Bank unexpectedly weakened the Yuan. But the truly injurious developments occurred in our alternative energy investments SunEdison and TerraForm Global, where the circular feedback loop of loss of confidence leading to loss of access to capital markets leading to loss of possible future growth led to a terrible dislocation. The declines in these two stocks accounted for a significant percentage of the Fund’s poor performance.

Trying to understand the psychology of investing (behavioral finance, loss aversion, cognitive errors, etc.) has always been part of our investment process. Emotions, biases, lack of patience are all commonly present on the human side of investing and can sometimes be the reasons behind the mispricing of stocks. We frequently witness outcomes strongly biasing perceptions (a team wins the Super Bowl – it must have been the best team, or a fund posting a strong year – must have been managed by skilled investors). Less frequent and harder to navigate are circumstances when perceptions bias the outcomes. By all accounts, the leverage deployed by Lehman Brothers during the financial crisis was not materially different from that of its peers but the perceptions and loss of investor confidence ultimately led to its demise.

As is typical, we do not have insights on the direction of the market. However, we do observe that unemployment in the U.S. remains fairly low, the economy appears to be humming along, and the decline in oil prices should provide meaningful savings to consumers. While we expect the market to remain volatile, we are positive on the overall environment. Our goal remains to maximize long-term returns without taking significant risks of permanent loss of capital. Our focus continues to be on identifying and investing in what we believe are unique companies with sustainable competitive advantages that have the ability to reinvest capital at high rates of return.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 9/30/2015)
  • Shares of, Inc., the world’s largest retailer, rose in Q3 due to better-than-anticipated operating margins for Q1 and guidance for Q2. The company also broke out Amazon Web Services (AWS) margins for the first time, which were meaningfully higher than expected. We believe retail margins will improve through the year as the company focuses on productivity gains. With e-commerce representing less than 10% of global retail sales, we believe the shift to online retailing represents a multi-year growth opportunity from which Amazon should benefit.

  • Stronger-than-anticipated second quarter results drove up shares of search engine Google, Inc. in Q3. Google announced it would change its corporate name to Alphabet Inc.and adopt a new holdco structure that is designed to give management more direct oversight over newer businesses such as Google Fiber and Calico. While desktop search is becoming a more mature business for the company, we believe Google is well positioned to benefit from substantial growth in mobile and online video advertising.

  • Shares of Starbucks Corp., the leading specialty coffee company, rose in Q3 after delivering another quarter of industry-leading sales and earnings growth. Same store sales growth at company-owned cafes accelerated to 7% during Q3, driven by growth in emerging markets and key merchandising and marketing initiatives. With the core in-store beverage business as strong as ever, we believe Starbucks is just scratching the surface of its opportunities in food, mobile payment and loyalty programs, Asia-Pacific expansion and wholesale channel development.

Detractors (for quarter ended 9/30/2015)
  • Shares of SunEdison, Inc., the world’s largest renewable energy developer, declined in the wake of its acquisition of U.S. residential solar developer Vivint Solar, with plans to drop down its solar portfolio to its yieldco TerraForm Power, Inc. Investors questioned aspects of the deal, including its $2.2 billion cost. We believe in the secular renewable energy story and that SunEdison’s large development pipeline will benefit it and its yieldcos. We think the market dislocation is technical and temporary and that SunEdison will resume future growth.

  • FireEye, Inc. is a cybersecurity software and services vendor. While FireEye reported a strong Q2 with a significant beat on profitability metrics, the stock fell on the news that its CFO was leaving and disappointing (though robust) growth in product license numbers. We think cyber-attack activity will continue to increase and FireEye will be a long-term beneficiary. We also think FireEye has a significant lead over competition through its incident response service, which gives FireEye an effective first point of interaction with customers.

  • Alibaba Group Holding Ltd. is the largest e-commerce company in China and the world. Weak performance in Q3 was driven by the devaluation of the Chinese RMB and the slowdown in the Chinese economy. We continue to hold Alibaba given its market leading position, positive network effects, high cash generation, and what we believe to be its long runway for continued growth. Over the long-term, we see further upside from its cloud computing business, as well as its interest in Alipay, the largest online payments provider in China.

Quarterly Attribution Analysis (for quarter ended 9/30/2015)

The Quarterly Attribution Analysis for period ending September 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 advice 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. I Investing in the stock market is always risky. Current and future portfolio holdings in the Fund are subject to risk.

Source: FactSet PA.