Baron Fifth Avenue Growth Fund (BFTHX)
Review and Outlook
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
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending September 30, 2015 is not yet available
Back to Top
Invest In Baron Funds Today
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.