Baron Fifth Avenue Growth Fund (BFTIX)

Portfolio Management

AlexUmansky
Alex Umansky

Fund Manager since 2011

View All Commentary by Alex

Fund Description

Baron Fifth Avenue Growth Fund invests in large growth companies.

    

Portfolio Commentary

Institutional Performance

Review and Outlook (for quarter ended 6/30/2015)

In the second quarter of 2015, U.S. market participants appeared to continue to worry about the debt crisis in Greece and the timing of the Federal Reserve’s initial move to start raising interest rates. Though not without some volatility, the U.S. large cap market proved to be relatively quiet with the indexes ending the quarter more or less where they began. We generally tend to do well in these kinds of environments.

As was the case last quarter, most excess returns in Baron Fifth Avenue Growth Fund were generated through stock selection, with 10 of our investments appreciating more than 10% during the quarter. Unlike last quarter, the effect of sector allocation was modestly positive this time. Once again portfolio returns were led by strong performances from Amazon.com, Starbucks, and FireEye. This quarter Illumina, Mobileye, MasterCard, YUM! Brands, and Equinix also made strong contributions, which explains why Consumer Discretionary, Health Care, and Information Technology highlighted the sectors where our stock selection was strongest.

The quarter was not without some disappointments. Twitter and LinkedIn “blew up,” Wynn Resorts finally exceeded our pain tolerance threshold, and Google made a rare appearance on the “significant” detractors list, but all in all, the good outweighed the bad.

In the last couple of weeks of the quarter and into July, the China A share markets collapsed, giving back roughly half of their prior twelve month gains. This dramatic turn of events has prompted yet another prediction of a Chinese “debacle” and global contagion. Though the Greek crisis seems to have been averted (or postponed), the U.S. Federal Reserve will likely begin to raise interest rates in September, making many investors nervous. We do not have any insight on the direction of the market. However, we do observe that unemployment in the U.S. continues to decline, the economy appears to be strengthening, and the decline in oil prices should provide meaningful savings to consumers. While we expect the market to be volatile, we remain positive on the overall environment.

Our goal remains to maximize long-term returns without taking significant risks of permanent loss of capital. We continue to focus on identifying and investing in unique companies with sustainable competitive advantages that we believe have the ability to reinvest capital at potentially high rates of return.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 6/30/2015)
  • Shares of Amazon.com, Inc., the world’s largest retailer, were up due to better-than-anticipated operating margins for Q1 and guidance for Q2. It also broke out Amazon Web Services margins for the first time, and at 17%, these margins were meaningfully higher than what investors had feared. We believe retail margins through the rest of the year will improve as Amazon focuses on productivity gains. With e-commerce less than 10% of global retail sales, we believe the shift to online retailing represents a multi-year growth opportunity for Amazon.

  • Illumina, Inc. is the leading provider of next generation DNA sequencing instruments and consumables. Shares rose on reports of better-than-expected revenue and earnings driven by strong sales of sequencing instruments. We maintain conviction because we believe Illumina holds a monopoly on DNA sequencing at a time when DNA sequencing is increasingly being used in cancer research and diagnosis and reproductive health.

  • FireEye, Inc. is a next generation network security company that pioneered Advanced Persistent Threat Protection. The company has grown by more than 10 times over the last four years. FireEye continued its strong performance in Q2 as organizations around the world scrambled for solutions to growing cyberthreats. FireEye is the leading provider of breach response services and it has been using this advantage to cross-sell services and products. We think this will allow FireEye to keep growing at a fast pace for a while.

Detractors (for quarter ended 6/30/2015)
  • Twitter, Inc. is an online social networking and micro-blogging service. Shares fell as a result of weaker Q1 results and a slower user growth outlook for Q2. A recent change in senior leadership also created short-term uncertainty. We continue to believe that Twitter is in the early stages of monetization and evolution as a platform. The company has launched several new efforts and product initiatives to increase user growth and engagement on the platform, which we think will gain traction over time.

  • LinkedIn Corp. is the #1 professional networking platform with over 350 million registered members. Shares were pressured by noisy Q1 results, where the company lowered guidance due to foreign exchange rates, an internal sales force transition, display advertising weakness, and the unexpected accounting treatment of a recent acquisition. We believe LinkedIn is a unique platform asset in the early days of capturing a $27 billion talent acquisition market and a $25 billion B2B advertising market, with interesting upside optionality.

  • Shares of Wynn Resorts Ltd., a gaming company with casinos in Macau and Las Vegas, decreased in Q2 due to the slowdown in Macau and concerns over a smoking ban on VIP gaming expected to be enacted next year. The slowdown, combined with the unpredictability of how many tables Wynn will receive at its new casino opening in April 2016, led to our sale of the stock. While we think the company will still be able to finance and open the casino, the return may not be what investors expect and the increased supply could cannibalize existing assets.

Quarterly Attribution Analysis (for quarter ended 6/30/2015)

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 Fifth Avenue Fund increased 3.58% in the second quarter and outperformed the Russell 1000 Growth Index by 346 basis points, mainly due to stock selection.

The Fund’s Consumer Discretionary, Industrials, Health Care, and Information Technology (IT) investments were the largest contributors to relative results. Within Consumer Discretionary, outperformance of Internet retailers Amazon.com, Inc. and Ctrip.com International Ltd. and meaningfully larger exposure to this sub-industry, which rose 14.8% within the index, added the most value. Amazon was the largest contributor to absolute performance, while shares of China-based online travel agency Ctrip increased on solid quarterly results and the acquisition of a 37.6% equity stake in eLong. Restaurant holdings Starbucks Corp. and YUM! Brands, Inc. also aided relative results after outperforming their index counterparts by 838 basis points. Starbucks shares marched to new highs on another quarter of strong sales and earnings growth, while shares of YUM rose on reports of better-than-expected same-store sales and restaurant margins in China.

Within Industrials, lack of exposure to the declining airlines, aerospace & defense, and railroads sub-industries and outperformance of Fastenal Co. led contribution to relative results. Shares of Fastenal, a distributor of industrial supplies in North America, rose on double digit earnings growth despite a challenging sales environment. Earnings benefited from the company’s focus on cost control and a more aggressive posture toward share repurchases.

Within Health Care, outperformance of Illumina, Inc. and Regeneron Pharmaceuticals, Inc. was partly offset by lack of exposure to pharmaceutical stocks, which rose 4.9% within the index. Illumina was the second largest contributor on an absolute basis. Shares of Regeneron, a biopharmaceutical company with three marketed products and a pipeline of candidates in development, rose on the FDA’s recommended approval of Praluent for the treatment of hypercholesterolemia.

Strength in IT was largely attributable to the outperformance of FireEye, Inc., the third largest contributor to absolute performance, and Mobileye N.V., which designs camera-enabled advanced driver assistance systems. Mobileye’s shares rose on reports of a strong start to 2015 and an upbeat earnings call with highlights that included a 100% win rate over the last 12 months and two significant new contracts. Payment networks MasterCard, Inc. and Visa, Inc. also contributed to relative performance after Chinese authorities announced that on June 1 it would implement rules governing the planned opening of its payments market to foreign competitors. Another contributor to relative performance in IT was global data center company Equinix, Inc. Despite currency headwinds, Equinix beat quarterly expectations and raised annual guidance as a result of increased data center demand, Internet traffic growth, and a stabilizing pricing environment.

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. Investing in the stock market is always risky. Investing in the stock market is always risky. Current and future portfolio holdings in the Fund are subject to risk.

Source: FactSet PA.