Review and Outlook
Baron Fifth Avenue Growth Fund increased 10.2% in the third quarter. In a complete reversal from the first half of the year, where the Fund plainly lacked sizable winners, the Fund saw broad-based strength across the entire portfolio, with 21 of our 36 investments rising double digits, and 12 of them appreciating over 15%.
Investments in Information Technology (IT), Consumer Discretionary, and Health Care were the top contributors. IT advanced on the strength of double-digit increases in 10 out of 13 sector investments. Performance was led by Alibaba Group Holding Ltd., the Fund’s second largest contributor in the quarter. Alphabet, Inc., the world’s largest search and online advertising company, was another significant IT contributor after its share price increased on the strength of quarterly results that surpassed Street expectations. With five investments posting double-digit share price increases, Consumer Discretionary appreciated in the third quarter, led by top contributor Amazon.com, Inc. Also within the sector, shares of leading online travel agency The Priceline Group, Inc. rose after reporting strong Q2 results and a robust outlook for Q3. While Health Care investments posted somewhat mixed performance, contributors outweighed detractors. Life sciences tools & services company Illumina, Inc. was the Fund’s third largest contributor. Holdings in the Real Estate sector lost some ground in the quarter due to a decline in the share price of Equinix, Inc., which was the second largest detractor from performance. The Materials sector was a minor detractor after the share price of the Fund’s sole holding within the sector, Monsanto Company, fell modestly in the period.
Our goal is to maximize long-term returns without taking significant risks of permanent loss of capital. We continue to focus on identifying and investing in what we believe are unique companies with sustainable competitive advantages and the ability to redeploy capital at high rates of return. We are optimistic about the long-term prospects of the companies in which we are invested and continue to search for new ideas and investment opportunities.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
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 Growth Fund increased 10.16% in the third quarter and outperformed the Russell 1000 Growth Index by 558 basis points. During the quarter, stock selection and, to a lesser extent, relative sector weights lifted relative results.
Consumer Discretionary, Health Care, and Information Technology (IT) investments and lack of exposure to the lagging Consumer Staples sector, which fell 4.9% in the index, contributed the most to relative results. Within Consumer Discretionary, outperformance of internet & direct marketing retail holdings Amazon.com, Inc. and The Priceline Group, Inc. and larger exposure to this strong performing sub-industry added the most value. Amazon was the largest contributor to absolute results, while shares of leading online travel agency Priceline rose on strong Q2 results and a robust outlook for Q3. Naspers Limited, a South Africa-based internet and media platform operator, also contributed to relative performance due to its large ownership position in Tencent Holdings Limited, whose stock price rose more than 20% in the quarter. Strength in Health Care was mostly attributable to the outperformance of Illumina, Inc., the third largest contributor on an absolute basis, and biotechnology holdings Biogen, Inc. and Regeneron Pharmaceuticals, Inc. Within IT, outperformance of internet software & services holdings, led by Alibaba Group Holding Limited and Alphabet Inc., and significantly larger exposure to this better performing sub-industry contributed the most to relative results. Alibaba was the second largest contributor to absolute performance, while shares of leading search and online advertising company Alphabet were up in the quarter, driven by quarterly results that surpassed Street expectations. Payment networks Mastercard Incorporated and Visa, Inc. also aided relative performance.
Larger exposure to the underperforming Real Estate sector, which was hurt by the poor performance of REITs, detracted the most from relative performance.
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