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 3/31/2015)

Baron Fifth Avenue Growth Fund is off to a good start in 2015. While small-caps outperformed mid-caps, which outperformed large-caps, growth did better than value, making for a benign investing backdrop overall. We did not observe anything particularly interesting in the marketplace, especially in the U.S., where the Fund is primarily invested, and would, in fact, characterize the quarter as dull. This is the kind of market environment in which we tend to do well.

As is typical for us, all of the excess returns came from stock selection, with 12 of our investments appreciating more than 10% during the quarter. The portfolio had an unusually good balance. We benefited from some reversion to the mean, as Amazon.com, Twitter, and Concho Resources regained most of last year’s losses. The stalwarts - Apple, Starbucks, and Costco continued to perform well, and our newer additions, FireEye and Ctrip.com, rewarded us with unexpected instant gratification. We had one significant loser, Alibaba Group, which we added to and like even more now than we did before; and one continuing, although less meaningful now, source of pain and outright anxiety, Wynn Resorts, which we stubbornly refuse to end on the count of us being late and the stock appearing cheap. We added one name (Ctrip.com) and eliminated one (Ralph Lauren). The Fund benefited from net inflows, all of which were promptly put to work. Overall, we were pleased with the quarter’s results.

With the bull market run in its seventh year, it seems that the consensus is again calling for a pause. We do not have any insight on the direction of the market. However, we do observe that unemployment continues to drop, the economy continues to exhibit signs of strength, and the sharp decline in oil prices should provide meaningful savings to consumers. 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 3/31/2015)
  • Shares of Amazon.com, Inc., the world’s largest retailer, rose on a better-than-expected profitability outlook for Q1. The company also provided greater disclosure on its business and plans to break out Amazon Web Services' contribution separately on its next earnings call. Visibility into improving profitability, especially in North America, buoyed investor confidence in Amazon’s long-term opportunity to grow profits while investing for future growth.

  • Twitter, Inc. is an online social networking and micro-blogging service. Shares of Twitter were up due to strong Q4 results and a positive outlook. In the past few months, the company has launched several new efforts and product initiatives to increase both user growth and engagement on the platform. While it is likely to take some time for these efforts to gain greater traction, we believe that Twitter is in the early stages of monetization and evolution as a platform.

  • After a strong Q3, Apple, Inc. delivered stunning Q4 unit iPhone sales of 74.5 million. On March 9th, Apple launched its iWatch and regained some of the innovation aura it lost with investors when Steve Jobs died. The strength of the iPhone combined with excitement around innovation at Apple contributed to strong performance in Q1. We see continued iPhone strength and the potential for new categories, ranging from phones, tablets and watches all the way to the connected car.

Detractors (for quarter ended 3/31/2015)
  • Alibaba Group Holding Ltd. is the largest e-commerce company in China and the world. Shares declined due to a revenue miss as a result of increased mobile contribution, a greater mix of sales through its Taobao marketplace, and an algorithm change. The stock has also been weak ahead of lock-up expirations. We view these issues as temporary. We believe Alibaba’s market leading position, positive network effects, asset-light business model, and high cash generation give it a long runway for continued growth.

  • Shares of Wynn Resorts Ltd., an operator of casinos in Macau and Las Vegas, declined in Q1 as a result of the Chinese government’s anti-corruption campaign, which has produced a slowdown in Macau and lower spend at the casinos. We believe that eventually comparisons will ease and new supply will draw visitors back to Macau. Wynn continues to generate strong cash flow which, in our view, supports its 5% dividend yield.

  • Shares of industrial supplies distributor Fastenal Co. fell in Q1. Sales growth moderated due to slowing demand in oil and gas regions and the impact of a stronger U.S. dollar on customers with large export divisions. Current growth rates of about 10%, while industry-leading, represent a deceleration from last year’s 15-20% runrate and are impacting Fastenal’s ability to leverage earnings faster than sales growth. We still see a path to double digit growth over the next several years, as well as an attractive valuation and debt-free balance sheet.

Quarterly Attribution Analysis (for quarter ended 3/31/2015)

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.

The Baron Fifth Avenue Growth Fund (Institutional Shares) gained 5.01% in the first quarter and outperformed the Russell 1000 Growth Index by 117 basis points, primarily due to stock selection.

Outperformance of the Fund’s investments within Consumer Discretionary, Information Technology (IT), and Financials and its lower exposure to the lagging Industrials sector contributed the most to relative results. Within Consumer Discretionary, the Fund’s meaningfully larger exposure to Internet retail stocks, which rose 13.9% as a group within the index, and outperformance of Amazon.com, Inc. and Starbucks Corp. added the most value. Amazon.com was the Fund’s largest contributor on an absolute basis, while shares of Starbucks increased after the company’s quarterly results reflected strong sales and earnings growth. While its core in-store beverage business remains solid, we believe Starbucks is just scratching the surface of opportunities in food, mobile payment, and loyalty programs; emerging market expansion; and wholesale channel development in single-serve platforms. Strength in IT was largely attributable to the outperformance of the Fund’s systems software holdings, led by FireEye, Inc. and Red Hat, Inc. Shares of FireEye, a leading cybersecurity vendor, gained more than 25% as an increase in cyber-attacks forced companies to engage in data protection remediation. Shares of Red Hat, the largest open source software provider in the world, rose after the company’s impressive fiscal year results gave investors increased confidence in its ability to be a next generation IT infrastructure company. Additionally, the Fund’s significantly larger exposure to the outperforming Internet software & services sub-industry through its large investments in companies such as Facebook Inc., Twitter, Inc., and Google, Inc. aided relative performance. The Fund’s two holdings in the Financials sector, Brookfield Asset Management, Inc. and CME Group, Inc., together rose 7.4% and outperformed their counterparts in the index by 683 basis points.

The Fund’s investments within the Health Care and Materials sectors were the primary detractors from relative results. Within Health Care, underperformance of Alexion Pharmaceuticals, Inc., which develops therapeutics for patients with severe and ultra-rare disorders, and Illumina, Inc., the leading provider of next generation DNA sequencing instruments and consumables, detracted the most from relative results. Both companies have been negatively impacted by currency headwinds attributable to the stronger dollar. Weakness in Materials was mainly due to the underperformance of the Fund’s only holding in the sector, Monsanto Co., an agrochemical and agricultural biotechnology company. Monsanto’s shares declined due to a drop in corn plantings, the stronger dollar, and a shift toward more direct North American seed sales, which pushed profits from Q2 into Q3.

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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. 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.