Baron Focused Growth Fund (BFGFX)

Portfolio Management

Ron Baron

Fund Manager since 1996

View All Commentary by Ron

Fund Description

Baron Focused Growth Fund invests in a focused portfolio of small and mid-size growth companies.



Fund Resources

side column img example
Ron Baron on focused investing

Watch Video

Latest Fact Sheets

Standard Fact Sheet

Expanded Fact Sheet - Institutional Shares

Portfolio Commentary

Retail Performance

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

U.S. stock markets were unusually volatile during the three months ended September 30, 2015. Most indexes fell sharply, with small and mid-cap stocks performing worse than large caps. The smid cap Russell 2500 Growth Index lost 11.05% in the third quarter.

The markets were pressured by several disruptive events in the period. China growth slowed and the China A shares market fell sharply. Oil prices remained depressed, and the share prices of energy businesses and companies that supply or service the energy industry fell sharply in the quarter. High yield spreads increased by almost 200 basis points. This market was negatively impacted by impending financial problems of leveraged energy companies and downgrades of Volkswagen and Glencore debt. Interest rates, however, did not change. It is now nine years since the last time the Fed raised rates. This decision was attributed to slower-than-expected growth, market turmoil, and lower-than-desired inflation. The Fed also considered developments in China and economies overseas.

Baron Focused Growth Fund declined by 13.77% in the quarter. Consumer Staples was a modest contributor. Sub-industries that materially contributed to performance included property & casualty insurance and electric utilities. Consumer Discretionary, Information Technology (IT), and Industrials were the top detracting sectors to performance.

Consumer Staples benefited from the performance of Church & Dwight Co., Inc., the Fund’s third largest contributor in the period. Top contributor Arch Capital Group, Inc., added to performance of the property & casualty insurance sub-industry. Electric utilities contributed on a stock rise by electric transmission company ITC Holdings Corp., which benefited from risk off investment into the defensive Utilities sector. Consumer Discretionary lost ground as the Fund’s seven sector holdings all lagged in the quarter. IT suffered from weak performance across the sector, led by the second largest detractor, Benefitfocus, Inc. Industrials also had a challenging quarter with declines in three of four holdings, led by top detractor CaesarStone Sdot-Yam Ltd.

The decline in the profitability of oil companies and their industrial suppliers has resulted in slower-than-desired economic growth and subdued inflation. We think the short-term slowdown caused by the decline in the profits of energy businesses will soon be offset by faster growth in the rest of the economy in part spurred by the lower cost of energy.

The U.S. stock market is closely aligned with GDP. Median stock values are presently 15X earnings, below the median for the last 55 years. Individual stock prices reflect growth of value in business. When earnings grow significantly and stock prices decline or remain steady, this creates investment opportunities. This is presently the case.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 9/30/2015)
  • Arch Capital Group Ltd. is a Bermuda-based specialty insurance and reinsurance company. Shares rose on reports of good quarterly financial results with 9% growth in book value per share. Despite soft industry pricing conditions, Arch continues to generate above-average returns due to profitable underwriting, benign catastrophe losses, and favorable reserve development. The recently acquired mortgage insurance business is scaling up. M&A activity in the property & casualty insurance industry has also helped boost share prices.

  • ITC Holdings Corp. is the nation’s largest independent transmission company. Shares rose due to the relative strong performance of the electric utility subsector as investors rotated away from risk in the broader stock market. We believe ITC has robust prospects for growth and will continue to execute on its growth strategy. The primary drivers for transmission investment – reliability and connection of new generation (including renewables) – remain intact, and we believe ITC is well positioned to benefit from these trends.

  • Shares of consumer products company Church & Dwight Co., Inc. rose in the period. Despite continued category headwinds and a weak consumer market, performance was solid. Organic sales grew by over 5%, and we think momentum will continue, as the company has successfully addressed supply constraints in its vitamin business. Investors appeared confident in Church & Dwight’s ability to make growth-enhancing acquisitions. There is also speculation of a takeover by a firm looking to enter the U.S. market.

Detractors (for quarter ended 9/30/2015)
  • CaesarStone Sdot-Yam Ltd. is a leading global manufacturer of quartz surfaces for kitchens and bathrooms. Shares fell sharply in August after the company reduced its full-year revenue guidance on the second quarter earnings call. A negative report by a short seller of the stock also weighed on the stock price. We believe investors overreacted to both events and remain positive on our investment in CaesarStone, as earnings growth accelerates from successful new product launches and quartz market share gains vs. other countertop materials.

  • Shares of Benefitfocus, Inc., a leading provider of cloud-based benefits software, detracted from Q3 performance after performing well earlier in the year. The company conducted a secondary offering during Q3, which we believe weighed on the stock. It continued to generate robust financial results, growing its employee customer count by 36% and demonstrating initial traction with its newly launched modules. We believe that BenefitFocus serves an addressable market that is more than 100x larger than its current business.

  • Shares of The Carlyle Group, an alternative asset manager, declined in the period. The company continues to perform well in its corporate private equity division. However, its newer divisions in Real Assets and Investment Solutions and Global Market Strategies have faced issues. While poor performance in these areas will likely result in lower near-term distributions, we think Carlyle still holds long- term promise as it launches new products and performance of existing funds improves.

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

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

Source: FactSet PA.