Review and Outlook
The Review and Outlook for period ending September 30, 2016 is not yet available
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 Focused Growth Fund increased 1.05% in the third quarter, yet underperformed the Russell 2500 Growth Index by 593 basis points. During the quarter, stock selection and, to a lesser degree, relative sector weights hurt relative performance.
Lack of exposure to the lagging Real Estate sector, which was hurt by the poor performance of REITs, and outperformance of Consumer Discretionary investments contributed the most to relative results. Strength in Consumer Discretionary, owing to the outperformance of Vail Resorts, Inc. and AO World plc, was overshadowed by significantly larger exposure to this underperforming sector. Vail was the largest contributor on an absolute basis, while shares of AO, the U.K.’s leading online retailer of major domestic appliances, increased double digits after being added to the Fund in July. AO continues to expand rapidly in its core U.K. market, while making further gains in the German market.
Aside from greater exposure to the underperforming Consumer Discretionary sector, investments in Information Technology (IT), Health Care, and Financials detracted the most from relative results. Within IT, underperformance of CoStar Group, Inc., a real estate information and marketing services company, and Guidewire Software, Inc., a leading provider of core systems software to the global P&C insurance industry, hampered relative results. Shares of CoStar fell slightly on modest multiple compression after outperforming in Q2, while Guidewire’s shares declined after earnings guidance was slightly below Street expectations due to an accounting-related deferral that we expect will reverse next year. Lack of exposure to the semiconductors and systems software sub-industries, which were both up more than 25% in the index, also hurt relative results. Within Health Care, underperformance of the Fund’s only position in the sector, Inovalon Holdings, Inc., and lack of exposure to strong performing biotechnology and health care equipment stocks weighed on relative results. Inovalon was the largest detractor from absolute performance. Weakness in Financials was mostly attributable to the underperformance of FactSet Research Systems, Inc., a financial information provider to investment firms, and The Carlyle Group, one of the largest diversified alternative asset managers with approximately $180 billion under management. FactSet’s shares lagged as growth moderated slightly due to choppy end markets, while Carlyle’s shares fell alongside other alternative asset managers as investor concerns about flows and fees pressured the share prices of these companies. Electronic trading firm and market maker Virtu Financial, Inc. also detracted from relative performance in the sector.
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