Baron Global Advantage Fund (BGAFX)
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Baron Global Advantage Fund invests in growth companies of all sizes anywhere.
Review and Outlook
The heightened market volatility has remained a constant over the last few years, and this quarter was no exception. The outcome of the ill-conceived idea of the U.K.’s referendum on leaving the E.U. seemed benign just a few days before the June 23 vote. The predictions markets showed a 90% probability that “BRemain” would win and global equities were rallying nicely in anticipation of a positive resolution to yet another risk and uncertainty. Instead, the U.K. voted to leave the E.U., producing a sharp global sell-off.
Within two days, market participants appeared to realize that this new risk and uncertainty will likely cause the U.S. Federal Reserve to delay its planned policy rate hikes until later this year or possibly until 2017 and that the negotiations over a formal withdrawal from the E.U. are likely to take a couple of years. Within three days, the market erased the prior two-day losses, and we have been grinding higher ever since.
Baron Global Advantage Fund had many big winners during the quarter with eight investments rising over 20%. Unfortunately, only two of the eight (Amazon.com and TAL Education Group) were owned in a large enough size to be in the top 10 at the start of the quarter. We had a medium size position in Cetip SA, whose agreement to be acquired by BM&FBOVESPA caused the stock to rise 24%. Glaukos Corp., Mobileye N.V., Aerie Pharmaceuticals, and TerraForm Global all bounced back from meaningful declines in the prior quarter. Largely offsetting those gains were double-digit declines in Pacira Pharmaceuticals, EPAM Systems, Illumina, Mellanox Technologies (the Fund’s top contributor last quarter), and Allergan.
Our investments in China have continued to make significant positive contributions to returns. At over 15% of the Fund (on average) compared to just about 2% in the benchmarks, China is by far our largest geographic overweight. With GDP of $11.4 trillion in 2015, China is the second largest economy in the world. After decades of torrid growth, China now represents 15.5% of global GDP. Until a few years ago the Chinese economy was dominated by manufacturing, mining, and construction businesses. Today, services industries are over 50% of China’s GDP and rising, accounting for 87% of total GDP growth in 2015. The Chinese middle class is continuing to emerge with urban disposable income per capita rising to 23% of total income. While shortcomings in transparency and corporate governance need to continue to improve, we believe China offers an unusually fertile ground for long-term investment opportunities.
We are excited about the long-term prospects of the companies that comprise this portfolio. Our goal remains to maximize long-term returns without taking significant risks of permanent loss of capital. We believe the best strategy for long-term capital appreciation is to collect a mix of unique companies that sell into different end markets and different geographies. We will continue to focus on identifying and investing in companies that we believe have sustainable competitive advantages and the ability to reinvest excess capital at high rates of return.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending June 30, 2016 is not yet available
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