Review and Outlook
The Baron Global Advantage Fund declined approximately 2% in the third quarter and is up 4% year-to-date, both roughly in-line with its benchmark. We continue to maintain a healthy lead over the benchmark over the last 12 months and since inception. While we would characterize the quarterly result as somewhat uneventful, we had a number of sizable winners as well as portfolio holdings that got hit unusually hard. We did very well with investments in China, large cap U.S., and in the Information Technology sector, with TAL Education Group, Baidu, Facebook, Mellanox Technologies, and Mobileye all posting at least double digit gains and making meaningful contributions to quarterly returns. On the other hand, we gave up most of last quarter’s gains in Brazil, took it on the chin in Europe, and saw most of our small cap investments decline precipitously with Coupons.com, Benefitfocus, AO World, Grifols, and Acxiom all posting substantial stock price declines. We think this is a favorable environment for managers who are looking to invest in businesses at substantial discounts to their intrinsic values. We have continued to find new ideas and our “pipeline” of compelling investment candidates is the largest it’s ever been. One place we will not be finding them any time soon is Russia.
We have generally been very bullish on the emerging markets, especially China, India, and Indonesia. The emergence of the middle class has allowed these countries to develop their own economic eco-systems. The emerging markets economies, in aggregate, did not suffer a down year in 2008 or 2009, and the three countries mentioned above did not post even a single down quarter! In many respects, the global financial crisis of ’08-’09 was a wonderful stress test that the emerging economies passed with flying colors. These countries tend to have younger populations, high local savings rates, and infrastructure needs that are new in nature (rather than rehab projects like highways and airport renovations that last forever but do not really lead to new efficiencies or opportunities). This being a global fund, looking for competitively advantaged companies that could also benefit from these beneficial long-term trends is always high on our priority list.
While we expect the markets to remain volatile, we remain positive on the overall environment. Over the last 50 years, despite the doubling of the population, average global income per capita has tripled, life expectancy has risen by a third, and child mortality is down 70%. Literacy rates are up meaningfully, and average IQs are considerably higher even after adjusting for inflation and better nutrition. People are healthier, smarter, and more prosperous than they have ever been. All predictions of doom have repeatedly proved wrong. Despite disasters and reverses, quality of life and material wealth and prosperity have continued to increase everywhere in the world (although, not equally distributed), and we think that’s unlikely to change. Our goal remains to maximize long-term returns without taking significant risks of permanent loss of capital.
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Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending September 30, 2014 is not yet available
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