Baron Global Advantage Fund (BGAIX)
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Baron Global Advantage Fund invests in growth companies of all sizes anywhere.
Review and Outlook
Baron Global Advantage Fund declined 18.3% in the third quarter compared to the declines of 8.6% and 9.5% for the MSCI ACWI Growth and MSCI ACWI Indexes, respectively. Year-to-date through September 30, 2015, the Fund is down 13.5% compared to the declines of 4.2% and 7% for its respective benchmarks.
The portfolio has high active share, which means it is not uncommon for the Fund’s results to deviate significantly from those of its benchmarks. However, needless to say, we were disappointed with quarterly performance. We had an unusually high number of significant losers, as 23 out of the 43 investments we held in the Fund during the quarter declined at least 20%. The weakness was broad-based as the markets declined 21% in China, 19% in Indonesia, 27% in Brazil, 18% in South Africa, and 22% in Norway. These were all markets to which the Fund had exposure. In addition, our investments in energy-related master limited partnerships, which we believed had little to no correlation to the price of energy, have fallen 41% on average. However, the biggest damage to the portfolio came from our investment in SunEdison and its related yieldcos TerraForm Global and TerraForm Power, where the circular feedback loop of loss of confidence leading to loss of access to capital markets leading to loss of possible future growth led to a terrible dislocation. The declines in these two stocks accounted for a significant percentage of the Fund’s poor performance.
Trying to understand the psychology of investing (behavioral finance, loss aversion, cognitive errors, etc.) has always been part of our investment process. Emotions, biases, lack of patience are all commonly present on the human side of investing and can sometimes be the reasons behind the mispricing of stocks. We frequently witness outcomes strongly biasing perceptions (a team wins the Super Bowl – it must have been the best team, or a fund posting a strong year – must have been managed by skilled investors). Less frequent and harder to navigate are circumstances when perceptions bias the outcomes. By all accounts, the leverage deployed by Lehman Brothers during the financial crisis was not materially different from that of its peers but the perceptions and loss of investor confidence ultimately led to its demise.
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. We are excited about the long-term prospects of the companies in which we are invested and continue to search for new ideas and investment opportunities.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending September 30, 2015 is not yet available
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