Review and Outlook
U.S. stock markets continued to exhibit volatility during the three months ended December 31, 2015, as investors reacted to events overseas and at home. After a significant decline in the third quarter, the fourth quarter began with a strong rally in U.S. equities. Markets were boosted by soft economic data suggesting the Federal Reserve would continue to delay a rate hike. Talk of additional stimulus from the European Central Bank and a rate cut by China augmented the global trend of easy monetary policy. An easing of concerns around the negative impact of a slowdown in China and a modest recovery in oil prices also helped drive gains.
As the quarter progressed, signs of an improving U.S. economy and a seemingly more stable global economy inspired the Fed to signal it would start a rate increase cycle. In December, the Fed raised interest rates modestly for the first time since 2006. After an initial rally, the markets sold off some fourth quarter gains over concerns about the implications of Fed tightening in the face of questions around employment trends, commodity prices, overseas growth, and corporate earnings.
Baron Growth Fund increased in the quarter. Information Technology (IT), Utilities and Industrials were the top contributing sectors. Consumer Discretionary, Health Care, and Consumer Staples detracted. IT contributed on stock price increases in 10 of 12 holdings, led by the third largest contributor to performance, CoStar Group, Inc. Utilities gained on a share price increase in ITC Holdings Corp., the Fund’s sole sector holding and the second largest contributor to performance. Industrials benefited from the strong performance of quartz countertop manufacturer CaesarStone Sdot-Yam Ltd. The Consumer Discretionary sector had a mixed quarter, although detractors outweighed contributors. The sector included both the top contributor, Vail Resorts, Inc., and the two biggest detractors, Under Armour, Inc. and Dick’s Sporting Goods, Inc. Weakness in the Health Care sector was due primarily to the poor performance of Community Health Systems, Inc., the third biggest detractor in the quarter. Consumer Staples holdings had a mixed quarter. Healthy foods distributor United Natural Foods, Inc. was the largest sector detractor and fourth largest detractor overall, after its stock price fell as a result of weak financial results.
A significant percentage of the market weakness was attributable to Energy and companies that service the energy industry as a result of the decline in oil prices. We think the constrained economic environment caused by low oil prices will eventually be offset by faster growth in the rest of the economy, as assets previously allocated by consumers and businesses to energy-related costs are redeployed.
Investing for growth is investing in the future, and when the future seems especially uncertain, investors tend to exit growth stocks. This behavior has contributed to the recent contraction in many growth stocks, despite the strong fundamentals and continued growth of these companies. Furthermore, the economy is in good shape and has been getting stronger. We believe this creates investment opportunities for growth investors like us.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending December 31, 2015 is not yet available
Yearly Attribution Analysis
The Yearly Attribution Analysis for period ending December 31, 2015 is not yet available
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