Baron Growth Fund (BGRFX)
Review and Outlook
U.S. stock markets were unusually volatile during the three months ended September 30, 2015. Most indexes fell sharply, with small and mid-cap stocks performing worse than large caps. The small cap Russell 2000 Growth Index lost 13.06% in the third quarter.
The markets were pressured by several disruptive events in the period. China growth slowed, and the China A shares market fell sharply. Oil prices remained depressed, and the share prices of energy businesses and companies that supply or service the energy industry fell sharply in the quarter. High yield spreads increased by almost 200 basis points. This market was negatively impacted by impending financial problems of leveraged energy companies and downgrades of Volkswagen and Glencore debt. Interest rates, however, did not change. It is now nine years since the last time the Fed raised rates. This decision was attributed to slower-than-expected growth, market turmoil, and lower-than-desired inflation. The Fed also considered developments in China and economies overseas.
Baron Growth Fund declined by 8.66% in the quarter. Utilities was a modest contributor. Sub-industries that materially contributed to performance included apparel accessories & luxury goods, property & casualty insurance, and health care equipment. Industrials, Health Care, and Financials were the top detracting sectors to performance.
Utilities contributed on a stock rise by electric transmission company ITC Holdings Corp., which benefited from risk-off investment into the defensive Utilities sector. Apparel accessories & luxury goods was boosted by the strong performance of top contributor Under Armour, Inc. The second biggest contributor, Arch Capital Group, Inc., added to performance of the property & casualty insurance sub-industry. Gains by veterinary diagnostics company IDEXX Laboratories, Inc. drove contribution of the health care equipment sub-industry. Industrials had a challenging quarter with declines in 13 of 14 holdings led by top detractor CaesarStone Sdot-Yam Ltd. Health Care detracted as investors exited higher growth stocks for presumed safer havens. Financials was negatively impacted by weak performance among the Fund’s asset management & custody banks holdings.
The decline in the profitability of oil companies and their industrial suppliers has resulted in slower-than-desired economic growth and subdued inflation. We think the short-term slowdown caused by the decline in the profits of energy businesses will soon be offset by faster growth in the rest of the economy in part spurred by the lower cost of energy.
The U.S. stock market is closely aligned with GDP. Median stock values are presently 15X earnings, below the median for the last 55 years. Individual stock prices reflect growth of value in business. When earnings grow significantly and stock prices decline or remain steady, we think this creates investment opportunities. This is presently the case.
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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The prospective performance of the companies discussed herein is based on our internal analysis and reflect our opinions only. We cannot promise future returns and our opinions are a reflection of our best judgement at the time of publication. Our views are not intended as recommendations or investment advise to any person and are subject to chage at any time based on market and other conditions and Baron has no obligation to update them. Investing in the stock market is always risky. Current and future portfolio holdings in the Fund are subject to risk.
Source: FactSet PA2.0 Performance Analytics Software.