Review and Outlook
After a volatile first quarter, much of the second quarter was relatively uneventful until late June, when the U.K. voted to exit the European Union. Even with the volatility that followed “Brexit,” U.S. equity markets ended the quarter mostly higher. Positive momentum was helped by a steady increase in oil prices. Although we are still in the midst of an oil glut, production has begun to fall as tight credit markets are forcing oil companies to cancel or delay exploration and new production projects.
Persistent low oil prices over the last two years have resulted in an energy depression and industrial recession in the U.S. Corporate earnings have now declined for four consecutive quarters, largely due to declines in energy company earnings. Outside of energy and energy-related industries, we believe the U.S. economy is improving. Bank loans are up. In accord with Federal Reserve Chairman Janet Yellen’s recent commentary, we think interest rates will remain low for an extended period. Employment is strong and wages are climbing. Housing prices are increasing. Retail sales improved in the second half of the quarter and consumer confidence rose. With weak conditions abroad, international investors are turning to U.S. equity markets.
Baron Growth Fund increased in the quarter. Holdings in Financials, Information Technology (IT), and Health Care contributed the most to performance. Consumer Discretionary investments detracted. The Financials sector had a strong quarter. Performance was led by Primerica, Inc., the top contributor in the quarter. Office REIT Douglas Emmett, Inc. was a top five contributor after its shares rose on Q1 earnings that beat Street expectations and an increase in full year guidance. IT benefited from the strong performance of CoStar Group, Inc., the second biggest contributor to performance. Syndicated IT research provider Gartner, Inc. also boosted sector performance on solid financial results. IDEXX Laboratories, Inc., the third biggest contributor in the quarter, led performance of the Fund's Health Care holdings. While results among Consumer Discretionary investments were mixed, detractors outweighed contributors. The sector included the top and third biggest detractor from performance in the quarter.
While we think the domestic economy is strengthening, “Brexit,” terrorism, China’s economy, and other events abroad, as well as recent civil unrest in the U.S., are creating uncertainty. Investing for growth is investing in the future, and when the future seems uncertain, investors tend to exit growth stocks. Subdued IPO activity and negative interest rates on sovereign debt is further evidence of uncertainty. Investor flight to the perceived safety of value stocks has caused the recent contraction in the stock prices of many growth stocks, despite the strong fundamentals and continued growth of these companies. Value stocks outperformed growth in the period and growth stocks now have earnings multiples below 20-year averages while value stocks in all categories have multiples above 20-year averages. For growth investors like us, this creates investment opportunities.
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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