Review and Outlook
The Review and Outlook for period ending September 30, 2016 is not yet available
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
When reviewing performance attribution on our portfolio, please be aware that we construct the portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio if it meets our rigorous investment criteria. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to achieve a target sector allocation or to approximate an index. Our exposure to any given sector is purely a result of our stock selection process.
Baron Growth Fund increased 2.59% in the third quarter, yet underperformed the Russell 2000 Growth Index by 663 basis points due to a combination of stock selection and relative sector weights. The notable outperformance of lower quality stocks in the quarter also weighed on relative performance.
Lower exposure to the lagging Industrials sector, lack of exposure to the poor performing Utilities sector, and outperformance of Consumer Discretionary investments contributed the most to relative results. Strength in Consumer Discretionary was mostly attributable to the outperformance of ski resort operators Vail Resorts, Inc. and Whistler Blackcomb Holdings, Inc., whose stock prices were up sharply in early August after Vail agreed to acquire Whistler Blackcomb. Outperformance of sporting goods retailer Dick’s Sporting Goods, Inc. and lower exposure to poor performing restaurant stocks, which fell 4.7% within the index, also added value. Favorable stock selection in the Consumer Discretionary sector was offset by larger exposure to the underperforming apparel, accessories & luxury goods, hotels, resorts & cruise lines, and education services sub-industries.
Information Technology (IT), Health Care, and Financials holdings were the largest detractors from relative results. Within IT, underperformance of the Fund’s two largest sector holdings, Gartner, Inc. and CoStar Group, Inc., and lack of exposure to outperforming semiconductor stocks detracted the most from relative results. Gartner was the largest detractor from absolute performance, while shares of CoStar, a real estate information and marketing services company, fell slightly on modest multiple compression after outperforming in Q2. Underperformance of application software holdings, led by ANSYS, Inc. and Guidewire Software, Inc., and lack of exposure to the strong performing systems software and communications equipment sub-industries also weighed on relative results. Within Health Care, meaningfully lower exposure to strong performing biotechnology stocks, which rose nearly 23% within the index, detracted 101 basis points from relative results. The underperformance of Inovalon Holdings, Inc., the second largest detractor from absolute results, and Bio-Techne Corporation, which sells specialized proteins, antibodies and assay kits used to investigate possible therapies for diseases, also hurt sector performance. Although Bio-Techne reported strong organic revenue growth during the quarter, the stock price declined due to dilution from a recent acquisition and foreign currency headwinds. Within Financials, underperformance of FactSet Research Systems, Inc. and Primerica, Inc. and significantly larger exposure to this lagging sector hurt relative results. Shares of FactSet, a financial information provider to investment firms, underperformed as growth moderated slightly due to choppy end markets, while Primerica gave back some gains after significantly outperforming in the prior quarter.
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