Review and Outlook
The Review and Outlook for period ending March 31, 2015 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.
The Baron Growth Fund (Institutional Shares) increased 4.75% in the first quarter, yet trailed the Russell 2000 Growth Index by 188 basis points. During the quarter, the Fund’s relative sector weights and, to a lesser extent, stock selection detracted from relative performance.
Outperformance of the Fund’s investments within Information Technology (IT) and Financials and its lower exposure to the underperforming Materials sector contributed the most to relative results. Strength in IT was partly attributable to the outperformance of MAXIMUS, Inc. and the Fund’s Internet software & services holdings, led by Benefitfocus, Inc. MAXIMUS was the Fund’s second largest contributor on an absolute basis, while shares of Benefitfocus increased double-digits due to robust financial results, a strong 2015 outlook, and a strategic investment from Mercer, which acquired a 10% stake in the company. Application software companies Advent Software, Inc. and FactSet Research Systems Inc., which both provide services to the global investment community, also aided relative performance. Shares of Advent rose sharply after SS&C Technologies announced its intent to acquire the company in an all cash offer, while FactSet’s shares increased in response to accelerated organic revenue growth, enhanced seat count additions, and meaningful earnings growth. Within Financials, outperformance of MSCI, Inc. and Gaming and Leisure Properties, Inc. added the most value, but this positive effect was somewhat offset by the Fund’s larger exposure to this lagging sector. Shares of index and analytics vendor MSCI rose after investors were encouraged by the possibility that the company may divest some of its underperforming businesses, while shares of Gaming and Leisure Properties (a REIT) increased on speculation that it would buy the real estate assets of Pinnacle Entertainment.
The Fund’s investments within the Health Care, Energy, and Utilities sectors were the largest detractors from relative performance. Within Health Care, the Fund’s meaningfully lower exposure to biotechnology and pharmaceutical stocks, which rose 16.0% and 14.9%, respectively, within the index, and underperformance of Community Health Systems, Inc. detracted the most from relative results. Community Health’s shares retreated in the quarter after investors took a more cautious stance pending the outcome of the Supreme Court’s King vs. Burwell decision, which will determine the legality of federal exchange subsidies under the Affordable Care Act. Weakness in Energy was largely attributable to the underperformance of the Fund’s largest holding in the sector, Targa Resources Corp., the General Partner of a growth oriented MLP. Targa Resources’ acquisition of Atlas Pipeline in the first quarter, while helping to grow and diversify Targa’s onshore U.S. presence, increased Targa’s sensitivity to commodity prices, and caused the stock to drop. Underperformance of the Fund’s only holding in Utilities, ITC Holdings Corp., was partly offset by its larger exposure to this sector, which rose more than 20% in the index. ITC was the Fund’s third largest detractor on an absolute basis.
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