Baron International Growth Fund (BIGFX)

Portfolio Management

Michael Kass

Fund Manager since 2008

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Fund Description

Baron International Growth Fund invests primarily in non-U.S. growth companies.



Fund Resources

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Michael Kass sees growth opportunities overseas.

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Quarterly Letter 4Q15


Portfolio Commentary

Retail Performance

Review and Outlook (for quarter ended 12/31/2015)

After a marked decline in the third quarter, the fourth quarter of 2015 began with an abrupt and powerful rally in international equities, commodities and credit. Coincident with the Fed’s deferral of an October rate hike, indicators began to suggest improving economic growth, global trade, and stabilization in China and the RMB. Such stability inspired the Fed to signal the start of a rate hike cycle in December, which seemed to act as an immediate financial tightening and stunted the rally. An increase in terrorism and rising Middle East tensions exacerbated the mid-quarter rise in risk premium, leading international equities to fade into year end.

For the year ahead, we expect further volatility. In our view, the key variables are the Chinese economy, policy and the RMB; the slope and duration of Fed tightening; commodity and oil prices; and increasing Middle East hostilities. We see the first two as directly related; any increase in the market-discounted rate of Fed tightening will force a more aggressive response from China and increase the risk of a more material RMB depreciation. This phenomenon was on display in the second half of 2015. RMB depreciation acts as a safety valve for China and deflects the deflationary pressure being absorbed back at the rest of the world. In the zero-sum world of subpar global economic growth and credit saturation, we continue to expect the “whac-a-(deflation) mole” policy response initiated by the Fed in 2009 and carried on by the Bank of Japan and the European Central Bank; in our view, it is now simply China’s “whac.”

The silver lining is that much of the developed world continues to exhibit reasonable economic growth and momentum while much damage has already been done in the emerging and commodity-sensitive markets. To us, the key question is whether the current tightening of financial conditions triggers an international credit event or enough RMB depreciation to suggest global contagion and the risk of recession. Should this occur, we believe associated volatility would likely force the Fed to reverse course, with the most likely result an abrupt and sustainable market recovery. It is also possible that global growth and leading economic indicators continue to improve upon what appeared a bottoming in early October; in effect, the Fed would now be appropriately hiking into a global re-acceleration, reducing the odds of a credit incident.

Over the past 18 months, we have maintained below-market exposure to emerging market equities given prevailing headwinds, while we have increased our investments in what we believe are well-positioned and high-quality domestic European and U.K.-based companies. While we remain comfortable that our current positioning is well aligned given the existing environment, we believe there are substantial investment opportunities ahead, and are identifying specific candidates, as well as a strategy to take advantage.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 12/31/2015)
  • Domino’s Pizza Enterprises Ltd. is the largest master franchiser of Domino’s Pizza, with operations in Australia/New Zealand, certain European countries, and Japan. The share price has performed well during Q4 as the company has been executing exceptionally well in its existing markets by expanding stores, and improving store productivity and margins. Additionally, Domino’s Pizza Enterprises announced entry into a new market, Germany, a strategic and synergistic market for the company and another avenue for long-term growth.

  • TAL Education Group was a leading contributor to performance for Q4. The education services provider reported favorable earnings during Q4, as enrollment growth reached 50% and revenue and operating earnings exceeded Street expectations. We continue to believe the investments TAL Education is currently making suggest sustainable long-term growth with attractive margins.

  • Shares of Qihoo 360 Technology Co. Ltd., the leading online security provider in China, rose during Q4 in concert with a broad rally in Chinese Internet services and software stocks. Late in Q4, Qihoo confirmed earlier-announced plans to go private in one of the largest such transactions announced to date involving a U.S. ADR-listed Chinese company.

Detractors (for quarter ended 12/31/2015)
  • RIB Software AG is a German software company with a 5D modeling capability for the construction industry. With construction highly prone to inefficiencies and grossly underutilizing technology, we think RIB’s innovative software can bring significant value to projects. While RIB is quickly becoming the new standard and share price has risen in concert, the company remains beholden to contract wins, which can be lumpy. As a result, RIB is likely to come one project short in 2015, which resulted in share weakness during Q4.

  • Golar LNG Ltd. is a liquefied natural gas (LNG) shipping, regasification and liquefaction company. During 2015, Golar worked on a gas liquefaction project in Cameroon. While we think this project represents a great long-term investment opportunity, declining oil prices made LNG less attractive. In addition, LNG carriers have been trading at day rates that do not cover operational expenses. As a result, Golar’s stock price fell. Long term, we think progress in floating LNG projects and focus around midstream rather than shipping will create value.

  • Nomad Foods Limited is an acquisition-driven frozen food business in Europe. Its stock price fell as the rising cost of capital resulted in a difficult acquisition environment. Macroeconomic and competitive headwinds in the U.K., Germany, and Italy also spurred discounting and consumer preference for private label (cheaper) brands. We remain invested based on Nomad’s strong management and solid fundamentals, while we evaluate whether its growth strategy remains viable in light of current capital market conditions.

Quarterly Attribution Analysis (for quarter ended 12/31/2015)

The Quarterly Attribution Analysis for period ending December 31, 2015 is not yet available

Yearly Attribution Analysis (for year ended 12/31/2015)

The Yearly Attribution Analysis for period ending December 31, 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 advice to any person and are subject to change 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 PA