Review and Outlook
The Review and Outlook for period ending March 31, 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 Opportunity Fund decreased 7.76% in the first quarter and underperformed the Russell 3000 Growth Index by 810 basis points. During the quarter, stock selection and the Fund’s significantly larger exposure to poor performing Internet and software stocks hurt relative performance.
Outperformance of the Fund’s sole holding in the Energy sector, Concho Resources, Inc., and its lower exposure to lagging biotechnology stocks within Health Care contributed the most to relative results. Shares of Concho, an independent exploration and production (E&P) company focused on the Permian basin in West Texas and New Mexico, rose after the company enhanced its position in the Delaware basin, and provided a 2017 outlook that beat expectations. We think Concho is one of the best run mid-cap E&P companies and is well-positioned to exploit the inventory of drilling locations in the Delaware Basin in New Mexico/West Texas. We believe its strong balance sheet will enable it to navigate these turbulent times in the energy business and emerge as a stronger company.
Underperformance of Information Technology (IT) and Consumer Discretionary investments, lower exposure to the outperforming Industrials sector, and lack of exposure to the Consumer Staples sectors detracted the most from relative performance. Weakness in IT was partly due to the underperformance of Internet software & services holdings, led by LinkedIn Corp. and CoStar Group, Inc., and meaningfully larger exposure to this lagging sub-industry, which declined 1.9% in the index. LinkedIn was the largest detractor from absolute results before being sold in early February, while shares of CoStar, a real estate data and marketing services company, fell as high-growth, high-multiple technology stocks sold off. Systems software and application software investments also hurt relative results, driven by the underperformance of Servicenow, Inc. and Guidewire Software, Inc., respectively. Shares of Servicenow, a cloud-based workload management platform, declined due to a billings shortfall and tepid guidance despite solid Q4 results. Guidewire was the third largest detractor on an absolute basis. Significantly larger exposure to poor performing application software stocks, which fell 1.9% within the index, also hampered relative results. Within Consumer Discretionary, underperformance of Restoration Hardware Holdings, Inc. and Manchester United plc detracted the most from relative results. Restoration Hardware was the second largest detractor from absolute performance before being sold in early March, while shares of English Premier League professional sports team Manchester United declined over concerns that the team will not qualify for the Champions League next year. We believe the team still has a chance to qualify, and even if it does not, the financial impact will be modest. We expect the company to benefit from future sponsorship deals, the roll-out of new merchandise agreements, and a digital offering under development. Larger exposure to the underperforming Internet retail sub-industry through investments in Amazon.com, Inc., Netflix, Inc., and The Priceline Group, Inc. also weighed on relative results.
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