Baron Opportunity Fund (BIOIX)

Portfolio Management

MichaelLippert
Michael Lippert

Fund Manager since 2006

View All Commentary by Michael

Fund Description

Baron Opportunity Fund invests in innovative high-growth companies.

    

  

Portfolio Commentary

Institutional Performance

Review and Outlook (for quarter ended 6/30/2016)

The Review and Outlook for period ending June 30, 2016 is not yet available

Top Contributors/Detractors to Performance

Contributors (for quarter ended 6/30/2016)
  • Shares of Amazon.com, Inc., the world’s largest retailer and cloud services provider, rose in Q2 on strong revenue growth and improving margins in the core business. Amazon’s other major business segment, Amazon Web Services (AWS) continues to gain traction with enterprise customers, and had another strong quarter of growth. Over time, we expect AWS to be the larger contributor to value creation. Amazon continues to invest in new and potentially large business segments such as e-finance, business supplies, and apparel.

  • Shares of CoStar Group, Inc., a real estate information and marketing services company, increased on outstanding financial results. Revenue growth accelerated to 25%, margins expanded 14% year over year, and earnings almost tripled. CoStar grew in its core commercial real estate market and captured share in the multifamily space. We believe CoStar is poised to generate accelerating organic revenue growth and significant margin expansion as it leverages recent investments in sales headcount, product expansion, and multifamily marketing.

  • Shares of property and casualty insurance software vendor Guidewire Software, Inc. increased in Q2. Guidewire enjoys near-perfect retention rates, a growing installed base, and accelerating adoption. The company is early in its core system replacement cycle, and is expanding its addressable market through persistent innovation. We believe Accenture’s April sale of rival insurance software vendor Duck Creek and its new relationship with Guidewire will help to enhance pricing and win rates and shorten sales cycles.

Detractors (for quarter ended 6/30/2016)
  • Shares of DNA sequencing company Illumina, Inc. fell in Q2 on first quarter revenue that missed Street expectations and a lowered forecast for 2016 due to weak first quarter sales of its HiSeq instrument line and a lower forecast for Europe. Management believes the issues are short-term, fixable, and unrelated to fundamental market demand. We continue to believe Illumina has a long runway for growth driven by increasing adoption of DNA sequencing in clinical markets such as cancer screening, diagnosis, and treatment.

  • Alphabet Inc. is the world’s largest search and online advertising-related company. Shares of Alphabet were driven down by Q1 results that missed Street expectations. We believe that while desktop search is becoming a more mature business for the company, Alphabet is well positioned to benefit from substantial growth in mobile and online video advertising.

  • Pacira Pharmaceuticals, Inc., a pharmaceutical that makes pain control drug EXPAREL, had a watershed event in mid-December 2015 when it won a favorable settlement of a marketing dispute with the FDA. Pacira received broad, definitive labeling for many major surgical uses. Shares peaked earlier in 2016, but have since dropped due to broader concerns in the pharma sector as well as growth guidance biased toward the second half of 2016. We believe Pacira has the potential for 25-35% top line growth for years to come.

Quarterly Attribution Analysis (for quarter ended 6/30/2016)

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 increased 3.44% in the second quarter and outperformed the Russell 3000 Growth Index by 264 basis points, primarily due to stock selection. Smaller cap stocks outperformed large cap stocks during the quarter, and greater exposure to smaller cap stocks also aided relative performance.

Outperformance of Information Technology (IT), Consumer Discretionary, and Financials investments contributed the most to relative results. IT holdings contributed 375 basis points, driven by outperformance of Internet software & services holdings CoStar Group, Inc., Zillow Group, Inc., and Benefitfocus, Inc. CoStar was the second largest contributor to absolute performance, while shares of real estate website operator Zillow rose on improving fundamentals and the favorable settlement of a lawsuit with Move, Inc. Shares of benefits software vendor Benefitfocus rose on outstanding financial results driven by traction in new logo acquisition and cross-sales of new modules. Favorable stock selection in Internet software & services was partly offset by meaningfully larger exposure to this poor performing sub-industry, which declined 2.0% in the index. Outperformance of application software holdings, led by Guidewire Software, Inc. and Mobileye N.V., and larger exposure to this strong performing sub-industry also added value. Guidewire was the third largest contributor to absolute performance, while Mobileye recouped first quarter losses after management allayed investor concerns with its announcement of two autonomous program wins. Lack of exposure to Apple, Inc., a sizeable position in the index whose shares fell nearly 12%, and outperformance of Gartner, Inc. also lifted relative performance in IT. Strength in Consumer Discretionary was mostly attributable to the outperformance of Amazon.com, Inc., the largest contributor on an absolute basis, and Manchester United plc, an English Premier League professional sports team. Manchester United’s shares recovered in anticipation of potentially better results on the field under the direction of new coach Jose Mourinho. Within Financials, outperformance of global colocation REIT Equinix, Inc. contributed the most to relative results.

Underperformance of Health Care investments and lack of exposure to Consumer Staples, which rose 3.9% in the index, detracted the most from relative performance. Weakness in Health Care was partly due to the underperformance of pharmaceutical holdings, led by Pacira Pharmaceuticals, Inc. and Allergan plc. Pacira was the third largest detractor from absolute results, while shares of Botox manufacturer Allergan fell after the U.S. Treasury disallowed the Pfizer-Allergan inversion. Investments in Illumina, Inc., the largest detractor on an absolute basis, and Alexion Pharmaceuticals, Inc., a biotechnology company serving orphan disease markets, also hurt relative performance. Alexion’s shares fell due to slowing growth of lead product Soliris and a light launch for new drug Kanuma.

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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