Baron Opportunity Fund (BIOIX)

Portfolio Management

MichaelLippert
Michael Lippert

Fund Manager since 2006

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Fund Description

Baron Opportunity Fund invests in innovative high-growth companies.

    

  

Fund Resources

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Michael Lippert discusses how he invests in innovative companies

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Portfolio Commentary

Institutional Performance

Review and Outlook (for quarter ended 6/30/2015)

Baron Opportunity Fund performed well in the quarter and year-to-date. The market environment has been more favorable than last year for the higher growth, innovative businesses in which we invest – not yet a tailwind, but no longer a headwind. While there are always exceptions, the majority of our companies have continued to show solid operating progress and the innovative themes we focus on have continued to cement themselves even further into the fabric of our business and consumer lives.

  • Netflix continued to add subscribers at a fast clip as Internet-delivered, on demand, ad free TV provides a superior consumer experience to traditional, ad supported TV.
  • Tesla continues to lead innovation in electric drive vehicles and energy storage. The latest version of the Model S goes from 0 to 60 MPH in 2.8 seconds, and is widely recognized as not just the world’s best electric car, but the world’s best car period.
  • Benefitfocus' cloud-delivered software enables its enterprise customers to provide employees with better and more diversified benefits packages by providing education and tools for choosing the right set of benefits for themselves and their families.
  • Illumina’s DNA sequencing platform – instruments, test kits, sample prep, informatics, test services, etc. – has helped usher in a new age of personalized medicine where genetic information is utilized to diagnose, treat and prevent disease and to develop a new generation of targeted drugs and therapies.
  • Through organic development and accretive M&A, SunEdison is trying to become the first of the renewable energy “majors.” Solar and wind are the fastest growing sources of electricity generation in many regions of the world.
  • Facebook is pioneering a new age of people-based advertising – targeting relevant ads to actual people or audiences, not content. Last year, in the U.S., mobile accounted for 24% of time spent but only 8% of advertising spend. The “catch up” of ad spend to media time provides a powerful tailwind to Facebook and other mobile-centric ad platforms.
The Fund’s consistent aim has been to give our investors something different from passive indexes or generalized growth funds by investing in a portfolio of competitively advantaged, higher growth, innovative businesses. We focus on long-term secular trends that span industries and represent the world’s future. These trends are visible, impactful, persistent, and long-term. They will likely create significant growth opportunities by disrupting existing industry dynamics and capturing large profit pools from the legacy way of doing things. The most significant of these trends represent paradigm shifts or generational changes, such as gas to electric, on premise to cloud, desktop to mobile, coal to the sun, and treat the disease to treat the patient, to highlight just a few.

We remain steadfast in our view that a portfolio of well-managed, higher-growth businesses capitalizing on innovative and longer-term secular growth themes will outperform the broader market and passive indexes across market cycles. Of course, there are no guarantees.

Top Contributors/Detractors to Performance

Contributors (for quarter ended 6/30/2015)
  • Netflix, Inc. is the leading global on-demand video service with over 50 million subscribers. Shares of Netflix were up sharply in Q2 based on strong Q1 subscriber additions and a robust subscriber growth outlook for Q2. The company is accelerating its efforts to grow internationally while also investing aggressively in original content. While quarterly fluctuations in net additions will likely continue, we believe Netflix is capable of ultimately achieving 50 million subscribers domestically and over 100 million subscribers abroad.

  • Shares of electric vehicle company Tesla Motors, Inc. rose on an upbeat Q1 earnings call that included strong early results from the launch of Tesla Energy, its new commercial battery business. The early success of the entry level 70D model launch also helped boost share price. As a higher performing vehicle versus the lower-priced 60 model, which it replaced, we believe the 70D significantly expands Tesla's addressable market. We also look forward to Tesla’s upcoming launch of the Model-X SUV.

  • Shares of Benefitfocus, Inc., a leading provider of cloud-based benefits software, contributed to performance. The company generated robust Q1 results and announced a reseller agreement with SAP, which we believe will be an important long-term accelerant to sales. The stock’s multiple has been expanding since February, when the company received a strategic investment from private exchange operator Mercer. We believe Benefitfocus serves an addressable market more than 100 times larger than its current business.

Detractors (for quarter ended 6/30/2015)
  • Aerie Pharmaceuticals, Inc. is developing a glaucoma medication called Rhopressa. In Q2, Aerie reported results from the first of two pivotal Phase 3 trials. While various data cuts showed potential and the drug inarguably lowered pressure, the primary endpoint of non-inferiority to Timolol was not met, and shares fell sharply. We exited our position.

  • The Spectranetics Corporation is a medical device company that specializes in equipment that clears plaque from cardiac and peripheral (arm and leg) arteries. After the company reported that it had missed revenues in Q1 and lowered full year guidance, shares fell. We believe the market misunderstood certain dynamics, and based on our conversations with management and industry experts, bought more near the bottom.

  • Shutterstock, Inc. is the leading online provider of royalty free stock photography. Shares were down in Q2 in the wake of Adobe’s launch of a rival stock photo product. We believe Shutterstock's localized marketplace dynamics and unique search capabilities differentiate it. Adobe has tried unsuccessfully to enter the stock photo market several times before. We think Shutterstock will gain market share in royalty-free images and accelerate its initiatives in music and video footage licensing, enterprise sales, and international expansion.

Quarterly Attribution Analysis (for quarter ended 6/30/2015)

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 gained 2.90% in the second quarter and meaningfully outperformed the Russell 3000 Growth Index by 263 basis points, primarily due to stock selection.

Consumer Discretionary, Information Technology (IT), Energy, and Industrials investments were the primary contributors to relative results. Within Consumer Discretionary, outperformance of Internet retail holding Netflix, Inc. and larger exposure to this strong performing sub-industry, which increased 14.6% in the index, contributed the most to relative results. Netflix was the largest contributor to absolute performance after shares increased nearly 60%. Tesla Motors, Inc., the second largest contributor on an absolute basis, and Manchester United plc, an English Premier League professional sports team, also aided relative performance. Shares of Manchester United increased after its fourth place finish made qualification to the Champions League a possibility.  Within IT, outperformance of Benefitfocus, Inc., the third largest contributor on an absolute basis, and SunEdison, Inc., the world’s largest renewable energy developer, and meaningfully larger exposure to the top performing application software sub-industry added the most value. Shares of SunEdison rose on the announcement of several acquisitions and an IPO filing for TerraForm Global, its emerging market “yieldco.” Other meaningful contributors to relative performance in IT were FireEye, Inc. and Equinix, Inc. Shares of network security company FireEye increased on solid financial results, and shares of data center operator Equinix rose after beating quarterly expectations and raising annual guidance. Strength in Energy was mainly due to the outperformance of Golar LNG Ltd., a liquefied natural gas midstream services company, whose shares rebounded on news of progress in its liquefaction projects. Within Industrials, outperformance of CaesarStone Sdot-Yam Ltd. and lack of exposure to lagging airline and railroad stocks were the largest contributors to relative results. Shares of CaesarStone, a quartz countertop manufacturer, outperformed due to better-than-expected quarterly results and management’s rosy outlook.

Investments within Health Care were the only meaningful detractors from relative performance. Sector weakness was mostly attributable to the underperformance of pharmaceuticals and health care supplies holdings, led by Aerie Pharmaceuticals, Inc. and The Spectranetics Corporation, respectively. These companies were also the two largest detractors on an absolute basis. Unilife Corporation, a pharmaceutical company focused on improving the delivery of injectable drugs, also detracted from relative performance before being sold late in the quarter. Lower exposure to biotechnology stocks, which rose 6.5% within the index, and underperformance of Foundation Medicine, Inc. also hurt relative results. The Fund exited its position in Foundation Medicine, a cancer testing and information services company, after it announced test volumes slightly lower than consensus estimates.

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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