Baron Opportunity Fund (BIOPX)
Review and Outlook
The third quarter was full of unexpected challenges. Markets endured a late summer swoon in August and September as investors expressed concerns about global growth and reassessed the timing of the Fed’s long anticipated rate increase. The sell-off began with the unexpected devaluation of the Chinese RMB in mid-August. This coincided with disappointing Chinese economic data and led to a reduction in Chinese GDP growth expectations, which led to a significant decline in Chinese equity markets. Many developing economies are highly dependent on China, creating second order concerns about the health of emerging markets and how an emerging markets slowdown may ultimately impact developed nations. At the same time, investors debated the likelihood of the Fed raising interest rates given an uncertain global macroeconomic picture. That debate is continuing as of this writing, although we believe the probability of a 2015 rate increase is currently running close to zero. Finally, we believe that the unexpected resignation of House Speaker John Boehner added further uncertainty to the mix, a condition that is rarely good for markets.
Materials holdings contributed modestly to Baron Opportunity Fund in the period. Holdings in the specialized REITs, apparel accessories & luxury goods, and Internet retail sub-industries also contributed to performance. Information Technology (IT), Health Care, Utilities, and Industrials were the top detracting sectors. Materials gained from a significant increase in the stock price of Flotek Industries, Inc., which was the top contributor in the period. Under Armour, Inc. helped boost performance of apparel accessories, on the strength of another period of robust financial results driven by revenue growth and cost management. Internet retail had a relatively good quarter, with Amazon.com, Inc. and Netflix, Inc. noteworthy contributors. IT was negatively impacted by risk-off sentiment that dominated the quarter. Health Care similarly lost ground as investors exited high-growth, high-multiple stocks. Utilities was hurt by a sharp decline in the Fund’s renewable electricity holdings. The second largest detractor from performance, CaesarStone Sdot-Yam Ltd., led the decline in the Fund’s Industrials investments.
In our opinion, none of the recent macro events have impacted the secular trends or long-term drivers of business value for the companies in which we are invested. We remain steadfast in our view that a portfolio of well-managed, higher growth businesses capitalizing on innovative and longer-term secular growth themes could potentially outperform the broader market and passive indexes across market cycles. It is becoming increasingly clear to us that the world is changing fast, that legacy business models and technologies are being left behind, and that consumers and enterprises alike are quickly adopting new ways of doing things.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending September 30, 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