Review and Outlook
After a solid end to the fourth quarter of 2015, Baron Opportunity Fund had a rough start to the year. It was certainly poor from a quarterly performance perspective, but critically, in our view, not in the least from an investing perspective. Our underlying innovation themes continue to accelerate, and the vast majority of our individual investments have seen no change to their solid fundamentals. What happened in the quarter was straightforward: In January and February, the Fund’s performance was driven back by the gale force winds of a fear-driven market dominated by a “sell now, ask questions later” mentality. The Fund performed better in March. There is a lot of year left, and we continue to work at our research and portfolio management to perform as well as we can.
To paraphrase Benjamin Graham, in the short term the market acts as a voting machine. The votes of its participants are the multiples investors and traders are willing to pay at that very moment. Daily voting is based much more on sentiment or emotions than fundamental analysis. In optimistic environments, multiples rise; in fearful, risk-off settings, they fall. In aggressive risk-off markets, the multiples assigned to higher growth, higher multiple stocks – often the recent winners – fall the most. That is precisely what happened to us in January and February. Many of our winners from last year sold off due to short-term multiple contraction, in our opinion, without a whiff of a change in their fundamentals or long- term growth opportunities.
Our Baron investment philosophy is grounded in the view that in the long term, the market is a weighing machine (the second part of Graham’s observation). We do not try to predict the daily or monthly voting by the market. Instead, we hold fast to the belief that the market’s long-term weighing machine correctly values companies based on the fundamental growth drivers of their business.
That is why we focus on whether companies possess durable and powerful competitive advantages, their financial models and balance sheets, and the quality of their management teams. Valuation, of course, is a key piece of the puzzle. But while we monitor and consider current and near-term multiples, short-term valuation does not dominate our thinking. We have learned through years of experience that many of the truly special companies and some of the strongest long-term returners, like Amazon, Alphabet (Google), and Netflix, always appear somewhat expensive on near-term numbers. So we prioritize long-term valuation: investing when applying conservative and appropriate multiples to our internal forecasts of free cash flow and earnings can make at least a double over a 4-to-5-year period.
Our approach is a differentiated, long-term strategy. We provide our investors with something distinct from a passive ETF or generalized growth fund: a focused portfolio of higher growth and innovative businesses capitalizing on powerful secular growth trends. While we can offer no guarantees, we are committed to tipping the scales of the weighing machine in our investors’ favor.
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Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending March 31, 2016 is not yet available
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