Review and Outlook
The Review and Outlook for period ending December 31, 2014 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 rose 3.56% in the fourth quarter, yet trailed the Russell Midcap Growth Index by 228 basis points, primarily due to stock selection.
The Fund's investments in the Information Technology (IT) and Health Care sectors were the largest contributors to relative results. Within IT, the Fund's larger exposure to the systems software and IT consulting & other services sub-industries, coupled with outperformance of these holdings, meaningfully contributed to relative results. Red Hat, Inc. and Qualys, Inc. performed well in systems software, while Gartner, Inc. was the main contributor in IT consulting & other services. Red Hat and Gartner were also two of the largest contributors to absolute performance. Shares of security software provider Qualys rose as headlines about cyber security breaches helped management increase penetration in the high-end enterprise market. Another contributor to relative performance was Benefitfocus, Inc., the leading provider of cloud-based benefits software. Shares of Benefitfocus jumped on strong financial results, confidence around the company’s cash requirements, and a recognition by investors that the stock was undervalued. Favorable stock selection in IT was partly offset by significantly larger exposure to Internet software & services stocks, which declined 5.4% within the index. Strength in Health Care was mostly attributable to the outperformance of Illumina, Inc., the leader in next generation DNA sequencing instruments and consumables, and The Spectranetics Corporation, which develops laser-based devices for interventional cardiovascular therapy. Shares of Illumina were up after the company reported better-than-expected quarterly results and raised guidance for the year. Shares of Spectranetics increased in the quarter, driven in part by the July approval of a major product initiation.
Underperformance of Consumer Discretionary, Energy, and Materials, and the Fund’s lack of exposure to the outperforming Consumer Staples sector detracted the most from relative results. Within Consumer Discretionary, meaningfully larger exposure to the lagging Internet retail, automobile manufacturer, and broadcasting sub-industries, all of which declined in the index, detracted the most from relative performance. The underperformance of Manchester United plc, an English Premier League professional sports team, also hurt relative results. Manchester United’s shares fell due to a secondary offering. Energy holdings Oasis Petroleum, Inc. and Golar LNG Ltd. underperformed amid the drop in oil prices during the quarter, yet this negative effect was partly offset by the Fund's lower exposure to this lagging sector. These two stocks were the largest detractors from absolute performance. Weakness in Materials was mainly due to the underperformance of Flotek Industries, Inc., a leading supplier of specialized chemicals to the oil & gas industry. Flotek generated record revenues and strong profits in the quarter, but investor concerns about falling oil prices appeared to overshadow the positive fundamentals.
Yearly Attribution Analysis
Baron Opportunity Fund declined 1.67% for the year, underperforming the Russell Midcap Growth Index by 13.57%, mainly due to stock selection.
The Fund’s larger exposure to the outperforming Telecommunication Services sector, which rose 27.6% in the index, and its lower exposure to Energy, which was the worst performing sector in the index as a result of the sharp drop in oil prices, contributed the most to relative performance. These positive effects were overshadowed by underperformance of investments within the Information Technology (IT), Consumer Discretionary, Industrials, and Financials sectors.
Within IT, the Fund’s meaningfully larger exposure to Internet software & services, which declined 4.6% in the index, and underperformance of its holdings in this sub-industry, detracted the most from relative results. Among the largest detractors were Benefitfocus, Inc., the leading provider of cloud-based benefits software, and Xoom Corp., an online consumer-to-consumer international money transfer company. Shares of Benefitfocus were hurt by higher-than-planned investment spending, a secondary offering, and the sell-off in high-growth technology stocks. Xoom’s shares suffered as competitive pressures and poor execution around the World Cup led to slower growth rates. The company also experienced unexpected management changes. The Fund exited its position in Xoom late in the year. The majority of the Fund’s application software investments also underperformed, led by Splunk, Inc. and RealPage, Inc. Both companies were sold during the year due to deteriorating fundamental performance.
Within Consumer Discretionary, underperformance of movie & entertainment holdings DreamWorks Animation SKG, Inc. and Manchester United plc, and the Fund’s larger exposure to poor performing Internet retail and broadcasting stocks, hurt relative results. Shares of DreamWorks, which makes animated films and TV shows, fell on disappointing feature film results. Shares of Manchester United fell due to disappointing on-field results to start the season and a secondary offering.
The Fund’s Industrials holdings fell 4.1%, and trailed their index counterparts by more than 14%, led by DigitalGlobe, Inc. and Verisk Analytics, Inc. Shares of DigitalGlobe, a satellite imagery provider, moved sharply lower early in the year after the company missed earnings and lowered fiscal 2014 guidance. Shares of Verisk, which provides risk information to the insurance, health care, and mortgage industries, declined after earnings fell slightly short of expectations due to variability in the company’s health care and insurance verticals. The Fund’s lack of exposure to airlines, which benefited from the drop in oil prices, also hampered relative performance.
Weakness in Financials was mainly due to the underperformance of Financial Engines, Inc., which provides independent technology-enabled portfolio management services to defined contribution plan participants. The Fund exited its position after the company experienced slowing enrollment rate growth and diminishing margins.
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