Review and Outlook
The Review and Outlook for period ending September 30, 2016 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 Partners Fund increased 3.72% in the third quarter, yet trailed the Russell Midcap Growth Index by 87 basis points due to stock selection.
The Fund may use leverage and is especially likely to do so when we believe prospects for businesses are favorable and stock prices of those businesses do not reflect those prospects. As of September 30, 2016, Baron Partners Fund had 136.3% of its net assets invested in securities, and this use of leverage in an up market contributed 170 basis points to relative performance.
Aside from leverage, Financials investments and lack of exposure to the underperforming Consumer Staples sector, which fell 4.6% in the index, contributed the most to relative results. Within Financials, significantly larger exposure to this strong performing sector and outperformance of The Charles Schwab Corp. and Arch Capital Group Ltd. added value. Schwab was the second largest contributor on an absolute basis, while Arch’s shares performed well after reporting solid quarterly results, driven by profitable underwriting, modest catastrophe losses, and favorable reserve development.
Underperformance of investments in Information Technology (IT) and Industrials weighed the most on relative results. IT investments detracted 329 basis points from relative performance after falling 3.2%, with the Fund’s two largest holdings in the sector, Zillow Group, Inc. and CoStar Group, Inc., driving the decline. Zillow was the third largest detractor from absolute results, while shares of CoStar, a real estate information and marketing services company, fell slightly on modest multiple compression after outperforming in Q2. Another detractor from relative performance was syndicated IT research provider Gartner, Inc., whose shares declined due to tougher comparisons and slightly more challenging macro conditions. Weakness in Industrials was mainly due to the underperformance of Fastenal Co., a leading distributor of industrial supplies, and Verisk Analytics, Inc., which provides information about risk to companies in the insurance, financial services, and energy industries. Both of these stocks underperformed after reporting disappointing financial results.
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