Baron Partners Fund (BPTIX)
Fund Manager since 1992View All Commentary by Ron
Portfolio CommentaryInstitutional Performance
Review and Outlook (for quarter ended 3/31/2013)
Equity investors continued to be rewarded during the first quarter, as several major U.S. market indexes reached all-time highs. Fourth quarter earnings results were generally positive, and the U.S. economy continues to improve. Existing home prices and new home construction activity are increasing, automobile sales are rebounding, and natural gas prices and electricity costs remain low, which positively impact industrial activity. These factors appeared to offset fears surrounding consumer deleveraging, government fiscal restraints, higher taxes, and the economic impact of sequestration. In addition, positive money flows continued into equity investments, indicating that investors' long-awaited shift away from cash finally might be beginning.
A shift to equities may benefit our investments in Financials and information services companies, whose revenues are tied to equity markets. Examples include The Charles Schwab Corp., three other asset management firms, as well as MSCI, Inc. and FactSet Research Systems, Inc.
The Fund's best performers included investments in the Financials, Consumer Discretionary, and Industrials sectors. Sixteen of the Fund’s 21 investments achieved double-digit returns in the quarter, and only one investment, C.H. Robinson Worldwide, Inc., declined in the quarter. We believe the long-term growth prospects for this business remain favorable.
From December 1999 to December 2012, our economy grew 4.1% per year on a nominal basis, and the S&P 500 Index was down .23% (up 1.66% including dividends). This is an anomaly in our opinion. We were subject to a terrorist attack and participated in two wars; and we experienced the worst financial crisis in our history, followed by a deep recession, consumer deleveraging, fiscal restraints, and higher taxes, all coupled with global uncertainty.
The U.S. stock markets and the U.S. economy have been inextricably linked over the long term. For example, from 1960, when John F. Kennedy became President, to the end of last year, the nominal GDP of our economy rose from $524 billion to $15.9 trillion. Over the same time period, the S&P 500 Index rose from 58.11 to 1,426.19. While GDP grew at an annualized rate of 6.75% per year, the S&P 500 Index advanced 6.35%, or 9.71% including dividends, per year, for the past 52 years.
We think our economy will continue its measured recovery and eventually return to about 6% growth per year in nominal dollars, and the U.S. stock markets will continue their measured advance. We believe growth will be propelled by new technologies in unconventional energy and resource development and low natural gas prices, agricultural transformation, advancements in IT, software and online commerce, and the housing recovery. We continue to find many investment opportunities in these areas and many others across all sectors of our economy. Of course, we continue to expect our competitively advantaged, well managed, growth companies to outperform markets by 300 to 500 basis points per year over the long term, although we cannot assure that will be the case.
Top Contributors/Detractors to Performance
Contributors (for quarter ended 3/31/2013)
Detractors (for quarter ended 3/31/2013)
Quarterly Attribution Analysis (for quarter ended 3/31/2013)
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.
The Baron Partners Fund (Institutional Shares) gained 18.74% in the first quarter, significantly outperforming the Russell Midcap Growth Index by 723 basis points. During the quarter, the Fund’s use of leverage, as well as its relative sector weights and favorable stock selection contributed to relative performance.
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 March 31, 2013, Baron Partners Fund had 121.1% of its net assets invested in securities, and this use of leverage in an up market contributed significantly to relative results.
Outperformance of the Fund’s investments in the Financials, Information Technology (IT), and Utilities sectors were the primary contributors to relative results. Within Financials, a combination of favorable stock selection and the Fund’s significantly larger exposure to the outperforming sector contributed to relative results. During the quarter, all but one of the Fund's investments in Financials outperformed, led by the largest holding in the sector, Arch Capital Group Ltd., a specialty insurance and reinsurance company. Arch’s shares rose during the quarter due to better than expected earnings results and an improving insurance market. Another contributor in the sector was The Charles Schwab Corp., a premier discount brokerage firm. Schwab’s shares advanced as improved asset flows, especially to equities, improved profitability and total assets under management surpassed $2 trillion by quarter end. Strength within the IT sector was mostly attributable to outperformance of CoStar Group, Inc., the leading provider of commercial real estate data in the U.S. and the U.K. Shares of CoStar rose 22.5% in the quarter driven by outstanding financial results, accelerating business momentum, and growing synergies from its LoopNet acquisition. Within Utilities, a combination of favorable stock selection and the Fund’s larger exposure to the outperforming sector contributed to relative performance. The Fund’s only holding in the sector, ITC Holdings Corp., the nation’s largest independent transmission company, outperformed in the quarter as investor concerns regarding a potential dividend tax hike and changes in the company’s regulatory structure began to subside.
Underperformance of the Fund’s investments within the Consumer Discretionary and Energy sectors were the largest detractors from relative performance. Weakness in the Consumer Discretionary sector was mostly due to the underperformance of Dick’s Sporting Goods, Inc., the country’s largest sporting goods retailer. Shares of Dick’s underperformed in the quarter after reporting disappointing earnings and guidance. Within Energy, a combination of unfavorable stock selection and the Fund’s lower exposure to the sector, the best performing sector in the benchmark, hurt relative results. Negative stock selection effect was the result of the Fund’s only holding in the sector, Helmerich & Payne, Inc. The company owns and operates the largest fleet of modern generation land-based drilling rigs in the U.S. Despite posting better than expected quarterly results in the quarter, shares of Helmerich & Payne underperformed due to a selloff late in the quarter after a competitor, Nabors Industries Ltd., cut pricing.Invest In Baron Funds Today
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.