Baron Partners Fund (BPTRX)
Portfolio Management
Ron Baron
Fund Manager since 1992
View All Commentary by RonFund Description
Baron Partners Fund invests in all-cap companies with significant growth opportunities.
Fund Resources
Ron Baron invests in people.
Latest Fact Sheets
Expanded Fact Sheet - Retail Shares
Portfolio Commentary
Retail PerformanceReview 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.
Outlook
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)
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Arch Capital Group Ltd. is a specialty insurance and reinsurance company. The stock rose during Q1 due to better than expected earnings results and an improving insurance market. Arch also announced an acquisition that would allow it to enter what we believe to be an attractive new business line.
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ITC Holdings Corp. is the nation’s largest independent transmission company. The company outperformed in Q1 as investor concerns regarding a potential dividend tax hike and changes in ITC’s regulatory structure began to subside. This led to multiple expansion as investors increasingly recognized ITC’s superior growth prospects relative to other regulated utilities. In addition, there has been a substantial reduction in the short interest in ITC.
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Shares of Verisk Analytics, Inc., which provides information about risk to companies in the insurance, health care, and mortgage industries, outperformed the market as the company announced better than expected earnings for Q4. For Q1, the company grew earnings 26%, with particularly robust results from the company’s expanding portfolio of health care-related analytical and fraud prevention tools. We believe that increasing insurance rates, coupled with product enhancements and extensions, will help to accelerate revenue growth from Verisk’s insurance customers over the next few years.
Detractors (for quarter ended 3/31/2013)
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Shares of the leading U.S. truck broker, C.H. Robinson Worldwide, Inc., detracted from performance during Q1, declining 5.4% after reporting disappointing earnings. Although truckload freight volumes are improving, C.H. Robinson is experiencing temporary margin pressure as cost of capacity increases faster than its ability to pass pricing to shippers. We believe this issue will be resolved as 2013 unfolds and gross volumes accelerate.
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 (Retail Shares) gained 18.65% in the first quarter, significantly outperforming the Russell Midcap Growth Index by 714 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 TodayThe 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.