Review and Outlook
U.S. stock markets continued to exhibit volatility during the three months ended December 31, 2015, as investors reacted to events overseas and at home. After a significant decline in the third quarter, the fourth quarter began with a strong rally in U.S. equities. Markets were boosted by soft economic data suggesting the Federal Reserve would continue to delay a rate hike. Talk of additional stimulus from the European Central Bank and a rate cut by China augmented the global trend of easy monetary policy. An easing of concerns around the negative impact of a slowdown in China and a modest recovery in oil prices also helped drive gains.
As the quarter progressed, signs of an improving U.S. economy and a seemingly more stable global economy inspired the Fed to signal it would start a rate increase cycle. In December, the Fed raised interest rates modestly for the first time since 2006. After an initial rally, the markets sold off some fourth quarter gains over concerns about the implications of Fed tightening in the face of questions around employment trends, commodity prices, overseas growth, and corporate earnings.
Baron Partners Fund increased in the quarter. Information Technology (IT), Utilities, and Industrials contributed. Consumer Discretionary, Financials, and Health Care detracted. IT gains were driven primarily by CoStar Group, Inc., the quarter’s top contributor to performance. Utilities moved higher on the strong performance of ITC Holdings Corp., the second largest contributor in the quarter. Industrials benefited from share price increases in all four of the Fund’s investments in the sector. Consumer Discretionary had a mixed quarter, although detractors outweighed contributors. The sector included both the third largest contributor, Vail Resorts, Inc., and two of the top three detractors, Dick’s Sporting Goods, Inc. and CarMax, Inc. Financials had a mixed quarter, although detractors outweighed contributors. Weakness in Inovalon Holdings, Inc., the Fund’s second biggest detractor, weighed on the Fund’s Health Care investments.
A significant percentage of the market weakness was attributable to Energy and companies that service the energy industry as a result of the decline in oil prices. We think the constrained economic environment caused by low oil prices will eventually be offset by faster growth in the rest of the economy, as assets previously allocated by consumers and businesses to energy-related costs are redeployed.
Investing for growth is investing in the future, and when the future seems especially uncertain, investors tend to exit growth stocks. This behavior has caused the recent contraction in many growth stocks, despite the strong fundamentals and continued growth of these companies. Furthermore, the economy is in good shape and has been getting stronger. We believe this creates investment opportunities for growth investors like us.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending December 31, 2015 is not yet available
Yearly Attribution Analysis
The Yearly Attribution Analysis for period ending December 31, 2015 is not yet available
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