Baron Real Estate Fund (BREFX)
Fund Manager since
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Baron Real Estate Fund invests in securities of real estate and real estate related companies of all sizes.
Review and Outlook
Despite the strong performance of Baron Real Estate Fund for the six years since inception, we are disappointed with its 2015 performance, in which we made a few key investment mistakes (particularly in senior housing and hotel investments). We have spent considerable time reviewing 2015 and documenting “lessons learned,” and believe we are well positioned to avoid these missteps in the future.
We have been taking advantage of the recent, largely indiscriminate market sell-off to upgrade the quality of the holdings and overall structure of the Fund.
- We are buying what we view as best in class companies that are now “on sale” (e.g., CBRE Group, Inc., Mohawk Industries Inc., Boston Properties, Inc.)
- We have lowered overall leverage by trimming or exiting positions in companies with more highly leveraged balance sheets.
- We are minimizing our exposure to smaller and less liquid companies.
- We are de-emphasizing complex companies that may have a narrower investor audience and are less likely to receive full credit for intrinsic value.
- We are trimming exposure to geographic markets that may face headwinds due to low oil prices (Houston), elevated real estate construction activity (e.g., New York City hotels), or unfavorable international exposure (e.g., Brazil).
- We are increasing exposure to REITs. Near-term prospects for REITs appear relatively attractive. Most REITs are largely domestic, have average dividend yields of about 4%, may continue to benefit from low interest rates, should benefit from occupancy growth and increased rents at a time of limited new construction activity, and have stronger balance sheets and access to low cost capital and accretive investment opportunities, in our view. We are also positioning the Fund with a larger yield and a defensive orientation. Our view is that targeting a 30-40% REIT allocation is prudent, given current economic and market conditions.
- Other real estate categories we are prioritizing include commercial real estate service companies, cruise line operators, data center companies, and building product/services companies. We are de-emphasizing hotels, timeshare operators, international gaming companies, and senior housing operators.
While the near-term outlook for real estate is a bit more cautious than a few years ago, we maintain a favorable bias because we believe the positive considerations outweigh the negative ones. We believe the factors that have fueled the real estate recovery largely remain in place. Demand continues to outstrip supply in many markets, most balances sheets are in solid shape, and credit remains available at low interest rates. Absent a recession, our sense is that business prospects for many categories of real estate will remain positive.
We recognize that in the months ahead, there may be periods of continuing market weakness. Nevertheless, we believe that the overall prospects for real estate and the Fund remain promising.
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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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.