Review and Outlook
The Review and Outlook for period ending June 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 Real Estate Fund rose 0.60% in the second quarter, yet underperformed the MSCI USA IMI Extended Real Estate Index by 303 basis points. During the quarter, stock selection added value, but was overshadowed by the negative effect of relative real estate category weights.
Outperformance of investments within the REITs, building products/services, and casinos & gaming categories contributed the most to relative results. Strength in REITs was mostly attributable to the outperformance of recent IPO MGM Growth Properties LLC, Douglas Emmett, Inc., and specialized REITs, led by Digital Realty Trust, Inc., Gaming and Leisure Properties, Inc., and Equinix, Inc. Favorable stock selection in the REITs category was somewhat offset by meaningfully lower exposure to these outperforming stocks, which detracted 72 basis points from relative results. Within building products/services, lower exposure to Home Depot, Inc., and outperformance of Martin Marietta Materials, Inc., added the most value. Shares of Martin Marietta, a leading supplier of crushed stone, sand, and gravel for the construction industry, rose after reporting Q1 financials results that beat Street estimates and raising 2016 guidance. Within the casinos & gaming category, MGM Resorts International aided relative performance. MGM Resort’s shares increased on strong Q1 earnings results, driven by growth in revenue per available room that exceeded Street estimates. The company also increased the amount it expects to generate from its profit growth plan.
Real estate services, hotels & leisure, and homebuilders & land developers investments were the largest detractors from relative performance. Within real estate services, larger exposure to this lagging category through investments in CBRE Group, Inc., Jones Lang LaSalle, Inc., and Kennedy-Wilson Holdings, Inc. detracted 167 basis points from relative results. The U.K.’s vote to exit the European Union weighed on these holdings given their exposure to the region. Within hotels & leisure, underperformance of cruise line holdings Norwegian Cruise Line Holdings Ltd. and Royal Caribbean Cruises Ltd. and larger exposure to this lagging category detracted the most from relative performance. Norwegian was the largest detractor on an absolute basis, while shares of Royal Caribbean fell due to lower yields in Europe and China, coupled with a large increase in capacity. Weakness in the homebuilders & land developers category was mainly due to the underperformance of Toll Brothers, Inc., a residential homebuilder focused on luxury buyers in the U.S. Although Toll reported Q1 results that beat Street expectations, the stock underperformed due to concerns that demand from luxury buyers is waning. The stock was also affected by concerns that oversupplied conditions in the NYC condo market could adversely impact Toll’s City Living high rise business, and fears that slower economic growth in China will hurt demand from Chinese buyers in California, where Toll has a significant presence.
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