Review and Outlook
Stocks rebounded in the fourth quarter of 2015 as confidence in the strength of large economies picked up. Stocks rallied about 9% during October and November as economic reports showed renewed strength, especially jobs growth, and leading indicators in Europe and Asia improved. The small cap market reverted to its form of earlier in the year, as biotech/pharma and high growth tech stocks led the bounce. The Federal Reserve raised the fed funds rate in mid-December, the first increase since 2006. The increase was expected and generally applauded by the investment community on the rationale that monetary policy was “normalizing” with the economy in good stead. The Fed indicated that gradual increases in the fed funds rate were to be expected if economic activity continued to expand and inflation started to perk up. Against this backdrop, we continued to do what we do – try to find special small cap growth companies, the fundamentals of which remain strong in the face of a volatile market.
Baron Small Cap Fund gained in the fourth quarter. Industrials, Information Technology (IT), and Health Care were the top contributing sectors to performance. The Fund’s Industrials holdings had a strong quarter. The sector included the top three contributors to performance, Acuity Brands, Inc.; Waste Connections, Inc.; and On Assignment, Inc. IT’s contribution was driven largely by gains in the application software and IT consulting & other services sub-industries. Health Care’s advance was led by the Fund’s life sciences tools & services investments. Consumer Staples and Consumer Discretionary detracted. A sharp decline in the stock price of top detractor United Natural Foods, Inc. weighed on performance of the Consumer Staples sector. The Fund’s Consumer Discretionary holdings had a mixed quarter, although detractors outweighed contributors. In particular, the two specialty stores holdings hurt performance, including The Container Store Group, Inc., which was the third biggest detractor from performance in the period.
As the new year starts, fear has gripped the markets and stocks have suffered heavy losses. The major concerns are declining growth in China and the continued fall in the price of oil, which just broke $30 per barrel. Both are feared to be harbingers of slower global growth, with the potential contagion effect on our domestic economic climate. However, the U.S. economy is performing well. Jobs reports continue to be robust. Softness in the Energy and Industrials sectors is being offset by expansion in the service sectors. Many stocks have sold off to levels where we deem them very attractive. After two years of relative underperformance, small-cap stocks now trade in line with their normal 5% premium to large caps, at 16 times 2016 estimates.
We are aware of the challenges, but we have faith in our process and believe over the long term that it will be rewarded. We continue to favor companies that we believe are able to continue to grow despite the headwinds. We think our portfolio of small to mid-sized quality growth companies is well positioned. A key will be if earnings come in as we expect.
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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