Baron Small Cap Fund (BSFIX)

Portfolio Management

CliffGreenberg
Cliff Greenberg

Fund Manager since 1997

View All Commentary by Cliff

Fund Description

Baron Small Cap Fund invests primarily in small growth companies.

    

    

Portfolio Commentary

Institutional Performance

Review and Outlook (for quarter ended 3/31/2014)

The Review and Outlook for period ending March 31, 2014 is not yet available

Top Contributors/Detractors to Performance

Contributors (for quarter ended 3/31/2014)
  • Shares of TransDigm Group, Inc., an aircraft parts manufacturer, increased in Q1 as the company continued to post impressive earnings numbers and executed well on its strategy. In the quarter, TransDigm also closed a small aircraft parts acquisition, which was right in the strike zone of its business, and which should be nicely accretive.

  • Shares of Acuity Brands, Inc., North America’s leading provider of lighting solutions, were up in Q1 after posting strong organic growth. Acuity stands to benefit from the secular demand for energy efficiency, spurred by government regulations and attractive returns on investment. Lower LED prices are also accelerating the “retrofit” opportunity for older, less efficient structures in the U.S.

  • Shares of Brookdale Senior Living, Inc., the nation’s largest provider of senior housing and related healthcare services, rose in Q1. Fundamentals continued to improve, but the big news was the announced acquisition of senior housing provider Emeritus. We believe this deal will prove to be highly accretive, making Brookdale the clear industry leader and unlocking considerable real estate value. Longer term, we think the company will benefit from favorable demographics, deeper industry penetration, and healthcare reform.

Detractors (for quarter ended 3/31/2014)
  • Shares of Financial Engines, Inc., an investment accounts advisor, declined in Q1, in response to Q4 results that missed expectations due to margin contraction. In addition, asset growth was a bit less than prior periods as only three new plans were added in the quarter. However, Financial Engines is still gaining new plans and converting assets to its professionally managed service. It is developing and implementing new products and increasing marketing spend, which we think should improve enrollment rates over the coming years.

  • Shares of DigitalGlobe, Inc., a satellite imagery provider, decreased in Q1 as it missed earnings and lowered guidance for the 2014 fiscal year. The company experienced an unexpected slowdown in the commercial side of its business, due largely to emerging markets project delays, as well as a slight delay in the launch timing of a new imagery satellite. We believe that DigitalGlobe has a unique satellite constellation and imagery database, and has numerous opportunities to increase growth going forward.

  • Shares of Fairway Group Holdings Corp., a high growth specialty food retailer in New York, fell sharply in Q1 over concerns around new store productivity, the health of the chain’s real estate pipeline, and unanticipated management changes. As recognition of the company’s volatile results given a base of just 14 stores, we have materially reduced our position size until we gain greater clarity on pending leadership changes and signs of improving operational execution. Longer term, we see Fairway as a multi-year growth story within the grocery industry.

Quarterly Attribution Analysis (for quarter ended 3/31/2014)

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 Small Cap Fund (Institutional Shares) declined 0.91% in the first quarter and underperformed the Russell 2000 Growth Index by 139 basis points, due to relative sector weights and stock selection.

The Fund's investments within the Materials, Energy, and Telecommunication Services sectors were the largest contributors to relative performance. Strength in Materials was mostly attributable to outperformance of specialty chemical companies Platform Specialty Products Corp. and Flotek Industries, Inc. With its acquisition of MacDermid, Inc., shares of Platform increased more than 35% during the quarter. With stable margins and high free cash flow, we believe MacDermid has a great platform upon which to build a premier specialty chemicals business. Flotek is a leading supplier of specialized chemicals to the oil & gas industry whose proprietary citrus oil based products are experiencing rapid growth related to the boom in shale oil drilling in the U.S. and Canada. Within Energy, the Fund has meaningful exposure to the oil & gas storage & transportation sub-industry, which consists primarily of master limited partnerships (MLPs), and these companies rose 9.6% during the quarter. Among the top contributors to relative performance in this sub-industry were Phillips 66 Partners LP and Targa Resources Corp. During the quarter, growth-oriented MLP Phillips 66 Partners announced a larger than anticipated $700 million dropdown from its parent, which doubled the company’s cash flows. The Fund’s larger exposure to this sub-industry also aided relative results. Within Telecommunication Services, the outperformance of Sarana Menara Nusantara Tbk PT, the largest independent owner of wireless towers in Indonesia, added the most value. With organic lease growth up 23%, Sarana Menara had strong quarterly results and its shares rose more than 50% for the quarter.

Underperformance of the Fund’s investments within Information Technology (IT), Consumer Staples, and Financials, and its significantly lower exposure to the top performing Health Care sector, detracted the most from relative results. Broad multiple contraction among software stocks during the quarter took a toll on the Fund’s application software holdings, which declined 11.7% as a group. RealPage, Inc., a property management software company serving the rental housing industry, and Advent Software, Inc., a leading provider of critical back-office software and solutions for investment management firms, led the decline. Shares of RealPage fell after the company reported weak quarterly results as problems involving Internet listing services and transactional revenue led to a drop in revenue growth. Weakness in Consumer Staples was mostly attributable to the underperformance of Fairway Group Holding Corp., a New York specialty food retailer, and The Chefs' Warehouse, Inc., a specialty food distributor to upscale restaurants. Shares of Chefs’ Warehouse declined following disappointing year-end results. The company experienced weather related disruptions as well as challenges in managing the margins of a newly acquired gourmet meat business. Within Financials, the underperformance of Financial Engines, Inc., an investment accounts advisor, detracted the most from relative performance.

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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 advise to any person and are subject to chage 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.