Review and Outlook
The Review and Outlook for period ending March 31, 2014 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.
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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