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 9/30/2014)

The Review and Outlook for period ending September 30, 2014 is not yet available

Top Contributors/Detractors to Performance

Contributors (for quarter ended 9/30/2014)
  • Leading U.S. mattress retailer Mattress Firm Holding Corp. was a contributor in the quarter. Shares rose on news of the company’s acquisition of The Sleep Train, which expands Mattress Firm’s reach into the West Coast. We are positive on this acquisition because it means that, with the exception of the Northeast, Mattress Firm has a presence throughout the entire U.S. We believe that Mattress Firm will eventually acquire its competitor in the Northeast and become the dominant mattress retailer in the country.

  • Shares of wireless tower company SBA Communications Corp. rose in Q3 after the company reported strong Q2 results that showcased cash flow growth above consensus expectation. We have long believed that SBA’s U.S. contract structure, coupled with its commitment to invest abroad (especially in Brazil), will allow it to grow faster than its U.S. competitors. With all four major U.S. telecommunications companies building 4G networks, we believe strong cash flow growth should continue for SBA in both the U.S. and abroad.

  • Shares of TransDigm Group, Inc., an aircraft parts manufacturer, increased in the quarter as the company continued to put up impressive earnings numbers in Q2 and executed well on its strategy. At the end of the second quarter, the company paid a large $25 per share special dividend, and we continue to expect that TransDigm will increase revenues and free cash flow, which will lead to either accretive acquisitions or further shareholder value creation.

Detractors (for quarter ended 9/30/2014)
  • Shares of Financial Engines, Inc., a service provider to defined contribution plans and individual investors, fell in Q3. While the company continues to penetrate the market, investors have become concerned about profitability and competition. Gross profit yield remains under pressure as plan providers use their gatekeeper position to receive a higher share of the economics. Investors are also concerned that cheaper target date funds could take market share. We retain conviction given what we believe are the company's unique product and significant market opportunity.

  • Shares of Lumber Liquidators Holdings, Inc., the leading specialty retailer of hardwood flooring, declined sharply in Q3. The company missed Q2 sales targets due to the protracted weather-related impact on demand and supply chain disruptions as a result of the company’s stringent new compliance standards. Despite the pullback, we believe Lumber’s growth opportunity remains intact, in light of several initiatives targeting larger format new stores, sourcing efficiencies, and broader advertising, augmented by a multiyear recovery in housing.

  • Del Frisco’s Restaurant Group, Inc., a steakhouse restaurant chain, was a detractor in the quarter. Delays in the turnover of properties by real estate developers have resulted in the pushback of a number of new unit openings until later in 2014, which negatively impacted quarterly results. While this pushback will impact profits in the short term, we have not adjusted our expectations for 2015 profits.

Quarterly Attribution Analysis

This Fund does not have an Attribution Analysis for this time period.

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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.