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Past performance is not a guarantee of future performance. Investment results and principal value will fluctuate so shares, when redeemed, may be worth more or less than their original cost. Investors should be aware of the additional risks associated with investments in non-diversification, undervalued or overlooked companies and investments in specific industries. Additional risks may include those associated with investing in foreign securities, emerging markets, and companies with relatively small market capitalizations.
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as of 03/31/21
The first quarter of 2021 saw a perceptible shift in market leadership from growth to value. At the same time, the “reopening trade,” or rotation away from the work-from-home stocks, picked up steam. Russell 1000 Growth Index returns were driven by energy, bank stocks, airlines, cruise lines, and hotels – areas we typically do not invest in -- while many of the work-from-home beneficiaries (i.e., companies enabling digital transformation, some of which we have owned for years) sold off. After enjoying a favorable investing environment over the last four years, we think it is fair to point out these headwinds, which, while challenging, were not entirely unexpected. That said, we have no intention of adjusting the portfolio in response. The reasons are rooted in our investment philosophy and process and how we execute it in circumstances like these.
While the recent shift in market leadership has been a headwind to the businesses we favor, we are not all that concerned. We think rotations, pullbacks, and corrections are generally necessary and healthy and often create attractive opportunities for long-term investors like us. The more important development, in our view, has been the steady rise in interest rates. Besides offering a bit of an alternative to savers, higher interest rates make fast growing companies more expensive since future earnings must be discounted back at higher rates. Having said that, the Federal Reserve has said that it intends to keep interest rates low until at least 2023. And as the saying goes: “don’t fight the Fed,” especially, as in this case, when the government is helping with fiscal stimulus.
as of 03/31/21
as of 03/31/21
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.
as of 03/31/21
Baron Fifth Avenue Growth Fund (Institutional Shares) declined 1.57% in the first quarter and underperformed the Russell 1000 Growth Index by 251 basis points due to negative impacts from stock selection and various style biases.
Outperformance of Communication Services and Financials investments and lack of exposure to the lagging Consumer Staples sector added the most value. Strength in Communication Services was driven by social network Facebook, Inc. and online advertising company Alphabet Inc., whose shares were up 7.9% and 17.7%, respectively, in the period. Facebook reported robust quarterly results driven by strong advertising pricing growth and e-commerce-enabled tailwinds from newer shopping and payments products. Alphabet was the top contributor after the company’s quarterly results beat Street expectations due to recovering advertising spend and accelerating cloud revenue growth. Favorable stock selection in Financials came from financial information services provider S&P Global Inc., whose shares were lifted by strong fourth quarter results and 2021 guidance.
Investments in Information Technology (IT), Consumer Discretionary, and Health Care detracted the most from relative performance. Negative stock selection in IT accounted for half of the underperformance in the period, led by share price declines from RingCentral, Inc., CrowdStrike, Inc., Snowflake Inc., ServiceNow, Inc. and several other software companies. These holdings relinquished a portion of last year’s gains as valuations contracted for growth-oriented software stocks during the quarter. Cloud-based data platform Splunk, Inc. also weighed on performance after experiencing a meaningful deceleration in contract activity. Weakness in Consumer Discretionary was largely due to the underperformance of Latin American digital marketplace MercadoLibre, Inc. and Chinese retailer and e-commerce company Alibaba Group Holding Limited. MercadoLibre’s stock price was down despite reporting strong quarterly results as investors rotated out of last year’s COVID-19 lockdown beneficiaries and into stocks perceived to benefit from economic reopening and normalization. Alibaba’s shares continued to be negatively impacted by an ongoing antitrust investigation. Worries about increased competition and a muted margin expansion outlook given greater investment in growth initiatives also weighed on the stock. Health Care holdings trailed their counterparts in the index due to share price declines from robotic surgical system leader Intuitive Surgical, Inc. and global biotechnology company Vertex Pharmaceuticals Incorporated. Intuitive Surgical’s shares were pressured by downbeat commentary on the company’s most recent earnings call during which management outlined a list of headwinds to near-term revenue and earnings growth. We reduced our Vertex position because of concerns about the company’s long-term growth being more dependent upon acquisitions than originally thought.
Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectuses contain this and other information about the Funds. You may obtain them from the Funds’ distributor, Baron Capital, Inc., by calling 1-800-99BARON or visiting www.BaronFunds.com. Please read them carefully before investing.
The performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor's shares, when redeemed, may be worth more or less than their original cost. The Fund’s transfer agency expenses may be reduced by expense offsets from an unaffiliated transfer agent, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted.
Risks:All investments are subject to risk and may lose value.
The discussion of market trends is not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed on this page reflect those of the respective writer. Some of our comments are based on management expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from our expectations. Our views are a reflection of our best judgment at the time and are subject to change at any time based on market and other conditions and Baron has no obligation to update them
Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.
The index performance is not fund performance; one cannot invest directly into an index.