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as of 06/30/21
U.S. equity markets continued to move higher in the second quarter driven by strong macroeconomic data, supportive fiscal and monetary policy, and strong corporate earnings results. After ceding leadership to cyclical “recovery” stocks, secular growth stocks came back into favor in the back half of the quarter, especially among large-cap technology stocks. The economy continued to grow rapidly as the effects of the pandemic receded. However, inflation also accelerated significantly during the quarter, both in goods and wages, causing investor concerns about whether policy is too stimulative, whether the Federal Reserve needs to change course, and whether interest rates will continue to rise.
Against this backdrop, Baron Opportunity Fund increased in the quarter. Holdings within Information Technology (IT), Health Care, and Communication Services contributed the most. Industrials, Real Estate, and Financials investments detracted. IT had a solid quarter, with top contributor Microsoft Corporation and third largest contributor NVIDIA Corporation both within the sector. Advances within Health Care were led by biopharmaceutical firm Arrowhead Pharmaceuticals, Inc. and medical device company ShockWave Medical, Inc. Second largest contributor Alphabet, Inc. drove positive performance within Communication Services. Declines within Industrials were led by ACV Auctions Inc. We exited our position. Digital home purchase and sale platform Opendoor Technologies Inc. drove declines within Real Estate. Financials was a slight detractor due to a share price drop in electronic bond trading platform MarketAxess, Inc.
We remain convinced that our investments and themes, many of which thrived and proved vital during the pandemic, will be even stronger as the post-pandemic “new normal” world emerges. The pandemic – and consumer and business responses to the crisis it caused – merely accelerated the changes driven by the last few decades of innovation, technology disruption, and digital transformation. The world is not going back. Change is hard, but once we change, whether because we are forced to do so or choose it voluntarily, and we see that the changes are better, we seldom retreat to the old ways of doing things. Innovation – the overarching theme of the portfolio – stood with us during the pandemic, it is the light leading us out of this tunnel (e.g., novel mRNA vaccines), and it will drive us forward into the future, always separating the business winners and losers. We invest in where the world is going, not where it has been.
as of 06/30/21
as of 06/30/21
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 06/30/21
Baron Opportunity Fund (Institutional Shares) appreciated 10.14% in the second quarter, yet trailed the Russell 3000 Growth Index by 124 basis points due to stock selection.
Outperformance of investments in Health Care, Information Technology (IT), and Materials and lack of exposure to the lagging Consumer Staples sector added the most value. Favorable stock selection in Health Care was driven by sharp gains from intravascular lithotripsy medical device manufacturer ShockWave Medical, Inc. and RNAi therapeutics developer Arrowhead Pharmaceuticals, Inc. ShockWave’s shares performed well after management increased sales guidance for 2021 based on the strong commercial launch of its device for severely calcified coronary artery disease. Arrowhead’s stock price responded well to positive clinical updates for its lead programs in Alpha One Antitrypsin disease, as well as increased investor focus on data catalysts for the RNAi platform. Within IT, outperformance of syndicated research provider Gartner, Inc. and software development company Endava plc bolstered relative results. Gartner’s share price continued to rebound after reporting financial results significantly ahead of Street estimates. Growth in the company’s research business reaccelerated, led by its Global Business Sales segment, which is benefiting from a multi-year investment cycle. Endava’s shares were up after the company’s quarterly financial results exceeded Street expectations and management raised full-year guidance. Strength in Materials came from biofacturing platform Zymergen Inc., whose shares appreciated following the company’s successful IPO in late April.
Communication Services, Industrials, and Real Estate investments detracted the most from relative performance. Adverse stock selection in Communication Services was mostly responsible for the Fund’s underperformance in the quarter, owing largely to share price declines from online travel platform Tripadvisor, Inc. and real estate and rental marketplace Zillow Group, Inc. Tripadvisor was the top detractor on news that competitor Expedia will expand its current rewards program to compete more aggressively with the company’s new Tripadvisor Plus subscription offering. Zillow’s stock price declined due to disappointing second quarter revenue guidance and investor concerns about the potential impact of rising interest rates on the housing market. Industrials holdings underperformed after falling 3.8% as a group, with automotive digital marketplace ACV Auctions Inc. driving the decline. We sold ACV during the quarter to reallocate capital into other higher conviction ideas. Weakness in Real Estate came from Opendoor Technologies Inc., a leading digital platform for residential real estate. Opendoor was the second largest detractor after being hurt by rising mortgage rates and the potential knock-on effects to the housing environment.
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.