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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 03/31/20
At the start of the quarter, few could have guessed that within a couple of months, the world would nearly come to a halt as it grappled with a global pandemic. As of this writing, there are over 1.5 million cases of COVID-19 in more than 200 countries and territories around the world. While countries try to flatten the curve of the spread to give the necessary breathing room for their health care systems, economies are being temporarily put on hold with movement limitations and mandated business closures. A recession is now unavoidable.
Against this backdrop, Baron Durable Advantage Fund declined. No sector contributed in a particularly challenging quarter for the market. Information Technology (IT), Health Care, and Communication Services holdings detracted the most. Second largest detractor Accenture plc led declines in IT. All Health Care investments lost ground, led by third largest detractor Iqvia Holdings Inc. Top detractor the Walt Disney Company led weakness within Communication Services.
How deep and how long will this crisis last? The answer depends on many variables – social distancing efforts, hospital capacity, the risk calculus involved in strategies to re-open the economy, and governmental fiscal and monetary support. Many experts have opinions, but as is usually the case in forecasting macro events, no one really knows, so we spend no time trying to answer these questions.
Instead we focus our efforts on ensuring our businesses have rock-solid financial positions enabling them to withstand a prolonged recession and management teams with the right balance, patience, and forward-looking thinking to do the right thing in the near term while not taking their sights off the long term. We believe our companies will come out of this crisis stronger as they gain share over weaker competitors. We therefore do not believe the intrinsic value of our businesses has declined significantly due to COVID-19, giving us the conviction to add when prices come down.
It is our belief that investing in great businesses at attractive valuations will enable us to earn excess risk-adjusted returns over the long term. We look for companies with strong and durable competitive advantages, proven track records of successful capital allocation, high returns on invested capital, and high free cash flow generation, a significant portion of which is regularly returned to shareholders as dividends or share repurchases. We hope to maximize long-term returns without taking significant risks of permanent loss of capital. We are optimistic about the prospects of the companies in which we are invested while continuing to search for new ideas and opportunities.
as of 03/31/20
as of 03/31/20
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 03/31/20
Baron Durable Advantage Fund (Institutional Shares) declined 15.95% in the first quarter, yet outperformed the S&P 500 Index by 365 basis points largely due to positive stock selection. Relative sector weights and underexposure to the poor performing dividend yield, earnings yield, leverage, and value factors also added value.
Outperformance of Financials and Real Estate investments and lack of exposure to the lagging Energy sector contributed the most to relative results. Stock selection in Financials accounted for most of the outperformance in the period, driven by credit rating agencies S&P Global Inc. and Moody's Corporation. These companies outperformed as debt issuance activity surged in the latter half of the quarter amid demand for higher-quality bonds and stimulus measures from the Federal Reserve. Investment decision support tools provider MSCI, Inc. and global asset management firm BlackRock Inc. also performed well in the sector. Strength in Real Estate came from data center REIT Equinix, Inc., whose shares were up after guidance for the coming year was in line with Street expectations due to robust bookings and demand.
Investments in Consumer Staples, Communication Services, and Health Care detracted the most from relative performance. Weakness in Consumer Staples was mainly due to the underperformance of Constellation Brands, Inc., the third largest producer of beer in the U.S. and the world’s leading premium wine company. Constellation’s shares fell after the company’s on-premise business, which represents approximately 15% of revenue, was materially impacted by COVID-19. Investors were also concerned about consumers trading down from higher-end beer amid a weaker U.S. economy. Performance in Communication Services was hindered by The Walt Disney Company, a diversified global family entertainment and media company. Disney was the top detractor on an absolute basis before being sold due to concerns about theme park closures. Negative stock selection in Health Care, coming from technology solutions and contract research services provider Iqvia Holdings Inc., was partly offset by higher exposure to this outperforming sector. Iqvia’s shares declined on concerns about clinical trial disruptions due to the COVID-19 pandemic.
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.