Review and Outlook

as of 12/31/18

We are living at a time in human history where innovation is accelerating at an exponential pace. Within the space of about three decades, communications have morphed from rotary-style phones to voice activated hand-held computers that can practically read your mind. Medical imaging has gone from fuzzy images to high resolution, real-time maps that can electronically guide surgery. And in this time, innovators in medicine appear to have reached the threshold of unlocking the human genome to understand the genetic codes that cause disease, so we may find them and treat them.

The pace of innovation is relentless and will not be deterred by a volatile stock market. The pioneers who take innovation and commercialize it for consumption tend to be rewarded in time (and we, as investors, strive to share in those rewards by investing in the best of these entrepreneurs). Of course, the timing of reward capture is highly uncertain. That is why we believe in long-term investing, where we seek to achieve excess market returns by investing strategically rather than by trading tactically.

Baron Discovery Fund declined in concert with the overall market in an exceptionally volatile quarter. No sector contributed. Health care services was the only contributing sub-industry, driven by positive performance of Guardant Health, Inc., a provider of biopsy tests for cancer patients that went public in early October. Holdings in the Health Care, Information Technology (IT), and Industrials sectors detracted the most from performance. Health Care had a challenging quarter, with the six largest detractors all within the sector. Application software led the decline within the IT sector, with seven out of eight holdings in that sub-industry experiencing double-digit drops in share price as stocks with high multiples sold off. Industrials sank on overall sector weakness driven largely by concerns around slowing growth in China.

We are mindful of the pain that can be caused in down markets. That is why we continue to rely on our time-tested, repeatable investment process. It seems to us that there is a higher probability of a positive return through investing in a company with favorable prospects at a reasonable price than through attempting to time the mercurial moods of the market. We will continue our carefully reasoned process in both good and bad markets, as we strive to earn our targeted returns on capital.

Top Contributors/Detractors to Performance

as of 12/31/18


  • Corium International, Inc. is a specialty pharmaceutical company that is developing extended release patches to treat patients with Alzheimer's disease. Shares increased when it was acquired by a private equity firm during the quarter.
  • Shares of Macau casino operator Studio City International Holdings Limited increased despite concerns around a Macau slowdown, as the casino's target of a mass market customer has served it well. While the VIP segment of Macau has seen a deceleration of spend, the mass segment continues to grow at a healthy double-digit rate. The latter is the casino's main target audience, as only 10% of its earnings come from the VIP segment of the market. We think Studio City's $1.4 billion expansion will be a positive and the company will generate strong double-digit returns on capital.
  • Anaplan, Inc. provides a cloud software solution that allows customers to connect data, people, and plans across the enterprise, replacing manual planning processes done on worksheets and point solutions. Shares of Anaplan increased following the company's IPO and strong quarterly results delivering revenue and free cash flow exceeding Street expectations. We believe Anaplan has a significant runway for growth as the speed of disruption accelerates, driving the need for a real-time, collaborative, and data-driven planning process, which is enabled by the Anaplan software.


  • IntriCon Corporation is a medical device company that sells components for Medtronic's diabetes business and value-based hearing aids. Shares fell after the company reported quarterly results that missed expectations. We believe IntriCon's base business is well positioned for growth in the near term and its hearing aid business has potential to accelerate growth in the next few years, driven by regulations permitting direct-to-consumer sales of hearing aids.
  • Shares of Teladoc Health, Inc., the U.S.’s largest telehealth company, fell with the broader market retreat, which was particularly brutal for high-growth stocks. The sell-off also reflected news of the resignation of the CFO/COO for violation of the company's workplace relationship policy. We believe the incident will not stall Teledoc's substantial momentum in the rapidly expanding telehealth space, where it is the dominant player. Guidance was reiterated and the CFO/COO's acting replacement is well known and respected by investors. We remain bullish on prospects for Teladoc.
  • Sientra, Inc. is a medical device company that is one of only three manufacturers of breast implants in the U.S. Shares were down in the quarter after management said that production from its new outsourced plant would be delayed from one to two quarters due to its methodical ramp of volume. We are not concerned, as it is critical that the products be perfect before sold and the delay appears to be minor. In addition, Sientra's new Miradry product for underarm sweat/odor seems to be performing above industry expectations.

Quarterly Attribution Analysis

as of 12/31/18

Yearly Attribution Analysis (for year ended 12/31/2018)