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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 03/31/19
In the first quarter of 2019, domestic markets recovered almost all the decline suffered late last year, with the S&P 500 Index posting its best quarter since 2009. Investors fretted about interest rates and trade during the fourth quarter of 2018, and found relief on both fronts to start the year. Subdued inflation and softer global economic growth motivated the Fed to reverse course on interest rates and the magnitude of its balance sheet roll-off. The status of ongoing trade negotiations between the U.S. and China continues to resemble a game of “telephone” where each participant strains to perceive and relay the true state of affairs without being privy to the actual discussions. The message currently being received by the market is more upbeat, with an agreement and the elimination of most tariffs perhaps coming as soon as this spring. While the details remain to be seen, any improvement in trade relations between the world’s two largest economies is favorable.
Against this backdrop, Baron Discovery Fund advanced in the first quarter. All sectors contributed to performance, led by Information Technology (IT), Health Care, and Industrials investments. All holdings but one within IT advanced. Trade Desk, Inc. and Yext, Inc., respectively the top and third largest contributors, led performance within the sector. ForeScout Technologies, Inc. was another noteworthy contributor after its stock price increased more than 60% on strong earnings and guidance. ForeScout has developed agentless technology that discovers devices in real time as they connect to an IT network and continuously monitors and assesses their security posture. The solution provides security customers with visibility to 30% more devices on their network after installation. As penetration is low relative to the market opportunity, we continue to hold the stock. TherapeuticsMD, Inc. added the most to performance of the Health Care sector after one of the company’s drugs demonstrated strong prescription growth. Second largest contributor Mercury Systems, Inc. led gains within the Industrials sector.
We believe we have a significant number of stock specific catalysts that we expect to take place through the remainder of the year. We are also excited by the number of small, fast growing companies in our new idea funnel. We continue to work to process these ideas to discover the next great small growth companies.
as of 03/31/19
as of 03/31/19
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 03/31/19
Baron Discovery Fund appreciated 19.72% in the first quarter and outperformed the Russell 2000 Growth Index by 258 basis points due to favorable stock selection across most sectors.
Investments in Information Technology (IT), Industrials, Financials, and Consumer Staples contributed the most to relative results. Stock selection in IT added 185 basis points to relative results, driven by the Fund’s software holdings, which were up more than 37%. The Trade Desk, Yext, Inc., ForeScout Technologies, Inc., and 2U, Inc. were among the best performing software companies after reporting robust financial results during the quarter. Strength in the sector also came from semiconductor capital equipment firm Ichor Holdings, Ltd., magnetic RAM market leader Everspin Technologies, Inc., and identity resolution services provider LiveRamp Holdings, Inc. Aside from stock selection, higher exposure to software stocks, which were up more than 30% in the index, added value. Several of the Fund’s larger positions in Industrials outperformed, led by Mercury Systems, Inc., Sun Hydraulics Corporation, and Luxfer Holdings PLC. Mercury was the second largest contributor to absolute results as the company continued its strong run of performance with another beat and raise quarter. Shares of Sun Hydraulics, a leading designer and manufacturer of hydraulic and electronic control solutions for diverse markets, were up after reporting earnings results that exceeded investor expectations. Shares of materials technology company Luxfer rebounded after management decided to step away from the previously announced acquisition of Neo Performance Materials while reporting strong quarterly results and reiterating 2019 guidance. Within Financials, outperformance of the Fund’s only holding in the sector, specialty insurer Kinsale Capital Group, Inc., and lack of exposure to lagging bank stocks added value. Kinsale’s growth accelerated in the quarter as the company benefited from dislocations at AIG and Lloyd’s, solid rate momentum, and continued ramping up of all business lines. Performance in Consumer Staples was bolstered by Limoneira Company, which specializes in the growing and packing of lemons and avocados. We believe the company remains positioned for another year of organic growth, helped by more cooperative weather, a new efficient lemon packing plant, increased lemon volumes, additional lemon acreage, and a solid return to profitability in oranges.
Cash exposure and underperformance of Health Care investments weighed the most on relative results. Weakness in Health Care was mainly due to the underperformance of Sientra, Inc. and Ra Medical Systems, Inc., the top detractors from absolute performance in the quarter.
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.