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as of 03/31/20
Stocks reached all-time highs in mid-February before falling sharply as the spread of COVID-19 left few countries unscathed, raising concerns about global health risks and bringing economies to a stop. Despite the Federal Reserve’s drastic actions and Washington’s massive stimulus plan, stock prices ended the period down significantly, and U.S. equity markets suffered their worst quarter since the financial crisis. It was a precipitous and alarming end to the 11-year bull market.
Against this backdrop, Baron FinTech Fund, which launched on December 31, 2019, declined in the quarter. No sector contributed in a particularly difficult period for the market. Investments in Information Technology (IT), Industrials, and Financials detracted the most. With 9 of the 10 largest detractors within the sector, IT had a challenging quarter. Declines in Industrials were led by consumer credit bureau TransUnion. Despite quarterly results that beat Street expectations the stock fell as investors questioned the sustainability of TransUnion’s strong growth in a possible recession. Financials detracted on stock drops in 8 of 11 holdings in the wake of widespread weakness in this sector, which was hard hit by COVID-19-related credit concerns and declining interest rates.
While we do not know how severe or prolonged the COVID-19 pandemic and resultant economic fallout will be, over the long term, we think this crisis will accelerate a number of disruptive secular trends in which we invest. Fear of contaminated cash should hasten the move to electronic and contactless payments. Greater comfort with online shopping and desire to avoid crowds should promote the growth of e-commerce. Companies will need to find better ways to serve their customers through new technologies and cloud-based solutions. Market participants will need to find better ways of accessing liquidity and managing risk. Finally, businesses will increasingly rely on data to inform decision making. As the Fund invests in companies that are driving or benefiting from all of these trends, we think the long-term outlook for our holdings is bright. Our research suggests that our companies all have solid balance sheets and sufficient liquidity to weather this storm and capture additional market share while weaker competitors retrench.
as of 03/31/20
as of 03/31/20
Baron FinTech Fund (Institutional Shares) was down 12.50% in the first quarter, yet meaningfully outperformed the S&P 500 Index by 710 basis points due to favorable stock selection and, to a lesser extent, cash exposure in declining market and relative sector/sub-industry weights.
Aside from cash, investments in Financials and Industrials and lack of exposure to the Energy sector, which was down sharply alongside the price of oil, added the most value. Positive stock selection in Financials accounted for most of the Fund’s outperformance in the period, driven by financial exchanges & data companies MSCI, Inc., S&P Global Inc., and Moody's Corporation. Investment decision support tools provider MSCI was the top contributor to absolute performance after reporting solid fourth quarter earnings at the end of January. Credit rating agencies S&P Global and Moody’s 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. Performance in the sector was also bolstered by specialty insurer Kinsale Capital Group, Inc. and global investment bank Houlihan Lokey, Inc., whose share prices were up modestly in the quarter. Kinsale was the second largest contributor on an absolute basis after being less impacted by COVID-19 and slower economic growth than many other businesses. Houlihan’s quarterly results beat Street expectations with 12% revenue growth and 13% EPS growth. The company also benefited from expectations of increased activity for the restructuring business from financially distressed companies. Favorable stock selection in Financials was somewhat offset by meaningfully higher exposure to this lagging sector, which was pressured by sharp declines from banks. Strength in Industrials was related to the outperformance of data and analytics vendor Verisk Analytics, Inc. and real estate information and marketing services company CoStar Group, Inc. Verisk sold its capital intensive Geomni business while retaining potential upside related to Geomni’s aerial imagery analytics, which was well received by investors. CoStar’s business trends remained outstanding, with the company’s bookings improving by approximately 20% year-over-year in 2019. We are optimistic about the company’s growth prospects in the multi-family marketing space, which should be enhanced by the pending acquisition of RentPath and the ramping success in the LoopNet marketplace.
Lack of exposure to the defensive Health Care and Consumer Staples sectors, which held up well in the down market during the quarter, and underperformance of investments in Information Technology (IT) detracted the most from relative results. Adverse stock selection in IT coming from payment services companies Network International Holdings Ltd. and WEX Inc. was mostly offset by significantly higher exposure to this outperforming sector.