Review and Outlook

as of 12/31/18

It was a rough fourth quarter for U.S. equity investors. The decline was broad-based, causing indexes to turn negative for the year and in the process, wiping out most of our gains. The market was slowly but persistently grinding lower until December 6, when the S&P 500 Index’s 50-day moving average crossed its 200-day moving average on the way down (apparently known as “the death cross”) sending the universal sell signal to every technical algorithm-trading machine, and the market went into a significant sell-off phase.

In the meantime, the federal government shut down is in its second month and domestic political uncertainty remains high. Trade tensions, Brexit, and rising interest rates continue to pose risks to investors. We continue to believe it is the latter that will have the largest impact on the short-to-intermediate direction of stocks. There is way too much uncertainty right now about economic growth for the Federal Reserve to remain on "auto-pilot." We think Chairman Powell’s remarks walking back that comment and stressing that the Fed is not on a pre-determined path and will be vigilant and patient if needed is the primary reason the markets are off to a good start in early 2019.

Baron Fifth Avenue Growth Fund declined in the quarter in concert with overall market weakness. No sector contributed. Among sub-industries, systems software, financial exchanges & data, and automobile manufacturers contributed to performance. Systems software advanced on the strength of top contributor Red Hat, Inc. The financial exchanges & data sub-industry added to performance due to a share price gain in second largest contributor CME Group, Inc. Third largest contributor Tesla, Inc. drove gains of the automobile manufacturers sub-industry. Investments in Consumer Discretionary, Information Technology (IT), and Communication Services detracted the most from performance. Top detractor, Inc. led declines within Consumer Discretionary. All but one of the holdings within IT pulled back, led by third largest detractor Apple, Inc. Second largest detractor Activision Blizzard, Inc. led weak performance within Communication Services.

Every day we live and invest in a world full of uncertainty. The constant challenges we face are real and serious, with clearly uncertain outcomes. History would suggest that most will prove passing or manageable. The business of capital allocation (or investing) is the business of taking risk, managing the uncertainty, and taking advantage of the long-term opportunities that those risks and uncertainties create. We are confident that our process is the right one, and we believe that it will enable us to make good investment decisions over time.

Top Contributors/Detractors to Performance

as of 12/31/18


  • Red Hat, Inc. is the leading provider of open source software, building and commercializing enterprise-ready distributions of open source projects and providing updates, support, and management tools. Shares appreciated after IBM announced that it will acquire the company. The deal's price represents a premium of approximately 63% to the closing price of $117 on the day before the announcement. We believe IBM's significant commitment supports our positive long-term thesis on Red Hat, given significant growth opportunities in its emerging products segment.
  • CME Group, Inc. is the world’s largest and most diversified derivatives marketplace. The stock performed well as elevated market volatility drove 31% growth in daily trading volume during the fourth quarter. The company also reported third quarter earnings that exceeded market expectations. We continue to own the stock because CME should benefit from higher volatility, interest rate normalization, and greater adoption of exchange-traded futures, in our view.
  • Tesla, Inc. designs, manufactures and sells fully electric vehicles, solar products, and energy storage solutions. Shares appreciated on third quarter results that exceeded investor expectations, including a margin profile and cash generation that eased investor fears of liquidity risks. Tesla also expressed confidence it can support growth with internally generated cash flow. Tesla is expanding Model 3 activity to new markets, including acceleration of production facilities in China and deliveries in China and Europe as soon as early 2019.


  •, Inc. is an e-commerce pioneer, innovator, and market share leader. Shares fell on softer revenue growth, but the company remains one of our highest conviction investment ideas. While penetration of e-commerce is rising rapidly, Amazon continues to grow its total addressable market at an unprecedented pace. We believe Amazon's advertising business has the potential to generate $30 billion in the next four years and the ability to substantially improve Amazon's core margins. AWS is also the leader in the cloud infrastructure market by a wide margin.
  • Shares of Activision Blizzard, Inc., a leading video game publisher, detracted from performance in Q4. Destiny 2 is under-performing, there are questions around the launch slate for 2019, and more broadly, sentiment in the entire video game sector is negative at the moment. While this near-term environment is challenging, we retain long-term conviction in Activision due to a long track record of success and industry tailwinds that should benefit the company going forward, including the shift to digital, in-game monetization, mobile gaming, advertising, and eSports.
  • Apple, Inc. is a technology company known for its iconic iPhone. The company was a detractor in the quarter because it surprised investors with an announcement that it would no longer report unit sales for its hardware products, coupled with concern over the company's Chinese manufacturing base and Chinese revenues as a result of escalating trade war tensions. We have significantly reduced our position given decelerating smartphone market growth but maintain some exposure given the hefty cash generation of the business and significant capital return profile.

Quarterly Attribution Analysis

as of 12/31/18

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