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as of 03/31/20
The first quarter of 2020 was like no other that we or any money manager have ever experienced. After a strong start, with the market at all-time highs, the world fell into the grip of a global health pandemic. The market declined dramatically in response. The S&P 500 Index fell 33.8% from mid-February till late March. Volatility was intense, with the indexes swinging over 3% on 22 of 26 days from late February to the end of March. Smaller capitalized stocks, as measured by the Russell 2000 Growth Index, fell even more.
Economies around the world have shuttered in an effort to control the spread of the disease, resulting in a drastic contraction in economic activity. Unemployment claims have skyrocketed and small business and larger ones that are leveraged or directly impacted are fighting for survival. The severity and duration of the pandemic, the length and depth of the sharply reduced economic activity, and the path and timing of reopening the economy are all unknowns. The Federal Reserve and Congress have unleashed massive monetary and fiscal programs to try to blunt the impacts of the crisis, providing liquidity to markets and the financial system, increasing unemployment benefits, and extending loans and grants to businesses in need.
Against this backdrop, Baron Small Cap Fund declined in the quarter. Real Estate investments contributed to positive performance. Holdings in Consumer Discretionary, Information Technology (IT), and Industrials detracted the most. Americold Realty Trust, which owns temperature-controlled warehouses, led performance in Real Estate amid expectations that it will benefit from consumer stockpiling of food during the pandemic. Consumer Discretionary holdings were hard hit by the economic shutdown resulting from the pandemic. Gartner, Inc. and WEX Inc., respectively the second and third largest detractors, led declines within IT. Top detractor ASGN Inc. led weak performance within Industrials.
As of this writing, we are seeing cautious optimism from early signs that the COVID-19 spread across the U.S. may be slowing and hope that the government's resolve and response to carry its citizens and businesses during the shutdown would succeed. However, we remain concerned that it will not be so easy to quickly re-open the economy, that substantial damage will be done the longer the economy stays shut, and that it is unlikely that the recovery will be robust.
Our optimism and study of the situation causes us to believe that this will pass. We think in time our companies will earn more than we originally expected this year, and their stocks will be higher. We believe small caps are set up to shine when the equity markets recover, as usually is the case. We suspect it will be a tug of war along the way, based on the pace of economic recovery and investor sentiment. At the bottom, bearishness is extreme and anxiety high, which is a good time to buy. We think investors who can stomach the uncertainty and stay invested, as we are in our strong businesses, even if 2020 will be a lost year for some of them, will benefit in the long run.
as of 03/31/20
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.