More than 5,000 investors attended the 27th Annual Baron Investment Conference in New York to see the presentations by the CEOs of Baron Funds’ 2018 featured companies, as well as to hear the Baron Funds portfolio managers’ views on long-term investing strategies and their short-term outlook on the economy and financial markets.
The morning session at the conference featured presentations by top officers of four companies in which Baron Funds has invested and expects to have good potential for sustained growth and positive returns on investment. The four CEO presenters at the Nov. 9 event were:
The first afternoon session featured a panel of Baron Funds portfolio managers who each shared insights and key strategies they use for their funds, as well as the overall strategy of the entire Baron Funds portfolio of investment products.
“Invest in high-quality, well-managed unique businesses for the long term.”
Baron Funds use internal research of markets and individual businesses to determine the best potential companies in which to invest. As a result of the research, the identified companies tend to offer above-average returns in bull markets and minimize the downside during troubled times.
“We try to invest with people that we believe are going to be exceptional stewards of our investor’s capital.”
The company’s own research looks for three key things when seeking to identify companies in which the fund can invest and hold for five or more years. Number one is secular growth, which means that the identified company must be addressing a large and growing market and should be able to grow somewhat irrespective of the underlying economic environment. Number two is to look at whether the company has “a strong and competitive advantage in doing something that others cannot replicate.” That advantage should be maintained for a long time. The third key factor is that the company must have a “best-in-class” management team.
“At Baron Discovery Fund, we are trying to do the same that Andrew [Peck] is doing, just at an earlier stage of growth.”
The companies that we are looking at are truly off Wall Street’s radar. Because of the early stage of growth, the market in which this fund invests is very inefficient and the available information is very imperfect. Therefore, the portfolio managers of this fund conduct a lot of their own primary research, which includes making personal visits to the companies across the country to learn about their business.
“Fifty percent of Russell 2000 growth is a combination of IT and health care. That is where the economy is growing”
The fund’s holdings reflect this growth trend with 55% of the fund’s total assets allocated in those two sectors. Because this fund focusses on growth companies with a small market capitalization, the target horizon for significant returns from this fund is two to three years.
“Technology and the trends in technology are stronger than ever.”
Focusing on the technology sector, the Baron Opportunity Fund seeks to invest in technology companies that offer solutions for disruptive change in their respective markets. While driving most of the growth over the past couple of years, the sector can also be highly volatile. This volatility is because of many uncertainties regarding the direction of the economy, interest rates and potential escalation of the trade war.
“If we see the Fed [Federal Reserve] begin to back down, we’ll see a recovery in the absolute sense for the emerging markets stocks and currencies.”
Baron Funds saw the early warning signs and cautioned its investors at the beginning of 2018 about the potential headwinds in emerging and international markets this year. As a result, from “a greater pressure for liquidity withdrawals that that had been priced in at the beginning of the year”, the federal funds rate increases created pressure on foreign currencies.
“Real estate has unquestionably been a beneficiary of the Fed’s 10-year experiment of holding interest rates effectively at zero and 2018 is the inflection year.”
As the Fed started to withdraw the monetary stimulus, the real estate market has experienced increased volatility. However, Baron’s believes that the market volatility is not foreshadowing another collapse of the real estate market, but that it is rather just a correction before the next real estate market upturn. To manage the downturn, the funds have allocated larger shares of assets into cash and are mindful of companies with high leverage.
“We think health care will be a great place to invest over the next decade.”
Established at the end of April 2018, BHCFX is Barron’s newest fund. With nearly 92% of its $6.6 million total assets invested in health care stocks, this fund seeks to take advantage of the latest scientific developments in the medical equipment, biotechnology, pharmaceuticals, etc. Some of the key disruptions in the sector are liquid biopsy technology – which allows for blood tests to be used instead of traditional biopsies – as well as diagnosing cancer in asymptomatic patients. Additionally, the significant reduction in time and cost to map the genome will aid in development of new types of treatments, which could significantly improve treatment efficiencies and minimize side effects.
“There is this really big change going in the energy industry in terms of how these companies are running their businesses.”
Energy companies went through a period where their primary focus was on expansion and capital investments, with only secondary considerations of returns. However, the companies in the energy sector appear to have shifted their strategies towards better management of their capital structure, a more efficient use of their investments and increased total returns.
“…volatility is the killer of amateur investing, but it is not necessarily value destructive for long-term investors.”
In response to a question regarding managing volatility, Umansky questioned the very premise that volatility is the enemy of long-term investing and that it needs to be managed. He asserted that, while most investors understand the benefits of managing volatility, very few investors are aware of the costs that stem from managing volatility. Psychologically, most investors are willing to settle for lower upside potential in exchange for a better protection on the downside. However, as markets have historically continued to rise, the effects of this tradeoff tend to reduce total returns on initial investments over very long investment horizons. These changes should result in better resource management, more consistent growth over time and will attract a broader base of investors.
Regardless of individual messages, the overall theme is that investors should buy shares in companies with good fundamentals, tolerate short-term volatility and take a long-term approach to investing.
Ned Piplovic is the assistant editor of website content at Eagle Financial Publications. He graduated from Columbia University with a Bachelor’s degree in Economics and Philosophy. Prior to joining Eagle, Ned spent 15 years in corporate operations and financial management. Ned writes for www.DividendInvestor.com and www.StockInvestor.com.
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