Baron WealthBuilder Fund (the “Fund”) trailed its primary benchmark this quarter, but meaningfully surpassed it over the first nine months of 2019. The third quarter witnessed a shift in investor sentiment. Economic data has been relatively strong with low unemployment, healthy consumer sentiment, declining interest rates, and modest inflation. However, some believe the global financial picture is weakening and are taking steps to position their portfolios for a slowdown. Defensive and value-oriented stocks outperformed as investors increased allocations to these businesses. Higher- growth companies saw a decline in valuations as investors more heavily discounted future earnings potential and questioned the stability of some balance sheets. Shares of any company that showed a mild slowdown in growth were significantly impacted. Our approach allows us to make attractively priced high-quality growth investments that we think should outperform the broader market over the long term. We remain encouraged about the Fund’s prospects.
The Fund declined in value by 2.09% (Institutional Shares) in the quarter. The S&P 500 Index (the “Index”) increased by 1.70%, while the MSCI ACWI Index declined by 0.03%.
Michael Baron, Assistant Portfolio Manager and Ron Baron, CEO & Portfolio Manager
Table 1. Performance
Annualized for periods ended September 30, 2019
| Three Months3 | Nine Months3 | One Year | Since Inception (December 29, 2017) |
|
|---|---|---|---|---|
| Baron Wealth Builder Fund Retail Shares1,2 | (2.18)% | 22.98% | 2.77% | 8.26% |
| Baron Wealth Builder Fund Institutional Shares1,2 | (2.09)% | 23.15% | 3.04% | 8.47% |
| Baron Wealth Builder Fund TA Shares1,2 | (2.09)% | 23.15% | 2.94% | 8.47% |
| S&P 500 Index1 | 1.70% | 20.55% | 4.25% | 8.46% |
| MSCI ACWI Index1 | (0.03)% | 16.20% | 1.38% | 2.97% |
1 The indexes are unmanaged. The index performance is not Fund performance; one cannot invest directly into an index. The S&P 500 Index measures the performance of 500 widely held large cap U.S. companies. The MSCI ACWI Index is an unmanaged, free float-adjusted market capitalization weighted index reflected in US dollars that measures the equity market performance of large- and mid-cap securities across developed and emerging markets. The indexes and the Fund are with dividends, which positively impact the performance results.
2 The performance data in the table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or redemption of Fund shares.
3 Not annualized.
Performance listed in the above table is net of annual operating expenses. Annual expense ratio for the Retail Shares, Institutional Shares, and TA Shares as of December 31, 2018 was 2.02%, 1.61%, and 1.71%, respectively, but the net annual expense ratio was 1.42%, 1.17%, and 1.17% (includes acquired fund fees, net of the Adviser’s fee waivers), respectively. 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. BAMCO, Inc. (‘BAMCO” or the “Adviser”) has agreed that, pursuant to a contract expiring on August 29, 2030, unless renewed for another 11-year term, it will reimburse certain expenses of the Fund, limiting net annual operating expenses (portfolio transaction costs, interest, dividend, acquired fund fees and expenses and extraordinary expenses are not subject to the operating expense limitation) to 0.30% of average daily nest assets of Retail Shares, 0.05% of average daily net assets of Institutional Shares and 0.05% of average daily net assets of TA Shares, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted. For performance information current to the most recent month end, visit www.BaronFunds.com or call 1-800-99BARON.
As previously mentioned, the Fund remains considerably above these indexes since the beginning of the year. The Fund has also had impressive absolute returns year-to-date. The Fund is now up 23.15% in 2019. This compares favorably to the Index and MSCI ACWI Index, which have increased 20.55% and 16.20%, respectively.
In this quarter, only 2 out of the 14 underlying Baron Fund holdings had positive returns. Baron Real Estate Fund and Baron Durable Advantage Fund had gains of 4.87% and 3.14%, respectively. These funds invest in businesses that are less volatile than the typical growth investments that dominate the remaining holdings. Baron Real Estate Fund benefited from a strong macroeconomic backdrop coupled with declining interest rates. GDP growth, low unemployment, and falling mortgage rates considerably improved demand and prices for commercial and residential real estate. The fund’s mix of real estate investment trusts and real estate-related businesses should continue to benefit in this environment as they constructively grow their portfolios. Additionally, investors have migrated towards the reliable cash flows of these businesses. These investors struggle to find attractive yield elsewhere. Valuations are higher but still reasonable.
Baron Durable Advantage Fund benefited from a shift in investor sentiment. Reliable growth is being favored over volatile growth, a sentiment that is favorable for this fund, which invests in companies in later stages of growth. Consistency of operations and cash generation is preferred over rapid but irregular expansion. These businesses continued to execute on their business plans with minimal disruption.