Baron Asset Fund: Open For Investment?

Baron Asset Fund (BARAX) is a diversified mid-cap growth fund that has been in operation since 1987. The fund seeks capital appreciation through long-term investments in securities of mid-sized companies with undervalued assets or favourable growth prospects. As of October 2024, the fund's daily change was -$1.02 (-0.95%) and it had a Morningstar rating. The fund has a history of strong performance, with returns of 9.01% over the past decade. Baron Capital, the fund's manager, takes a long-term approach to investing and seeks to identify businesses with durable competitive advantages, large addressable markets, and strong management teams. With its roots in research, Baron Capital has developed deep industry expertise and a successful track record in growth investing.

Baron Asset Fund's investment approach

Baron Capital's investment approach is united under a single investment style and objective. The company is made up of long-term investors in secular growth businesses with durable competitive advantages that are run by great management teams.

The company's portfolio managers and research analysts are the most important source of idea generation. With roots in research, Baron Capital has developed deep industry expertise and knowledge about the companies in the industries they cover. The goal of the research process is to identify and monitor investments that will deliver above-average, long-term, and risk-adjusted results.

Every Baron Capital portfolio is built from the bottom up, stock by stock, based on the company's conviction about the future growth prospects of each business. The company has a deeply embedded risk management culture, viewing risk as the probability of an adverse outcome leading to a permanent loss of capital.

Baron Capital offers a wide range of growth equity solutions in a variety of investment vehicles. The company carefully constructs its funds for the long term, one company at a time, with the objective of outpacing inflation and helping investors meet their financial needs.

Baron Capital's long-term approach to investing is one of the distinguishing features of the company. The company has an unusually long-term approach, with an average holding period for a stock of six to seven years, compared to less than a year for the fund industry. This approach resembles that of the private equity industry, where investors expect to hold shares for five or more years.

Baron Capital only invests in businesses that it believes can double in market value in five to six years, implying compounded growth of 15% per year. The company's investment professionals often spend months researching a firm before investing and then maintain due diligence once the security is in the portfolio. Sitting down with senior management teams to understand what makes them tick is critical to the process, and something that founder Ron Baron particularly enjoys.

Ron Baron has an incredible head for numbers and seems to recall the price, market value, and performance of almost every stock he has purchased over a half-century of investing. His inquisitive mind absorbs lessons and insights gleaned from others over time, which he then applies to his investing.

Baron Capital's investment approach

The company's portfolio managers and research analysts are its most important source of idea generation. Baron Capital's roots are in research, and it has developed deep industry expertise and knowledge about the companies in the industries it covers. The goal of its research process is to identify and monitor investments that will deliver above-average, long-term, and risk-adjusted results.

Every Baron Capital portfolio is built from the bottom up, stock by stock, based on the company's conviction about the future growth prospects of each business. The company has a deeply embedded risk management culture, viewing risk as the probability of an adverse outcome leading to a permanent loss of capital.

Baron Capital's research team facilitates frequent interaction and collaboration. Research analysts are sector and industry specialists with expertise in their coverage areas and the companies they cover, including many in which the company does not invest. Portfolio managers are typically generalists but may have particular geographic, industry, or market cap expertise.

The company identifies growth opportunities by looking for secular, rather than cyclical, growth. It estimates a company's total addressable market (TAM) over the long term to size the opportunity, its significance, and likely duration. Baron Capital develops an investment thesis by researching whether the company benefits from a durable competitive position relative to others. This competitive advantage could come from a unique product or service, a strong brand, a platform/ecosystem of suppliers and customers, proprietary data or technology, first-mover advantage, low-cost production capabilities, dominant market share, key talent, pricing power, or regulatory barriers that limit competition.

The company conducts extensive due diligence to test its investment thesis, meeting with management and speaking with vendors, suppliers, competitors, and others. It also visits company headquarters, factories, stores, and other facilities. To verify its thesis, Baron Capital analyzes past performance and conducts external checks with vendors, customers, competitors, partners, former employees, and industry experts. It reviews financial statements and other company materials, and looks at ownership structure and executive compensation to determine whether the interests of management and shareholders are aligned.

The company values and stress-tests companies, looking for a threshold annualized return of 15% over time. It applies the valuation methodology it deems appropriate for each business and industry. For example, it looks at free cash flow for subscription-based companies and EBITDA multiples for asset-intensive businesses.

Baron Capital does not build portfolios relative to a benchmark nor does it utilize a top-down macroeconomic framework. Its investments do not depend on factors such as interest rates, inflation data, or energy prices. However, it assesses how macro factors might affect the growth opportunities for its portfolio companies.

The company determines position sizes based on five key factors: risk/return analysis, end market exposures and diversification, regulatory implications, portfolio construction guidelines, and conviction. It maintains watchlists of prospective investments and typically starts with a smaller position, adding more as its conviction strengthens.

Baron Capital's long-term investment horizon helps to mitigate risk and adds a margin of safety. The company is less reactive to interim price fluctuations, macro events, and market noise, which reduces the likelihood of an emotional or hasty decision resulting in a loss. Instead, it views short-term volatility as a potential opportunity to add to existing or initiate new positions at attractive prices.

The company manages risk by investing in what it believes are attractively valued quality businesses with appropriate capital structures. It believes that deep research is key to successful investing and that extensive knowledge about a select group of companies is better than a superficial understanding of many.

Baron Asset Fund's performance

Baron Asset Fund, a diversified mid-cap growth fund, has delivered returns of 1.39% over the past year, -0.63% over the past three years, 7.02% over the past five years, and 9.01% over the past decade. The fund's performance has been rated 5.7/10 by U.S. News, which evaluated 519 Mid-Cap Growth Funds.

The fund's fees are rated as average compared to other funds in the same category, with an expense ratio of 1.29%. According to Morningstar, the risk associated with the fund is above average compared to similar funds.

Baron Capital, the company that manages the Baron Asset Fund, takes a long-term investment approach, seeking to invest in secular growth businesses with durable competitive advantages and strong management teams. Their goal is to identify and monitor investments that will deliver above-average, long-term, risk-adjusted results.

Overall, Baron Asset Fund has delivered mixed returns over the past years, with better performance in the longer term (five and ten years) than in the shorter term (one and three years).

Baron Capital's history

Baron Capital was founded in 1982 by Ron Baron, who remains the company's chairman and chief executive officer. Baron started the company with £100,000 in capital, having caught the investment bug at a young age. As a child, he invested £1,000 of gift money from his bar mitzvah in a local bank, Monmouth County National Bank, and quickly turned that into £1,700.

For much of the first decade, Baron Capital mainly managed private partnerships. Mutual funds were launched in 1987. By 1992, when the firm managed $150 million, Baron calculates that his funds had generated more than $44 billion in realised and unrealised gains.

The company has since expanded its fund offerings to include foreign stocks, healthcare and real estate, but always with the same growth focus. Its objective is to "outpace the ravages of inflation and help investors meet their financial needs".

Baron Capital's portfolio managers and research analysts are described as the company's "single most important source of idea generation". The company has a deeply embedded risk management culture and views risk as "the probability of an adverse outcome leading to permanent loss of capital".

The Baron way is drilled into staff on a daily basis, with low staff turnover helping to maintain consistency. Four of the five original employees are still with the firm. Portfolio managers are expected to invest in the funds they manage and most have risen through the ranks, starting as analysts.

The company has an open and transparent office environment designed to foster collaboration. Each year, Baron Capital hires two or three analysts, generally straight out of business school. Analysts are assigned to sectors such as healthcare, technology or real estate companies, and rigorously trained in the Baron way.

The company has an extraordinarily long and successful track record. As of the end of the first quarter of 2022, 15 of 17 funds, representing 98.5% of Baron Funds' $49 billion of assets under management, had beaten their index benchmarks since their inception.

Baron Asset Fund's holdings

Baron Asset Fund (BARAX) is a diversified mid-cap growth fund that has been in operation since 1987. The fund seeks capital appreciation through long-term investments in securities of mid-sized companies with undervalued assets or favourable growth prospects.

As of August 31, 2024, the top ten fund holdings of the Baron Asset Fund, based on net assets, were:

• Verisk Analytics, Inc. (VRSK)
• Guidewire Software, Inc. (GWRE)
• Fair Isaac Corporation (FICO)
• Arch Capital Group Ltd. (ACGL)
• Space Exploration Technologies Corp. (SpaceX)
• Gartner, Inc. (IT)
• IDEXX Laboratories, Inc. (IDXX)
• Mettler-Toledo International Inc. (MTD)
• CoStar Group, Inc. (CSGP)
• Roper Technologies, Inc. (ROP)

The fund's holdings are diverse, spanning various sectors, including information technology, consumer discretionary, communication services, and healthcare. The fund's performance has been mixed over the past year, three years, five years, and ten years, with returns of 1.39%, -0.63%, 7.02%, and 9.01%, respectively.

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