This new small-cap fund has risen almost 17% since its launch in December. It may be appropriate for more aggressive, risk-oriented investors.
Baron Discovery (BDFFX)
from The No-Load Fund Investor
Baron Discovery (BDFFX) was launched in September. The fund is managed by Laird Bieger and Randy Gwirtzman, who joined BaronAssetManagement as equity analysts in 2000 and 2002, respectively. They are overseen on the fund by Cliff Greenberg, the long-time manager of Baron Small Cap (BSCFX) and the director of research at the firm.
Compared with Small Cap and Baron’s remaining small-cap-oriented fund, Growth (BGRFX), Discovery is more aggressive. In particular, it invests in smaller stocks with higher valuations, and it includes a smaller number of securities (recently 53).
Bieger and Gwirtzman attempt to find companies in relatively early stages of their development, with many years of strong growth ahead thanks to sustainable competitive advantages. The portfolio has two sides. The first focuses on key growth themes (also heavily represented in other Baron funds), including healthcare product innovation that leads to better outcomes at lower cost; the movement of critical operational software to the so-called cloud (software as a rented service); energy efficiency and “green” technology; innovation in the semiconductor industry; computer network security; and financial companies that are changing the ways people transact.
Companies on this side of the fund tend to have high valuations, partly because current earnings are reduced by large investments to ramp up their products and services, but also because of investor enthusiasm. The other side includes growth companies in more traditional segments, including retailers and restaurants; companies benefiting from the building out and maintenance of utility and energy infrastructure; and gaming companies that the managers believe will benefit from industry consolidation. These companies tend to have more mild valuations and a little less risk of extreme stock price volatility during difficult market environments.
The fund is off to an excellent start. Even after a loss of a little less than 8% in April, it is up almost 17% since inception. The managers currently devote about 30% of the fund’s $32 million in assets to the top 10 holdings. The fund’s median market capitalization was recently $1.14 billion. Though that’s about the same as that of the small-cap Russell 2000 Index, it’s about half as large as the average of all small-cap funds. After the expense reimbursement by Baron Funds, the fund’s net expense ratio is 1.35%.
Though we may wait a few more months before deciding whether or not to boldface Baron Discovery in our tables, investors who like to invest small portions of their assets in new, speculative funds certainly should consider this fund.
Mark Salzinger, The No-Load Fund Investor, 800-706-6364, www.noloadfundinvestor.com, May 2014