Last week we were given the opportunity to meet with the two portfolio managers of Baron Discovery, a fund which we added to our clients’ portfolios in August 2014. The fund is managed by Randy Gwirtzman and Laird Bieger, both of whom have studied under the tutelage of legendary small cap managers Cliff Greenberg and Ron Baron.
Randy and Laird were visiting Houston this past week, and we were fortunate to have some time with them in our office. Much can be gleaned in face-to-face conversations that might otherwise get lost when looking at prospectuses and Morningstar fact sheets. The benefit of the insights we gain from direct manager conversations like this is immeasurable.
Baron Discovery invests in high growth, small and micro-cap companies with great long-term prospects. Identifying a rising star early is the key to the success of the fund. For the full year of 2014, the Institutional share class of the fund boasted a total return of 13.8%, while it’s Russell 2000 Growth benchmark made only 5.6%.
All of the signs of a great synergy between Randy and Laird were obvious after only a few minutes of conversation. The managers, who originally met one another in graduate school at Columbia University, have a deep expertise in different sectors of the small-cap stock market. Randy has a special focus on health care, technology, and industrial sectors, while Laird specializes in energy, consumer discretionary, and real estate companies. These complimentary skills have allowed them to build a portfolio of around 60 companies that have great long-term prospects and could potentially be targeted in a buyout by larger companies, an event that can boost the stock price of the acquired company tremendously.
As an example, Randy told us about a stock in the portfolio called Foundation Medicine, Inc., which provides cutting edge genomic information to oncologists and cancer patients in an effort to laser focus their individual treatment. It was announced on January 11th that roughly 56% of the company was to be purchased by drug developer Roche at a 109% premium, boosting the stock from about $24/share on Friday the 9th to over $46/share on Monday the 12th. Needless to say, that was a good day for the fund!
This sort of buyout is “gravy” according to Laird. While they expect a handful of buyouts to happen in most years, they invest for the long-term, not relying on a buyout to justify the addition of a stock to the portfolio. Companies make their way into the portfolio by exhibiting the ability to generate accelerating cash flow and strong management.
Randy also emphasized, “We’re stock pickers, not market timers.” Picking stocks successfully involves a great deal of both quantitative and qualitative research. While in Houston, Laird stopped by The Container Store on Westheimer because they hold the stock in their portfolio. He was curious how strong the store’s recent sales had been, how the managers and employees thought their annual Elfa sale was going, and how the rollout of their new high-end closet line was coming. This sort of “boots-on-the-ground” knowledge can have a big impact on whether or not a stock makes it into the fund, how much of it might be owned, and whether or not it’s time to sell. Individual investors can’t reasonably replicate this sort of qualitative research.
Another advantage Randy and Laird have is the long history of Baron as a respected small-cap manager. They are regularly able to obtain meetings with company management prior to IPOs, when only a handful of investment firms may be granted such a meeting.
There has been much debate in recent years about whether or not actively managed mutual funds have any chance of beating an unmanaged index. We believe that there are a select group of special fund managers who have the talent to add value over time, and those ingredients for success are definitely there with Baron Discovery.
Sources: Morningstar, San Francisco Business Times