Baron Emerging Markets had a strong quarter outpacing its growth benchmark as well as the broader MSCI EM Index. Emerging Market equities continue to outperform since the asset class began to rebound at the beginning of the year. The Baron managers are aware that some of the recent growth has been due to cyclical earnings expansion but they are confident that a more secular trend is beginning to take place within emerging markets.
Market Overview:
– EM equities further extended their leadership while posting strong gains in the quarter and YTD
– Performance has been fueled by a number of positive tailwinds and outcomes in EM:
o Global growth and trade flows
o Broad-based improvement in profit margins
o Expectations for continued interest rate cuts
o Improved sentiment particularly in China
– Political risks in countries such as Brazil, Argentina, and South Africa were also largely diffused in the recent quarter providing support to returns
– Largely credit the cyclical earnings expansion for leadership of EM equities over past 18 months
o Broadening list of support factors have increased confidence that longer term more secular phenomenon may be taking place
Performance Overview:
– During the quarter BEXIX outpaced its EM growth benchmark as well as the broader MSCI EM Index
– Consumer discretionary strength was paced by strong gains in core, long term holdings TAL Education Group and Smiles SA
– Within consumer staples, China Mengnui Dairy was the top contributor
– Materials sector performance was paced by Sociedad Quimica, one of the world’s leading lithium producers
– Top countries included Chile, China, and Russia driven by stock selection
– Telecom was a relative detractor from an allocation and stock selection perspective
o Tata Communications of India, and China Mobile, Ltd. were leading detractors posting flat to modestly negative returns for the quarter
– Due to significant inflows into the Fund, increased positions in Baidu, Alibaba, and Tencent
o Gained conviction that such companies are well positioned to help carry out the country’s rebalancing and reform objectives
o These are now clearly the largest portfolio holdings
– During the quarter, the team exited several positions
o Got out of Momo Inc. in China as the live streaming app did not appear capable of converting marketing expenses into new users
o Sold Naver Corporation, another Chinese media company, on signs of deteriorating fundamentals
Market Outlook:
– Believe that fresh catalysts have emerged with the EM equity space
o Global growth and trade flows remain constructive
o Visibility and implementation of reforms in EM countries has emerged as a catalyst
– Suspect that cyclical earnings expansion has propelled EM over the past 18 months
o However, the team is gaining confidence that a more secular investment opportunity is developing
o This secular trend is supported broadly by reform, productivity, and greater private sector participation
– Such long term trends play to the strengths of Baron’s investment process
– Portfolio has had strong absolute and relative performance and remain optimistic that their differentiated discipline and process position them well moving forward
Performance Review:
