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Expanding Boundaries

Baron Emerging Markets takes the Baron approach to growth investing farther afield.

Tom Lauricella, 02/01/2017

In every issue, Undiscovered Manager profiles a manager on the Morningstar Manager
Prospects list, which is compiled by Morningstar's manager research group.

For Michael Kass, manager of Baron Emerging Markets BEXFX, it’s all about finding stocks that will benefit from what he calls Emerging Markets 2.0. 

Kass builds his portfolios on a foundation of long-term investment themes. For the six-year-old Emerging Markets fund, the central pillar is that of a secular shift in developing-market economies, away from the kinds of capital-intensive, low-wage manufacturing or state-owned enterprises that have dominated emerging-markets stock portfolios for most of the past three decades.

Instead, Kass is focused on finding entrepreneurial, productivity-driven companies with high return on capital that will benefit from a series of long-term changes across industries and within specific countries. These include companies that stand to benefit from the growing middle class, an emphasis on stepped-up business productivity in the face of rising wages, and regulatory reforms such as the opening up of China’s financial sector.

When the fund opened at the end of 2010, “that was right around a major inflection point… that was bigger than anything we would have thought,” says Kass. Granted, with this opportunity has come macroeconomic-induced volatility, as soon became evident in 2011. The new fund suffered losses when emerging markets sold off in its first year of operation, and 2015 was rough as well.

However, Kass has navigated these turbulent markets well overall: Baron Emerging Markets gained a cumulative 11.4% from its inception through Dec. 31, as its typical diversified emergingmarkets peer lost 14.1% and the MSCI Emerging Markets Index lost 12.7%. The new fund’s ability to build positions in 2011’s down market may have been an advantage, but its 6.1% annualized five-year return from 2012–2016 ranks among the top 3% of its peers, and its annualized 1.6% loss over the past three years lands in the top quartile.

Venturing Abroad
Featured on Morningstar Prospects, a list of up-and-coming or under-the-radar strategies, Baron Emerging Markets has grown to $2.6 billion in assets. However, Baron Funds is still generally known as a domestic shop.

Ron Baron founded Baron Capital in 1982, and BAMCO, Baron Funds’ advisor, in 1987. The $20 billion New York City-based money management firm made a name for itself by identifying fast-growing small and medium-sized companies early in their history. Its calling card is seeking out entrepreneurial managements and companies that can benefit from long-term trends.

Tom Lauricella is the editor of Morningstar Direct.

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