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An Intriguing Small-Cap Option on Our Radar

Christopher Franz, CFA

Christopher Franz: Led by an up-and-coming management duo, Baron Discovery is off to a strong start and is on our radar. Comanagers Laird Bieger and Randy Gwirtzman have led the fund since its late 2013 launch but are no stranger to small-caps. The two joined Baron Capital in the early 2000s as analysts, supporting Silver-rated Baron Small Cap and its manager Cliff Greenberg. While Greenberg has been a resource and mentor, Bieger and Gwirtzman have given their small-cap fund a distinct profile.

Baron Small Cap skews larger in-cap, with an average market cap near $6 billion, whereas this fund offers more pure small-cap exposure, with an average market capitalization below $2 billion, in line with the Russell 2000 Growth Index. Additionally, this fund is more willing to invest in earlier stage and riskier fare than its cousin, such biotech and pharmaceutical companies, so long as they meet Bieger and Gwirtzman's quality criteria.

Thus far, the two are off to an outstanding start. From its inception through October 2018, the fund's 16% annualized return almost doubles the Russell 2000 Growth's 9% gain and is a top performer in the small-growth Morningstar category. However, investors should brace for the volatility that comes with such eye-popping returns, exhibited by the fund's bottom-decile 2015 result, nor have Bieger and Gwirtzman been tested by a sustained market downturn, but they are backed by Baron Capital's strong supporting research team. 

Above-average expenses are a headwind, but the fund, with an asset base near $400 million, is an intriguing and open small-cap option.