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Baron Growth Fund (BGRFX) has an enviable track record. As of June 2012, it had outdistanced, often by a wide margin, its Small Company objective group over every trailing time period Value Line measures—3 months, 6 months, 1 year, 3 year, 5 year, 10 year, and 15 year. The fund hasn’t been in existence for 20 years, but with a 3.3 percentage point head start over the Objective group over the trailing 15-year period, it’s got a good head start on the 20-year trailing time range, too, when it gets there. This is nothing short of impressive and speaks to two important factors.

First, the fund, which is managed by Baron Funds’ founder Ron Baron, clearly has a solid investment approach. In a nut shell, the portfolio is invested in companies with market caps below $2.5 billion at the time of purchase that Baron believes have significant potential. He likes to “think like an owner,” using Baron’s independent research staff to understand the long-term fundamental growth prospects of a business. Particular attention is paid to the management of a company, as well as competitive advantages. Price is also an important factor, with his style easily characterized as growth at a reasonable price.

When making an investment, Baron prefers to hold for the long term and often gets to know a company’s management team quite well. In fact, he often adds to positions on weakness. What he may not do, however, is sell a company as its market cap drifts higher. This is the second most important aspect for investors to consider, particularly if one is using an asset allocation model. Indeed, the bias to hold on to companies as they grow can lead to the fund’s average market cap drifting higher and often results in the fund being classified as a mid-cap offering, as Value Line has done.

From an investor’s standpoint, this may not be such a bad thing—unless one is rigidly adhering to allocation targets. It clearly makes sense to hold on to positions that are appreciating because of solid underlying company growth, particularly if that growth shows little sign of abating. It is, in fact, what most individuals would do with their own stock holdings. Based on the success that Baron has shown with this approach, allowing one’s small cap exposure to drift a little toward mid cap seems a small price to pay to have Baron on “the team.” The ability to hold on to companies as they increase in size also makes managing a $4.5 billion fund more manageable.

Baron Growth Fund’s minimum initial investment requirement is $2,000, and its expense ratio has historically been below that of its objective group. Thus, it is well within reach of most investors and the ongoing costs of owning it are very reasonable. Its standard deviation, a measure of absolute volatility, is in line with the group’s, and its beta, a measure of volatility relative to the broader market, is well below the group’s average.

Some of the fund’s top performers in the first half included rural hospital company Community Health Systems (CYH), which benefited from the Supreme Court’s decision to uphold the Affordable Care Act. Baron believes this is a positive development for hospitals, which will increase the number of insured Americans and, in the process, increase the payment rates at hospitals. He notes that the company’s admission trends have been improving and that its acquisition pipeline remains robust. Baron still sees the stock as undervalued. United Natural Foods, Inc. (UNFI) was another strong performer, rising over 17% in the second quarter on strong business performance. The company is the largest wholesale distributor of natural and organic grocery products in North America, counting Whole Foods as its largest customer. This once niche market has been going mainstream and there looks to be continued growth ahead.

Investors looking for a small cap growth fund would do well to consider Baron Growth Fund, noting that it might tilt that allocation toward the mid-cap realm. However, with an impressive track record of success, holding on to good companies “too long” to fit nicely into a predetermined allocation box doesn’t seem like too big a deal.


At the time of this article’s writing, the author did not have positions in any of the securities mentioned.