Andrew Peck: I manage the Baron Asset Fund, which is an open-ended mutual fund focused on investing in midcap growth stocks. We consider midcap growth to be stocks between roughly $3 billion and $30 billion in market cap at time of purchase.
The fund’s weighted average market cap is around $15 billion, which makes it very much an in-the-box conventional, midcap growth strategy. I would characterize the approach as being a high-conviction, research-driven, fundamental approach toward investing. The top ten stocks in the portfolio represent about 40% of assets. The top 20 stocks represent approximately 60% to 65% of assets.
The fund owns about 55 positions at any given time. We invest in companies that we believe have multi-year, secular-growth opportunities and sustainable competitive advantages that we think will allow us to double our clients' money over a four to five-year time horizon.
Wally Forbes: Are these U.S. companies or are they international?
Peck: It is a domestic-focused fund. It has the ability to invest internationally, but it does so only on very rare occasions. At this point in time, essentially the whole portfolio is invested in U.S. stocks.
I think the most distinctive thing about our strategy is its low turnover approach toward investing in growth stocks. The turnover in the fund averages approximately 15% a year. Said another way, this implies that the typical holding is owned for something like six or seven years on average.
We take something akin to a private equity approach toward investing in the public markets. The reason is that we are focused on a different set of metrics than most investors. We're focused on assessing what we believe a company's earnings stream can be three, four, five years into the future and making investment decisions largely premised upon that belief. We're really not focused on what companies are likely to earn over the next quarter or even the next year -- which I think makes us different from many other mutual fund investors.
Forbes: That's quite a long time to be predicting out.
Peck: Yes. The key to our approach is trying to identify companies that we feel comfortable buying today and owning for an extended time period. We ask ourselves three key questions about all stocks we're evaluating.
Number one: Does the company display secular growth? Meaning can we develop confidence that the demand for a company's product or service will increase for many years into the future -- somewhat irrespective of the economic cycle over that time period?
Number two: Does a company have a sustainable competitive advantage? Is the company doing something unique that others can't replicate? And, can we develop conviction that this advantage can be maintained for a long period of time?
Thirdly: We invest with whom we believe to be great managers. People are crucial to our process. We view the managers of businesses in which we invest as stewards of our investors' capital, and we meet extensively with all corporate executives prior to making investments in stocks. And then, once we've made an investment we have frequent ongoing dialogues with its management team.
Forbes: Very interesting.
Peck: We're trying to find people we trust and respect who are really smart. We spend a great deal of time trying to understand the backgrounds of the senior executives, how they're motivated, how they're incentivized, how they've built their business careers, and how they built the businesses they're leading.
Then, we distill all the information learned from focusing on those three questions into a quantitative analysis that looks out five years into the future. We’re looking for stocks that we think can deliver a roughly 100% return over a four or five-year time horizon.
Forbes: How long has your firm had this particular fund?
Peck: Baron Capital was founded in 1982 and the Baron Asset Fund was started in 1987. So it's just celebrated its 30th anniversary, and I've been managing the fund since 2004.
Forbes: How's it been doing relative to your objectives?
Peck: The fund fortunately has had a very strong run -- particularly as of late -- and was recently awarded its fifth star by Morningstar, which we're very pleased about.
Forbes: Terrific. How about getting into some specific investments that you like or don’t like?
Peck: A company called Gartner (NYSE: IT) is presently the largest holding in the Baron Asset Fund. Gartner is the leading provider of research and analytics on the information technology sector.
Gartner is a stock that we first purchased ten years ago at approximately $20 a share. The stock is now around $125 a share. So it’s clearly been a very nice investment for us. In many ways, it's emblematic of the type of company we're always trying to find.
Gartner has more than 1,200 analysts who track highly specialized subsectors within the information technology space and then convey those findings to Gartner's clients through published reports, phone calls, and in-person meetings.
Forbes: You think that it's a good buy at this price?
Peck: I do for a couple reasons. Coming back to the secular-growth criterion, Gartner is a long-term play on the increasing pervasiveness and complexity of technology in all of our lives. Businesses of all sizes now must have strategies for addressing all sorts of areas within technology that many never would have even guessed would have existed three or five years ago -- areas like mobile computing, social-media, the cloud, and big data.
Gartner is in some ways like Switzerland, in that it's not wed to any particular type of technology or to any particular technology vendor. But rather, it's a trusted independent source of market information and intelligence. Companies use Gartner to make essential buying decisions about particular technology applications and also to think about how to position their technology strategy looking into the future.
Forbes: Got you.
Peck: From a growth perspective, it certainly meets our objectives. And, from a competitive advantage perspective, it is very appealing that Gartner is by far the leader in its category. It's more than six times larger from a revenue perspective than the number-two player in its space. And, it has five times more research analysts than the number-two player. That leading position affords it the ability to sell its research to companies of all sizes in all industries in all geographies.
I think it's the best known and most trusted brand within its space -- which is very important.
Forbes: Do you have another one?
Peck: A company called IDEXX Laboratories (NASDAQ: IDXX). That is also a stock that we've owned for a long period of time. We bought it in 2006 -- also at around $20 a share. It's also had a very nice run and is at around $170 a share today.
IDEXX is the leading provider of testing and diagnostic services to the veterinary industry. One of the things that's very appealing about the veterinary industry is that it is growing at an attractive rate, as more people, both domestically and around the world, are becoming pet owners. And, many of those pet owners are spending an increasing amount of money on the health needs of those pets.
Forbes: So this is an international company?
Peck: It's actually based in Maine, but it is a leader in its marketplace both domestically and internationally. It sells machines and diagnostic tests that are used by veterinarians in their offices. In addition, the company owns and operates standalone testing centers that are used by those same veterinarians to conduct testing in central labs.
It's a very interesting company, in our view. It has an approximate 65%-plus market share in the categories of instruments that it sells. But in terms of new sales, its market share is much higher than even that figure. This is because the company’s products are so much more compelling than those that are offered by competitors. It also has a 99% customer retention rate.
And, IDEXX has a very compelling razor/razor blade model for the products it sells -- meaning its testing machines require consumable products that are sold only by IDEXX. So, once the company’s products are used in a veterinary practice, they provide a very attractive recurring revenue stream for a long period of time.
Forbes: Well, terrific, Andrew.
Peck: Many thanks, Wally, for the opportunity to share some ideas with your readers.
