Mutual Funds & Personal Finance
 

Baron Growth Rides Megatrend Waves BY PAUL KATZEFF INVESTOR'S BUSINESS DAILY Posted 1/11/2006

Ron Baron is a big-picture sort of guy, make that a Jumbotron sort of guy.

He doesn't care what's happening with mere macro trends like interest rates and the price of gold.

"Instead, we look for megatrends that create opportunities for businesses," said Baron, manager of $5.1 billion Baron Growth Fund.

He is also chairman and chief executive of Baron Capital Group.

"I look for ongoing conditions that some businesses can (intentionally) benefit from," Baron said.

These days he's watching six megatrends in particular.

They range from terrorism to the growing ranks of U.S. millionaires.

They include adult education, health care, industries that outpace inflation and insurance.

"We try to identify opportunities for businesses to achieve significant growth whether or not the economy grows, interest rates rise or gold goes up or down," Baron said.

The strategy has worked for Baron Growth.

Over the five years going into Wednesday, the fund's average annual gain was 12.37%. Its small growth rivals tracked by Morningstar averaged 4.44%. The S&P 500 averaged 1.31%.

Last year the fund advanced 5.70% vs. 5.74% for its peers and 4.91% for the S&P 500.

And over the three months going into Wednesday it gained 9.57% vs. 11.60% for its peers and 9.15% for the bogey.

Baron also exercises patience.

Baron Growth has an average annual turnover rate of 15%.

That translates into a holding period of 6.5 years per stock on average.

A typical small-cap growth stock holds stocks barely nine months.

And the fund does not sell its small- and mid-cap holdings when they get big just because of size.

"If they're still growing the way we like, we hold on," Baron said.

The fund lagged the overall market in the third quarter. Then it outperformed in Q4.

One reason: The fund was underweight in energy names. It was overweight in companies whose business slows as energy costs rise.

"We had about 25% of our money in companies like hotels, resorts, retailers and restaurants," he said.

CB Richard Ellis (CBG) has been a top performer for the fund.

Over the past 12 months the stock has risen 95%. It has IBD's Composite Rating of 93.

The firm provides a range of services, including property brokerage, investment management and loan servicing and origination.

"Commercial real estate vacancy rates have been high, but falling," Baron said. "They're still much higher than at the trough of the last cycle, so I'm looking for this company to get more brokerage commissions and higher returns."

The fund began to buy shares at Ellis' initial public offering in June 2004. Its average cost is 21. The stock trades around 63.

"Wall Street's earnings estimates for it are always low," Baron said. "But the firm keeps beating them, so the stock keeps going up."

Carter's (CRI) makes baby and young children's clothes.

The stock is up 84% over 12 months. It has a 95 Composite Rating.

Since going public in October 2003, the firm has slashed costs. It has moved production to cheaper Asian facilities.

It has also expanded sales through major mass merchandisers like Target (TGT) and Wal-Mart. (WMT)

In July the firm closed its purchase of OshKosh B'Gosh. And it has expanded its roster of company-run stores.

Those factors boosted Q3 net sales 48.1%. Excluding one-time charges, EPS rose 21%.

The fund began to buy Life Time Fitness (LTM) in September 2004. Its average cost is 33.68. The fitness chain trades around 38.

The firm differs from other fitness shops, Baron says. It offers a customer-friendly, month-by-month payment plan. Many competitors charge upfront for extended membership and levy penalties for cancellation.

Life Time runs huge facilities, which offer programs ranging from yoga to rock climbing. It also provides free day care.