A recent story in Barron’s covers the Baron Asset Fund (BARAX; Retail class shares). This $3 billion, mid-cap fund has a 1.31% expense ratio and 13% turnover. According to the article

Over the past five years, the fund returned 15% a year on average, better than 84% of its Morningstar mid-cap growth peers.

The current manager took over the fund in late January 2008. Therefore, the following analyses will start in February 2008, the first full month under sole management.

The primary prospectus benchmark for the fund is the Russell Midcap Growth Index. One of the long-lived and accessible implementations of this index is the iShares Russell Mid-Cap Growth ETF (IWP). Alpholio™ calculations indicate that through June 2017 the fund returned more than the ETF in only 32% of all rolling 36-month periods, 39% of 24-month periods and 38% of 12-month periods.

Rolling 36-Month Returns of Baron Asset Fund (BARAX) and iShares iShares Russell Mid-Cap Growth ETF (IWP)

The median cumulative (not annualized) underperformance over a rolling 36-month period was 3%.

In contrast to our earlier post about the fund, this analysis will use a simpler variant of the patented Alpholio™ methodology, in which both the membership and weights of ETFs in the reference portfolio are fixed. Here is the resulting chart of the cumulative RealAlpha™ with statistics for Baron Asset:

Cumulative RealAlpha™ for Baron Asset Fund (BARAX)

With a comparable volatility, the fund cumulatively underperformed its reference ETF portfolio by over 52%.

The following chart with related statistics illustrates the constant composition of the reference ETF portfolio (the membership was limited to a maximum of six ETFs):

Reference Weights for Baron Asset Fund (BARAX)

The fund had major equivalent positions in the Consumer Discretionary Select Sector SPDR® Fund (XLY), iShares Morningstar Mid-Cap Growth ETF (JKH), iShares S&P Small-Cap 600 Growth ETF (IJT), First Trust US Equity Opportunities ETF (FPX), Guggenheim Insider Sentiment ETF (NFO), and iShares U.S. Medical Devices ETF (IHI). These positions constituted average exposures the fund generated over the entire analysis period. They should be viewed in the context of the overall investment portfolio of which the fund may be part.

The final chart with traditional statistics compares the total return of Baron Asset to that of the aforementioned IWP and JKH:

Total Return for Baron Asset Fund (BARAX), iShares Russell Mid-Cap Growth ETF (IWP) and iShares Morningstar Mid-Cap Growth ETF (JKH)

The fund performed similarly to JKH (best-fit mid-cap ETF) but underperformed IWP (benchmark mid-cap ETF). Despite a relatively low turnover, in each of the past four years the fund had significant long-term capital gain distributions, which made it much less tax-efficient than these two ETFs. At the end of August, the fund held only 55 equity positions, with top-ten holdings accounting for almost 43% of assets. Divesting just a few of these positions could result in additional large distributions.

In sum, under current management the Baron Asset Fund did not outperform the available investment alternatives on a risk-adjusted basis. Any value added was consumed by a sizeable management fee.

To learn more about the Baron Asset and other mutual funds, please register on our website.

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