Baron Funds, an asset management firm, published its “Baron Growth Fund” second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly return of 7.80% was delivered by the fund’s institutional shares for the Q2 of 2021, outperforming its primary benchmark, the Russell 2000 Growth Index, which rose to 4.88%, but below the S&P 500 Index that delivered an 8.55% return for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Baron Funds, the fund mentioned MSCI Inc. (NYSE: MSCI) and discussed its stance on the firm. MSCI Inc. is a New York, New York-based finance company with a $52.8 billion market capitalization. MSCI delivered a 43.69% return since the beginning of the year, while its 12-month returns are up by 71.90%. The stock closed at $629.59 per share on August 27, 2021.
Here is what Baron Funds has to say about MSCI Inc. in its Q2 2021 investor letter:
“MSCI is the largest of our Financials investments. It is the dominant market leader for cross-border indexes, with approximately 90% market share in cross-border benchmarks. Given the powerful network effects and influence of asset owners and their advisors, it is extremely difficult for managers to select an alternative provider. MSCI has demonstrated its ability to consistently grow this business at double-digit rates through consistent product innovation, volume expansion, and disciplined pricing trends. It has supercharged its growth by licensing the same data to ETF providers to construct passive indexes. Given the significant upfront cost and low incremental costs, its margins in this business exceed 70%. We see an analogous opportunity emerging with MSCI’s ESG franchise, which is the same business with attractive secular growth and compelling market share but 20 years earlier. MSCI is successful in generating compelling conversion of earnings into free cash flow, which it has adeptly deployed back into its business, for mergers and acquisitions, and to return to shareholders.”
Based on our calculations, MSCI Inc. (NYSE: MSCI) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. MSCI was in 37 hedge fund portfolios at the end of the first half of 2021, compared to 38 funds in the previous quarter. MSCI Inc. (NYSE: MSCI) delivered a 37.09% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
