An old saying warns that too many cooks in the kitchen can spoil the broth. Not so with Randy Gwirtzman and Laird Bieger, co-managers of the $512 million Baron Discovery fund. Friends for 22 years and colleagues for 17, the two credit their fund’s success and long-term focus on its two-manager structure.
“The obvious idea is that two people can either cover twice as many stocks, or look at the same number of stocks twice as deeply—and the reality is some combination of both,” Bieger says. “But for a lot of teams, it’s so hard to make one-plus-one really equal something more than two, simply because working together is like a marriage in many ways.”
Gwirtzman, 52, and Bieger, 49, met in their first semester at Columbia Business School in 1997. They both started at Baron Funds in the early 2000s as research analysts, working under their former professor, Cliff Greenberg, on the firm’s small-cap strategy. Before business school, Bieger held legal and marketing roles at Ford Motor (F), leading him to specialize in consumer, software, and real-estate sector research at Baron. Gwirtzman, a former bankruptcy litigator, focused on health care, technology, and industrial companies. Their complementary range of expertise helps them play off each other’s strengths.
As research analysts, they came up with ideas for stocks that were either too small or too early-stage to find a home in Baron’s small-cap or other funds, Gwirtzman says. So they pitched a growth-oriented small-cap fund based on these names, leading to the Baron Discovery fund’s inception in late 2013, with the two as co-managers. The fund (BDFFX) has returned an average 12.1% annually for the past five years, ahead of 85% of its small-growth peers on Morningstar. So far this year, its 19.5% return has beaten 48% of peer funds.
Gwirtzman and Bieger aren’t afraid to start small. New additions to the portfolio are often under $1.5 billion in market value, with fledgling business plans and lengthy paths to profitability ahead of them. “Laird and I like to say, ‘You’ve never heard of these companies, but you will,’” Gwirtzman says.
Bieger sees the greatest opportunities in the more inefficiently priced small-cap space because of the comparative lack of sell-side analyst coverage and winners’ ability to grow into a large market over several years. But finding and understanding those undiscovered names requires legwork.
Gwirtzman and Bieger each recently returned from visiting a portfolio company’s operations. Gwirtzman had sat down with senior leadership at Myriad Genetics (MYGN) in Utah, and toured the company’s laboratories. Bieger had jetted off to Las Vegas, where he was making his third visit to the under-renovation Palms Casino, owned by Red Rock Resorts (RRR).
Despite the high-growth, early-stage composition of the 60- to 70-stock portfolio, the Baron Discovery fund has maintained low volatility relative to the Russell 2000 Growth index since inception, while outperforming the benchmark. Gwirtzman credits such stability to the portfolio’s balanced composition of growth characteristics. High-growth investments with more than 20% annual revenue growth make up about 35% of the portfolio, while companies growing at a pace of 15% to 20% have a 40% weight. The fund’s remaining 25%—the so-called “ballast” category—includes uncorrelated stocks, special situations, out-of-favor “fallen angels,” and a small cash position.
By industry, the fund is less diverse: About 50% of holdings are in technology or health care. Overall, the goal is to provide compound growth of 10% to 15% a year over five years, essentially doubling in value over that span.
One of Baron Discovery’s most recent additions, Floor & Decor Holdings (FND), belongs in the high-growth bucket. When the flooring-products retailer went public in 2017, Bieger admired its disruptive growth potential and competitive prices—but felt that the stock was too expensive. Then the market’s fourth-quarter swoon knocked the stock down to the low $20s, from a summer peak of $55.
“We reacted very quickly and said, ‘We want to own the best company in the space that’s taking share and has huge growth opportunities,’ ” Bieger says. From 103 stores today, Floor & Decor sees a market opportunity of more than 400 stores in the U.S. and can realize a 50% return on investment on new stores in four or five years, according to Bieger.
Mercury Systems (MRCY), Baron Discovery’s largest holding, falls in the regular-growth category. The defense-electronics contractor has a $3.6 billion market value and works with the likes of Raytheon (RTN), Lockheed Martin (LMT), and Boeing (BA) on large, complicated electronic-defense systems for a variety of land, sea, and air platforms. Mercury’s 19% compound annual sales growth in the past five years has come from both organic growth and acquisitions that have added new systems and customers. Gwirtzman is bullish on its ability to continue to pull both levers. He thinks that major defense contractors will increase their outsourcing and Mercury will make more acquisitions.
One of the fund’s “ballast” category holdings is Americold Realty Trust (COLD). The largest cold-storage real-estate investment trust, Americold owns and operates football-field-size freezer warehouses that store food products for food producers and grocery retailers. Bieger sees organic and acquisition-driven growth driving mid-double digit returns for the stock in coming years. And with growing customer adoption of e-commerce groceries, Bieger counts on Americold to keep expanding, regardless of broader market cycles.
“Our philosophy is that the stock market’s going to do what the stock market’s going to do,” he says. “We’ll just look at individual companies and see how they’re stacking up against the metrics that we laid out for them.”
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