The stage star Eddie Cantor famously joked it had taken him 20 years to become an overnight success.
There are admittedly limited comparisons to be made between 1920s Broadway performers and modern portfolio managers, but the quote could well be used to describe Randy Gwirtzman, manager of the Baron Discovery fund.
His $178.9 million small-cap growth strategy has never been hotter, with table-topping one-year numbers that double those of the average fund in the sector, earning Gwirtzman and his fellow manager, Laird Bieger, write-ups in the Wall Street Journal and interviews on Bloomberg TV.
At just over three years old the fund is the duo’s first as named managers, all of which could make their success look a little sudden, but this appearance belies the pair’s vast experience.
Gwirtzman and Bieger have been researching stocks for 20 years and have been with Baron Funds for 15 years and 17 years respectively.
Their time together goes back even further. They met on their MBA course at Columbia Business School back in the late-1990s where they formed a friendship that would endure and eventually become the partnership they enjoy today.
And they are really are enjoying it.
Over three years the fund ranks 18th out of 146 in the Citywire Small-Cap Growth category, returning 39.1% versus the average strategy’s 24.5% and the Russell 2000 Growth’s 28%. Over one year it is number one out of 151 funds, returning 41%, against the average’s 19.8% and the benchmark’s 19.7%.
Year to-date things aren’t too shabby either, with the fund up 18.9%, almost three times the Russell.
The week we speak, things are better still.
The day before Citywire talks with Gwirtzman one of the fund’s holdings, fluorescence imaging specialist Novadaq Technologies, soared 95% on news it was to be acquired by Stryker Corporation for $11.75 per share, a deal that valued the company at $701 million. ‘Yesterday was one of the biggest days we’ve had,’ Gwirtzman says.
The fund had held the stock for almost three years, and although it had been an up-and-down journey – it had in fact been one of the fund’s biggest losers this year – Gwirtzman had been adding to the position ahead of the acquisition.
‘You can’t predict those kinds of things,’ he says. ‘I had been nibbling at it. The stock was down and we had heard people had been shorting it. I was increasing my position slowly to see how the turnaround panned out, and then someone else saw value too.
‘When you see these acquisitions it’s amazing because you know you got the fundamentals right. My valuation for the company a year out was basically what it got acquired for.’
The stock is typical for the fund, which targets firms with a market cap of around $1 billion in the earlier stages of their growth cycles.
Technology and healthcare stocks account for well over 50% of the portfolio and over the past 12 months six holdings have been subject to an acquisition, with three in 2017 alone (Novadaq, satellite imager DigitalGlobe and international school company Nord Anglia).
Gwirtzman is quick to stress that the tech and healthcare stocks are not speculative start-ups.
‘It’s important to understand that we are not investing in venture capital, science projects or anything that is uninformed,’ he says. ‘These are all real business plans with what we view as top-quality management teams, but they are in the earlier stages of the execution of what are fully formed business plans.’
He also emphasizes that M&A activity has not been the main driver of returns during the fund’s recent run, and in fact can mean it missed out on some upside.
‘It’s a mixed blessing,’ he says. ‘You spend a lot of time learning to understand these companies, you get an immediate effect [from the acquisition] and then you are losing out on excess return that is being captured by the acquirer.’
He says the basis of the recent success has been smart stock picking, with highlights here including defense systems provider Mercury Systems, drug company Flexion Therapeutics, cancer diagnostics developer Foundation Medicine, and molecular diagnostic firm Myriad Genetics.
Gwirtzman says these companies are set to grow due to high-quality leadership and business plans, with catalysts for further growth including smart acquisitions they have made or, in the case of healthcare companies, impending approvals from the US Food and Drug Administration.
Gwirtzman specializes in technology, healthcare and industrials, including aerospace and defense. Meanwhile, Bieger is an expert in consumer, retail and lodging stocks as well as real estate and energy.
From the ground up
Gwirtzman says the duo use their experience and accumulated knowledge of these industries to find their investments.
‘We don’t do screening. We don’t set up Bloomberg or FactSet search criteria. The way we find our companies is that we know the sectors very deeply,’ he says.
‘We find our companies because we have been doing this 15 to 20 years. We know a lot of the predominate small-cap companies in these areas, and when something happens we are paying attention.
‘So even though we have 60 investments in the portfolio, between us and the 25 analysts at the firm we are following hundreds of other companies, and we are constantly attuned to what might be going on.’
Given the pair’s respective specialisms and the current weighting of the portfolio (tech, healthcare and industrials accounted for 80% at the end of March), it might seem as though Gwirtzman is stealing his buddy’s limelight, but he laughs and says this is not the case.
‘No, we get along really well,’ he says. ‘He covers some cool stuff like casinos [the fund holds Red Rocket Resorts and Pinnacle Entertainment] and F1 [Liberty Media], so don’t cry for him. He has some pretty interesting stuff and his conferences tend to be in Vegas. I never get to go to Vegas.’
It is also worth pointing out that Bieger works on tech and industrials too.
While the duo clearly share a sincere friendship, they also share Baron’s research driven investment approach and an encyclopaedic knowledge of their market.
‘We picked up these industries through the course of time,’ Gwirtzman says.
‘You wind up seeing hundreds and hundreds of companies, I have interviewed management teams, read the trade magazines, gone to conferences and when you continue to follow the industries you have done the work on, it is amazing how much you retain. Experience counts for a lot.’
Eddie Cantor, no doubt, would agree.
Head of research, Citywire
The Baron discovery fund is an exciting prospect – the returns this year have been exceptional against a backdrop of a small cap sector that is slowing down. Clearly, the stock selection has been working.
That being said, given how much of the portfolio is focused on fledgling companies when it gives back returns it does so dramatically, as was the case in 2015. It has one of the highest total returns in the sector since launch, but also among the highest volatility.
It’s still nimble at less than $200 million, but it’s growing fast – it will be interesting to see if this return pattern can be maintained as it grows.