A Growth Fund Thriving in Volatile Markets

NEW YORK (TheStreet) -- Ron Baron ranks as one of the top growth managers. During the past 15 years, his Baron Growth (BGRFX) has returned 9.3% annually, outdoing its average mid growth peer by nearly 3 percentage points, according to Morningstar. What makes the record especially noteworthy is that the fund delivered strong returns while being less volatile than peers.

Racetrack owner Penn National is one of Baron's holdings.

Baron does particularly well in bear markets. The fund outdid its category by wide margins during the downturns of 2002 and 2008. When stocks collapsed this May, Baron Growth topped 97% of peers for the month.

The fund achieved the strong performance by following a distinctive strategy. Baron looks for companies that can deliver sustained earnings growth and strong returns on capital over long periods of time. Once the fund buys, it holds patiently. The average holding period for stocks in the portfolio is seven years. In contrast, competitors turn over their portfolios every year.

To find companies that can grow year after year, Baron looks for businesses with clear advantages. Many holdings have strong franchises that are protected by moats, factors that keep competitors from stealing market share. Such steady performers have enabled the fund to perform well in hard times.

Holdings include Penn National Gaming (PENN) , an operator of casinos and racetracks. The earnings have been reliable because the company has exclusive licenses to operate in smaller cities that are not near major gambling centers. Another holding is Under Armour (UA) , the maker of athletic clothing. The company has gained loyal customers by offering innovative products that absorb perspiration.

Ron Baron says that his fund aims to double its share price every five or six years. In an era of sluggish growth, the goal may seem ambitious. But in a recent shareholder letter, Baron argues that stocks can deliver solid returns because valuations have sunk sharply over the past decade.

During the 1990s bull market, the price/earnings ratio of the market peaked at 30, as investors expected the good times to last indefinitely. After the Internet bubble burst, optimism cooled. With valuations declining, the Standard & Poor's 500 returned 1.5% annually from 2000 through the first quarter of this year. The market performance was the worst in the country's history, trailing even the results of the Great Depression. By January 2012, the P/E had dipped to 12, well below the long-term average of 15.

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