Review and Outlook

as of 12/31/20

U.S. equity markets continued their rally during the fourth quarter, driven by factors including the successful development of COVID-19 vaccines, the resolution of the U.S. Presidential election, the ongoing tailwind from central bank liquidity measures, additional monetary policy accommodation, and economic and corporate earnings data that surprised to the upside.

Against this backdrop, Baron Asset Fund increased in the quarter. Investments in Information Technology (IT), Health Care, and Consumer Discretionary contributed the most to performance. With double-digit advances in 12 of 16 holdings, IT had a strong quarter. Second largest contributor Gartner, Inc., led advances. Other noteworthy sector contributors included payroll software provider Ceridian HCM Holding Inc. and P&C insurance software vendor Guidewire Software, Inc. Shares of Ceridian increased on new sales of the company's flagship Dayforce platform. We expect Dayforce to generate rapid revenue growth, leading to meaningful gross margin expansion, improved free cash flow conversion, and rapid deleveraging. Shares of Gartner increased as the company approaches the midpoint of its cloud transition, which should correspond with a bottoming of the income statement. We believe Guidewire has tripled its addressable market through new products and cloud delivery. Top contributor IDEXX Laboratories, Inc. led positive performance within Health Care. Strong performance of weighing instruments supplier Mettler-Toledo International, Inc. also added to sector performance after third quarter results significantly exceeded investor expectations and 2021 guidance came in well ahead of market forecasts. Consumer Discretionary's strong results were driven by Vail Resorts, Inc., which was the third largest contributor, and Farfetch Limited, a global luxury fashion e-commerce marketplace. Shares of Farfetch increased by almost 118% following its announced partnership in China with Alibaba and Richemont. The company remains focused on expanding its reach in China, which is one of the world's most important luxury marketplaces. Real Estate was the only detracting sector due to weak performance of SBA Communications Corp., the top detractor in the quarter. 

We believe that advances in technology and changing consumer preferences and business practices will continue to drive long-lasting benefits for certain businesses and challenges for others. We continue to adhere to our traditional investment methodology while working hard to identify these long-term corporate beneficiaries. We remain optimistic that this approach will generate strong performance for our portfolio regardless of the economic climate.

Top Contributors/Detractors to Performance

as of 12/31/20

Contributors

  • Shares of veterinary diagnostics leader IDEXX Laboratories, Inc. contributed to performance in the quarter. Veterinary visits continued to recover from lows in the early months of the pandemic, with practice visits growing at double-digit rates through October. IDEXX’s competitive trends are outstanding, and we expect new proprietary innovations and field sales force expansion to be meaningful contributors to growth. Margins are moving significantly higher, and we believe margins can exceed 30% over time.
  • Shares of Gartner, Inc., a provider of syndicated research, increased after reporting financial results that beat analyst expectations. The company’s research business continued to generate growth, albeit at a slower rate than before the pandemic. We expect growth to re-accelerate as conditions stabilize, leading to meaningful margin expansion and enhanced free cash flow generation. While Gartner’s destination events business has been disrupted by the pandemic, the company has pivoted to virtual events, which may offer enhanced economics over the long term. 
  • Vail Resorts, Inc., a global operator of ski resorts, contributed in the quarter on season pass sales that were up 20% from last year despite the pandemic. Robust renewal rates demonstrated loyalty in Vail's pass base while first time pass sales have the potential to accelerate future growth. We expect Vail to grow recurring revenue given its strong renewal rates, which, combined with a robust balance sheet, should position the company for continued growth in the years ahead.

Detractors

  • After strong performance earlier in the year, SBA Communications Corp. detracted from performance in the fourth quarter as the market rotated into “laggards” and a slight backup in interest rates impacted companies with elevated valuations. SBA is a REIT that owns and operates 30,000 cell phone towers, with 16,000 in the U.S. and 14,000 internationally. We retain conviction in SBA due to durable demand drivers in data growth and video as well as the company’s ability to consistently return capital to shareholders via share buybacks and dividends.
  • DexCom, Inc. sells a continuous glucose monitoring device for people with diabetes. The stock fell due to concerns about competition from Abbott Laboratories, which received regulatory approval to market its third generation Libre device in Europe. We continue to have conviction in DexCom based on the company's large addressable under-penetrated market and new product pipeline.
  • Shares of GoodRX Holdings, Inc., which operates the nation's largest online platform providing users free access to drug pricing information and pharmacy discounts, gave back some of its heady post-IPO run on Amazon's announcement that it has entered the online pharmacy space. Although Amazon is a formidable rival, we believe its success is not assured as its participation is limited to the low-penetration mail order segment of the market while GoodRX has the advantages of the leading brand, best pricing, telehealth tie-in, and nascent opportunities in drug manufacturer referrals.

Quarterly Attribution Analysis (Institutional Shares)

as of 12/31/20

When reviewing performance attribution on our portfolio, please be aware that we construct the portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio if it meets our rigorous investment criteria. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to achieve a target sector allocation or to approximate an index. Our exposure to any given sector is purely a result of our stock selection process.

as of 12/31/20

Baron Asset Fund (Institutional Shares) increased 15.21% in the fourth quarter, yet trailed the Russell Midcap Growth Index by 381 basis points primarily due to stock selection.

Consumer Discretionary investments and lack of exposure to the underperforming Consumer Staples sector contributed the most to relative results. Strength in Consumer Discretionary was partly due to the outperformance of luxury fashion e-commerce marketplace Farfetch Limited and global ski resort operator Vail Resorts, Inc. Farfetch’s shares more than doubled after being added to the Fund early in the quarter. Investors were enthusiastic about the company’s recently announced partnership with Alibaba and Richemont in China. The company remains focused on expanding its reach in China, which is one of the world's most important luxury marketplaces. Vail was the third largest contributor after season pass sales were up 20% from last year despite the pandemic. Lower exposure to the sector, which failed to keep pace with the broader market during the quarter, also added value.

Investments in Information Technology (IT), Real Estate, Industrials, and Communication Services accounted for all of the underperformance in the period. Weakness in IT was largely due to share price declines from web software firm Wix.com Ltd. and payment services provider Fidelity National Information Services, Inc. Wix’s shares fell slightly during the quarter after doubling in the first nine months of the year as the company benefited from accelerating digitization due to COVID-19. Fidelity National’s stock underperformed due to revenue headwinds from the COVID-19 pandemic as less travel and spending activity led to lower transaction volumes. Management believes these headwinds are temporary and expects growth to accelerate next year. Lack of exposure to semiconductor and semiconductor equipment stocks, which were up nearly 40% in the index, also detracted over 100 basis points from relative results. Negative stock selection in Real Estate came from specialized REITs SBA Communications Corp. and Equinix, Inc., whose shares were penalized for strong performance earlier in the year as investors rotated into more cyclical companies. Within Industrials, underperformance of research & consulting services businesses Clarivate Plc, CoStar Group, Inc., and Verisk Analytics, Inc. and higher exposure to this lagging sub-industry hampered relative results. These companies saw their share prices trail the broader market after meaningfully outperforming in the early stages of the COVID-19 pandemic. Performance in Communication Services was hurt by ZoomInfo Technologies Inc., which operates a cloud-based information platform used primarily by sales professionals to identify and target their highest-value potential sales targets. ZoomInfo’s shares underperformed given an uncertain client spend environment, which we believe is improving.

as of 12/31/20

Yearly Attribution Analysis (for year ended 12/31/2020)

Baron Asset Fund (Institutional Shares) was up 33.33% for the year, yet underperformed the Russell Midcap Growth Index by 226 basis points due to stock selection and headwinds from style biases, particularly underexposure to the strong performing liquidity and residual volatility factors.

Investments in Health Care, Industrials, and Communication Services and lack of exposure to the lagging Consumer Staples, Energy, and Materials sectors added the most value. Within Health Care, higher exposure to this strong performing sector and sharp gains from veterinary diagnostics leader IDEXX Laboratories, Inc. and medical instruments manufacturer West Pharmaceutical Services, Inc. lifted relative results. IDEXX was the top contributor on an absolute basis as veterinary visits quickly recovered from the April bottom, with practice visits growing at double-digit rates through October. West was the third largest contributor due to solid financial results and expectations for the company's sales to benefit from COVID-19-related sales into 2021. Favorable stock selection in Industrials, coming from research & consulting services businesses Clarivate Plc, CoStar Group, Inc., and Verisk Analytics, Inc., was partly offset by greater exposure to this underperforming sector. Clarivate’s stock price was lifted by solid quarterly earnings results and optimistic guidance. The company’s $6.8 billion acquisition of CPA Global, which provides IP management and technology solutions to law firms and corporate customers, was also well received by investors. CoStar’s shares benefited from accelerated demand for its digital marketplace businesses as traditionally offline activities are increasingly shifting online. This trend was partially offset by slower trends in its CRE data licensing businesses. Verisk’s shares outperformed after the company sold its capital intensive Geomni business while retaining potential upside related to aerial imagery analytics. Strength in Communication Services came from Zillow Group, Inc., which operates leading U.S. real estate sites, a mortgage marketplace, and the Zillow Offers home-buying business. Zillow was the second largest contributor due to strong quarterly results and a favorable newly public comp for the Offers business.

IT and Consumer Discretionary investments and higher exposure to the underperforming Financials and Real Estate sectors detracted the most from relative results. Weakness in IT was driven by syndicated research provider Gartner, Inc. and P&C insurance software vendor Guidewire Software, Inc. Gartner’s destination events business has been disproportionately impacted by COVID-19, while Guidewire’s transition to the cloud has caused short-term financial headwinds and slowed the cadence of new license sales. Within Consumer Discretionary, elevated exposure to leisure facilities and hotels, resorts & cruise lines, whose businesses were adversely impacted by the COVID-19 outbreak, detracted the most from relative results.

Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectuses contain this and other information about the Funds. You may obtain them from the Funds’ distributor, Baron Capital, Inc., by calling 1-800-99BARON or visiting www.BaronFunds.com. Please read them carefully before investing.

The performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor's shares, when redeemed, may be worth more or less than their original cost. The Fund’s transfer agency expenses may be reduced by expense offsets from an unaffiliated transfer agent, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted.

Risks:All investments are subject to risk and may lose value.

The discussion of market trends is not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed on this page reflect those of the respective writer. Some of our comments are based on management expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from our expectations. Our views are a reflection of our best judgment at the time and are subject to change at any time based on market and other conditions and Baron has no obligation to update them

Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.

The index performance is not fund performance; one cannot invest directly into an index.