Review and Outlook

as of 12/31/23

​Following a downturn from the end of July through October, the markets went on a bull run in the last two months of 2023. Improving inflation data coupled with dovish comments from the Federal Reserve spurred an “everything rally.” In a significant shift from its earlier stance, the Fed suggested it was planning three interest rates cuts over 2024. The end of “higher for longer” rate fears especially boosted growth and small-cap stocks, as the market views these categories as beneficiaries of lower rates. Despite low unemployment and robust consumer spending – typically viewed as inflation drivers -- inflation continued to trend lower, with the annual inflation rate dropping to 3.4% in December. Investor fears of a recession were replaced by optimism that the Fed had successfully orchestrated a “soft landing,” generating further cause for cheer on top of the prospect that the Fed would soon start cutting interest rates.

Baron Discovery Fund increased in the quarter. Holdings within Information Technology (IT), Consumer Discretionary, and Industrials contributed the most to performance. Financials and Consumer Staples investments detracted. IT had a strong quarter, with all top three contributors within the sector. DraftKings Inc. led gains within Consumer Discretionary, after shares of this leading sports betting app rose as a result of sizable market share capture and strong customer engagement during the early months of the NFL season. We believe DraftKings's product and scale advantages will enable the company to maintain its leadership position in the rapidly growing online sports betting market. Military drone manufacturer Kratos Defense & Security Solutions, Inc. and Axon Enterprise, Inc., which makes the TASER non-lethal self-defense weapon, led positive returns within Industrials. Financials lost ground due to sole sector holding Kinsale Capital Group, Inc., whose shares gave back some gains after the company reported slower premium growth for the third quarter. Sole Consumer Staples holding the Beauty Health Company drove losses within the sector after reporting execution issues in the roll out of its latest generation HydraFacial machine. We exited our position.

We believe 2024 will be the “year of small cap," as relative valuations return to more normalized levels, with small caps garnering bigger multiples than large, versus the opposite situation that now exists. We also believe our style of stock picking -- active management driven by experientially based fundamental analysis -- will be amply rewarded. That said, we continue to apply our risk management process in all respects, including a wide diversity of investments, conservative position sizing, significant due diligence, and a strict adherence to our long-term valuation estimates.

Top Contributors/Detractors to Performance

as of 12/31/23


  • SentinelOne, Inc. specializes in endpoint protection, cloud security, and security data analytics. Shares rose on outstanding quarterly financial results and strong guidance. SentinelOne is one of the fastest-growing public cybersecurity companies, with revenue expected to grow more than 46% this fiscal year. Growth has been driven by a combination of 1) market share capture from legacy endpoint vendors who struggle to compete against SentinelOne’s AI-enabled platform, 2) an ongoing shift of IT infrastructure to the cloud driving demand for cloud application protection (growing triple digits), and 3) cybersecurity vendor consolidation favoring platforms with comprehensive security portfolios over point solutions. The company is also leveraging its single data store and AI capabilities to cross-sell more products into its existing customer base and increase average sale prices. Between the larger deal sizes and improving operating efficiencies, we believe the company can continue to expand margins at a significant rate and begin generating positive free cash flow in the next fiscal year.
  • GitLab Inc. is an end-to-end software development and IT operations platform that enterprises use to create, secure, and deploy code. The stock rose after GitLab delivered strong quarterly results driven by improving win rates in enterprise deals, solid seat growth, and higher average selling prices. In recent years, GitLab has delivered more than 400 feature enhancements to its platform, enabling its customers to consolidate more software development steps into GitLab, lowering total IT costs and achieving faster software delivery times. As a result, GitLab has realized higher average revenue per user (ARPU) through a combination of price increases and upgrades to its Ultimate Tier. These ARPU increases, coupled with consistent user growth, bode well for future sales and margin expansion. Gitlab also has several exciting new growth levers, including a monetizable generative AI product (that helps developers write code, detect vulnerabilities automatically, and remediate bottlenecks in the coding process), a new enterprise planning SKU that brings non-developers into the platform, and a Dedicated Tier for clients in regulated industries.
  • Varonis Systems, Inc. is a cybersecurity vendor that helps organizations classify, locate, and protect sensitive data across on-premise and cloud environments. Shares of Varonis increased on strong quarterly results with annual recurring revenue (ARR) growth and free cash flow beating consensus. Last year, Varonis began transitioning to a SaaS model, which will benefit clients via lower maintenance costs, better automation, and faster remediations of data vulnerabilities. Throughout 2023, demand for the SaaS model has been much higher than investors anticipated, and SaaS already accounts for over 15% of ARR. SaaS customers are landing with more licenses, paying 30% higher prices per license, and signing deals faster. As this mix shift progresses, we anticipate improved sales efficiency and higher margins. Varonis remains a competitively advantaged business in the data security industry, which we believe can accelerate in 2024 as recent SEC disclosure requirements for security breaches drive industry awareness, and regulated companies look to invest in data security as a prerequisite for adopting generative AI.


  • Shares of specialty insurer Kinsale Capital Group, Inc. gave back some gains from earlier this year after the company reported slower premium growth in the third quarter. Earnings beat Street expectations, with EPS doubling and ROE exceeding 34%. However, investors focused on the slowdown in gross written premiums to 33% growth from 58% growth in the prior quarter, which management attributed to normal seasonality for property insurance. Additionally, we believe some of the share price weakness resulted from a sector rotation away from defensive stocks to more speculative stocks following a decline in interest rates. We continue to own the stock because we believe Kinsale is well managed and has a long runway for growth in an attractive segment of the insurance market.
  • Chart Industries, Inc. is a global leader in design, engineering, and manufacturing of process and storage technologies and equipment for gas and liquid handling. Shares fell after the company missed analyst earnings forecasts on project revenue recognition timing. Chart also held an investor day in which it provided mid-term financial targets instead of further detail on its 2024 outlook, falling short of some analyst expectations. We remain investors. Business fundamentals are strong, in our view, with management seeing solid demand across the portfolio and cost synergies from the Howden acquisition ahead of company targets. Chart also has a much larger than normal backlog supporting growth in 2024, providing good visibility. We believe the integration of Howden is proceeding well, with the combined company on track to become a globally diversified, high-quality, high-growth industrial business with proprietary technology and solutions serving the growing hydrogen, carbon capture, LNG, and other end markets. Valuation remains attractive against Chart's growth and margin profile, in our view.
  • Establishment Labs Holdings Inc. sells next-generation breast implants that have meaningfully lower safety risks compared to competitor products. The company's implants have captured significant share in many international markets, and the upcoming U.S. and China launches will more than double the addressable market. Shares fell in the quarter. The near-term issue is that breast augmentations are expensive discretionary cash-pay procedures, and macroeconomic headwinds are leading to weaker global demand. Compounding this, distributors in Asia-Pacific are working down inventory as they run leaner in uncertain economic times. This weakness also creates uncertainty whether Establishment Labs can achieve certain milestones needed to access additional tranches of debt, absent which the company will likely need to raise capital. Longer term, we think Establishment Labs will capture significant share in the U.S. and China, which will drive an acceleration in revenue growth and profitability.

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 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.