Review and Outlook

as of 09/30/20

The third quarter started on a strong note, with the first two months continuing the rally of the prior quarter. The markets were buoyed by a combination of factors, including employment results that were better than Street forecasts, strength from big tech, corporate earnings and guidance that on average surprised to the upside, improved consumer confidence, and perhaps most significantly, continued monetary support from the Federal Reserve.

The markets took a sharp turn in the last month of the quarter. Technology stocks, which had led the five-month rally, came off their highs while investors rotated into value plays. Elevated unemployment numbers as small businesses continued to struggle, coupled with the stalemate in Congress over additional fiscal support, raised investor concerns that the economic recovery would take longer than hoped. A sense that stock valuations were overextended also pressured share prices. Nevertheless, while volatility spiked in September, the markets posted mostly positive results in the quarter.

Against this backdrop, Baron Discovery Fund increased in the quarter. Investments in Health Care, Consumer Discretionary, and Industrials contributed the most. No sector detracted. Second largest contributor Silk Road Medical, Inc. led gains within Health Care and top contributor Penn National Gaming, Inc. led gains within Consumer Discretionary. Environmental services company Montrose Environmental Group, Inc. and wind blade manufacturer TPI Composites, Inc. were both noteworthy contributors to positive performance within Industrials.

We are still grappling with major questions regarding the course of the pandemic, progress on a vaccine, corporate earnings, fiscal stimulus, the upcoming presidential election, and the path to economic recovery, any of which could result in significant volatility in the short term. Over the longer term, we remain encouraged by the fundamental prospects of our portfolio investments. We try not to be sidetracked by the macro “noise” and instead focus our energies on managing our existing investments and finding new ones. The good news is that we continue to find high quality, fast growing small companies with significant stock appreciation potential.

Top Contributors/Detractors to Performance

as of 09/30/20

Contributors

  • Shares of regional casino company Penn National Gaming, Inc. increased in the quarter on news of strong betting activity after the early September launch of the Barstool sports book app, in which Penn has a 36% stake. The company reported revenue and EBITDA results that beat investor forecasts, driven by robust margin growth across its assets. The resulting increase in cash flow, combined with a recent equity offering, should help Penn pay down debt on its balance sheet and make additional investments.
  • Silk Road Medical, Inc. is a medical device company that has developed a new treatment for carotid artery disease called transcarotid artery revascularization. The stock rallied on investor anticipation of a recovery in hospital procedure volumes generally and, more specifically, Silk Road's procedures. We continue to believe the company's treatment offers benefits over current treatment methods and has potential to become standard of care.
  • Shares of Vital Farms, Inc., a provider of ethically produced butter and pasture-raised eggs, rose following its public listing in the quarter. Investor interest in this IPO was strong given the unique business model and growth opportunity. The company beat its second quarter guidance and raised its full-year outlook on elevated and persistent consumer demand. We expect Vital Farms to benefit from increased consumer focus on ethically produced goods. We also expect Vital Farms to grow its platform through category expansion and distribution gains.

Detractors

  • Esperion Therapeutics, Inc. is a biotechnology company launching a new drug in the cardiovascular space for patients with elevated cholesterol levels. As launch was set for 2020 in the large and in-person end market of cardiologists and primary care doctors, Esperion was forced to pivot, and shares have lagged. We maintain conviction given the millions of potential patients suffering from elevated cardiovascular risk markers that are unsuitable for a generic statin or are otherwise in need of alternative options.
  • Inogen, Inc. manufactures and sells portable oxygen concentrators (POCs) to patients with severe breathing disorders such as emphysema. The stock declined as continued lower volumes of patient visits to pulmonologists resulted in fewer prescriptions for POCs. We believe Inogen remains well positioned in the space and shares will rally as the pandemic recedes.
  • Applied Therapeutics, Inc. is a biotechnology company developing a class of drugs called aldose reductase inhibitors for galactosemia, a rare genetic disorder, and diabetes complications. Shares fell due to a slew of short reports that highlighted a lot of known risks and harped on a few management messaging mistakes from prior quarters. Given that none of the claims were new and many were biased and/or potentially wrong upon review, these reports changed nothing in our investment thesis and we retain conviction.

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.