Review and Outlook

as of 06/30/21

U.S. equity markets continued to move higher in the second quarter in conjunction with strong macroeconomic data, supportive fiscal and monetary policy, and excellent corporate earnings results. After ceding leadership to cyclical “recovery” stocks, secular growth stocks were back in favor in the back half of the quarter, especially among large-cap technology stocks. The market rotation during the first half of the year has resulted in a more normalized overall balance among various sectors, styles, and market caps, in our opinion.

The economy continued to grow rapidly as the effects of the pandemic receded, and U.S growth appears likely to stay strong. However, inflation accelerated significantly during the quarter, both in goods and wages. This metric caused consternation about whether policy is too stimulative, whether the Fed needs to change course, and whether interest rates will continue to rise, all of which muted the market’s appreciation.

Baron Discovery Fund increased in the quarter. Holdings within Information Technology (IT), Health Care, and Communication Services contributed the most. Third largest contributor Endava Plc led advances within IT. Appreciation within Health Care was led by CareDx, Inc. Shares of this market leader in transplant diagnostics increased after the company beat earnings estimates and raised full-year 2021 guidance by 6%. Its flagship kidney testing product is growing rapidly, and it is adding new tests for lung and heart transplant testing. Top contributor Future plc led positive performance within Communication Services. Top detractor Array Technologies, Inc. led losses within the Industrials sector. We exited our position. Holdings within Financials detracted slightly as well.

We are closely watching policy decisions by the federal government and the Federal Reserve as well as commodity pricing, which might give us hints about whether the current inflationary pressures we are seeing (wages, basic materials, transportation) will persist. However, we always manage the portfolio on a micro, not a macro basis, and feel that each of our investments stands alone on its merits. New opportunities abound, and many are extremely interesting. Generally, we feel good about our companies’ prospects, about our idea generation, and about the state of the U.S. economy.

Top Contributors/Detractors to Performance

as of 06/30/21

Contributors

  • Future plc is a special-interest publisher of digital content, magazines, and events with a brand portfolio including TechRadar, PC Gamer, and Gizmodo. Shares were up on well-received M&A and pandemic-related tailwinds to e-commerce in Future's largest categories -- technology, gaming, music, sports, home, and lifestyle -- as well as strength in the broader advertising environment. We believe Future can continue to grow both organically and through M&A, with potential to complete in the $150 billion-plus global B2B market with lead generation and business intelligence offerings.
  • The Beauty Health Company, formerly known as HydraFacial, is an innovative skin care and beauty health company providing consumers the benefits of a professional medical treatment with the experience of a consumer brand. Shares increased after the company came public via SPAC in May on increased awareness of its growth opportunities as well as upbeat quarterly earnings results showing strong delivery system growth and increasing consumer demand.  We like the company's asset light, recurring revenue business model and see a long runway for growth.
  • Endava plc provides outsourced software development to business customers. Shares increased after the company reported quarterly results that beat Street estimates and raised full-year guidance. Following a brief slowdown last year, business has fully rebounded as clients recognize the need for greater investment in digital transformation. Management expects organic revenue growth to exceed 20%, with upside from accretive acquisitions. We continue to own the stock because we believe Endava will continue gaining share in a large global market for IT services.

Detractors

  • Array Technologies, Inc. is a leading manufacturer of utility-scale solar trackers. Shares fell after Array retracted 2021 guidance due to rising steel costs, which caused uncertainty and loss of management credibility. This decline was in excess of the sharp pull back of the entire sector due to concerns about project push outs and higher interest rates, as these costs need to be absorbed in the supply chain. We have trimmed our position given a lack of confidence in management's ability to execute their plan.
  • Viant Technology Inc. is a leading internet advertising demand-side platform, enabling agencies to efficiently purchase digital advertising across PC, mobile, and online video channels. Shares were down following announcements by Apple and Google of their intention to restrict the tracking of third-party cookies on which many advertisers rely. However, Viant's tracking capabilities are based on household-level data rather than third-party cookies. We remain positive on Viant given its proprietary technology and continued secular growth in digital advertising.
  • Tripadvisor, Inc. is an online travel company where users can browse reviews and plan trips. Shares fell on concerns that new COVID-19 variants would delay the recovery of the travel industry. In addition, investors appeared concerned that Tripadvisor’s new Tripadvisor Plus subscription offering, which launched in June, would face competitive pressures. We do not believe traditional loyalty programs will be materially competitive with the upfront savings offered by Tripadvisor Plus. We also think Tripadvisor is well positioned to benefit from pent-up consumer demand for travel. 

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.