Review and Outlook

as of 12/31/20

In the fourth quarter of 2020, equity markets marched higher, continuing their rally of the prior two quarters. Markets looked past an alarming spike in the number of COVID-19 cases and instead focused on positive news around vaccines, the U.S. election results, and continued monetary and renewed fiscal stimulus. Small stocks rallied in the quarter, and while growth equities underperformed value stocks, growth was still ahead by a wide margin for the year.

Baron Discovery Fund increased in the fourth quarter. Health Care, Industrials, and Information Technology (IT) investments contributed the most. No sector detracted. Performance within Health Care was led by top contributor Pacific Bioscience of California, Inc., whose share price surged by nearly 162%, and second largest contributor CareDx, Inc., with another impressive share price gain of more than 91%. With double- or triple-digit increases across all 12 of the portfolio's Industrials holdings, this sector had a strong quarter as well. Advances were led by third largest contributor TPI Composites, Inc. IT gained ground on overall strong performance in the portfolio's holdings within the sector, led by Allegro Microsystems, Inc. and PAR Technology Corporation. Shares of Allegro, a fabless designer and manufacturer of sensor integrated circuits (ICs) and application-specific analog power ICs for automotive and industrial markets, rose after its IPO in the quarter, driven by investor expectations of improved near-term earnings due to a recovery in automotive end markets that beat market forecasts. Shares of PAR Technology, a leading provider of software, systems, and service solutions to the restaurant industry, rose during the quarter as pandemic-driven restaurant investment in technology built business momentum. An equity raise also signaled that an acquisition might be close.

While markets have moved substantially in the past three quarters, we have consistently risk-managed the portfolio as part of our process to ensure that we are matching our enthusiasm about the business prospects of our holdings with their valuations. To the extent we sell or trim positions, we believe we still have terrific new ideas flowing into the portfolio. With the massive amount of capital markets activity we are seeing (including IPOs, secondary offerings, and SPAC mergers) we believe we have some exciting new opportunities on tap for 2021.

Top Contributors/Detractors to Performance

as of 12/31/20

Contributors

  • Pacific Biosciences of California, Inc. (PacBio) provides long-read DNA sequencing systems to help scientists conduct genetic analysis. Shares performed well for the quarter. We believe there is increasing excitement about the potential for its platform as it lowers sequencing costs and seeks to move beyond its current commercial niche. Recently appointed CEO Christian Henry previously served as CFO and Chief Commercial Officer at Illumina, Inc., and we think he is well-qualified to commercially execute on PacBio’s differentiated long-read platform.  
  • CareDx, Inc. is the market leader in transplant diagnostics, with a presence in nearly all U.S. and EU centers. Shares were up sharply in the fourth quarter as the company continued to successfully execute on its growth strategy. CareDX reported roughly $128 million in kidney testing revenue in 2020, up about 72% year-over-year. Despite this impressive growth rate, we estimate CareDX is only mid-teens penetrated into the $2 billion kidney opportunity and has additional testing opportunities worth over $5 billion in incremental total addressable market.
  • Shares of TPI Composites, Inc., the only global independent wind turbine blade manufacturer, rose during the quarter. Global stimulus and an upcoming regime change in the U.S. have revived optimism for the renewable energy industry. The company also reported strong quarterly earnings and hinted that it plans to boost its long-term targets based on the more favorable industry outlook. On top of the strength in the wind industry, we believe the company will continue building out its transportation business for additional upside.

Detractors

  • Shares of Vital Farms, Inc., a producer of pasture-raised butter and eggs, fell during the quarter after reaching post-IPO highs in the prior quarter. While financial results beat consensus, investors shifted near-term focus to more immediate potential beneficiaries of the COVID-19 vaccine. Longer term, we expect Vital Farms to gain from increased consumer focus on better-for-you and better-for-the-environment products and to grow its platform through category expansion and distribution gains in natural and traditional grocery stores.
  • Esperion Therapeutics, Inc. is a biotechnology company commercializing a novel cholesterol-lowering therapeutic. Shares detracted due to a tepid set of early launch sales metrics. While this is somewhat explainable due to the nature of launching a primary care drug during a pandemic, the market has adopted a wait-and-see mindset, making it impossible to gauge the success of the drug launch until 2021/2022 in a more normalized environment. For these reasons, we maintain conviction in Esperion.  
  • Emergent BioSolutions Inc. is a pharmaceutical company that provides vaccines and post-exposure treatments for extreme pathogens. In the third quarter, Emergent was awarded contracts from four drug companies (J&J, Novavax, Vaxart, and AstraZeneca) and the U.S. government to help develop and provide volume production of COVID-19 vaccines.  News in the fourth quarter that the FDA approved two rival vaccines pressured shares. We still believe Emergent’s partners are on track for FDA approvals and the company will benefit for years from COVID-19 and other development programs.

Quarterly Attribution Analysis

as of 12/31/20

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

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.