Review and Outlook

as of 09/30/21

For much of the past year and a half, equity markets have been in a steady upward trajectory following the steep decline at the onset of the pandemic. The third quarter of 2021 saw that trend level off notably as the Delta variant of COVID-19 spread across the globe, pressuring both the demand and supply of goods and services. This setback in the expected COVID-19 recovery timeline dragged stocks lower. The expected end of government fiscal and monetary support, inflationary concerns, and a pullback in corporate earnings growth also dampened market sentiment. The S&P 500 Index market notched a small positive return for the quarter, although much of the growth was driven by mega-cap technology companies. U.S. small-cap growth companies – as measured by the Russell 2000 Growth Index – were hit the hardest, finishing down 5.65%.

Against this backdrop, Baron Discovery Fund declined. Holdings within Communication Services, Consumer Staples, and Financials contributed. Second largest contributor S4 Capital Plc drove gains within Communication Services, and top contributor The Beauty Health Company drove appreciation within Consumer Staples. Insurance brokerage firm BRP Group, Inc. was the top performer within Financials. Investments within Health Care, Industrials, and Information Technology (IT) detracted the most. With both the second and third largest detractors – CareDx, Inc. and Inogen, Inc., respectively – within the sector, Health Care had a challenging quarter. Weakness within Industrials was led by top detractor Mercury Systems, Inc. Despite mixed performance, declines outweighed advances among investments within the IT sector.

While the Delta variant has certainly been a “speed bump” in the pace of the economic recovery, it is our belief that the U.S. economy is back on track and the economic impact of COVID-19 is mostly in the rearview mirror. As we look to the end of 2021 and into 2022, we continue to believe our portfolio companies are well positioned to benefit from the economic resurgence that we expect to come post-COVID-19. We have a large pipeline of innovative emerging growth companies that are trading at attractive valuations.

Top Contributors/Detractors to Performance

as of 09/30/21


  • The Beauty Health Company is an innovative skin care and beauty health company providing consumers with the benefits of a professional medical treatment and the experience of a consumer brand. Shares increased on a revenue beat and raised guidance reflecting new retail partnerships with Nordstrom and Ulta that position the company well as it accelerates marketing investments and introduces new products. We like the company's asset light, recurring revenue business model and see a long runway for growth.
  • S4 Capital plc is a global marketing services business founded by Sir Martin Sorrell, the founder and former CEO of WPP, the largest ad agency in the world. S4 encompasses creative production firm MediaMonks and data-driven media consultancy MightyHive. Shares of S4 were up on recovering global ad spend, continued M&A, and increasing investor awareness. We believe S4 has meaningful potential over the long term to grow revenue at north of 25% annually at high-teens EBITDA margins, benefiting from digital transformation across industries and geographies.
  • Endava plc provides outsourced software development for business customers. Shares increased on quarterly results and guidance that exceeded Street expectations. Following a brief slowdown in the early months of the pandemic, business has fully rebounded and accelerated 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 believe Endava will continue gaining share in a large global market for IT services.


  • Mercury Systems, Inc., a provider of defense electronics solutions, detracted in the quarter.  In early August, the company announced earnings that beat consensus but took down full year 2021 guidance due to some program delays on ship-based radar, fighter jet electronics, missile defense systems, and foreign military sales. Management indicated that it expected some carryover into fiscal 2022 but with a strong rebound in the back half of 2022 into 2023. We believe Mercury will see organic re-acceleration as well as acquisitions and the share price is a bargain.
  • CareDx, Inc. provides transplant testing and ancillary services. We believe the weak share performance related to competitive noise. The company put up extremely good numbers for the second quarter (beat and raised full year guidance), driven by kidney and heart transplant tests. It also is moving forward with studies on more transplant tests (liver, stem cell/bone marrow transplant, cell transplant, and lung). We are not concerned by the short-term dip in the share price, as CareDx offers both best-in-class testing and full transplant center service and support.
  • Inogen, Inc. makes portable oxygen concentrators (POCs) for patients with lung issues. Shares were down in the quarter. While it handily beat June 2021 consensus numbers (driven by both sales and rentals of POCs), Inogen took down full year 2021 estimates as a component supply shortage (chips) is preventing it from meeting strong demand. We believe this situation is much like the one in the automobile industry and that it will be resolved over the next few quarters as the chip supply increases. Shares now trade for a bargain price, in our view.

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.