Review and Outlook

as of 12/31/20

The fourth quarter capped off an unpredictable and unforgettable year. Early on in 2020, we witnessed the epoch of economic and market uncertainty while the year ended in a pinnacle of confidence and optimism. In November, news of multiple COVID-19 vaccines and the U.S. election results triggered a rally in global financial markets. Despite an alarming spike in cases, investors remained focused on the potential for a vaccine-driven return to economic and social normalcy. Fiscal support to bridge the gap to normalcy also boosted the markets. For the quarter, emerging market (EM) equities notably outperformed their U.S. counterparts, with the exception of U.S. small-cap stocks.

Looking forward, we believe the COVID-19 crisis has pushed global policymakers through the portal of “Modern Monetary Theory,” and that this development, concurrent with the transfer of policy/stimulus leadership to elected officials, suggests a sustainable period of dollar weakness and relative outperformance for EM equities.

To us, the immediate question, post the historic fourth quarter rally, is how much of this good news has already been priced into markets? In our view, while the strong performing areas in 2020 are likely to sustain gains given solid fundamentals and a reluctance of policymakers to tighten liquidity, several underperforming areas are now likely to deliver significant earnings surprises, potentially sparking a mean reversion in leadership in the more economically cyclical sectors for a temporary period, much as in 2016. Irrespective of sector leadership, we are quite enthusiastic regarding EM equities, as we expect a material improvement in relative earnings and capital flows and a likely recovery in relative valuation. In our view, investors remain too skeptical regarding the potential for much-improved relative growth.

We expect multi-year catalysts from major reforms in countries such as India, China, and Brazil, as well as from China’s pivot to consumption and value-added economic development, and away from low-value manufacturing, infrastructure and export-oriented activity. While we believe this pivot can drive higher returns domestically and benefit China’s trading partners, we suspect it may simultaneously have an adverse effect on the relative earnings growth of many U.S. multi-national corporations that have benefited for years from access to and the growth of demand for value-added manufactured goods in China, from semiconductors to software to automobiles. With relative valuations near historic lows, and risk premiums on non-dollar assets elevated after years of U.S. foreign policy aggression, we currently believe we have entered the early innings of a typical EM relative bull market.

Top Contributors/Detractors to Performance

as of 12/31/20


  • Shares of South Korea-based conglomerate Samsung Electronics Co., Ltd. increased during the quarter as demand recovered heading into 2021, driven by continued strength in smartphone and hyperscale spending. In addition, Samsung gained share from Huawei with the successful launch of its new flagship smartphone series while its foundry business is set to accelerate due to increasing demand. Potential shareholder returns via buy backs and dividends continued to support investor sentiment. We are confident Samsung will remain a global leader in semiconductor and 5G/6G smartphones.
  • Leading semiconductor manufacturer Taiwan Semiconductor Manufacturing Company Ltd. contributed during the quarter as demand for its 5N processing node remained robust while development for its next generation nodes progressed smoothly. The market is beginning to price in the additional revenue contribution from Intel's potential outsourcing, which further strengthens Taiwan Semi's market share and competitive moat. We believe the company will deliver above its 5%-10% growth target in the next three to five years.
  • Zai Lab Limited is a leading biotechnology company in the growing Chinese health care market. Although the fourth quarter was relatively quiet, shares have continued their strong run alongside the Chinese health care indices. We think Zai Lab is well-positioned to become a leader in the delivery of drugs to the Chinese market.


  • Alibaba Group Holding Limited is the largest retailer and e-commerce company in China. Alibaba operates shopping platforms Taobao and Tmall and owns 33% of Ant Group, which operates Alipay, China's largest third-party online payment provider. Shares were down on the news that Chinese regulators had launched an investigation into Alibaba for suspected monopolistic behavior. We continue to believe Alibaba's core business remains highly profitable, complemented by rapid growth in the cloud business and inflection in the Cainiao logistics and New Retail segments.
  • Reliance Industries Ltd. is India’s leading conglomerate, with business interests in telecom, digital services, retail, oil refining, and petrochemical. Shares were negatively impacted due to a retracement of earlier gains when the company raised over $20 billion from strategic (Facebook, Google) and financial investors in its Jio Platforms and Reliance Retail business verticals. We retain conviction in Reliance, as it is a key beneficiary of the “Digital India” theme with immense potential to emerge as the “Amazon/Facebook/Netflix” of India, in our view.
  • Sino Biopharmaceutical Ltd. is China's leading biopharmaceutical player with a key focus on R&D. Performance was adversely impacted after financial results missed analyst estimates due to pandemic-related restrictions in hospital visits that resulted in decreased pharmaceutical sales. We retain conviction as we think the company's strong R&D capabilities and robust product pipeline should generate double-digit earnings growth for the next three to five years.  

Quarterly Attribution Analysis (Institutional Shares)

as of 12/31/20

When reviewing performance attribution on our portfolio, please be aware that we construct the portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio if it meets our rigorous investment criteria. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to achieve a target sector allocation or to approximate an index. Our exposure to any given sector is purely a result of our stock selection process.

as of 12/31/20

Baron Emerging Markets Fund (Institutional Shares) was up 20.48% in the fourth quarter, performing roughly in line with the MSCI EM Index as favorable stock selection was mostly offset by the negative effect of cash exposure in a rising market.

On a country level, favorable stock selection in China, Taiwan, and Korea and lack of exposure to lagging Saudi Arabian equities contributed to relative results. Higher exposure to Brazil also added value as the country’s stock market experienced its biggest quarterly gain in over a decade due to accelerating foreign inflows and positive vaccine developments. Offsetting a portion of these gains was lower exposure to strong performing Korean equities, adverse stock selection in Brazil and India, and unique exposure to Hong Kong, where Techtronic Industries Co. Ltd. and Hong Kong Exchanges and Clearing Limited trailed the broader market.

Consumer Discretionary, Information Technology (IT), and Health Care investments added the most value. Within Consumer Discretionary, lower exposure to Chinese retailer and e-commerce company Alibaba Group Holding Limited contributed over 100 basis points to relative results. Alibaba’s shares sold off on news that Chinese regulators are investigating the company for suspected monopolistic behavior. Strength in the sector also came from the outperformance of electric vehicle manufacturer Li Auto Inc., home appliance company Midea Group Co., Ltd., and duty free shop operator China Tourism Group Duty Free Corporation Limited, which are part of the Fund’s China value add/localization theme. Favorable stock selection in IT was driven by sharp gains from Brazilian payment platforms StoneCo Ltd. and PagSeguro Digital Ltd. These companies benefited from accelerating volume trends as payments increasingly go digital as a result of the COVID-19 pandemic. Higher exposure to better performing application software stocks and outperformance of Chinese enterprise resource planning software company Kingdee International Software Group Co. Ltd. also added value. Performance in Health Care was bolstered by Chinese biotechnology company Zai Lab Limited, which is bringing a portfolio of in-licensed therapies from Western biopharmaceutical companies to the newly opened and fast-growing health care market in China. Zai’s shares continued to move higher as investors believe the company is well positioned to become a leader in the delivery of drugs to the Chinese health care market. Chinese clinical trial and research services organization Hangzhou Tigermed Consulting Co., Ltd. and Brazilian integrated managed care services provider Notre Dame Intermedica Participacoes S.A. also performed well in the sector.

Apart from cash, underperformance of Indian conglomerate Reliance Industries Limited in the Energy sector weighed the most on relative results. Reliance was the second largest detractor after relinquishing some gains following meaningful outperformance earlier in the year.

as of 12/31/20

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

Baron Emerging Markets Fund (Institutional Shares) appreciated 29.22% for the year and significantly outperformed the MSCI EM Index by 10.91% due to a combination of stock selection, relative sector weights, and a variety of style biases.

On a country level, investments in China were up more than 58% as a group, accounting for the entirety of the Fund’s outperformance in the period. Favorable stock selection in India, Taiwan, Brazil, Argentina, Russia, and Mexico, higher exposure to strong performing Chinese stocks, and lower exposure to declining South African and Thai equities also added value. These positive effects were somewhat offset by lower exposure to outperforming Korean and Taiwanese equities, unique exposure to Panama, and higher exposure to lagging stocks in Brazil, India, and Mexico. Cash exposure in a sharp up market and adverse stock selection in South Africa and Korea also hampered relative performance.

On a sector level, investments in IT, Health Care, Financials, and Energy and lower exposure to the underperforming Real Estate sector added the most value. Strength in IT was related to sharp gains from Chinese cloud software and data center holdings Kingdee International Software Group Co. Ltd., Glodon Company Limited, and GDS Holdings Limited, whose fundamentals were enhanced by the accelerating pace of digitization following the COVID-19 pandemic. The Fund’s overweight position in IT, which outperformed the broader market in the period, and share price gains from Brazilian payment processors StoneCo Ltd. and PagSeguro Digital Ltd. also added value. Within Health Care, higher exposure to outperforming biotechnology and life sciences tools & services stocks contributed more than 285 basis points to relative results. Stock selection was also positive in the sector owing largely to Chinese biotechnology company Zai Lab Limited, whose shares more than tripled in the period. Within Financials, meaningfully lower exposure to declining banks and outperformance of Indian non-bank financial company Bajaj Finance Limited bolstered relative results. Within Energy, lower exposure to this lagging sector and outperformance of Reliance Industries Limited lifted relative results. As India’s leading conglomerate, with business interests in telecommunications, digital services, retail, and oil refining, Reliance is benefiting from accelerated adoption of 4G connectivity and digital services. The company raised more than $20 billion from strategic (Facebook/Google) and financial investors in its Jio Platforms and Reliance Retail business verticals.

Aside from cash, Industrials investments detracted the most from relative results, largely due to the underperformance of Latin American airlines Azul S.A. and Copa Holdings, S.A. These stocks were down sharply for the period held due to a collapse in demand related to the COVID-19 outbreak.

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.