Review and Outlook

as of 03/31/23

The first quarter began much as 2022 ended: ebbing inflation expectations, downward pressure on bond yields and the U.S. dollar, and an ongoing recovery in global equities, led by emerging markets/China. Then, in early February, a series of stubborn U.S. inflation readings reversed these trends, as bond yields and central bank rate hike expectations abruptly spiked and the U.S. two-year treasury yield briefly surpassed 5% for the first time in over 15 years, while the dollar rose and equities retreated, with EM reversing relative gains. On March 9, everything changed again as this market-based rate repricing shifted investor attention towards pressures in the bank sector, in particular, SVB Financial Group’s liquidity and solvency challenges, and then to the aggressive policy response addressing the risk of widespread deposit flight which spread to several additional institutions including behemoth Credit Suisse.

We believe the banking crisis confirms our premise that we are passing peak hawkishness, and a dollar bear market and an EM equity relative bull market lie ahead. For several EM jurisdictions that began a rate hike cycle well ahead of the U.S., and/or have also experienced a much less pronounced rise in inflation, we believe the confirmation of peak hawkishness may act as a signal that they can soon begin to ease as the tail risks of currency depreciation and inflation have ebbed, which would support outperformance.

China-related equities began the year quite strong on enthusiasm over reopening and policy support, only to peak in late January and retrace most of the gains, though we remain encouraged on the margin and anticipate that recovering demand combined with newfound expense and capital discipline will drive positive earnings surprises and solid equity returns as we move through this year. India stood out during the quarter as one of the only jurisdictions to register negative returns, impacting our relative performance, which we regard as largely attributable to mean reversion for a second quarter after a long period of relative strength; we remain quite optimistic long-term on India and our investments there.

As always, we are confident we have constructed a diversified portfolio of well-positioned and well-managed companies that are also benefiting from the tailwinds of long-term and attractive investment themes.

Top Contributors/Detractors to Performance

as of 03/31/23


  • Semiconductor giant Taiwan Semiconductor Manufacturing Company Limited contributed in the first quarter due to easing geopolitical concerns and expectations for end-demand recovery later in 2023. We retain conviction that Taiwan Semi’s technological leadership; pricing power; and exposure to secular growth markets, including high-performance computing, automotive, 5G, and IoT; will allow the company to sustain strong earnings growth over the next several years.
  • Tencent Holdings Limited operates the leading social network and messaging platforms (QQ, WeChat), the largest online entertainment and media business, and the largest online gaming business in China. Shares of Tencent were up this quarter, given improving macroeconomic conditions, the post-COVID reopening of China, and more friendly regulatory activity, particularly around game approvals. We retain conviction that Tencent can durably grow earnings given its track record of execution, scale, and unique and diversified online assets.
  • Shares of Kingsoft Corporation Ltd., a leading Chinese office software, interactive entertainment, and cloud computing company, increased during the quarter, driven by strong growth in office software subscription revenue and investor expectations that new generative AI features will increase long-term demand for productivity tools. We expect Kingsoft will be the primary beneficiary of the rapid growth of China’s office software market and shift towards domestic software vendors, and we remain shareholders.


  • Bajaj Finance Limited is a leading non-banking financial corporation in India. The stock detracted during the quarter due to a near-term slowdown in business activity amid rising competition and moderating consumer spend in India. We believe Bajaj is well positioned to benefit from growing demand for consumer financial services including mortgages, personal and credit card loans, and vehicle financing. We retain conviction in Bajaj given its best-in-class management team, robust long-term growth outlook, and conservative risk management frameworks.
  •, Inc. is one of the three largest e-commerce platforms in China. Shares declined after the company reported a slowdown in fourth quarter sales and commented that deliberate culling of unprofitable SKUs would also be a drag on headline revenue growth in the first half of 2023. We believe the slowdown was driven by the peak in Chinese COVID-lockdowns, which have since ended, and the elimination or reduction of unprofitable business is better for long-term margins and returns on capital. We remain investors.
  • Tenaris S.A. manufactures seamless steel pipe products with large operations in the U.S., Latin America, and the Middle East. Most of its products are oil country tubular goods (OCTG) for the energy industry. Shares fell due to the decline in oil prices and investor expectations of weaker oil demand. We retain conviction. The conflict in Ukraine highlighted the need to reorient supply chains away from politically risky jurisdictions such as Russia. Near term, this focus on energy security will likely result in increased reliance on the domestic supply of hydrocarbons, particularly U.S. shale gas. As one of the lowest-cost OCTG producers, Tenaris should be a major beneficiary of the increase in capital expenditures on U.S. drilling operations. We also expect Tenaris will continue to generate better pricing and higher margins for its OCTG products due to limited supply.

Quarterly Attribution Analysis (Institutional Shares)

as of 03/31/23

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 03/31/23

Baron Emerging Markets Fund (Institutional Shares) appreciated 2.68% in the first quarter, yet trailed the MSCI EM Index by 128 basis points due to a combination of stock selection and differences in country weights.

On a country level, favorable stock selection in China, South Africa, and the Philippines along with unique exposure to Japan added the most value. Lack of exposure to several commodity-centric countries in the Middle East, namely Saudi Arabia, the UAE, and Kuwait, also aided performance as falling oil prices hampered performance in these jurisdictions. These relative gains were mostly offset by the Fund’s meaningfully higher exposure to India given equity markets in the country continued to retrace prior period gains due to profit taking as valuations became a bit overextended following strong relative performance over the last few years. The pullback was made worse by widespread selling of Adani-linked securities following the release of a scathing short report targeting the Adani Group and other related businesses in late January. Lower exposure to better performing Taiwanese equities coupled with disappointing stock selection in Brazil, Korea, and India also factored into the relative shortfall during the quarter. Lastly, the Fund’s unique exposure to Italy, Hong Kong, and the U.K. proved costly, detracting 80-plus basis points from relative performance.

From a sector or theme perspective, lack of exposure to the lagging Utilities sector together with favorable stock selection in Industrials and Communication Services added the most value. A few of the Fund’s China value-added holdings were responsible for relative gains in Industrials, with Estun Automation Co., Ltd. and Zhejiang Dingli Machinery Co., Ltd. leading the way in the sector. Performance in Communication Services was almost entirely bolstered by Chinese software leader Kingsoft Corporation Ltd. and artificial intelligence (AI) company Baidu, Inc., which belong to the Fund’s China value-added and digitization themes, respectively. Kingsoft benefited from strong growth in office software subscription revenue and expectations that new generative AI features will increase long-term demand for productivity tools. We believe Kingsoft will be the primary beneficiary of the rapid growth of China’s office software market and shift towards domestic software vendors. Baidu’s shares rose in response to the company’s successful introduction of China's first ChatGPT-like AI chat bot. We see significant upside for Baidu due to an improving outlook for its mobile ecosystem, continued market share gains in cloud computing supported by its generative AI capabilities, solid progress in autonomous vehicle development, and improving operational efficiency.

The above-mentioned gains were offset by adverse stock selection in Financials, as several of the Fund’s India wealth management/consumer finance holdings were a material drag on performance, led by Bajaj Finance Limited, JM Financial Limited, SBI Life Insurance Company Limited, ICICI Bank Limited, Nippon Life India Asset Management Limited, and Edelweiss Financial Services Limited. Brazilian fintech disruptor XP Inc. also weighed on performance after reporting disappointing financial results as the higher for longer rate environment has proved extremely challenging for the company’s business model. Lower exposure to strong performing semiconductor stocks within Information Technology coupled with stock-specific weakness in Energy also played a role in the underperformance during the quarter. Oil country tubular goods manufacturer Tenaris S.A. (global security) and Indian conglomerate Reliance Industries Limited (digitization) were responsible for the relative shortfall in the Energy sector. Tenaris was hurt by the decline in oil prices and expectations of weaker oil demand, while Reliance shares underperformed due to disappointing refining margins.

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.