Review and Outlook

as of 06/30/20

After lagging at the start of the quarter, emerging market (EM) equities finished quite strong. As the U.S. Federal Reserve, Congress, and global policymakers moved to construct a fiscal and liquidity bridge to economic reopening, capital moved toward the underwritten assets. Countries with room for fiscal expansion or with account and FX reserve surpluses and industries or companies with strong credit quality were also early beneficiaries. By mid-April, it was clear that markets were discerning among industries and companies as perceived beneficiaries of COVID-19 disruption, others that were adversely impacted but likely to remain going concerns, and a third group viewed as “COVID-19-impaired.” Like most equity managers, our portfolio contained exposure to each category. Our strategy was to hold our COVID-19-impaired investments given what we viewed as overly punitive discounts, with a goal of exiting should they return to our assessment of fair value on enthusiasm over reopening or vaccine/therapy developments. We also added to certain COVID-19-impacted investments given our view that they would eventually return to normal conditions and analyzed COVID-19-beneficiaries to determine whether the benefit was long term or transitory. Similarly, markets assigned a hierarchy of performance by country based on perceived ability to manage the health care, economic, and liquidity crises, with certain EM countries at the short end of the stick. In our view, given that capital markets and currencies had already been repriced, capital chasing those assets carrying the greatest insurance premium had created an attractive arbitrage opportunity for the perceived riskier securities and businesses.

As the second quarter progressed and global economies increasingly pursued reopening and progress towards potential vaccines was announced, lagging COVID-19-impacted and impaired equities and currencies began to outperform as capital migrated from the consensus underwritten and beneficiary assets. This drove high volatility and significant mean reversion. Strong performance by our COVID-19 beneficiaries combined with a significant recovery across the rest of our portfolio led to a robust quarter for our strategy while also allowing us to opportunistically upgrade our holdings as appropriate in a post-COVID-19 environment.

Looking forward, we believe COVID-19 will be the catalyst that likely confirms a policy shift through the portal of “Modern Monetary Theory,” which we suspect will lead to a shift in relative performance in favor of non-U.S. equities, as well as a U.S. dollar bear market. We have taken advantage of recent market events to further concentrate our portfolio in attractive long-term themes and companies that we believe are well positioned to prosper from significant catalysts, reforms, and long-term trends. Also, we believe the evolving and complex relationship between the U.S. and China represents a tectonic shift in geopolitics that is creating exciting long-term investment opportunities for forward looking and bottom-up investors such as ourselves.

Top Contributors/Detractors to Performance

as of 06/30/20


  • Tencent Holdings Limited operates the leading social network and messaging platforms in China (QQ, WeChat), the largest online entertainment and media business in China, and the largest online PC and mobile gaming business in China. Shares of Tencent were up on strong Q1 results as the pandemic drove increased time spent on Tencent platforms and strong performance in smartphone gaming. Long term, we believe Tencent can grow each of its large business segments for years to come given its track record of execution, scale, and unique and diversified online assets.
  • Zai Lab Limited is a Chinese biotechnology company in-licensing drugs from developed countries to introduce to the Chinese health care market. Shares increased given a favorable reception to its recent in-licensing deal with Regeneron. The deal continues to cement Zai as a partner of choice for Western medicines in the China market. Recent commercial launches of two drugs for cancer treatment by Zai and a strong China health care market broadly should also help drive positive sentiment toward the company, in our view.
  • Reliance Industries Limited is India's leading conglomerate, with business interests that include oil refining, petrochemicals, media, telecommunications, and retail. Shares increased after the company sold a 25% stake in Jio Platforms for more than $15 billion to a number of strategic and financial investors including Facebook, KKR, and Silver Lake. This is a very large capital raise for an Indian company, and we see it as a vote of confidence by outside investors in Reliance's e-commerce growth opportunity in India.  We believe earnings can grow 15-18% CAGR over the next 5 years.   


  • Guangzhou Automobile Group Company Limited detracted from performance due to the COVID-19 pandemic’s negative impact on auto sales and industry profitability in China. Although Guangzhou remains one of the top automakers in China with a strong brand portfolio, we believe increasing competition and a potentially long recovery path will continue to weigh on the stock sentiment. We decided to exit the position.
  • Haitong Securities Co., Ltd. is a securities firm in China primarily focused on brokerage, asset management, and investment banking. Shares declined due to a weaker outlook for brokerage and investment income as suggested by interim operating figures. The announced removal of Haitong from the Hang Seng China Enterprises Index also weighed on shares. We exited our position, as the benefits of China's capital markets reform are taking longer than we anticipated, and company earnings remain tied to market volatility and cyclical factors.
  • Infraestructura Energetica Nova S.A.B. de C.V. is a Mexico-based energy infrastructure firm. It owns natural gas pipelines, an LNG storage and regasification terminal, a gas distribution utility, an electricity generation plant, and renewable energy assets. Shares came under pressure after a regulatory decision to significantly curtail the use and development of renewable electricity generation. We decided to exit our investment due to regulatory uncertainty, which in our view negatively impacts broader business development for both utilities and LNG exports in Mexico. 

Quarterly Attribution Analysis (Institutional Shares)

as of 06/30/20

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 06/30/20

Baron Emerging Markets Fund (Institutional Shares) was up 26.67% in the second quarter, meaningfully outperforming the MSCI EM Index by 859 basis points due to stock selection and, to a lesser extent, relative sector weights.

On a country level, favorable stock selection in China, Brazil, and India and higher exposure to strong performing Indian equities added the most value. India was among the top performing countries in emerging markets due to COVID-19 treatment optimism and hopes for a long-awaited stimulus package from the Indian government. Investments in Hong Kong, Russia, Hungary, and Argentina also outperformed the broader market in the period. These positive effects were somewhat offset by cash exposure in a rising market and adverse stock selection in Korea.

On a sector level, investments in Information Technology (IT), Financials, Communication Services, and Consumer Discretionary and higher exposure to strong performing biotechnology and pharmaceutical stocks within Health Care added the most value. Stock selection in IT accounted for approximately a third of the Fund’s outperformance in the period, led by sharp gains from Chinese software providers Glodon Company Limited, Kingdee International Software Group Co. Ltd., and Kingsoft Corporation Ltd., whose fundamentals were enhanced by the accelerating pace of digitization following COVID-19. Brazilian payment processors PagSeguro Digital Ltd. and StoneCo Ltd. also added value after their businesses benefited from the rapid transition to contactless payments because of COVID-19. Within Financials, significantly lower exposure to diversified banks added the most value after these businesses were negatively impacted by declining interest rates and concerns around credit risks. Performance in the sector was also bolstered by Brazilian investment management company XP Inc., financial exchange operator B3 S.A. - Brasil, Bolsa, Balcao, and several Indian financial companies, including Max Financial Services Limited, Bajaj Finance Limited, and Edelweiss Financial Services Limited. Communication Services holdings outperformed after appreciating nearly 36% as a group, led by Indian telecommunication services provider Tata Communications Limited, Russian search engine Yandex N.V., and Indonesian tower operator PT Tower Bersama Infrastructure, Tbk. Strength in Consumer Discretionary came from travel agency and duty-free business operator China Tourism Group Duty Free Corporation Limited and home services shopping platform Meituan Dianping. China Tourism Group’s stock price more than doubled following the unveiling of a new policy to further support Hainan province becoming a free trade center and lifting duty-free purchasing restrictions. Meituan’s shares rose sharply after the company’s quarterly results surpassed investor expectations, helped by a resilient food delivery business.

Aside from cash, lower exposure to the outperforming Materials sector hurt relative results.

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.