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. While growth equities underperformed value stocks, growth was still ahead by a wide margin for the year.

Baron Focused Growth Fund increased in the quarter. Consumer Discretionary, Communication Services, and Industrials investments were the top contributors. Holdings within Health Care detracted. All six holdings within Consumer Discretionary had double-digit gains, including top contributor Tesla, Inc., which soared by nearly 65%, as well as Vail Resorts, Inc. and Hyatt Hotels Corporation, the second and third largest contributors, respectively. Communications Services advanced on strong performance by satellite communications company Iridium Communications Inc. and leading music streaming service Spotify Technology SA. Shares of Iridium rose after results revealed resiliency despite exposure to pandemic-impacted verticals. Shares of Spotify rose on robust user growth and engagement and an improving ad revenue outlook. CoStar Group, Inc. drove performance of the Industrials sector, after shares of this real estate information and marketing services company increased on an acceleration in demand for its digital marketplace businesses as traditionally offline activities increasingly shift online. With all three top detractors within the sector, Health Care had a relatively weak quarter.

We believe that while certain segments of the market will likely take longer to recover, in many cases, that likelihood is already baked into lower valuations for those companies. At the same time, we think other companies and segments of the market will continue to benefit from the acceleration in digitization and other secular trends as a result of the pandemic’s impact on the way we work, learn, socialize, and entertain ourselves.

We look at 2020 as a testament to our active, long-term approach to investing. Considering the unprecedented and unexpected effects of the pandemic on the economy and our lives, the fact that the markets have recovered all of their losses and then some since the start of the year is an outstanding outcome. The patient investor has been rewarded for staying calm during the storm.

Top Contributors/Detractors to Performance

as of 12/31/20

Contributors

  • Tesla, Inc. designs, manufactures, and sells fully electric vehicles, solar products, and energy storage solutions. The stock increased on strong financial results, including profitability that exceeded market forecasts and strong growth across different geographies and vehicle programs. Newly released full self-driving functionality could also lead to improving unit economics and growth opportunities, in our view. Lastly, Tesla joined the S&P 500 Index, a meaningful milestone that expands the potential shareholder base. 
  • Vail Resorts, Inc., a global operator of ski resorts, contributed in the quarter on season pass sales that were up 20% from last year despite the pandemic. Robust renewal rates demonstrated loyalty in Vail's pass base while first time pass sales have the potential to accelerate future growth. We expect Vail to grow recurring revenue given its strong renewal rates, which, combined with a robust balance sheet, should position the company for continued growth in the years ahead.
  • Global hotelier Hyatt Hotels Corp. contributed to results on investor expectations that travel will increase as several newly developed COVID-19 vaccines work to help bring an end to the pandemic. While it may take time for Hyatt's business and group customers to return, a strong leisure business is aiding recovery in revenue per available room. Hyatt has also successfully lowered its breakeven occupancy levels by reducing fixed costs and has cut its capital budget to preserve cash. Hyatt's strong balance sheet is allowing it to weather the pandemic-generated disruption.

Detractors

  • Shares of GoodRX Holdings, Inc., which operates the nation's largest online platform providing users free access to drug pricing information and pharmacy discounts, gave back some of its heady post-IPO run on Amazon's announcement that it has entered the online pharmacy space. Although Amazon is a formidable rival, we believe its success is not assured as its participation is limited to the low-penetration mail order segment of the market while GoodRX has the advantages of the leading brand, best pricing, telehealth tie-in, and nascent opportunities in drug manufacturer referrals.
  • Shares of American Well Corporation, one of the U.S.’s largest telehealth companies for health systems, health plans, employers, and doctors, gave back some post-September IPO gains after reporting third quarter results that beat consensus but included some pull forward from the fourth quarter as well as the benefit of some nonrecurring service revenues. Full year 2020 guidance beat Street estimates but implied top line and margin deceleration, which we believe could end up being conservative, given the lack of assumed increase in pandemic-driven volumes despite the current spike.
  • BioNTech SE is a leader in the emerging field of mRNA drugs and has additional programs in engineered cell therapies, antibodies, and immunomodulators. During the period held, shares pulled back from intra-quarter highs on likely profit taking, but we are looking past short-term valuation fluctuations to focus on long-term potential. The pandemic has been a strong proof point of the speed and efficacy of the mRNA platform, and we believe BioNTech has the potential to disrupt the biopharma space with a pipeline spanning oncology, infectious diseases, and rare diseases.

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.