Review and Outlook

as of 03/31/23

Stocks mostly increased during the first quarter, with the Russell 2500 Growth Index advancing 6.54%. The first two months were more or less a continuation from the end of 2022, with the market’s primary focus on inflation and the Federal Reserve’s next move. That shifted dramatically with the unexpected collapse of Silicon Valley Bank on March 10. Concerns about contagion and the overall health of the banking sector sent shares of many financial institutions into a steep slide. The Fed acted quickly to quell the panic, assuring depositors with assets above the FDIC insurance threshold that they would be made whole. With the banking sector narrowly averting a crisis, and mid-sized and regional banks facing renewed scrutiny and tighter regulations, market expectations are that the SVB failure may act as an additional headwind to an already slowing economy due to higher interest rates. As a result, some investors are now anticipating that the Fed will, in fact, pull back on its aggressive tightening program.

Baron Focused Growth Fund advanced 14.49% in the quarter. Holdings within Consumer Discretionary, Information Technology (IT), and Financials were the top contributors. Real Estate and Industrials investments detracted. Consumer Discretionary had a strong quarter, with top contributor Tesla, Inc. and second largest contributor Hyatt Hotels Corp. within the sector. IT increased on double-digit gains in the shares of all three sector holdings, led by P&C insurance software company Guidewire Software, Inc. MSCI Inc., a leading provider of investment decision support tools, drove much of the appreciation within the Financials sector. Real Estate had a challenging quarter, with second largest detractor Douglas Emmett, Inc. and third largest detractor Alexandria Real Estate Equities, Inc. both within the sector. Top detractor CoStar Group, Inc. drove weak performance within Industrials.

The near-term outlook remains highly uncertain. Investors are still weighing the possible impacts of SVB’s failure on the economy, including credit availability and corporate earnings. Inflation appears to have peaked, with economists now projecting a yearly rate of around 4.0% by the end of 2023, although this number is still ahead of the Fed’s targeted rate of 2.0%. While the job market remains strong, there are signs it is cooling, and housing prices have trended lower due to higher mortgage rates.

As long-term investors, we look past the short-term noise, which we believe is largely unpredictable, to stay true to our time-tested investment process, assembling and managing a portfolio of what we view as well-managed, competitively advantaged companies with durable growth opportunities at attractive valuations.

Top Contributors/Detractors to Performance

as of 03/31/23


  • Tesla, Inc. designs, manufactures, and sells electric vehicles, related software and components, and solar and energy storage products. Following a rapid decline at the end of 2022, the stock rebounded in the first quarter of 2023 on investor expectations that Tesla will continue to grow and maintain industry-leading margins despite a potential recession, COVID-related concerns, competition in China, and a price reduction. In addition, after devoting considerable time to reorganizing Twitter post-acquisition, CEO Elon Musk has re-established his commitment to Tesla, while a management presentation during its analyst day provided visibility into the broad quality of talent leading Tesla. We expect Tesla to continue to lead the electrification of the automotive and energy storage markets through its vertical integration, scale, and cost leadership. As long-term shareholders, we have witnessed Tesla increase deliveries from practically zero to over 1.3 million units while proving it can reduce costs and rapidly expand its product line and manufacturing footprint. We expect Tesla's next platform to have a similar impact on company results.
  • Shares of global hotelier Hyatt Hotels Corp. increased in the first quarter after it reported growth in revenue-per-available-room above pre-pandemic levels, driven by its strong leisure business, which is now 50% of its room base. We believe the company's business transient business should continue to rebound along with its group business that is now pacing above 2019 levels. Sustained owned margin gains from operating improvements implemented during the pandemic will also help drive EBITDA and cash flow over the next few years. Hyatt expects to complete its transition to an 80% fee-based business through the sale of $2 billion of owned assets by the end of 2024. Its balance sheet remains robust and should be able to withstand any economic slowdown that may impact travel, in our view.
  • Iridium Communications Inc. is a leading mobile voice and data communications services vendor offering global coverage via satellite. Shares increased following the company's announcement of a strategic partnership with Qualcomm aimed to integrate Iridium’s satellite communication technology into Qualcomm’s Snapdragon chip series. This partnership should provide a large growth opportunity for Iridium by significantly simplifying the integration of its technology with a slew of new devices including smartphones, laptops, tablets, and other connected devices within the Internet-of-Things (IoT) ecosystem. The relationship should generate revenue for Iridium not only through subscription services to potentially millions of devices but also through royalty and development payments. In addition, Iridium continued to see healthy growth across all key segments and has accelerated its robust shareholder return program with the announcement of its first cash dividend.


  • CoStar Group, Inc. is the leading provider of information and marketing services to the commercial real estate industry. After two straight quarters of robust performance, shares detracted during the quarter, likely due to profit taking. The company is generating robust financial performance, with net new sales growing 15% in the quarter, and margins expanding by 200 basis points excluding growth investments. We expect the company’s core businesses to continue to benefit from the migration of real estate market spend to online channels. CoStar has begun to invest aggressively in building out its residential marketing platform. We estimate CoStar invested around $230 million in this initiative in 2022, and its initial 2023 guidance implies a total investment approaching $500 million. While this is a significant upfront commitment, we believe the residential market represents a transformative opportunity. The company’s proprietary data, broker-oriented approach, and best-in-class management position it to succeed in this endeavor, in our view.
  • Douglas Emmett, Inc. is a REIT that owns and manages office buildings and apartment communities concentrated in West Los Angeles, the San Fernando Valley, and Honolulu. Shares declined due to weak fourth quarter results and full year guidance. Business fundamentals are challenged, driven by slower leasing activity, elevated vacancy, and diminished pricing power across the company's sub-markets. Higher interest expense is also negatively impacting earnings. We remain optimistic about the company's long-term business prospects, owing to its irreplaceable portfolio in supply-constrained markets and manageable debt levels, and we view the current valuation as highly discounted.
  • Alexandria Real Estate Equities, Inc. is the largest pure-play landlord and developer for the life sciences industry. Weak performance during the quarter was driven by investor concerns that tighter lending conditions for the biotechnology sector could lead to diminished leasing activity across Alexandria's real estate footprint. The high number of new life sciences office buildings planned for completion over the next couple of years could also pressure rents across Alexandria's markets. We remain optimistic about Alexandria's prospects given its irreplaceable portfolio of life science clusters that benefits from long-term secular demand tailwinds and meaningful land holdings that support incremental growth. Alexandria's portfolio also has a proven history of resilient performance during challenging economic periods. We view the current valuation as attractive.

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.