Review and Outlook

as of 06/30/21

Domestic investors spent the second quarter debating whether the ongoing economic rebound will lead to elevated inflation. As usual, short-term macroeconomic data was opaque, volatile, and inconclusive, enabling central bankers and investors to pick and choose the data that supported their favored conclusion. Visibility has been further confounded by a dispute over the impact of generous federal unemployment benefits on tight labor markets. Interest rates, as measured by the yield on the 10-year U.S. Treasury bond, fluctuated as investors struggled to divine the future trajectory of prices and how the U.S. Federal Reserve will accordingly set monetary policy. Despite the uncertainty, the markets were largely positive, rising to record highs during the quarter as a significant decline in COVID-19 cases combined with a near-total economic reopening across the country led a surge in economic growth.

Against this backdrop, Baron Focused Growth Fund increased in the quarter. Holdings within Health Care, Financials, and Information Technology (IT) contributed the most. Consumer Discretionary, Communication Services, and Industrials investments detracted. Health Care had a strong quarter, with top contributor BioNTech SE and second largest contributor Figs Inc. within the sector. Financials benefited from gains in the portfolio’s two holdings within the sector, including financial information provider FactSet Research Systems, Inc. Appreciation within IT was led by electronic payments provider Adyen B.V. Consumer Discretionary lost ground as travel and leisure-related stocks took a breather, including top detractor Penn National Gaming, Inc. and third largest detractor Hyatt Hotels Corp. Second largest detractor Tripadvisor, Inc. drove much of the weakness within Communication Services. Industrials gave up gains on weakness in Space Exploration Technologies Corp., which designs and builds rockets, satellites, and spacecraft.

While as investors we have always taken a long-term perspective, as people, we are as pleased as anyone that near-term prospects for our country seem quite encouraging as the vaccination program – unprecedented for its breadth and speed – appears to have been successful in helping put the worst of the pandemic in the rear-view mirror. We are feeling optimistic that continued government support for the economy combined with economic conditions that are moving back to normalcy bode well for the market going forward.

Top Contributors/Detractors to Performance

as of 06/30/21

Contributors

  • BioNTech SE is a leader in the emerging field of mRNA drugs, with additional programs in engineered cell therapies, antibodies, and immunomodulators. Shares performed well for the quarter. The COVID-19 vaccine rollout continued, and we believe the pandemic has been a strong proof point of the speed and efficacy of the mRNA platform. Beyond vaccines, we think BioNTech has potential to disrupt the biopharmaceutical space with a pipeline spanning oncology, infectious diseases, and rare diseases.
  • Figs Inc. operates the largest direct-to-consumer platform in health care apparel. The stock rose following its May IPO. We remain bullish on Figs' long-term growth opportunity to disrupt the medical apparel market both domestically and overseas and see plenty of space to grow its customer base. We like the company's financial operating model and mid-20’s EBITDA margins in 2020, which we believe are sustainable over the long term due to factors that include low markdown / fashion risk and declining customer acquisition costs.
  • Vail Resorts, Inc., a global owner and operator of ski resorts, contributed during the quarter on reports of season pass sales that were 33% above 2019 levels despite a 20% price cut. Season pass sales are a key component of growth as pass holders are the most frequent visitors to the resorts and the most likely to return the following season. Given the strong sales figures, we believe next year's EBITDA should be significantly above pre-pandemic levels, generating robust cash flow for the reinstallation of Vail's dividend and additional M&A.

Detractors

  • Penn National Gaming, Inc., a regional U.S. casino operator, detracted on news that the company had lost sports betting and i-gaming market share in both Michigan and Pennsylvania. While the lost market share is a disappointment, Penn has been able to maintain a double-digit share with no marketing. We believe the market is attributing little value to Penn's Barstool equity stake as well as its online gaming and sports betting opportunities including its access fees from other operators. We view the valuation as attractive.
  • Tripadvisor, Inc. is an online travel company where users can browse reviews and plan trips. Shares fell on concerns that new COVID-19 variants would delay the recovery of the travel industry. In addition, investors appeared concerned that Tripadvisor’s new Tripadvisor Plus subscription offering, which launched in June, would face competitive pressures. We do not believe traditional loyalty programs will be materially competitive with the upfront savings offered by Tripadvisor Plus. We also think Tripadvisor is well positioned to benefit from pent-up consumer demand for travel. 
  • Hyatt Hotels Corp., a global hotelier, detracted over investor concerns around a new, more contagious variant of COVID-19 and a reopening of Asia and Europe slower than market forecasts. While the slowed reopening is a disappointment, Hyatt's domestic business and group bookings are starting to return and we think conditions will normalize by 2022, at least domestically. The company remains on track with its asset sale program as the hotel transaction market returns to pre-pandemic valuations, which should make Hyatt a more valuable, fee-based business.

Quarterly Attribution Analysis (Institutional Shares)

as of 06/30/21

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 06/30/21

Baron Focused Growth Fund (Institutional Shares) appreciated 2.42% in the second quarter, yet trailed the Russell 2500 Growth Index by 362 basis points due to stock selection and, to a lesser extent, relative sector weights.

Health Care investments and lack of exposure to the underperforming Materials sector added the most value. Favorable stock selection in Health Care was largely due to sharp gains from mRNA vaccine manufacturer BioNTech SE and health care apparel platform Figs Inc. BioNTech was the largest contributor driven by additional strong clinical data on its COVID-19 vaccine and comparatively weaker data from competitors, while Figs was another top contributor following the company’s successful IPO in late May. Lower exposure to lagging biotechnology stocks and outperformance of Denali Therapeutics Inc. also added value. Shares of Denali, a biopharmaceutical company developing a broad portfolio of product candidates engineered to cross the blood-brain barrier for neurodegenerative diseases, performed well despite limited impactful news flow. We expect more significant news in the second half of the year as we get updates across key pipeline assets that utilize Denali's blood-brain barrier carrier technology to treat a rare genetic disease called Hunter syndrome.

Consumer Discretionary, Communication Services, and Industrials investments and meaningfully lower exposure to strong performing software stocks within Information Technology detracted the most from relative results. Adverse stock selection in Consumer Discretionary related to the poor performance of regional casino operator Penn National Gaming, Inc. and electric vehicle manufacturer Tesla, Inc. accounted for most of the relative shortfall in the period. Penn was the largest detractor after losing sports betting and i-gaming market share in both Michigan and Pennsylvania, while Tesla’s shares underperformed despite demonstrating strong execution in a complex supply chain environment and generally improving performance in China. Significantly higher exposure to this underperforming sector also weighed on relative results. Weakness in Communication Services was driven by online travel company Tripadvisor, Inc., whose shares were pressured by news that competitor Expedia will expand its current rewards program to compete more aggressively with the company’s new Tripadvisor Plus subscription offering. English Premier League professional sports team Manchester United plc and satellite company Iridium Communications Inc. also hampered performance in the sector as pandemic-related restrictions continued to negatively impact their businesses. Within Industrials, private rocket and spacecraft manufacturer Space Exploration Technologies Corp. (SpaceX) and real estate information and marketing services company CoStar Group, Inc. hurt relative performance. SpaceX’s shares were revalued lower using prices of recent transactions and a proprietary valuation model, while CoStar’s stock underperformed due to fallout from the company’s failed bid to acquire CoreLogic.

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.