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 (Institutional Shares)

as of 12/31/20

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 12/31/20

Baron Focused Growth Fund (Institutional Shares) increased 32.35% in the fourth quarter and outperformed the Russell 2500 Growth Index by 646 basis points due to favorable stock selection.

Outperformance of Consumer Discretionary and Communication Services investments and lack of exposure to the lagging Consumer Staples and Materials sectors added the most value. Stock selection in Consumer Discretionary accounted for the entirety of the Fund’s outperformance in the period, driven by a 64.5% gain from electric vehicle manufacturer Tesla, Inc. The company was the largest contributor due to strong operating results, the release of full self-driving functionality, and inclusion in the S&P 500 Index, a meaningful milestone that expands the potential shareholder base. Hotel and leisure companies Hyatt Hotels Corp. and Vail Resorts, Inc. also performed well given expectations that travel will increase as several newly developed COVID-19 vaccines work to help bring an end to the pandemic. Strength in Communication Services was due to the outperformance of satellite communications company Iridium Communications Inc. and digital music service leader Spotify Technology S.A. Iridium’s business proved resilient after reporting strong quarterly results and raising guidance due to record consumer activations. The company’s growing pipeline of Certus services within the Maritime and Department of Defense segments are expected to enhance growth as installations accelerate in the coming years. Spotify’s shares rose for the period held on strong quarterly results that saw robust user growth and engagement and an improving ad revenue outlook.

Investments in Information Technology (IT), Industrials, and Health Care and cash exposure in a market rally weighed the most on relative performance. Within IT, minimal exposure to strong performing software, semiconductor, and semiconductor equipment stocks detracted 175 basis points from relative results. Weakness in the sector also came from data center operator GDS Holdings Limited and electronic payment platform Adyen N.V., whose shares underperformed following a strong run of performance earlier in the year. Negative stock selection in Industrials was largely due to the underperformance of CoStar Group, Inc., a real estate information and marketing services company. CoStar’s shares failed to keep pace with the broader market after meaningfully outperforming in the early stages of the COVID-19 pandemic. CoStar has experienced accelerated demand for its digital marketplace businesses as traditionally offline activities are increasingly shifting online. This trend is being partially offset by slower trends in its CRE data licensing businesses. Within Health Care, the Fund’s small positions in online drug pricing platform GoodRx Holdings, Inc. and telehealth company American Well Corporation detracted from performance before being sold in an effort to allocate capital to higher conviction ideas.

as of 12/31/20

Yearly Attribution Analysis (for year ended 12/31/2020)

Baron Focused Growth Fund (Institutional Shares) appreciated 122.75% for the year and significantly outperformed the Russell 2500 Growth Index by 82.28% due to stock selection. Style biases also added value, driven by overexposure to the strong performing residual volatility, beta, liquidity, momentum, and growth factors.

Outperformance of Consumer Discretionary and Industrials investments and lack of or lower exposure to the lagging Materials, Consumer Staples, Real Estate, Energy, and Utilities sectors added the most value. Stock selection in Consumer Discretionary was the primary driver of outperformance in the period, owing to outsized gains from electric vehicle manufacturer Tesla, Inc. and regional casino company Penn National Gaming, Inc. Tesla was the largest contributor after exceeding key growth and profitability expectations in a difficult environment. Penn was another top contributor after revenues quickly rebounded at its reopened properties and betting activity was strong following the launch of the Barstool Sportsbook app. Penn’s quarterly revenue and earnings results beat investor expectations driven by robust margin growth across all of its casino properties. Strength in Industrials was due to the outperformance of CoStar Group, Inc., a real estate information and marketing services company. CoStar was the third largest contributor as net new sales reaccelerated more quickly than investor forecasts due to heightened demand for the company’s digital marketplace businesses. The company has over $3.6 billion cash on its balance sheet, which we expect it will use for TAM-expanding acquisitions, particularly in the residential market.

IT investments, minimal exposure to strong performing biotechnology, health care equipment, and life sciences tools & services stocks within Health Care, and higher exposure to the underperforming Financials sector detracted the most from relative results. Within IT, meaningfully lower exposure to software stocks, which were up 77% in the index, accounted for most of the negative relative impact in the sector. Weakness in IT was also due to the underperformance of benefits enrollment platform Benefitfocus, Inc. and P&C insurance software vendor Guidewire Software, Inc. Benefitfocus's share price decline was exacerbated by investor concerns about the company's ongoing business model transition, which pushed out profitability and cash flow targets by several years. We exited the position in early March as a result of these developments. Guidewire’s shares underperformed because the company’s transition to the cloud has caused short-term financial headwinds and slowed the cadence of new license sales.

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.