Review and Outlook

as of 03/31/24

The bull market that started at the end of October of 2023 kept running throughout the first quarter of 2024. Even the renewed threat of "higher for longer" interest rates did not put a check on equity performance. Investors entered the new year optimistic that a soft landing was in store for the economy, in which a recession would be avoided, inflation would continue to dissipate, and the Fed would start cutting interest rates in March. The economy has not only avoided recession but has been stronger than market forecasts. Meanwhile, inflation has again turned sticky, and Fed rate cuts have been delayed to at least June. The FactSet Global FinTech Index advanced 3.60%.

Against this backdrop, Baron FinTech Fund increased. Holdings within Financials, Industrials, and Real Estate contributed, while investments within Information Technology (IT) and Consumer Discretionary detracted. Financials had a strong quarter, with advances in 24 out of 27 holdings, including the top three contributors to performance. Credit bureau company TransUnion led gains within Industrials. Real Estate advanced on share price gains in CoStar Group, Inc., a provider of marketing and analytics to the real estate industry. Top detractor Endava plc led declines within IT. Consumer Discretionary detracted on a modest pullback in shares of MercadoLibro, Inc., the largest e-commerce company in Latin America and the portfolio’s only holding within the sector.

While we are certainly aware of the macroeconomic environment, we do not invest based on predictions of GDP growth, inflation, interest rates, or foreign currencies. We take an agnostic approach to short-term market and economic forecasts because nobody really knows. We do know economies tend to grow and equity markets tend to appreciate over time. We also know fintech includes a plethora of companies with long runways for growth and durable competitive advantages that we expect will outperform the broader equity market over the long run.

We have curated a diversified portfolio of fintech businesses to reduce exposure to any single economic outcome. The portfolio is balanced across seven themes, each of which is influenced by idiosyncratic factors. We include a mix of Leaders and Challengers, with the relative mix driven by top-down risk considerations and bottom-up opportunities. We believe fintech remains in the early innings of growth, as incumbent financial institutions still have a long digitization journey ahead and younger consumers continue favoring digital solutions.

Top Contributors/Detractors to Performance

as of 03/31/24

Contributors

  • Shares of insurance holding company The Progressive Corporation contributed in the quarter. Progressive reported strong results that suggested its current policy rates can support improved revenue and profits. The company spent most of 2023 pulling back on growth while it applied for, and received, rate increases from state insurance regulators. Having achieved adequate rates in most states entering 2024, management plans to increase ad spend to drive greater leads and policy growth. The prospects of strong earnings as a result of the rate increases and the company's growth initiatives led to shares performing well in the quarter.
  • Nu Holdings Ltd. is a digital bank with operations in Brazil, Mexico, and Colombia. Shares appreciated during the quarter, as the company reported strong balance sheet growth and continued improvement in profitability. Initiatives to deploy new products and accelerate growth in new geographies are yielding strong results, leading to enhanced earnings expectations. Nu also benefited from news that its shares had become eligible for inclusion in the MSCI Brazil index, which drove technical flows into the name. We remain investors. Nu is disrupting the financial services industry in Latin America via its digital distribution and intense focus on user experience, which has allowed it to reach over 90 million registered users (almost half of the Brazilian adult population) in less than 10 years with little marketing investment. We believe its superior product offering will allow it to take share from incumbents in this massive market.
  • Shares of leading private equity firm Apollo Global Management, Inc. contributed in the quarter following a positive earnings update in which management expressed optimism regarding opportunities for 2024 and beyond. We remain investors. Apollo continued to raise significant capital through both its captive insurer, Athene, and third-party capital, supporting strong earnings growth expectations. Apollo is also scaling its origination capabilities, which should facilitate the deployment of large amounts of capital and earn compelling returns for LPs. Finally, it kept 2024 guidance as is despite widespread expectations of lower interest rates, which should lead to positive earnings revisions down the road.

Detractors

  • Shares of IT services provider Endava plc fell after management cut guidance for the fiscal year ending June 30, 2024. Growth has slowed over the last year as business customers pulled back on discretionary IT spending due to macroeconomic uncertainty. Last fall, management was seeing early signs of a recovery, but new projects have been taking longer to materialize as customers delay spending decisions. Higher expenses due to increased staffing to meet anticipated demand weighed on margins as well. Management acknowledged that it misread the market and is taking steps to right-size the cost structure to improve margins. We remain invested because we expect these near-term headwinds to abate over time, leading to better growth as clients embrace digital transformation.
  • Shares of Intapp, Inc., a provider of cloud-based software for the legal, accounting, private capital, and investment banking sectors, detracted during the quarter. Intapp reported a solid fourth quarter with 23% revenue growth and 7% operating margins — both above consensus estimates — and management raised its full-year guidance for revenue, operating margins, and earnings per share. However, shares sold off during the quarter due to investor concerns about near-term budgetary headwinds in the investment banking customer segment. In addition, one of Intapp’s pre-IPO investors exited most of its position in early March. We view both issues as short term and purchased more shares on weakness. We are optimistic about Intapp's long-term prospects as it continues to win share in financial services markets, expand its wallet share across large clients, and improve its free cash flow margins.