Review and Outlook

as of 12/31/20

The Review and Outlook for period ending December 31, 2020, is not yet available.

Top Contributors/Detractors to Performance

as of 12/31/20

Contributors

  • Square, Inc. provides point-of-sale technology to small businesses and operates the Cash App ecosystem of financial services for individuals. The stock increased after the company reported strong financial results for the most recent quarter. Cash App gross profit increased 212%, driven by record new users and engagement while the Seller business was resilient despite headwinds from COVID-19.  We continue to own the stock due to, in our view, Square’s long runway for growth, sustainable competitive advantages, and unique corporate culture.
  • Adyen N.V. enables merchants to accept electronic payments.  The company has been less impacted by pandemic lockdowns than other payment companies due to its high e-commerce exposure.  Shares increased after the company reported accelerating growth in payment volume and revenue as economies reopened. The company also restated earnings higher after mistakenly double-counting certain costs, driving an upward revision in earnings estimates. We believe Adyen will be a prime beneficiary of the secular growth of e-commerce and will continue to gain share over time.
  • Nuvei Technologies Corp. is a Canadian-based payment processor that serves online merchants around the world.  The stock increased after the company reported strong financial results for the recent quarter with 36% payment volume, a meaningful acceleration from the prior quarter.  As a recent IPO, shares likely benefited from increasing investor awareness as well as optimism about the growth potential for online gambling in the U.S.  We continue to own the stock due to Nuvei’s numerous growth opportunities and founder-led management team.

Detractors

  • Alibaba Group Holding Limited is the largest retailer and e-commerce company in China. Alibaba operates shopping platforms Taobao and Tmall and owns 33% of Ant Group, which operates Alipay, China's largest third-party online payment provider. Shares were down on the news that Chinese regulators had launched an investigation into Alibaba for suspected monopolistic behavior. We continue to believe Alibaba's core business remains highly profitable, complemented by rapid growth in the cloud business and inflection in the Cainiao logistics and New Retail segments.
  • Duck Creek Technologies, Inc. is a leading provider of core systems software for the property & casualty insurance industry. Despite reporting results that beat analyst forecasts, with subscription revenue up 54% and SaaS annual recurring revenue up 85%, the stock price fell, possibly due to a rotation away from high-growth stocks. We retain conviction. Insurers are increasingly recognizing the need for modern, cloud-based software, and we like the company’s strong product set and long runway for growth.

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 FinTech Fund (Institutional Shares) appreciated 13.67% in the fourth quarter and outperformed the S&P 500 Index by 152 basis points primarily due to differences in sector weights. The Fund also benefited from exposure to smaller-cap stocks, which significantly outperformed their larger-cap counterparts as the market rallied during the quarter.

Outperformance of Information Technology (IT) investments and lack of exposure to the lagging Health Care and Consumer Staples sectors added the most value. Favorable stock selection in IT was driven by sharp gains from electronic payment companies Square, Inc. and Nuvei Technologies Corp. Square was the largest contributor after reporting strong financial results for the most recent quarter. Cash App gross profit increased 212%, driven by record new users and engagement while the Seller business was resilient despite headwinds from COVID-19. Nuvei was another top contributor after the company reported strong financial results for the recent quarter with 36% payment volume, representing a meaningful acceleration from the prior quarter. The company’s shares also likely benefited from increasing investor awareness as well as optimism about the growth potential for online gambling in the U.S. Strength in the sector also came from Adyen N.V., which enables merchants to accept electronic payments, and Fair Isaac Corporation, a data and analytics company focused on predicting consumer behavior. Adyen was the second largest contributor after reporting accelerating growth in payment volumes and revenue as economies reopened. The company has been less impacted by pandemic lockdowns than other payment companies due to its high e-commerce exposure. Fair Isaac’s shares were up after the company reported strong quarterly earnings and confirmed the implementation of another round of special pricing in FICO Scores, which provides consumer credit history ratings.

Financials investments, cash exposure in a rising market, and lack of exposure to the Energy sector, which was up sharply alongside the price of oil, detracted the most from relative results. Adverse stock selection in Financials, owing largely to the underperformance of credit rating agencies S&P Global Inc. and Moody's Corporation, was somewhat offset by higher exposure to this strong performing sector. Despite reporting solid financial results, shares of S&P Global and Moody’s were hurt by investor expectations that debt issuance will moderate in 2021 due to tough comparisons.

as of 12/31/20

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

Baron FinTech Fund (Institutional Shares) was up 47.20% for the year, meaningfully outperforming the S&P 500 Index by 28.80% due to favorable stock selection and, to a lesser extent, relative sector weights.

Investments in IT, Financials, and Industrials and lack of exposure to the declining Energy sector contributed the most to relative results. Significantly higher exposure to the top performing IT sector accounted for more than a third of the Fund’s outperformance in the period. Stock selection was also positive in the sector thanks to triple-digit gains from digital payment platforms Adyen N.V. and PayPal Holdings, Inc. These companies were the two largest contributors after benefiting from the rapid growth of e-commerce during the year. Several other holdings also performed well in the sector, led by outsourced software development providers EPAM Systems, Inc. and Endava plc, payment processors Repay Holdings Corporation, Nuvei Technologies Corp., and Shift4 Payments, Inc., and P&C insurance software vendor Duck Creek Technologies, Inc. Strength in Financials, related to the outperformance of specialty insurer Kinsale Capital Group, Inc. and investment decision support tools provider MSCI, Inc., was partly offset by higher exposure to this lagging sector. Kinsale’s shares nearly doubled after reporting strong quarterly financial results, with premium growth in excess of 40% in each of the first three quarters of the year and an improvement in the core underwriting margin. Industry conditions remain favorable and the company is meaningfully raising rates, which we believe should lead to continued strong earnings growth over time. MSCI’s stock price increased in response to solid earnings throughout the year despite the challenging COVID-19 backdrop as management was able to effectively manage costs. MSCI's asset-based fee revenue also positively contributed during the back half of the year due to strong market conditions and inflows. Performance in the sector was also bolstered by electronic trading platform MarketAxess Holdings Inc. and credit rating agencies Moody's Corporation and S&P Global Inc. MarketAxess stock rose as elevated market volatility and share gains drove growth in credit trading volume in the first half of the year, while shares of Moody’s and S&P Global outperformed as falling interest rates and stimulus measures from the Federal Reserve drove strong corporate bond issuance. Non-financial investment grade issuance hit a record by a wide margin after more than doubling in the period, and high yield issuance was also meaningfully higher. Within Industrials, outperformance of research & consulting services businesses CoStar Group, Inc. and Verisk Analytics, Inc. added the most value.

Lower exposure to the outperforming Consumer Discretionary sector weighed the most on relative results.