Review and Outlook

as of 12/31/23

Following a downdraft from the end of July through October, the markets went on a bull run in the last two months of 2023. Improving inflation data coupled with dovish comments from the Federal Reserve spurred an “everything rally.” In a significant shift from its earlier stance, the Fed suggested it was planning three interest rates cuts over 2024. The end of “higher for longer” rate fears especially boosted growth and small-cap stocks, as the market views these categories as beneficiaries of lower rates. Despite low unemployment and robust consumer spending – typically viewed as inflation drivers -- inflation continued to trend lower, with the annual inflation rate dropping to 3.1% in November. Investor fears of a recession were replaced by optimism that the Fed had successfully orchestrated a “soft landing,” generating further cause for cheer on top of the prospect that the Fed would soon start cutting interest rates. The FactSet Global FinTech Index returned 15.54% in the quarter.

Baron FinTech Fund increased in the fourth quarter. Financials, Information Technology (IT), and Consumer Discretionary holdings contributed the most. No sector detracted. Gains within Financials were led by third largest contributor S&P Global, Inc. Block, Inc. was another noteworthy performer within the sector. Shares of this mobile payment company rebounded after reporting healthy gross profit growth and profitability that beat Street estimates. We retain conviction due to Block’s long runway for growth, durable moat, and unique corporate culture. IT had a strong quarter, with top contributor Fair Isaac Corporation and second largest contributor Intuit Inc. within the sector. MercadoLibre, Inc. drove positive returns within Consumer Discretionary. Shares of Latin America's leading e-commerce company increased on quarterly results that beat Street expectations across the board. The company is generating above-market growth in gross merchandise value across its major markets and increasingly outperforming peers, particularly in Brazil.

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 12/31/23

Contributors

  • Shares of Fair Isaac Corporation (FICO), a data and analytics company focused on predicting consumer behavior, contributed to performance. The company reported good earnings results and gave preliminary guidance that looks quite conservative, especially since pricing initiatives in the Scores business remain on track. CEO Will Lansing expressed confidence that the business can perform relatively well across different economic backdrops and expressed optimism about the momentum in the software business. We retain conviction, as we believe FICO will be a steady earnings compounder, which should drive solid returns for the stock over a multi-year period.
  • Intuit Inc. is the leading provider of accounting software for small businesses and tax preparation software for individuals and tax professionals. Shares increased after the company reported quarterly financial results that exceeded Street expectations, with 15% revenue growth and 49% EPS growth. Intuit is benefiting from the sale of higher-value services and is well positioned to capitalize on increasing adoption of artificial intelligence given its vast data sets. The company recently launched Intuit Assist, a generative AI-powered digital assistant that improves productivity and unlocks valuable insights for customers. We continue to own the stock due to Intuit’s strong competitive position and numerous growth opportunities.
  • Shares of rating agency and data provider S&P Global Inc. increased due to higher debt issuance amid more favorable market conditions. Billed issuance rose 47% in October and 26% in November against subdued levels last year, with issuance likely boosted by the decline in yields and tightening of corporate bond spreads. Strong equity market performance in the fourth quarter benefited asset-based fees. In addition, the company reported strong quarterly financial results with double-digit growth in revenue and earnings and raised full-year earnings guidance. We continue to own the stock due to the company's long runway for growth and significant competitive advantages.

Detractors

  • Shares of specialty insurer Kinsale Capital Group, Inc. gave back some gains from earlier this year after the company reported slower premium growth in the third quarter. Earnings beat Street expectations, with EPS doubling and ROE exceeding 34%. However, investors focused on the slowdown in gross written premiums to 33% growth from 58% growth in the prior quarter, which management attributed to normal seasonality for property insurance. Additionally, we believe some of the share price weakness resulted from a sector rotation away from defensive stocks to more speculative stocks following a decline in interest rates. We continue to own the stock because we believe Kinsale is well managed and has a long runway for growth in an attractive segment of the insurance market.
  • TransUnion is a consumer credit bureau that helps businesses make lending and marketing decisions. Shares fell after the company reported quarterly financial results that were below consensus expectations and reduced full-year guidance. Lending and marketing activity softened during the quarter, particularly among smaller, subprime lenders. Management believes the new financial guidance is highly achievable and is increasingly focused on cost efficiency to improve margins. We continue to own the stock because we expect earnings growth to improve as cyclical headwinds abate and the company integrates recent acquisitions.
  • BILL Holdings, Inc., a leading provider of cloud-based software that simplifies, digitizes, and automates complex back-office financial operations, detracted from performance. The company recently reported solid quarterly earnings reports, but the stock fell due to a forward guidance outlook that missed consensus. Macro-related pressure on small-to-medium sized businesses (SMB) is leading to softer total payment volume per customer. In addition, there is some pressure on the payments take-rate due to select larger suppliers reducing their threshold for accepting virtual cards and the strength of the U.S. dollar leading to its increased use to settle cross-border transactions. Despite the potential near-term headwinds, we retain conviction as the digitization of B2B payments is a powerful secular trend with a long runway for continued growth and BILL remains well positioned to be a winner in the SMB market, in our view.