Review and Outlook

as of 06/30/22

U.S. equities suffered a disappointing quarter as investors grappled with persistently high inflation, rising interest rates, worsening geopolitical tensions, and COVID-related lockdowns in China. Most of the major U.S. market indexes entered bear market territory during the quarter. Growth underperformed value by a wide margin, which tends to weigh on relative performance for higher growth FinTech stocks.

Against this backdrop, Baron FinTech Fund declined in the quarter. No sector contributed. Information Technology (IT), Financials, and Industrials holdings detracted the most. IT, which comprises more than half the portfolio by weight, had a difficult quarter, with four out of five of the largest detractors within the sector, including top detractor Block, Inc. and second largest detractor Endava plc. Depreciation within Financials was led by S&P Global Inc. Shares of this rating agency fell due to much lower debt issuance activity during the quarter. We believe this ratings weakness is temporary and the non-ratings businesses (comprising over 70% of revenue) should continue growing nicely. Equifax Inc., a leading credit bureau and information services company, led weakness within Industrials.

While it’s been an exceptionally challenging market to navigate, we believe FinTech investors are becoming more discerning about the durability of business models, expected profitability, the duration of growth, and the cost of capital. We believe greater investor discipline in the FinTech market is healthy and should be a boon for the Fund. We focus on identifying businesses with open-ended growth opportunities, sustainable competitive advantages, and outstanding management teams and then investing at attractive prices. Frothy valuations for fast-growing yet unproven businesses had become increasingly prevalent over the past several years, but the broad market pullback has exposed inferior business models (which we try to avoid) and reset the valuations of good businesses (which we seek to buy) to more favorable levels.

Our long-term outlook for FinTech remains bright despite near-term headwinds from higher interest rates, FX changes, and market volatility. We view these headwinds as cyclical and temporary, not as secular and permanent. With the secular tailwinds we have identified at our back, we focus on finding the best FinTech businesses that can at least double in value in five years. Valuations are reasonable after the recent growth stock sell-off, making our return hurdle easier to achieve.

Top Contributors/Detractors to Performance

as of 06/30/22


  • Shares of Expensify, Inc., a small-to-medium-business-focused expense management software provider, contributed to performance. The company reported strong quarterly earnings, expressed confidence in performance into the next quarter, and initiated a repurchase authorization. In the near term, high growth software stocks have been out of favor, but we retain long-term conviction in Expensify and believe its product innovation continues at a rapid pace, the opportunity is large, and the company has an impressive balance of growth and profitability.
  • The Progressive Corporation is a leading property and casualty insurance company. Shares contributed during the period held after we took advantage of temporary weakness in the stock to build a position; shares subsequently rebounded, buoyed by strengthening market sentiment. We retain conviction in Progressive's long-term prospects, given its deep underwriting expertise, leading position in a hardening automotive insurance market, and improving conditions for the insurance business overall.
  • Shares of Alkami Technology, Inc., a cloud-based digital banking platform, contributed to performance. The company reported good first quarter earnings results and reaffirmed its plan to achieve break-even adjusted EBITDA exiting 2023. The near-term market dynamics for unprofitable software stocks are volatile, but we retain long-term conviction in Alkami and believe the company is well positioned to grow revenue 25% or more for the next several years, barring a major economic recession.


  • Block, Inc. (dba Square) provides point-of-sale technology to small businesses and operates the Cash App ecosystem of financial services for individuals. Shares fell due to mixed quarterly results with weakness in the Seller business offsetting strength for Cash App. While integration of recently acquired Afterpay is progressing well and credit metrics remain healthy, the business slowed due to greater competitive intensity. We continue to own the stock due to Block’s long runway for growth, sustainable competitive advantages, and unique corporate culture.
  • Endava plc provides consulting and outsourced software development for business customers. Shares fell despite strong business momentum, with 51% revenue growth and 43% EPS growth in the prior quarter and a more positive outlook for the fiscal year. The share price decline likely reflected concern about macroeconomic uncertainty weighing on client demand and the impact of currency depreciation, given that two-thirds of revenue comes from non-U.S. customers. We believe Endava will continue gaining share in a large global market for IT services.
  • Shares of MercadoLibre, Inc., the largest e-commerce platform in Latin America, declined due to continued selling pressure on global internet stocks, a devaluation in the Brazilian Real (where MercadoLibre generates 50% to 60% of revenue), and concerns that nonperforming loans in its fintech arm will rise owing to consumer weakness in Brazil. We believe MercadoLibre will be the dominant player in a Latin American e-commerce industry that still has a decade of double-digit growth ahead of it, and we remain shareholders.