Review and Outlook

as of 12/31/23

The fourth quarter contributed to a strong bounce-back year in 2023. The Russell 1000 Growth Index gained 14.16% during the quarter and 42.68% during the year, recapturing all its losses from the prior year. Brushing aside ongoing macro concerns, including the Federal Reserve’s continuation of its historical tightening cycle, the recession debate, geopolitical uncertainties, and poor investor sentiment following a tough 2022, the index climbed steadily through the first half of the year. After a third-quarter dip driven largely by investor concerns that rates were going to stay “higher for longer,” lower inflation data and the shifting focus to rate cuts prompted a bull run in the last two months of 2023.

Baron Fifth Avenue Growth Fund increased in the fourth quarter. Holdings within Information Technology (IT), Consumer Discretionary, and Financials contributed the most to performance. Investments within the Industrials sector detracted. IT had a strong quarter, with gains in all portfolio positions, led by top contributor Shopify Inc. and second largest contributor ServiceNow, Inc. Increases within Consumer Discretionary were led by third largest contributor Amazon.com, Inc. Positive returns within Financials were led by mobile payment provider Block, Inc. Shares rebounded from the prior quarter’s decline after the company reported healthy 21% gross profit growth and profitability that beat Street estimates. Declines within the Industrials sector were driven by second largest detractor GM Cruise Holdings LLC.

One of the biggest surprises of 2023 was the highly anticipated recession in the U.S. that has not materialized. While some were in the camp of hard landing and others were in the camp of soft landing, not many were in the camp of no landing…could that remain the case in 2024? When will the Fed start cutting rates? How aggressive will it be? What are the implications of the upcoming elections (the S&P 500 has not declined in an election year since 1940)?

Although we have a view on many of these questions we do not have the answers. The range of outcomes continues to be extremely wide, creating a challenging environment for investors. But since we are not macro investors, we stick to focusing on well-managed, high-quality businesses with durable competitive advantages for the long term. We continue to speak with company management teams as often as we can, test our investment theses, look for disconfirming evidence, and measure how well our businesses are performing fundamentally.

It is our belief that investing in great businesses at attractive valuations will enable us to earn excess risk-adjusted returns for our shareholders over the long term. We are optimistic about the prospects of the companies in which we are invested and continue to search for new ideas and investment opportunities.

Top Contributors/Detractors to Performance

as of 12/31/23

Contributors

  • Shopify Inc. is a cloud-based software provider for multi-channel commerce. Shares rose on strong financial results, with growth in gross merchandise value of 22% year-on-year, revenue growth of 25%, and non-GAAP operating margins surpassing 15% (up 1,900 bps year-on-year). The company also hosted a well-attended investor day in which it shared a variety of data points showcasing growing success in new segments in which it historically has been less well known, such as enterprise, B2B, and offline commerce. Shopify has added more merchants to the platform in the last year than in the prior two combined, while the expansion of existing cohorts of merchants remains ahead of the market. Lastly, the company provided data on the rapid adoption of new offerings, with its emerging products category growing at a 71% CAGR since 2019. We remain shareholders due to Shopify’s strong competitive positioning, innovative culture, and long runway for growth, as it still holds less than a 2% share of the global commerce market.
  • ServiceNow, Inc. offers cloud-based solutions that improve workflow efficiency through automation and digitalization. Stock appreciation was supported by strong quarterly results despite macro complexities, growing investor expectations that ServiceNow would benefit from the integration of generative AI (GenAI) technology into its products, and a favorable appreciation of software stocks in general. In the third quarter, the company beat analyst expectations across all key metrics. Management noted that key drivers included strong traction with government buyers, improving momentum with new customers, and budget consolidation into platforms like ServiceNow. In addition, the company launched its GenAI-supported product line, ProPlus, at the end of the quarter and has already signed on multiple customers with hundreds more in the pipeline. The new product line should generate material efficiencies for customers, which could translate into a substantial part of ServiceNow's business over time.
  • Amazon.com, Inc. is the world’s largest retailer and cloud services provider. Shares of Amazon were up in the quarter. Reported results were better than consensus, with a significant beat in North American operating profit. We believe the AWS cloud division has many years ahead of growth, with recent customer optimizations attenuating. We also believe Amazon is well positioned in the short to medium term to meaningfully improve core North American retail profitability to above pre-pandemic levels, benefiting from its new regionalized fulfillment network and its growing margin-accretive advertising business. Longer term, Amazon has substantially more room to grow in e-commerce, where it has less than 15% penetration of the total addressable market. Amazon also remains the clear leader in the vast and growing cloud infrastructure market, with large opportunities in application software, including enabling generative AI workloads.

Detractors

  • Argenx SE is a biotechnology company focused on autoimmune disorders. Shares fell in the quarter on the back of failed clinical trials in immune thrombocytopenic purpura and pemphigus vulgaris that called into question the applicability of the FcRn treatment landscape. While the exact nature of these data sets is nuanced and not entirely thesis-breaking, in our view, there are now real questions for the FcRn space that have not existed in the narrative for years. On the positive side, the strong launch of Vyvgart, with early sales tripling consensus expectations and global approvals coming earlier than guided, should continue to grow revenue and justifies a defensible valuation based on cash flow analysis. We expect 2024 to be another year of solid performance, with many catalysts including readouts in myositis, Sjogren's syndrome, multifocal motor neuropathy, and argenx's subcutaneous formulation launch.
  • GM Cruise Holdings LLC offers autonomous driving software and a fleet of vehicles aimed at reducing costs and improving the safety of transporting people and goods. We marked down the stock after the company lost its autonomous operating license in California. Despite achieving significant milestones over the past year, including completing millions of fully autonomous miles with passengers in various states and cities, an October incident involving a pedestrian in San Francisco prompted the California DMV to rescind the company's license. The regulator cited concerns about incomplete incident information disclosure. Consequently, this triggered a near-complete cessation of operations and key management changes at Cruise, as General Motors, the majority shareholder, charts a new course for the organization and its capital needs. While we strongly believe the life-saving technology achieved through the autonomous revolution holds immense value for both investors and society at large, the path to recovery for Cruise remains uncertain at this juncture, which is reflected in our valuation framework.
  • The Trade Desk is the leading internet advertising demand-side platform, enabling agencies to efficiently purchase digital advertising across desktop, mobile, and online video channels. Shares were down due to a rare miss on quarterly results. Still, we believe the company is well positioned for 2024 and beyond, with strong tailwinds in Connected TV, a secular growth category capturing spend at an increasing pace from linear TV, retail media, platform upgrade adoption, audio, and more. Longer term, we remain positive on the company given its technology, scale, and estimated 10% share in the $100 billion programmatic advertising market, a small and growing subset of the $700 billion global advertising market.

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.