Review and Outlook

as of 03/31/24

Global equities posted strong returns in the first quarter of 2024, continuing the bull run that started in late October 2023. Even the renewed threat of "higher for longer" interest rates did not put a check on equity performance. Stock prices continued to climb despite market expectations for more modest interest rate cuts in 2024.U.S. economic data was mostly positive during the quarter. Strong growth in the U.S. labor supply, driven by increased participation and a surge in immigration, helped generate job gains without elevating inflation. The U.S. unemployment rate, although still low, ticked up slightly. Existing home sales jumped 9.5% in February 2024, the highest percentage increase in a year and above consensus expectations.

Most other developed economies showed economic strength as well. Europe’s economy was supported by natural gas prices that fell below levels prior to the Russian invasion of Ukraine, an increase in global manufacturing activity, and a recovery in bank lending. Similar to the Fed, the European Central Bank suggested it will likely start cutting rates in June, as core inflation in the region declined. Japan continued its emergence from its decades-long stagnation, both in terms of economic activity and corporate profits growth. The U.K. was an exception to this overall positive narrative, with inflation declining relatively more slowly than in other peer economies.

Performance within emerging markets diverged. While Latin America and India began the year on a robust note, China continued to struggle to regain its footing following its prolonged zero-COVID lockdown, which it suddenly abandoned in late 2022, well after the rest of the world was phasing out COVID prevention measures. Problems in the property industry persisted, and the consumer price index was in deflation.

Against this backdrop, Baron Global Advantage Fund appreciated. Information Technology (IT) and Financials holdings contributed. Consumer Discretionary, Health Care, and Industrials detracted. Positive performance within IT was led by NVIDIA Corporation and CrowdStrike Holdings, Inc., respectively, the top and second largest contributor in the quarter. Electronic payment processor Adyen N.V. led gains within Financials. Declines within Consumer Discretionary were led by Tesla, Inc. and Rivian Automotive, Inc., the second and third largest detractors, respectively. Weakness within Health Care was driven by hybrid software/biotechnology company Schrodinger, Inc. Industrials lost ground due to a share price decline in Fiverr International Ltd., an online marketplace for freelance services.

We are optimistic about the long-term prospects of the companies in which we are invested and continue to search for new ideas and investment opportunities while remaining patient and initiating a position only when we believe the target companies are trading at attractive prices relative to their intrinsic values.

Top Contributors/Detractors to Performance

as of 03/31/24

Contributors

  • NVIDIA Corporation sells semiconductors, systems, and software for accelerated computing, gaming, and generative AI (GenAI). NVIDIA's stock rose in the first quarter, driven by continued strong demand for its GPUs that stand at the epicenter of the GenAI revolution. NVIDIA closed 2023 with unprecedented revenue growth at massive scale, with a fourth-quarter revenue run rate just shy of $90 billion, growing over 3.5 times year-on-year with operating margins of 67%. In addition to GenAI-driven demand, NVIDIA is benefiting from the transition to accelerated computing. NVIDIA continues to improve the performance of its chips and systems while removing hurdles for adoption through software innovation, such as the recently announced NVIDIA Inference Microservices, which make it easier for companies to adopt GenAI at scale.
  • CrowdStrike Holdings, Inc. is a cloud-architected SaaS cybersecurity vendor offering endpoint security, threat intelligence, and cyberattack response services. Shares increased following one of the strongest quarterly performances in company history. With market share gains in EDR (end point detection and response) accelerating, emerging products (Cloud, Identity, and SIEM) scaling to about $850 million in annual recurring revenue (ARR), and new partnership channels like Dell and Pax8 already making meaningful contributions, the outlook suggests sustained revenue growth of 30% or more over the next two years. Fiscal year 2025 guidance looks conservative, as it projects 8% to 12% net new ARR growth, a modest increase from the 6% growth it reported in fiscal year 2024. This guidance would suggest net new contributions from emerging products would significantly decelerate, landing in the range of 30% to 35% (on a 25% larger base), or that core EDR contributions would contract by roughly 15%, which are unlikely scenarios, in our view. We retain conviction in CrowdStrike, which is emerging as the security platform to beat in terms of scale, profitability, and free cash flow conversion.
  • Codere Online Luxembourg, S.A. operates online gaming and sports betting assets in Latin America and Spain. Shares increased during the quarter as the company reported net gaming revenue and EBITDA growth that beat consensus estimates. After a period of investing heavily to build its brand and gain share in its growth markets (Latin America), the return to normalized marketing spend is helping boost profitability. This, in turn, should accelerate earnings growth and drive a re-rating in the stock, which currently trades at a discount relative to its global peers, in our view.

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.
  • Tesla, Inc. designs, manufactures, and sells electric vehicles, related software and components, and solar and energy storage products. Shares fell as the core automotive segment remained under pressure due to a complex macroeconomic environment, factory shutdowns, growing competitive risks in China, and Tesla’s price reductions throughout 2023. During the first quarter of 2024, production was negatively impacted by Red Sea maritime supply chain interferences, sabotage at a Tesla factory power supply in Berlin, and the launch of the refreshed Model 3. We remain shareholders. Tesla has started delivery of its highly anticipated Cybertruck pickup, which features new technologies within the car and its manufacturing lines. Tesla also launched version 12 of its Full Self Driving product, which features material improvements and should enhance investor confidence in Tesla's unique software and hardware capabilities. Lastly, we expect energy storage sales to continue to grow over the coming years.
  • Shares of Rivian Automotive, Inc., a U.S.-based electric vehicle manufacturer, detracted from performance. Despite substantial improvements in production and delivery volumes in 2023 as well as improved unit economics, Rivian's business remains constrained by its limited scale, negative gross margins, and elevated cash outflows. Additionally, Rivian expects to temporarily shut down its production facilities for upgrades, impeding anticipated production growth in 2024. Compounding these challenges is the potential for demand constraints, which may not keep pace with production. Nevertheless, the recent unveiling of Rivian's mass-market products, the R2 and R3, garnered enthusiastic responses, evidenced by over 68,000 pre-orders within the first 20 hours post-launch. In a strategic move, management opted to produce the R2 in Rivian's existing facility, deferring the construction of a new factory. This decision should help reduce mid-term capital expenditure obligations while ensuring higher utilization of current facilities as the R2 ramps production in 2025.

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.