Review and Outlook

as of 12/31/23

Following a downturn from the end of July through October, the global markets went on a bull run in the last two months of 2023. Improving inflation data, moderating growth, and dovish comments from the U.S. Federal Reserve spurred an “everything rally.” The end of “higher for longer” rate concerns among investors especially boosted growth and smaller-cap stocks, as the market views these categories as beneficiaries of lower rates. In the U.S., the annual inflation rate dropped to 3.4% in December, while European inflation fell even more to 2.4%. Investor fears of a recession were replaced by optimism that the Fed and the other central banks had successfully orchestrated a “soft landing,” generating further cause for cheer on top of the prospect that they would soon start cutting interest rates. The emerging markets lagged their developed market counterpart largely due to weakness in China, as its slow recovery post the lifting of its zero-COVID policy in late 2022 continued to pressure corporate earnings in that country. The MSCI ACWI Index returned 11.03% in the fourth quarter.

Baron Global Advantage Fund increased in the fourth quarter. Holdings within Information Technology (IT), Financials, and Consumer Discretionary contributed. Health Care investments detracted. Positive performance within IT was broad-based, with 8 out of the top 10 contributors within the sector, including top contributor Shopify Inc. and third largest contributor Endava plc. Gains within Financials were driven largely by Block, Inc. Shares of this mobile payment operator rebounded from the prior quarter’s decline after the company reported healthy gross profit growth and profitability that beat Street estimates. Second largest contributor MercadoLibre, Inc. led appreciation within Consumer Discretionary. Health Care had a disappointing quarter. Declines were led by argenx SE. Shares of this biotechnology company fell on the back of failed clinical trials in two assets that called into question the applicability of the entire FcRn treatment landscape. 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 for the company.

Looking ahead, we are encouraged by recent signs of recovery in the global markets and economic conditions overall. However, as long-term investors who have lived through numerous market cycles, we have learned not to try to predict the unpredictable. We remain 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 investing only when we believe our target companies are trading at attractive prices relative to their intrinsic values.

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.
  • MercadoLibre, Inc., Latin America's leading e-commerce company, contributed to performance after reporting third-quarter earnings that beat Street expectations across the board. The company is generating above-market growth in gross merchandise value across its major Latin American markets and is increasingly outperforming its peers in e-commerce, particularly in Brazil. Over the last several quarters, MercadoLibre has also benefited from product innovation in fintech and solid underwriting in the growing credit business, which we believe will drive continued margin expansion and earnings growth as e-commerce in the region matures over the next 5 to 10 years.
  • Endava plc provides outsourced software development for business customers. Shares followed through on last quarter’s positive momentum after lagging for most of 2022 and the first half of 2023. Macroeconomic uncertainty has weighed on client demand and revenue growth, but management expects a meaningful rebound early in 2024 supported by a growing pipeline of large projects from newer clients. Margins should expand alongside faster revenue growth as the company leverages upfront costs to build capacity in anticipation of an expected recovery. The company has been acquisitive and is benefiting from vendor consolidation. We remain investors because we believe Endava will continue gaining share in a large global market for IT services.

Detractors

  • Think & Learn Private Limited, the parent entity of “Byju's – the Learning App,” detracted during the quarter. Weak performance was driven by a marked slowdown in business momentum as COVID-related tailwinds that benefited online/digital education have begun to dissipate. In addition, Byju’s announced that Deloitte had resigned as its auditor and will be replaced by BDO (another top five global audit firm). Three investor-appointed board of directors also resigned in late June. These developments were deemed a material adverse event that required the fair market value of our holdings to be adjusted down accordingly. As India’s largest edtech player, the company is well positioned, in our view, to benefit from structural growth in online education services in the country. While we are disappointed with recent developments, we continue to believe that Byju's remains a dominant franchise and can sustain low-to-mid 20% earnings growth over the next few years.
  • 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.
  • 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.

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.