Review and Outlook

as of 12/31/20

2020 will undoubtedly go down in history for many things. We think one of them will certainly be the compressed and violent market cycles. Stocks continued the prior year’s rally uninterrupted until the peak on February 12, suffered an unprecedented decline over the next five weeks until the trough on March 23, and then staged an equally unprecedented recovery over the next nine months through the end of the year.

Amazingly, and despite everything that happened, 2020 turned out to be year in which it was hard to lose money as long as one had the courage to remain invested through the downturn. Most equity indices were up double digits, both domestically and globally. Growth companies continued to be in favor, driven by lower interest rates and in many cases rapidly improving business fundamentals. COVID-19 proved to be a strong accelerant for companies that enable modernization and digital transformation, many of which we are invested in.

Against this backdrop, Baron Global Advantage Fund increased in the fourth quarter to end the full year up more than 79%, its best year-long performance since its 2012 inception. Information Technology (IT), Health Care, and Consumer Discretionary contributed the most. No sector materially detracted in the quarter. With 21 holdings that saw double-digit gains, IT had a strong quarter. Positive performance within the sector was led by Twilio, Inc., a Communications-Platform-as-a-Service company whose shares increased on broad strength due to accelerated digitization trends as a result of COVID-19, including 50%-plus revenue growth. Health Care also had a good quarter, with double- or triple-digit gains in 10 out of 12 holdings. Zai Lab Limited, a leading biotechnology company in the growing Chinese health care market, was the top performer within the sector after shares continued their strong run alongside the Chinese health care indices. MercadoLibre, Inc. and Fiverr International Ltd., respectively the second and third largest contributors, led performance within Consumer Discretionary.

Every day we live and invest in an uncertain world. Well-known conditions and widely anticipated events, such as Federal Reserve rate changes, ongoing trade disputes, government shutdowns, the unpredictable behavior of politicians the world over, and even, as we have seen, global pandemics, are shrugged off by the financial markets one day and seem to drive them up or down the next. We often find it difficult to know why market participants do what they do over the short term. The constant challenges we face are real and serious, with clearly uncertain outcomes. History would suggest that most will prove passing or manageable. The business of capital allocation (or investing) is the business of taking risk, managing the uncertainty, and taking advantage of the long-term opportunities that those risks and uncertainties create. We are confident that our process is the right one, and we believe that it will enable us to make good investment decisions over time.

Top Contributors/Detractors to Performance

as of 12/31/20

Contributors

  • Opendoor Technologies Inc. operates a digital platform where buyers can tour homes, make offers, and get financing, while sellers can receive next-day cash offers with flexible close dates. Shares were up in the quarter on continued reacceleration in residential real estate activity. In our view, Opendoor is the iBuying industry leader disrupting an enormous and highly inefficient industry, with 2019 revenue of $4.7 billion representing less than 0.5% share of a $1.3 trillion addressable market and strong unit economics driving expectations of EBITDA breakeven by 2023.
  • Shares of MercadoLibre, Inc., the largest digital marketplace in Latin America, appreciated during the quarter. The company showed accelerating gross merchandise value in its third quarter results despite the reopening of physical retail over the summer, indicating stickiness among recently acquired users and market share growth in some of its largest markets, particularly Brazil. We remain shareholders as we believe the company is a long-term winner in both ecommerce and payments across a region that remains in the early stage of digitization.
  • Shares of Fiverr International Ltd., a two-sided online marketplace for freelance services, contributed to performance. The company reported strong third quarter earnings as it is continuing to get a boost from pandemic-driven work arrangements and has an active product innovation pipeline. Over the long term, should Fiverr become the leading online freelancer marketplace as this market grows and procurement continues to shift online, we think the company will benefit from strong network effects and have material upside.

Detractors

  • Alibaba Group Holding Limited is the largest retailer and e-commerce company in China. Alibaba operates shopping platforms Taobao and Tmall and owns 33% of Ant Group, which operates Alipay, China's largest third-party online payment provider. Shares were down on the news that Chinese regulators had launched an investigation into Alibaba for suspected monopolistic behavior. We continue to believe Alibaba's core business remains highly profitable, complemented by rapid growth in the cloud business and inflection in the Cainiao logistics and New Retail segments.
  • Splunk, Inc. leverages its scalable data analytics solutions to allow customers to more efficiently manage operations across a broad array of use cases including IT operation and cybersecurity. The stock fell after Splunk reported a meaningful deceleration in contract activity within its large customer segment. Management withdrew its long-term targets as it evaluates the implications of these recent changes. We maintain conviction as we expect cloud and new pricing to support growth, although it may take longer to achieve in the pandemic-impacted spending environment.
  • Afya Limited is the leading medical education group in Brazil, operating around 20 undergraduate and graduate campuses. Afya offers courses and residency preparatory and specialization programs. Despite solid quarterly results, Afya’s stock declined due to continued concerns regarding the impact of COVID-19. We remain confident in Afya’s opportunity to benefit from limited supply and rapidly growing demand dynamics supporting a long runway for growth as Brazil remains understaffed with doctors, and COVID-19 is only crystalizing that issue.

Quarterly Attribution Analysis

as of 12/31/20

Yearly Attribution Analysis (for year ended 12/31/2020)

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.