Review and Outlook

as of 12/31/22

After a brutal nine months, stocks advanced in the fourth quarter. The MSCI ACWI Index gained 9.76%. It was evident from many indicators, such as goods, energy, and rent prices, that inflation – the primary concern for investors -- was cooling. There were signs of an economic slowdown on the horizon stemming from aggressive central bank tightening. The markets rallied in October and November, as interest rates declined, and the Federal Reserve chair laid the groundwork to slow the pace of its monetary tightening. However, the market gave back some gains in December as the Fed dampened hopes of interest rates cuts in 2023 and other central banks followed suit.

Against this backdrop, Baron Global Advantage Fund declined. Industrials and Materials holdings contributed. Investments within Consumer Discretionary, Information Technology (IT), and Communication Services detracted the most. Top contributor InPost S.A. led advances within Industrials. The portfolio’s only Materials holding, Farmers Business Network, Inc., contributed based on an increase in the fair value of this private agricultural technology company as it executed on its long-term vision of becoming the dominant platform for farmers. Tesla, Inc. and Amazon.com, Inc. led declines within Consumer Discretionary. These stocks were the second and third largest detractors from performance, respectively. Top detractor CrowdStrike Holdings, Inc. drove much of the decline within IT, and ZoomInfo Technologies Inc. drove declines within Communication Services. Shares of ZoomInfo, a provider of business intelligence software, detracted on a weaker top line outlook driven by meaningful macro challenges.

Stock prices have always traded and fluctuated around intrinsic values at an amplitude that depends on the prevalent psychology in the market. When investors feel good about the world, they are willing to underwrite longer-term prospects, and prices tend to rise above intrinsic values. However, during times of uncertainty and stress, time horizons shrink, reducing investor appetite for long-duration assets, and prices fall below intrinsic values. Over the long term, however, we believe that stock prices will reflect the success of the businesses, or said differently, they (and we) would do well if the businesses themselves do well. We remain confident the businesses we own in this portfolio will do very well over the long term.

Top Contributors/Detractors to Performance

as of 12/31/22

Contributors

  • InPost S.A., a logistics company that operates parcel locker networks across several European countries, contributed to performance after reporting third quarter volumes, revenues, and margins that exceeded expectations. We remain excited about InPost's opportunity to drive market share growth and margin expansion in its legacy Polish market, which is already benefiting from scale and network effects, as well as in its recently acquired French business, which Inpost plans to automate over the next five years.
  • Shopify Inc. is a cloud-based software provider offering an operating system for multi-channel commerce. Shares rose in the fourth quarter, reversing some of the declines earlier in the year, as early holiday results suggest a rebound in e-commerce activity. The company also reported an increase in take rates, pointing to a deeper adoption of its platform by merchants. We remain shareholders due to Shopify’s strong competitive positioning, innovative culture, and long runway for growth as it still holds less than 2% share of global commerce spending.
  • ASML Holding N.V. designs and manufactures semiconductor production equipment with a leading market share in photolithography. Shares rose during the quarter after the company maintained its strong near-term outlook despite expected industry weakness and increased its longer-term outlook. ASML has a monopoly in EUV equipment, which is a critical component of advanced semiconductor chip manufacturing and remains well positioned as its customers continue to build out capacity to support growing demand.

Detractors

  • CrowdStrike Holdings, Inc. is a cloud-architected cybersecurity vendor. Shares declined on the back of a weak earnings report in which the net new annual recurring revenue missed consensus due to elongated sales cycles that impacted deals with small- and medium-sized businesses (SMB) and phased subscription billing terms with customers opting for delayed start dates. While this is a painful reset, CrowdStrike noted its SMB win rates had improved, enterprise win rates remained consistent, gross retention rates were at a high, and net retention rates were the highest in seven quarters.
  • Tesla, Inc. manufactures electric vehicles, related software and components, and solar and energy storage products. Shares fell due to growing investor concerns regarding volume and pricing dynamics as demand appeared to be pressured by a potential recession and higher interest rates. In addition, following Twitter's acquisition, CEO Elon Musk dedicated a material portion of his time to the company and sold Tesla shares to fund the transaction, driving investors' concern regarding his dedication to Tesla. We remain confident in Tesla's fundamentals and management team.
  • Amazon.com, Inc. is the world’s largest retailer and cloud services provider. Shares of Amazon were down in the quarter, as the company guided to relative weakness in margins and Cloud. We believe that Amazon is well positioned in the medium term to improve profitability and sustain premium growth. Longer term, Amazon has substantially more room to grow in e-commerce, where it has less than 15% penetration in its total addressable market; and Cloud, where it is the clear leader in the vast and growing cloud infrastructure market with large opportunities in application software.

Quarterly Attribution Analysis (Institutional Shares)

as of 12/31/22

When reviewing performance attribution on our portfolio, please be aware that we construct the portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio if it meets our rigorous investment criteria. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to achieve a target sector allocation or to approximate an index. Our exposure to any given sector is purely a result of our stock selection process.

as of 12/31/22

Baron Global Advantage Fund (Institutional Shares) was down 8.90% in the fourth quarter, meaningfully trailing the MSCI ACWI Index by 18.66% due to stock selection and headwinds from an assortment of style biases.

From a country perspective, investments in developed markets were mostly responsible for the Fund’s underperformance in the period, driven by adverse stock selection in the U.S. and, to a lesser extent, the U.K. The Fund’s investments in emerging and other markets also contributed to the relative shortfall, led by weakness in India and Uruguay, respectively.

Lack of exposure to the lagging Real Estate sector along with positive stock selection in Materials and Industrials modestly contributed to relative performance. Strength in Materials and Industrials, owing largely to gains from private companies Farmers Business Network, Inc. and Space Exploration Technologies Corp., respectively, was negated by lower exposure to these commodity-sensitive sectors, which were among the leaders alongside the Energy sector.

Investments in Information Technology (IT), Consumer Discretionary, Health Care, and Financials detracted the most from relative performance. Negative stock selection in IT was responsible for about a third of the relative shortfall, driven by widespread weakness in systems software, where CrowdStrike Holdings, Inc., Snowflake Inc., Datadog, Inc., Zscaler, Inc., and Cloudflare, Inc. were all down in excess of 15% due to concerns about intensifying macroeconomic headwinds impacting near-term earnings results/guidance. Significantly higher exposure to this lagging sector and declines from outsourced software development providers Endava plc and EPAM Systems, Inc. also weighed on performance. Shares of both companies were down in spite of strong business momentum as investors were concerned about macroeconomic uncertainty weighing on client demand. Weakness in Consumer Discretionary was partly due to the underperformance of electric vehicle manufacturers Tesla, Inc. and Rivian Automotive, Inc. Tesla was the second largest detractor due to growing investor concerns about volume and pricing dynamics, as demand appeared to be pressured by a potential recession and higher interest rates. Rivian’s shares fell as liquidity risk remained elevated given outsized cash outflows during its early production stage. Investor confidence in the company’s unit economics and execution also remained challenged as macroeconomic uncertainty impacted the industry. Higher exposure to Amazon.com, Inc., Coupang, Inc., and other poor performing internet & direct marketing retail stocks also dampened relative results. The Fund’s Health Care holdings underperformed after falling 5.7% as a group, with liquid biopsy testing provider Guardant Health, Inc. leading the decline. Guardant’s shares fell after a data release for the highly anticipated Eclipse trial (for colorectal cancer screening) showed sensitivity below expectations, raising concerns around the ability of its tests to compete against stool-based tests. The Fund’s only position in Financials, Indian non-bank financial company Bajaj Finance Limited, was a drag on performance due to high-quality growth businesses underperforming value/cyclical businesses in India during the quarter.

as of 12/31/22

Yearly Attribution Analysis (for year ended 12/31/2022)

Baron Global Advantage Fund (Institutional Shares) declined 51.57% for the year, significantly underperforming the MSCI ACWI Index by 33.21% due to stock selection and, to a lesser extent, differences in sector weights. Style biases also played a part in the underperformance during the period, with most of the weakness coming from the Fund’s overexposure to the poor performing Residual Volatility and Beta factors.

On a country level, adverse stock selection in developed markets accounted for about 90% of the underperformance during the period, driven by significant declines from investments in the U.S., Canada, the U.K., and Israel. Higher exposure to poor performing Argentinian and Uruguayan equities along with disappointing stock selection in emerging markets (Indonesia, China, and Korea) were responsible for the remainder of the relative shortfall.

Industrials investments were the only material contributors to relative performance, owing mostly to the outperformance of private companies Space Exploration Technologies Corp. and GM Cruise Holdings LLC.

Investments in Information Technology (IT), Consumer Discretionary, Health Care, and Communication Services along with lack of exposure to the top performing Energy sector weighed heavily on performance. Negative stock selection in IT accounted for nearly 40% of the relative shortfall, as several of the Fund’s system software holdings (Twilio Inc., Snowflake Inc., Cloudflare, Inc., CrowdStrike Holdings, Inc., Datadog, Inc., and Zscaler, Inc.) fell sharply due to broader market weakness in high-multiple growth stocks. Additionally, higher exposure to Shopify Inc., Wix.com Ltd., and other poor performing internet services & infrastructure stocks, along with notable declines from outsourced software development providers Endava plc and EPAM Systems, Inc., hindered performance. Within Consumer Discretionary, higher exposure to this lagging sector together with significant declines from electric vehicle manufacturer Rivian Automotive, Inc. hampered performance. Rivian’s shares fell as investors rotated out of long-duration assets and became increasingly concerned about capital intensity and cash burn. Internet & direct marketing retail holdings Fiverr International Ltd., Amazon.com, Inc., MercadoLibre, Inc., and Coupang, Inc. were another drag on performance. Within Health Care, life science technology company 10X Genomics, Inc. and non-invasive prenatal testing provider Natera, Inc. detracted the most from relative results before being sold. 10X shares fell sharply for the period held after being caught up in the rotation out of unprofitable, high-growth stocks in the life sciences tools & services space. Natera’s stock price was down for the period held after being negatively impacted by a short report alleging inappropriate sales and billing practices as well as an unfavorable jury decision involving false advertising. Weakness in Communication Services was largely due to the underperformance of business intelligence software provider ZoomInfo Technologies Inc., whose shares dropped late in the year after management shared a weaker top-line growth outlook driven by intensifying macroeconomic uncertainty.

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.