Review and Outlook

as of 06/30/21

Domestic investors spent the second quarter debating whether the ongoing economic rebound will lead to elevated inflation. As usual, short-term macroeconomic data was opaque, volatile, and inconclusive, enabling central bankers and investors to pick and choose the data that supported their favored conclusion. Visibility has been further confounded by a dispute over the impact of generous federal unemployment benefits on tight labor markets. Interest rates, as measured by the yield on the 10-year U.S. Treasury bond, fluctuated as investors struggled to divine the future trajectory of prices and how the U.S. Federal Reserve will accordingly set monetary policy. Despite the uncertainty, the markets were largely positive, rising to record highs during the quarter as a significant decline in COVID-19 cases combined with a near-total economic reopening across the country led a surge in economic growth.

Against this backdrop, Baron Growth Fund increased in the quarter. Holdings within Financials, Health Care, and Information Technology (IT) contributed the most. Consumer Discretionary and Communication Services investments detracted. Top contributor MSCI, Inc. drove much of the appreciation within Financials. Positive performance within Health Care was led by second largest contributor IDEXX Laboratories, Inc. IT benefited from share price gains in third largest contributor Gartner, Inc. Consumer Discretionary had a challenging quarter, with all three top detractors within the sector. Both Communication Services holdings lost ground, including Iridium Communications Inc. Shares of this leading satellite communication services vendor were pressured by pandemic-related restrictions that negatively impacted growth initiatives and expectations for 2021. As COVID-19 restrictions are lifted, we anticipate growth from programs such as Certus Maritime to accelerate.

While as investors we have always taken a long-term perspective, as people, we are as pleased as anyone that near-term prospects for our country seem quite encouraging as the vaccination program – unprecedented for its breadth and speed – appears to have been successful in helping put the worst of the pandemic in the rear-view mirror. We are feeling optimistic that continued government support for the economy combined with economic conditions that are moving back to normalcy bode well for the market going forward.

Top Contributors/Detractors to Performance

as of 06/30/21

Contributors

  • Shares of MSCI, Inc., a leading provider of investment decision support tools, contributed to performance. The company reported strong first quarter earnings and management provided an upbeat assessment of the economic and market backdrop going forward. We retain long-term conviction as the company owns strong, "all weather" franchises and remains well positioned to benefit from numerous secular tailwinds in the investment community.
  • Shares of veterinary diagnostics leader IDEXX Laboratories, Inc. contributed to performance in the quarter. Veterinary visits continue to recover from pandemic lows, with practice revenue growing at double-digit rates. IDEXX’s competitive trends are outstanding, and we expect new proprietary innovations and field sales force expansion to be meaningful contributors to growth. Margins are moving significantly higher, and we believe that margins can exceed 30% over time.
  • Shares of Gartner, Inc., a provider of syndicated research, contributed to performance after reporting financial results significantly better than investor estimates. Growth in the company’s research business has reaccelerated, led by its Global Business Sales segment, which is benefiting from a multi-year investment cycle. We expect improved revenue growth and renewed focus on cost control to drive margin expansion and enhanced free cash flow generation. The company’s balance sheet is in excellent shape, and we expect an acceleration in repurchases.

Detractors

  • Penn National Gaming, Inc., a regional U.S. casino operator, detracted on news that the company had lost sports betting and i-gaming market share in both Michigan and Pennsylvania. While the lost market share is a disappointment, Penn has been able to maintain a double-digit share with no marketing. We believe the market is attributing little value to Penn's Barstool equity stake as well as its online gaming and sports betting opportunities including its access fees from other operators. We view the valuation as attractive.
  • Shares of Bright Horizons Family Solutions, Inc., a leading provider of high-quality corporate-sponsored childcare and other family support programs, experienced a pullback on uncertainties related to the post-pandemic pace of center re-enrollment and concerns of a potential decline in demand should more flexible work-from-home arrangements result in increased utilization of community-based providers. We believe Bright Horizons will successfully adapt to any market changes and that the future remains bright for this well-managed company.
  • Marriott Vacations Worldwide Corp., a developer and seller of timeshares, detracted in the quarter on investor concerns about the impact on travel of a new, more contagious variant of COVID-19. Shares were also pressured by the possibility of higher mortgage rates. While both developments are concerns, Marriott Vacations has seen no impact from either as its business is recovering quickly and the securitization market is at its best levels ever. Marriott Vacations remains a strong free cash flow business.

Quarterly Attribution Analysis (Institutional Shares)

as of 06/30/21

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 06/30/21

Baron Growth Fund (Institutional Shares) was up 7.80% in the second quarter, outperforming the Russell 2000 Growth Index by 388 basis points due to stock selection and, to a lesser extent, differences in sector/sub-industry exposures.

Investments in Financials, Health Care, Industrials, and Information Technology (IT) contributed the most to relative performance. Within Financials, outperformance of the Fund’s largest holding, investment decision support tools provider MSCI, Inc., and significantly higher exposure to this strong performing sector added the most value. MSCI was the top contributor due to solid first quarter earnings results and positive reports from management on the overall operating environment. Specialist asset manager Cohen & Steers, Inc., investment data company Morningstar, Inc., and investment management tools provider FactSet Research Systems, Inc. also performed well in the sector. Favorable stock selection in Health Care accounted for most of the outperformance in the period as several of the Fund’s holdings posted double-digit gains as a result of robust business momentum. Veterinary diagnostics leader IDEXX Laboratories, Inc., life sciences tools developer Bio-Techne Corporation, and pharmaceutical packaging manufacturer West Pharmaceutical Services, Inc. led the way in the sector. Meaningfully lower exposure to underperforming biotechnology stocks contributed an additional 53 basis points to relative results. Within Industrials, outperformance of composite residential decking manufacturer Trex Company, Inc. and lower exposure to this lagging sector bolstered relative results. Trex reported strong financial results and released second quarter sales guidance well ahead of Street expectations as composite decking continues to take share from wood. Additional manufacturing capacity also came online during the quarter, easing capacity constraints and increasing sales. Strength in IT was driven by Gartner, Inc., the world's leading research and advisory company. Gartner was the third largest contributor after the company’s financial results topped analyst forecasts. Growth in the company’s research business has reaccelerated and is poised to return to double-digit levels, while its events business should add to financial results as travel restrictions ease.

Underperformance of Consumer Discretionary and Communication Services investments detracted the most from relative results. Weakness in Consumer Discretionary was largely due to share price declines from regional casino operator Penn National Gaming, Inc., corporate daycare provider Bright Horizons Family Solutions, Inc., and timeshare company Marriott Vacations Worldwide Corp., which were the top three detractors on an absolute basis. Satellite company Iridium Communications Inc. weighed the most on performance in Communication Services as lingering COVID-19 restrictions negatively impacted short-term growth initiatives.

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.