Review and Outlook

as of 12/31/23

​Following a downdraft from the end of July through October, the markets went on a bull run in the last two months of 2023. Improving inflation data coupled with dovish comments from the Federal Reserve spurred an “everything rally.” In a significant shift from its earlier stance, the Fed suggested it was planning three interest rates cuts over 2024. The end of “higher for longer” rate fears especially boosted growth and small-cap stocks, as the market views these categories as beneficiaries of lower rates. Despite low unemployment and robust consumer spending – typically viewed as inflation drivers -- inflation continued to trend lower, with the annual inflation rate dropping to 3.1% in November. Investor fears of a recession were replaced by optimism that the Fed had successfully orchestrated a “soft landing,” generating further cause for cheer on top of the prospect that the Fed would soon start cutting interest rates.

Baron Growth Fund increased in the fourth quarter. Holdings within Information Technology (IT), Financials, and Real Estate contributed the most to performance. Communication Services investments detracted. Positive performance within IT was led by top contributor Gartner, Inc., while second largest contributor MSCI Inc. led gains within Financials. Appreciation within Real Estate was led by CoStar Group, Inc. Shares of this provider of marketing and data analytics to the real estate industry rose meaningfully as valuation multiples expanded. Despite challenging commercial real estate headlines, we believe trends in the company’s core subscription offerings remain strong and are increasingly encouraged by growing traction in CoStar’s nascent residential offering. Declines within Communication Services were driven by sole sector holding Iridium Communications Inc., which was the third largest detractor in the quarter.

Looking ahead, we are encouraged by recent signs of recovery in the markets and the U.S. economy. However, as long-term investors who have lived through numerous market cycles, we have learned not to try to predict the unpredictable. Instead, we focus on identifying and researching well-managed unique businesses with durable competitive advantages and compelling growth prospects and investing in them at attractive prices. We think the combination of unchanged long-term growth outlooks and attractive valuations should result in strong returns over time.

Top Contributors/Detractors to Performance

as of 12/31/23

Contributors

  • Shares of Gartner, Inc., a provider of syndicated research, soared after reporting excellent quarterly earnings results. Gartner’s core subscription research businesses continued to compound at attractive rates, and growth is poised to accelerate over the next several quarters. We believe Gartner will emerge as a critical decision support resource for every company evaluating the opportunities and risks of AI for its business. We expect this development to provide a tailwind to Gartner’s volume growth and pricing realization over time. Gartner’s sustained revenue growth and focus on cost control should drive continued margin expansion and enhanced free cash flow generation. The company’s balance sheet is in excellent shape and can support aggressive repurchases and bolt-on acquisitions, in our view.
  • Shares of MSCI, Inc., a leading provider of investment decision support tools, contributed to performance. The company reported largely solid quarterly earnings results and reiterated its 2023 free cash flow guidance. Shares also climbed higher in November and December as equity market performance improved. Despite some near-term macro uncertainty, we retain long-term conviction as MSCI 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 during the quarter. While foot traffic to veterinary clinics in the U.S. remained subdued, IDEXX’s excellent execution has enabled the company to continue to deliver robust financial results. We believe IDEXX’s competitive trends are outstanding, and we expect new proprietary innovations and field sales force expansion to be meaningful contributors to growth in 2024. We see increasing evidence that long-term secular trends around pet ownership and pet care spending have been structurally accelerated, which should help support IDEXX’s long-term growth rate.

Detractors

  • Shares of specialty insurer Kinsale Capital Group, Inc. gave back some gains from earlier this year after the company reported slower premium growth in the third quarter. Earnings beat Street expectations, with EPS doubling and ROE exceeding 34%. However, investors focused on the slowdown in gross written premiums to 33% growth from 58% growth in the prior quarter, which management attributed to normal seasonality for property insurance. Additionally, we believe some of the share price weakness resulted from a sector rotation away from defensive stocks to more speculative stocks following a decline in interest rates. We continue to own the stock because we believe Kinsale is well managed and has a long runway for growth in an attractive segment of the insurance market.
  • Shares of specialty insurer Arch Capital Group Ltd. gave up some gains in the fourth quarter after solid performance for most of the year. We believe the share price weakness was primarily due to a sector rotation away from defensive stocks to more speculative stocks following a decline in interest rates. Company fundamentals remained strong, with net premiums written growing 23%, operating ROE expanding to 25%, and book value per share rising 30% in the third quarter. Management expects favorable market conditions will persist. We continue to own the stock due to Arch’s experienced management team and our expectation of solid growth in earnings and book value.
  • Iridium Communications Inc. is a mobile voice and data communications services vendor offering global coverage via satellite. In 2022, Iridium announced an agreement with Qualcomm to incorporate Iridium's technology into Qualcomm's Snapdragon chip, allowing devices to seamlessly connect to both cellular and satellite networks. In a surprise turn of events, Qualcomm backed out of the partnership in November 2023. The decision shook investors' confidence in Iridium's direct-to-device opportunity. We retain conviction. Iridium remains a unique satellite owner and operator, with L-band spectrum, years of operational experience, relatively new satellite hardware, and hundreds of partners across verticals and geographies. In addition, management announced a commitment of $3 billion in return to shareholders between 2023 and 2030, representing a material portion of the current enterprise value.

Quarterly Attribution Analysis (Institutional Shares)

as of 12/31/23

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 12/31/23

Baron Growth Fund (Institutional Shares) rebounded 7.70% in the fourth quarter, yet failed to keep pace with the Russell 2000 Growth Index due to a difficult month of December. The quarterly underperformance was caused by stock selection and style-related headwinds, notably the Fund’s underexposure to the top performing Residual Volatility and Beta factors.

Adverse stock selection in Financials was responsible for about three-quarters of the underperformance in the period, with the primary culprits being specialty insurers Arch Capital Group Ltd. and Kinsale Capital Group, Inc. We believe Arch’s share price weakness was largely due to a market rotation away from defensive securities to more speculative stocks following a decline in interest rates. The company’s fundamentals remained strong with net premiums written growing 23%, operating ROE expanding to 25%, and book value per share rising 30% in the third quarter. We continue to own the stock due to Arch’s experienced management team and our expectation of solid growth in earnings and book value. Kinsale’s shares fell after the company reported slower premium growth in the third quarter. Earnings beat Street expectations, with EPS doubling and ROE exceeding 34%. However, investors focused on the slowdown in gross written premiums to 33% growth from 58% growth in the prior quarter, which management attributed to normal seasonality for property insurance. We remain shareholders because we believe Kinsale is well managed and has a long runway for growth in an attractive segment of the insurance market.

Additional headwinds came from disappointing stock selection in Consumer Discretionary and Communication Services, where a handful of holdings weighed on performance. Weakness in Consumer Discretionary was driven by share price declines from hotel franchisor Choice Hotels International, Inc. and global ski resort operator Vail Resorts, Inc. Choice's proposed hostile takeover of Wyndham Hotels pressured shares, as the deal would increase leverage that could take two to three years to return to more appropriate levels. However, we expect the acquisition to benefit Choice over time as its increased scale would enable franchisees to pay lower fees to online travel agencies, increase revenue via a larger loyalty program, and generate higher royalty rates given better revenue management tools to improve occupancy and rates. If the deal falls through, we believe the stock should trade much higher than current levels and see limited downside. Vail’s stock underperformed on concerns that limited snowfall to begin the season would result in lower visitation than the previous year. While the slow start to the season has negatively impacted occupancy and room rates, we believe conditions should improve as the season progresses. Additionally, season pass sales were strong this year, up double digits over last year, which should at least partially offset any declines in visitation and spending.

The only position in Communication Services, satellite communications company Iridium Communications Inc., was a material detractor after the company’s shares fell 9.2% in the period. Earlier in the year, Iridium announced a strategic partnership with Qualcomm seeking to integrate Iridium’s satellite communication technology into Qualcomm’s Snapdragon chip series. While this collaboration was projected to yield substantial profits for Iridium over time, Qualcomm unexpectedly backed out of the partnership in November. The decision shook investors' confidence in Iridium's direct-to-device opportunity and generated further competitive uncertainty. We retain conviction. Iridium remains a unique satellite asset and operator, with L-band spectrum, years of operational experience, relatively new satellite hardware, and hundreds of partners across verticals and geographies. In addition, management announced a commitment of $3 billion in return to shareholders between 2023 and 2030, representing a material portion of the current enterprise value.

Partially offsetting the above was favorable stock selection in Information Technology (IT) coupled with lack of exposure to the lagging Energy sector. Strength in IT was driven by syndicated research provider Gartner, Inc. and physics-based simulation software vendor ANSYS, Inc., whose share prices were up in excess of 20% for the quarter. Gartner was the top contributor after reporting excellent quarterly earnings results. The company’s core subscription research businesses continue to compound at attractive rates, and growth is poised to accelerate over the next several quarters. ANSYS shares rose sharply late in the quarter amid reports that multiple parties are interested in acquiring the company. While the potential for an acquisition remains uncertain, we believe ANSYS remains well positioned to benefit from its leading and broad product portfolio, large multi-year contracts, and tight relationships with key customers.

as of 12/31/23

Yearly Attribution Analysis (for year ended 12/31/2023)

Baron Growth Fund (Institutional Shares) increased 14.97% for the year, trailing the Russell 2000 Growth Index by 369 basis points as adverse stock selection more than offset the positive impact of active sector weights.

Unfavorable stock selection in Consumer Discretionary, Communication Services, and Real Estate was the main reason for the relative shortfall in the period. Weakness in Consumer Discretionary was driven by global ski resort operator Vail Resorts, Inc. and timeshare company Marriott Vacations Worldwide Corporation. Vail’s shares declined due to lower snowfall during the 2022-2023 season at its East Coast resorts coupled with storms in Tahoe that forced the resort to close some terrain due to wind conditions and avalanche dangers. We remain investors. Season pass sales have accelerated from 2022 levels with significant increases in East Coast penetration, which should help partially offset the impact of weak snowfall thus far in the 2023-2024 season or a potential recession in 2024. The company's higher-end customer base should also provide some resiliency in earnings and cash flow. Vail's strong balance sheet positions it well to weather any slowdown due to the snow. Vail continued to use its cash flow for share buybacks and its well-covered close to 4% dividend. We believe the stock remains attractive at current levels and think its multiple should revert to historical levels over time on the strength of its growth and durability of earnings and cash flow. Marriott Vacations stock fell in response to soft sales of timeshare units and the slow ramp of a new product offering. A default rate that was higher than the company had anticipated forced it to take a charge to increase its reserves, pressuring earnings and cash flow. We remain investors given the company’s strong balance sheet and well-covered 3% dividend. Marriott Vacations continues to use cash flow to buy back its shares, and management has personally bought stock at much higher levels than current prices.

Weakness in Communication Services came from satellite communications company Iridium Communications Inc., whose shares were pressured by a quarterly earnings miss and the unexpected termination of the company’s direct-to-device partnership with Qualcomm. Performance in Real Estate was hindered by casino REIT Gaming and Leisure Properties, Inc. and life sciences REIT Alexandria Real Estate Equities, Inc. Gaming and Leisure’s shares lagged due to investor concerns that the Federal Reserve would continue to raise interest rates, making transactions more difficult to close and less accretive to the company’s dividend. We remain shareholders given that Gaming and Leisure has a strong pipeline of transactions and is executing its strategy well. Alexandria’s underperformance was driven by slower leasing conditions that resulted from prolonged tenant decision making and softer operating conditions for biotechnology tenants. In addition, certain markets are seeing elevated levels of new supply deliveries, which is further pressuring rent growth. We expect Alexandria's portfolio to outperform the broader life sciences market because of its differentiated cluster model and captive tenant base. We remain excited about the company’s long-term prospects and view the current valuation as attractive.

These relative losses were partly offset by investments in Financials, Information Technology (IT), and Health Care. Lack of exposure to the underperforming Energy and Utilities sectors also aided performance. Within Financials, higher exposure to this better performing sector coupled with strong performance from term life insurer Primerica, Inc. added the most value. Primerica’s shares outperformed following an accounting change at the beginning of the year that drove a significant step-up in the operating margin. The company’s fundamentals remained positive with steady growth in the Term Life segment, improving revenue growth in the Investment segment, and underlying margin expansion even absent the accounting change. The company also continues to aggressively repurchase stock with diluted shares down 5% in 2023. Several other holdings also performed well in the sector, led by financial exchanges and data companies MSCI Inc. and Morningstar, Inc. Favorable stock selection in IT, owing mostly to gains from syndicated research provider Gartner, Inc. and physics-based simulation software vendor ANSYS, Inc., was partly offset by the Fund’s lower exposure to this better performing sector. Gartner’s shares were up in response to attractive financial results and investor belief that the company is a likely beneficiary of explosive growth in artificial intelligence. ANSYS stock performed well early in the year following a robust quarterly report and positive commentary from management noting continued traction among large customers and a healthy demand environment, especially in key verticals including technology, alternative energy, automotive, and aerospace.

Strength in Health Care was partly due to the outperformance of veterinary diagnostic leader IDEXX Laboratories, Inc. and pharmaceutical packaging manufacturer West Pharmaceutical Services, Inc. IDEXX’s shares performed well as excellent execution enabled the company to deliver robust financial results despite subdued foot traffic at its U.S. veterinary clinics. We believe IDEXX's competitive trends are outstanding, and we expect new proprietary innovations and field sales force expansion to be meaningful contributors to growth in 2024. We see increasing evidence that long-term secular trends around pet ownership and pet care spending have been structurally accelerated, which should help support IDEXX's long-term growth rate. West’s stock rose in response to SELECT trial results from Novo Nordisk, the maker of Ozempic and Wegovy, showing that obesity medicine Wegovy reduced major adverse cardiovascular events by 20% in overweight adults aged 45 or older with cardiovascular disease and no prior history of diabetes. The study’s results support broader insurance coverage of GLP-1 drugs, which use West's syringe plungers. In our view, the company should benefit from growing GLP-1 adoption and see an uptick in syringe plunger sales. Significantly lower exposure to this lagging sector contributed another 100-plus basis points of relative gains.

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.