Baron International Growth Fund

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.

Baron International Growth Fund (Institutional Shares) rose 1.35% in the first quarter, trailing the MSCI ACWI ex USA Index by 334 basis points principally due to disappointing stock selection. A handful of holdings suffered material declines during the quarter owing to a combination of earnings disappointments, legislative/project setbacks for sustainability/ESG-related companies, and the general underperformance of smaller cap stocks following strong relative performance in the prior quarter.

On a country level, stock selection in developed markets was almost entirely responsible for the underperformance in the period, driven for a third consecutive time by broad-based weakness in Europe, where the Fund’s investments in France, the U.K., Switzerland, the Netherlands, Spain, and Norway suffered losses. Weak stock selection in Japan was another drag on performance in developed markets. Partially offsetting the above was solid stock selection emerging markets, where Taiwan Semiconductor Manufacturing Company Limited and the Fund’s Indian holdings were among the standouts.

From a sector or theme perspective, adverse stock selection in Industrials, Consumer Discretionary, Information Technology (IT), and Energy proved costly, with material declines from a handful of holdings in these sectors accounting for much of the relative weakness in the period. Several holdings hampered performance in Industrials, with the largest detractor being Aker Carbon Capture ASA, a Norwegian carbon capture company with solutions, services, and technologies serving a range of industries with carbon emissions, including the cement, bio and waste-to-energy, gas-to-power, and blue hydrogen segments. Aker’s shares were down after the company lost a contract award in a long-anticipated BP Net Zero Teesside Power project to a competing consortium. We still like the company and see long term potential for new carbon capture project wins. Aker is a market leader in Europe and has a proprietary low-cost technology called “Just Catch” to capture CO2 from small industrial plants. Its patented solvents are also some of the most environmentally friendly solutions in the market, which is a big source of competitive advantage, in our view. There is a secular growth opportunity in carbon capture, as it plays an important role in CO2 emissions reduction, particularly in hard to de-carbonize industries such as cement, gas-to-power/hydrogen, and waste-to-energy.

Weakness in Consumer Discretionary was almost entirely driven by declines from British luxury watch retailer Watches of Switzerland Group PLC and Spanish online travel company eDreams ODIGEO SA. Watches of Switzerland was a top detractor after the company revised its earnings guidance for fiscal year 2024 following slow sales in December and January. We remain shareholders, as we believe Watches of Switzerland has an attractive opportunity to consolidate the U.S. luxury watch market over the next five to 10 years, driven in part by its long-standing, strategic relationship with Rolex, which represents roughly half of the company’s total revenue. EDreams shares were down as travel broadly continued to normalize from post-pandemic heights, negatively impacting gross bookings. Additionally, Prime member additions failed to surpass Street expectations. Still, eDreams has improved its fundamental positioning with a total of 5.4 million Prime subscribers, demonstrating its relative competitive strength in Europe. As the Prime members program matures, economics have begun inflecting towards higher profitability (e.g., less marketing spend on customer acquisition). The product roadmap should also materially improve the customer value proposition, with the addition of hotels (particularly in Europe's fragmented hotel landscape) and generative AI improvements. Given strong customer acquisition, an impressive pipeline of new products, and plans for the attractive hotel market, we retain conviction in the long-term opportunity.

Swiss solar modules supplier Meyer Burger Technology AG and British outsources software development provider Endava plc were responsible for most of the relative losses in the IT sector. Meyer Burger’s shares fell sharply after the company announced a large rights issue to close the funding gap to finance the completion of its U.S. solar module and cell manufacturing plant. This announcement followed unsuccessful negotiations with the German government to provide regulatory support given challenging market conditions in Europe, which prompted Meyer Burger to close its German factory. We sold our shares. Even though Meyer Burger's next generation heterojunction solar modules are more efficient and command premium prices, we are concerned about the oversupply of solar modules and cells in the industry and the company's U.S. project execution risks. Endava’s shares collapsed after management cut guidance for the fiscal year ending June 30, 2024. Growth has slowed over the last year as business customers pulled back on discretionary IT spending due to macroeconomic uncertainty. Last fall, management noted that seeing early signs of a recovery, but new projects have been taking longer to materialize as customers delay spending decisions. Higher expenses due to increased staffing to meet anticipated demand weighed on margins as well. Management acknowledged that it misread the market and is taking steps to right-size the cost structure to improve margins. We remain invested because we expect these near-term headwinds to abate over time, leading to better growth as clients embrace digital transformation.

Performance in Energy was hindered by Waga Energy SA, a French company that offers innovative technological solutions to reduce methane emissions by converting landfill gas into cost-competitive and grid-compliant renewable natural gas (RNG), a substitute for fossil natural gas. Waga’s stock declined after the company reported plans to accelerate the development of its renewable gas projects in the U.S., which require additional capital expenditure. The announcement of an equity offering to finance project development further contributed to share price weakness. We remain shareholders. Waga's patented proprietary technology WAGABOX®, which can capture RNG from almost any landfill, is a major competitive advantage, in our view. Industry experts forecast a 36% average annual increase in the consumption of RNG in the EU by 2030 based on stated government policies. The company has 20 WAGABOX units installed and secured contracts for 17 more, for combined fixed price sales of 100 million EUR annually. In addition, it has a pipeline of projects for 159 more sites.

Somewhat offsetting the above was solid stock selection in Materials and Financials along with lack of exposure to the lagging Utilities sector. Strength in Materials came from Brazilian pulp manufacturer Suzano S.A. (sustainability/ESG) and a few of the Fund’s best-in-class/high-quality growth holdings (Linde plc, DSM-Firmenich AG, and Symrise AG). Performance in Financials was bolstered by American insurer Arch Capital Group Ltd., financial instruments exchange operator Japan Exchange Group, Inc., and Japanese megabanks Mitsubishi UFJ Financial Group, Inc. and Sumitomo Mitsui Financial Group, Inc., which are part of the best-in-class/high-quality growth theme.