Review and Outlook

as of 03/31/24

The bull market that started at the end of October of 2023 kept running throughout the first quarter of 2024. Even the renewed threat of "higher for longer" interest rates did not put a check on equity performance. Gains were led by technology stocks, especially the companies seen as most likely to benefit from the artificial intelligence boom. Investors entered the new year optimistic that a soft landing was in store for the economy, in which a recession would be avoided, inflation would continue to dissipate, and the Fed would start cutting interest rates in March. The economy has not only avoided recession but has been stronger than market forecasts. Meanwhile, inflation has again turned sticky, and Fed rate cuts have been delayed to at least June.

Economic data was slightly mixed during the quarter. Strong growth in the U.S. labor supply, driven by increased labor force participation and a surge in immigration, supported job gains without higher inflation. The U.S. unemployment rate, though still low, rose slightly to 3.8%. The S&P Global US Services PMI, an index of the prevailing direction of economic trends in the U.S. service sector, pulled back modestly. Existing home sales jumped 9.5% in February 2024, the highest percentage increase in a year and above consensus expectations. At a 3.2% annualized rate, U.S. inflation, although it has yet to decline to the Fed’s stated 2% preferred level, is significantly less than the June 2022 peak of more than 9%. Looking ahead, a more normalized supply chain and moderating wage growth bode well for a continued slow decline in inflation.

Baron Opportunity Fund increased in the quarter. Investments within Information Technology (IT), Health Care, and Communication Services contributed the most. Consumer Discretionary holdings detracted. IT had a strong quarter, with top contributor NVIDIA Corporation and third largest contributor Microsoft Corporation leading advances. Health Care appreciation was led by second largest contributor Viking Therapeutics, Inc. Gains within Communication Services were led by Meta Platforms, Inc., owner of Facebook, the world's largest social media platform. Declines within Consumer Discretionary were led by Tesla, Inc. and Rivian Automotive, Inc., respectively the top and second largest detractor from performance in the quarter.

While we are certainly cognizant of the market’s day-to-day movements, we also understand its reaction to short-term macro events has no impact on fundamental business trends and secular themes. We remain true to our long-term investment mandate: leveraging our deep in-house research to identify 1) the powerful secular growth trends disrupting industries and driving long-term growth; and 2) the exceptional businesses poised to benefit from these trends with, among other things, durable competitive advantages, cash-generative business models, and double-digit multi-year projected annual returns. We continue to believe that non-cyclical, durable, and resilient growth should be part of investors’ portfolios and that our strategy will deliver solid long-term returns.

Top Contributors/Detractors to Performance

as of 03/31/24

Contributors

  • NVIDIA Corporation sells semiconductors, systems, and software for accelerated computing, gaming, and generative AI (GenAI). NVIDIA's stock rose in the first quarter, driven by continued strong demand for its GPUs that stand at the epicenter of the GenAI revolution. NVIDIA closed 2023 with unprecedented revenue growth at massive scale, with a fourth-quarter revenue run rate just shy of $90 billion, growing over 3.5 times year-on-year with operating margins of 67%. In addition to GenAI-driven demand, NVIDIA is benefiting from the transition to accelerated computing. NVIDIA continues to improve the performance of its chips and systems while removing hurdles for adoption through software innovation, such as the recently announced NVIDIA Inference Microservices, which make it easier for companies to adopt GenAI at scale.
  • Viking Therapeutics, Inc. develops metabolic disease medicines with focus on diabetes/obesity and MASH (metabolic steatohepatitis, i.e., fatty liver). Viking’s lead asset is VK2735, an injectable and oral version of a GLP-1/GIP combination weight loss medication that directly competes with Eli Lilly and Company’s Mounjaro/Zepbound. Viking’s second asset competes with Madrigal Pharmaceutical’s just approved MASH asset. Shares rose in late February when Viking announced positive top-line results from its Phase 2 clinical trial of VK2735. We remain investors. Both of Viking's main assets appear to be more efficacious than their competitors' in two exceptionally large revenue end markets. After a couple of decades of working on treatments for oncology and rare diseases, the pharmaceutical industry is shifting back to lower priced/higher volume primary care medications, led by treatments for obesity, and Viking has the potential to be a notable player in this space.
  • Microsoft Corporation is a software company traditionally known for its Windows and Office products. Over the last eight years, it has built a $100 billion-plus cloud business, including Office 365, CRM product Dynamics 365, and infrastructure-as-a-service product Azure. Shares increased following robust quarterly results, featuring an approximately 2% beat on the top line, upside across all three operating segments, and strong margin performance, despite ramping long-tailed investments in AI initiatives. During the fourth quarter, Azure revenue growth accelerated by one point to 30% year-over-year, fueled by increasing Azure AI revenue, now contributing 6% to the segment, up from 3% previously. Management emphasized the significance of inferencing over training large language models, marking a bullish trend, in our view, as we think inferencing is a more recurring, higher-quality revenue stream, driving fast growth with long-term durability. Given the company’s revenue growth in the second fiscal quarter and emerging AI monetization avenues like Azure AI services and M365 Copilot, we remain confident in Microsoft as the leader within the software space.

Detractors

  • Tesla, Inc. designs, manufactures, and sells electric vehicles, related software and components, and solar and energy storage products. Shares fell as the core automotive segment remained under pressure due to a complex macroeconomic environment, factory shutdowns, growing competitive risks in China, and Tesla’s price reductions throughout 2023. During the first quarter of 2024, production was negatively impacted by Red Sea maritime supply chain interferences, sabotage at a Tesla factory power supply in Berlin, and the launch of the refreshed Model 3. We remain shareholders. Tesla has started delivery of its highly anticipated Cybertruck pickup, which features new technologies within the car and its manufacturing lines. Tesla also launched version 12 of its Full Self Driving product, which features material improvements and should enhance investor confidence in Tesla's unique software and hardware capabilities. Lastly, we expect energy storage sales to continue to grow over the coming years.
  • Shares of Rivian Automotive, Inc., a U.S.-based electric vehicle manufacturer, detracted from performance. Despite substantial improvements in production and delivery volumes in 2023 as well as improved unit economics, Rivian's business remains constrained by its limited scale, negative gross margins, and elevated cash outflows. Additionally, Rivian expects to temporarily shut down its production facilities for upgrades, impeding anticipated production growth in 2024. Compounding these challenges is the potential for demand constraints, which may not keep pace with production. Nevertheless, the recent unveiling of Rivian's mass-market products, the R2 and R3, garnered enthusiastic responses, evidenced by over 68,000 pre-orders within the first 20 hours post-launch. In a strategic move, management opted to produce the R2 in Rivian's existing facility, deferring the construction of a new factory. This decision should help reduce mid-term capital expenditure obligations while ensuring higher utilization of current facilities as the R2 ramps production in 2025.
  • indie Semiconductor, Inc. is a fabless designer, developer, and marketer of automotive semiconductors for advanced driver assistance systems and connected car, user experience, and electrification applications. Shares fell during the quarter after indie guided to 2024 revenue growth that missed Street expectations as a result of customers absorbing excess inventory. While indie conservatively expects to maintain a healthy 25%-plus year-over-year growth rate, well above industry and peer benchmarks, and management expressed confidence in a robust second half given more than 20 new projects, investors seemed concerned about prolonged inventory digestion into 2024. We think indie remains well positioned for growth over the medium and long term, especially with its $6.3 billion design win backlog and significant program ramps anticipated in 2025, including a prestigious radar-related rollout – the company’s largest program to date. We believe indie can continue to significantly outpace the broader industry and reach nearly $1 billion in revenue by 2028 with premium margins, supported by its contracted visibility.

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.