Review and Outlook

as of 12/31/23

U.S. equities rose sharply in November and December, pushing the broad market indexes into double digits for the quarter and reversing the losses suffered over the preceding three months. Moderating inflation coupled with a softening labor market and a perceived peak in the cycle of interest rate hikes were the main drivers of the broad-based rally. The S&P 500 Index was up more than 26% for the year, closing at a new all-time high, while the NASDAQ Composite Index appreciated nearly 45%. Most of the gains in the broad market indexes came from the so-called Magnificent Seven, which together were up 76% for the year, driven, in part, by excitement surrounding their ability to gain from widespread adoption of artificial intelligence.

Baron Opportunity Fund increased in the quarter. Information Technology (IT), Consumer Discretionary, and Communication Services investments contributed the most. Health Care holdings detracted. IT had a very strong quarter, with all 21 of the portfolio's IT investments advancing. Sector gains were led by top contributor Microsoft Corporation and third largest contributor NVIDIA Corporation. Second largest contributor Amazon.com, Inc. drove appreciation within Consumer Discretionary. Gains within Communication Services were led by Meta Platforms, Inc. Shares of the owner of Facebook and Instagram rose on healthy topline growth and consensus-beating guidance, aided by a broader technology rally. Top detractor argenx SE and third largest detractor Illumina, Inc. drove declines within Health Care.

As we start 2024, it appears the market is trying to find its footing. On the one hand, it continues to be dominated by the macro uncertainties and debates around such hard-to-forecast issues like inflation levels, an economic soft landing vs. a recession, when the Federal Reserve will first cut rates and how many cuts will it make, wars in Europe and now the Middle East, U.S. trade relations with China, and the upcoming presidential election. On the other hand, the market has rewarded many secular growth companies. But the mere act of flipping the calendar sometimes has a short-term impact on market sentiment and trading. Some investors look to sell winners and buy laggards. Every sell-side analyst announces top picks and favorite trends for the new year.

However, arbitrary dates have absolutely no impact on fundamental business trends and secular themes. We remain true to our long-term investment mandate: leveraging our deep in-house research differentiation to identify 1) the powerful and undeniable 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 12/31/23

Contributors

  • 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 (including Azure AI services). Shares increased after posting strong quarterly results, with a material top line beat, upside across all three operating segments, and strong margin growth, despite ramping long tail investments behind AI. We remain confident that Microsoft is one of the best positioned companies in software with its vertically integrated software stack and broad sales distribution. We believe Microsoft will continue taking share across its business, driving durable, long-term, double-digit growth and best-in-class profitability.
  • Amazon.com, Inc. is the world’s largest retailer and cloud services provider. Shares of Amazon were up in the quarter. Reported results were better than consensus, with a significant beat in North American operating profit. We believe the AWS cloud division has many years ahead of growth, with recent customer optimizations attenuating. We also believe Amazon is well positioned in the short to medium term to meaningfully improve core North American retail profitability to above pre-pandemic levels, benefiting from its new regionalized fulfillment network and its growing margin-accretive advertising business. Longer term, Amazon has substantially more room to grow in e-commerce, where it has less than 15% penetration of the total addressable market. Amazon also remains the clear leader in the vast and growing cloud infrastructure market, with large opportunities in application software, including enabling generative AI workloads.
  • NVIDIA Corporation is a fabless semiconductor company that designs chips and software for gaming and accelerated computing. The stock rose in the fourth quarter, finishing the year up over 200% as a result of the unprecedented demand acceleration for generative AI (GenAI). NVIDIA is seeing the fruits of its nearly 20-year investment in AI and accelerated computing, with data center revenues growing five-fold from $3 billion in 2019 to $15 billion in 2022 and expected to triple to $45 billion in 2023. This extraordinary growth in revenues drove an even faster growth in earnings-per-share, resulting in multiple contraction despite the rapid rise in shares. While 2023 was a banner year for GenAI, we remain at the early innings of broad adoption. While the opportunity within the data center installed base is already large at roughly $1 trillion, the pace of innovation in AI in general, and GenAI in particular, should drive significant expansion in the addressable market, as GenAI creates a new way for human-computer interaction through language, and as companies are better able to utilize their data for decision-making.

Detractors

  • Argenx SE is a biotechnology company focused on autoimmune disorders. Shares fell in the quarter on the back of failed clinical trials in immune thrombocytopenic purpura and pemphigus vulgaris that called into question the applicability of the FcRn treatment landscape. While the exact nature of these data sets is nuanced and not entirely thesis-breaking, in our view, there are now real questions for the FcRn space that have not existed in the narrative for years. On the positive side, the strong launch of Vyvgart, with early sales tripling consensus expectations and global approvals coming earlier than guided, should continue to grow revenue and justifies a defensible valuation based on cash flow analysis. We expect 2024 to be another year of solid performance, with many catalysts including readouts in myositis, Sjogren's syndrome, multifocal motor neuropathy, and argenx's subcutaneous formulation launch.
  • GM Cruise Holdings LLC offers autonomous driving software and a fleet of vehicles aimed at reducing costs and improving the safety of transporting people and goods. We marked down the stock after the company lost its autonomous operating license in California. Despite achieving significant milestones over the past year, including completing millions of fully autonomous miles with passengers in various states and cities, an October incident involving a pedestrian in San Francisco prompted the California DMV to rescind the company's license. The regulator cited concerns about incomplete incident information disclosure. Consequently, this triggered a near-complete cessation of operations and key management changes at Cruise, as General Motors, the majority shareholder, charts a new course for the organization and its capital needs. While we strongly believe the life-saving technology achieved through the autonomous revolution holds immense value for both investors and society at large, the path to recovery for Cruise remains uncertain at this juncture, which is reflected in our valuation framework.
  • Illumina, Inc. is a leading provider of DNA sequencing platforms. The stock declined due to weak financial results, management turnover, and uncertainty about the outcome of the acquisition of Grail, which regulators have challenged on antitrust grounds and in the meantime has been burning cash flow and hampering Illumina's consolidated performance. Toward the end of the quarter, management committed to divesting the Grail business in 2024. We continue to believe Illumina has a dominant position in an attractive and growing end market and has a long runway for growth.

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.