Review and Outlook

as of 12/31/22

U.S. equities rose in the fourth quarter. Despite ongoing caution from the U.S. Federal Reserve, investors reacted positively to signs that inflation could be cooling, suggesting that the Fed would slow the pace of tightening in 2023. Although inflation remained elevated in December, it slowed to 6.45% year-over-year, materially below the June 2022 peak of 9.06%, with cheaper gas prices responsible for much of the decrease. While unemployment remained near multi-decade lows, just 223,000 jobs were added in December, the lowest number in two years. The housing market experienced a sharp slowdown due to higher mortgage rates, with existing home sales falling more than 35% and new home sales down more than 15% year-over-year in November, and many observers are expecting the market will decelerate further in 2023. All these signs pointed to a cooling economy, and the Fed, in fact, did reduce its final rate hike of the year to 50 basis points after four consecutive increases of 75 basis points.

Baron Partners Fund declined in the quarter. Virtually all the negative performance was due to a sharp drop in the share price of top detractor Tesla, Inc., and Consumer Discretionary, which includes Tesla, was the only detracting sector. On the positive side, Financials, Industrials, and Information Technology investments were the top contributors to performance. Top contributor Arch Capital Group Ltd. led gains within Financials. The Charles Schwab Corp. was another noteworthy contributor within the sector. Shares of this online brokerage firm rose in the quarter on rising interest rates, which should generate increased profits on Schwab's more than $600 billion of interest-earning assets. Second largest contributor Space Exploration Technologies Corp. led advances within Industrials. CoStar Group, Inc. also helped boost performance after shares of this provider of marketing and information services to the commercial real estate industry advanced on solid financial results and raised guidance. Syndicated research provider Gartner, Inc. drove most of the gains within IT.

As long-term investors who have lived through multiple bear markets, downturns, and even recessions, 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 more compelling valuations should result in attractive returns over time.

Top Contributors/Detractors to Performance

as of 12/31/22


  • Arch Capital Group Ltd. is a specialty insurance company based in Bermuda. Shares increased due to favorable pricing trends in the P&C insurance market. During the quarter, the company reported earnings that beat consensus despite significant losses from Hurricane Ian. The stock also benefited from inclusion in the S&P 500 index, which prompted buying from passive funds. We continue to own the stock due to Arch’s strong management team and our expectation of strong growth in earnings and book value.
  • Space Exploration Technologies Corp. (SpaceX) is a high-profile private company founded by Elon Musk that designs, manufactures, and launches rockets, satellites, and spacecrafts. Its long-term goal is to enable human beings to inhabit Mars. We believe SpaceX is creating substantial value through the expansion of its Starlink broadband service. It also reliably provides reusable launch capabilities, including crewed space flights, and is making progress on its largest rocket, Starship. We value SpaceX using prices of recent financing transactions and a proprietary valuation model.
  • Shares of veterinary diagnostics leader IDEXX Laboratories, Inc. contributed to performance, helped by financial results better than Street forecasts and multiple expansion. The rate of decline of veterinary visits seems to have stabilized, and we see increasing evidence that long-term secular trends around pet ownership and pet care spending have been structurally accelerated. IDEXX’s competitive trends are outstanding, and we expect new proprietary innovations and field sales force expansion to be meaningful contributors to growth.  


  • Tesla, Inc. manufactures electric vehicles, related software and components, and solar and energy storage products. Shares fell due to growing investor concerns regarding volume and pricing dynamics as demand appeared to be pressured by a potential recession and higher interest rates. In addition, following Twitter's acquisition, CEO Elon Musk dedicated a material portion of his time to the company and sold Tesla shares to fund the transaction, driving investors' concern regarding his dedication to Tesla. We remain confident in Tesla's fundamentals and management team.
  • X Holdings I, Inc. is a holding company used by Elon Musk to acquire social media company Twitter in October 2022. Twitter's mission is to become a "digital town square" that enhances the dialogue among users by enabling more transparent operations and allowing discussions as broad as the law permits. In addition, the company is expanding its revenue streams by offering new products including verified subscriptions and revenue sharing with content creators. We value the shares of this privately owned company based on a multi-aspect proprietary model.
  • Shares of Velo3D, Inc., a 3D printing manufacturer providing a full-stack hardware and software solution to enable support-free printing, fell during the quarter on a slightly lowered 2022 financial outlook due to timing of shipments and supply chain challenges. Despite this setback, the company is committed to achieving profitability by the end of 2023. We believe Velo's unique technology and software solutions will drive strong growth, especially as the Sapphire XC system, with its larger print volume, continues to penetrate the market for complex metal parts.

Quarterly Attribution Analysis (Institutional Shares)

as of 12/31/22

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 12/31/22

Baron Partners Fund (Institutional Shares) was down 19.94% in the fourth quarter, significantly underperforming the Russell Midcap Growth Index by 26.84% due to stock selection and headwinds from style biases, notably overexposure to the weak performing Residual Volatility, Beta, and Growth factors.

The Fund uses leverage to enhance returns, although this does increase the volatility of returns. As of December 31, 2022, the Fund had 120.2% of its net assets invested in securities, and the use of leverage in an up market contributed 100-plus basis points to relative performance.

Apart from leverage, investments in Information Technology (IT), Financials, and Industrials added the most value. Within IT, lower exposure to lagging software stocks and sharp gains from syndicated research provider Gartner, Inc. and cloud-based commerce platform Shopify Inc. bolstered performance. Gartner’s shares were up as business conditions remained strong, with the company’s research business compounding at double-digit levels. Shopify’s stock bounced back during the quarter, reversing some of the declines from earlier in the year, as early holiday results suggest a rebound in e-commerce activity. The company also reported an increase in take rates, pointing to a deeper adoption of its platform by merchants. Strength in Financials was partly driven by strong gains from specialty insurer Arch Capital Group Ltd. and online brokerage firm The Charles Schwab Corp. Arch’s quarterly earnings topped consensus estimates despite significant losses from Hurricane Ian, as the company benefited from favorable pricing trends in the property & casualty insurance market. The company‘s recent inclusion in the S&P 500 Index also lifted the stock, as it prompted buying from passive funds. Schwab’s shares rose in response to rising interest rates, which should lead to increased profits on the company's more than $600 billion of interest-earning assets. Moreover, despite turbulent markets, the company attracted over $400 billion of net new client assets over the last twelve months. Aside from stock selection, the Fund’s meaningfully higher exposure to this better performing sector contributed another 40-plus basis points to relative performance. Performance in Industrials was aided by private rocket and spacecraft manufacturer Space Exploration Technologies Corp., whose shares were revalued higher using prices of recent transactions and a proprietary valuation model. Real estate data and marketing platform CoStar Group, Inc. also performed well in the sector.

These favorable effects were completely undone by adverse stock selection in the Consumer Discretionary sector, where shares of electronic vehicle manufacturer Tesla, Inc. were down more than 53%. Tesla was entirely responsible for the relative shortfall in the period, detracting in excess of 31% from relative results due to growing investor concerns about volume and pricing dynamics as demand appeared to be pressured by a potential recession and higher interest rates. Lack of exposure to the outperforming Energy sector coupled with lower exposure to strong performing biotechnology and life sciences tools & services stocks within Health Care also hampered performance.

as of 12/31/22

Yearly Attribution Analysis (for year ended 12/31/2022)

Baron Partners Fund (Institutional Shares) fell 42.41% for the year, trailing the Russell Midcap Growth Index by 15.69% due to stock selection and, to a lesser extent, headwinds from style biases, leverage, and differences in sector/sub-industry weights.

Favorable stock selection in Industrials, Financials, and Communication Services along with significantly lower exposure to the lagging Information Technology sector added the most value. Strength in Industrials was driven by private rocket and spacecraft manufacturer Space Exploration Technologies Corp. (SpaceX) and real estate data and marketing platform CoStar Group, Inc. SpaceX shares were revalued higher using prices of recent transactions and a proprietary valuation model, while CoStar continued to benefit from the migration of real estate market spend to online channels. Within Financials, higher exposure to this outperforming sector and gains from specialty insurer Arch Capital Group Ltd. and online brokerage firm The Charles Schwab Corp. added the most value. Arch was the second largest contributor after the company’s quarterly earnings exceeded consensus estimates throughout the year. Pricing trends were favorable in the property & casualty insurance market, and margins for the mortgage insurance business improved substantially from last year’s cyclically depressed levels due to declining delinquencies. Schwab benefited from the belief that rising interest rates should lead to increased profits on the company’s over $600 billion of interest-earning assets. Positive stock selection in Communication Services came from satellite communications company Iridium Communications Inc., whose shares outperformed after continuously beating expectations against its core market opportunity, while generating substantial profits following years of investments in its newer constellation. Management is leveraging strong profitability to execute its shareholder-friendly capital allocation program with an acceleration of repurchasing activity and a recently announced quarterly dividend program.

Aside from leverage, Consumer Discretionary and Health Care investments together with lack of exposure to the better performing Energy and Consumer Staples sectors weighed heavily on performance. Adverse stock selection in Consumer Discretionary was responsible for much of the underperformance in the period, with most of the weakness coming from electric vehicle manufacturer Tesla, Inc. Tesla was the largest detractor due to a temporary shutdown of its factory in China, ongoing supply-chain disruptions, and concerns about volume and pricing dynamics as demand appeared to be pressured by a potential recession and higher interest rates. The Fund’s considerably higher exposure to this lagging sector detracted another 140-plus basis points from relative performance. Within Health Care, lack of exposure to strong performing biotechnology stocks and underperformance of veterinary diagnostics leader IDEXX Laboratories, Inc. hampered performance. IDEXX was a top detractor as multiple compression has been particularly acute for pandemic “winners” given challenging growth comparisons and normalizing trends.

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 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.