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.

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.