Review and Outlook

as of 09/30/20

The markets posted mostly positive results in the quarter, buoyed by a combination of factors, including employment results that were better than Street forecasts, strength from big tech, corporate earnings and guidance that on average surprised to the upside, improved consumer confidence, and perhaps most significantly, continued monetary support from the Federal Reserve. REITs, however, continued to lag the broader market over lingering investor concerns regarding rent collections, leverage, and the possibility of a prolonged slowdown in commercial real estate business fundamentals.

Against this backdrop, Baron Real Estate Fund advanced in the quarter. Holdings in the casinos & gaming operators, homebuilders & land developers, and real estate service companies categories contributed the most. Top contributor Penn National Gaming, Inc. led positive performance within casinos & gaming operators. Homebuilders & land developers had a strong quarter, with double-digit gains in five of six holdings, including third largest contributor Installed Building Products, Inc. Second largest contributor Zillow Group, Inc. drove gains within real estate services companies. Tower operators & wireless telecommunication services was the only category to detract from performance.

We are currently prioritizing four investment themes: 1) the ongoing recovery of the U.S. housing market, with an additional post-pandemic boost as people migrate to the suburbs and conduct more activities at home; 2) the intersection of technology and real estate; 3) hospitality and travel-related companies – a.k.a. “epicenter" companies; and 4) tactical opportunities in REITs.

We are mindful of the economic and real estate uncertainty generated by the pandemic. However, we are seeing advances in therapeutics and the development of a vaccine, so we do not anticipate a return to a total shutdown. For the real estate market in particular, historically low interest rates should also help boost growth. We believe this is a particularly opportune time for active managers in real estate who have the flexibility to shift into growth areas while avoiding others facing a longer and more uncertain recovery as a result of the pandemic. We believe our philosophy of structuring a more inclusive and unique real estate fund – one that includes REITs but is more expansive, balanced, and diversified than a typical “REIT only” fund – is a compelling long-term strategy.  

Top Contributors/Detractors to Performance

as of 09/30/20


  • Shares of regional casino company Penn National Gaming, Inc. increased in the quarter on news of strong betting activity after the early September launch of the Barstool sports book app, in which Penn has a 36% stake. The company reported revenue and EBITDA results that beat investor forecasts, driven by robust margin growth across its assets. The resulting increase in cash flow, combined with a recent equity offering, should help Penn pay down debt on its balance sheet and make additional investments.
  • Zillow Group, Inc. operates leading U.S. real estate sites, a mortgage marketplace, and the Zillow Offers home-buying business. Shares were up on strong second quarter results driven by record top-of-funnel metrics and a favorable newly public comp for the Offers business. In our view, Zillow is well positioned to penetrate the large online real estate advertising opportunity with substantial upside from Offers, which could grow the company's addressable market in both houses to be bought/sold and leads provided to Premier Agents, as well as from Zillow Home Loans.
  • Shares of insulation installer Installed Building Products, Inc. contributed positively to performance during the third quarter. Share gains were driven by second quarter financial results that exceeded Street forecasts and a bright outlook for the remainder of the year. The company continued to benefit from strong housing demand, share gains across various product lines, margin expansion, and accretive acquisitions.


  • American Tower Corp. owns and operates 180,000 cell phone towers with 40,000 in the U.S. and 140,000 internationally. Shares fell due to concerns around the timing of churn from the Sprint/T-Mobile merger and the resulting impact on organic growth over multiple years. The stock  had a strong run in the second quarter, along with the technology sector in general. We retain conviction given durable demand drivers in data growth and video, coupled with the company’s ability to grow its portfolio and return excess capital to shareholders.
  • Shares of Wynn Resorts Ltd., an owner and operator of casinos in Macau, Las Vegas, and Boston, fell on concerns around a recovery in Macau that has been slower than investor expectations, especially on the VIP side. The subdued recovery in Las Vegas, given lackluster group and convention business, as well as Wynn's levered balance sheet, also weighed on the stock in the quarter. We retain conviction as we believe pent-up demand will drive a quick recovery in both locations once travel restrictions ease and consumer confidence is restored.
  • Las Vegas Sands Corporation operates casinos in Las Vegas, Macau, and Singapore. Shares declined during the period held on continued weakness in Macau, given ongoing COVID-19-related concerns. Management expects Las Vegas to be the slowest region to recover from the pandemic given its exposure to the convention and group business, which it expects to be the last segment to return to normal levels. We believe pent-up demand will drive a quick recovery once consumer confidence returns. The company's strong balance sheet and liquidity profile should help it weather the downturn.

Quarterly Attribution Analysis (Institutional Shares)

as of 09/30/20

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 09/30/20

Baron Real Estate Fund (Institutional Shares) gained 18.65% in the third quarter and significantly outperformed the MSCI USA IMI Extended Real Estate Index by 974 basis points due to stock selection and, to a lesser extent, differences in real estate category exposures.

Investments in casinos & gaming operators, homebuilders & land developers, and REITs added the most value. Favorable stock selection in the casinos & gaming category was due to the outperformance of Penn National Gaming, Inc., Red Rock Resorts, Inc., and Boyd Gaming Corporation. Penn was the top absolute contributor on news of strong betting activity following the launch of the Barstool Sportsbook app, while Red Rock’s shares increased after adjusted EBITDA exceeded analyst forecasts. Red Rock’s management team is optimistic that strong trends in revenue and EBITDA will continue, and we believe the company could return to pre-COVID-19 levels or better in 2021. Boyd’s share price was up as business returned to pre-pandemic levels on a run-rate basis in the quarter. Targeted marketing to the highest spending customers given restricted capacity, coupled with lower costs due to fewer non-gaming amenities, resulted in increased cash flow which Boyd used to pay down debt on its balance sheet. Higher exposure to casinos & gaming operators also added value, as these stocks rallied after being challenged by the pandemic-induced economic downturn. Within homebuilders & land developers, higher exposure to this top performing category and outperformance of installation contractor Installed Building Products, Inc. (“IBP”) bolstered relative results. IBP was the third largest contributor on an absolute basis after reporting strong quarterly results and a bright outlook for the remainder of the year. The company continues to benefit from strong housing demand, share gains across various product lines, margin expansion, and accretive acquisitions. Homebuilders Lennar Corporation, D.R. Horton, Inc., Toll Brothers, Inc., and Taylor Morrison Home Corporation also performed well in the category after reporting exceptionally strong business results. We continue to like prospects for homebuilders given cyclically depressed levels of construction activity, low inventory levels, pent-up demand, and historically low mortgage rates. Within REITs, lower exposure to lagging retail, residential, and office REITs contributed over 165 basis points to relative results. Strength in the sector also came from industrial REITs Rexford Industrial Realty, Inc. and Prologis, Inc., whose shares increased as accelerating e-commerce sales resulted in heightened demand for warehouse space.

Significantly lower exposure to strong performing home improvement retail stocks within the building products/services category, cash exposure in an up market, and lack of exposure to the outperforming senior housing and other health care facilities category hampered relative results.

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.