Review and Outlook

as of 12/31/23

​Following a downdraft from the end of July through October, the markets went on a bull run in the last two months of 2023. Improving inflation data coupled with dovish comments from the Federal Reserve spurred an “everything rally.” In a significant shift from its earlier stance, the Fed suggested it was planning three interest rates cuts over 2024. The end of “higher for longer” rate fears especially boosted growth and small-cap stocks, as the market views these categories as beneficiaries of lower rates. Despite low unemployment and robust consumer spending – typically viewed as inflation drivers -- inflation continued to trend lower, with the annual inflation rate dropping to 3.1% in November. Investor fears of a recession were replaced by optimism that the Fed had successfully orchestrated a “soft landing,” generating further cause for cheer on top of the prospect that the Fed would soon start cutting interest rates.

Baron Small Cap Fund increased in the quarter. Industrials, Consumer Discretionary, and Information Technology (IT) holdings contributed the most. Top contributor Vertiv Holdings Co led positive returns within Industrials. Gains within Consumer Discretionary were led by third largest contributor Installed Building Products, Inc. Las Vegas locals casino owner Red Rock Resorts, Inc. and discount fitness chain Planet Fitness, Inc. were also noteworthy performers within the sector during the quarter. Appreciation within IT was led by second largest contributor Gartner, Inc. Communication Services investments detracted modestly, driven by weak performance of The Trade Desk. Shares of this leading internet advertising demand-side platform fell due to a rare miss on quarterly results. We believe the company is well positioned for 2024 and beyond, with strong tailwinds in Connected TV, a secular growth category capturing spend at an increasing pace from linear TV, retail media, platform upgrade adoption, audio, and more.

After limping into the fourth quarter, small-cap growth stocks rallied off their lows to stage a strong showing in the last two months of 2023. We are cautiously optimistic that this is the start of a long-awaited relative recovery for small caps. Longer term, we believe our companies will revert to their historic growth rates and earnings will be higher. Stocks will return to trading at appropriate multiples, which, for the most part, are higher than present. We believe higher earnings and multiples will result in strong returns for the portfolio.

Top Contributors/Detractors to Performance

as of 12/31/23


  • Vertiv Holdings Co, a manufacturer of critical infrastructure equipment for data centers, contributed in the quarter. The company is benefiting from a robust demand environment as well as successful implementation of its strategy to improve margins. As one of the leading providers of precision cooling for data centers, Vertiv stands to benefit from the increasing adoption of AI, as AI-related servers have higher energy density, which will necessitate more complicated cooling solutions. During the quarter, Vertiv held its first analyst day, where it introduced long-term growth targets for revenue growth of 8% to 11% CAGR out to 2028 and 500 bps of margin expansion to 20% over that same time frame. We remain confident Vertiv will be able to execute on this plan given the company's operational focus under a new CEO combined with its competitive advantage and strong industry backdrop. We trimmed the position into strength, but we remain shareholders as we see substantial upside over the long term as the company executes on its strategy.
  • Shares of Gartner, Inc., a provider of syndicated research, soared after reporting excellent quarterly earnings results. Gartner’s core subscription research businesses continued to compound at attractive rates, and growth is poised to accelerate over the next several quarters. We believe Gartner will emerge as a critical decision support resource for every company evaluating the opportunities and risks of AI for its business. We expect this development to provide a tailwind to Gartner’s volume growth and pricing realization over time. Gartner’s sustained revenue growth and focus on cost control should drive continued margin expansion and enhanced free cash flow generation. The company’s balance sheet is in excellent shape and can support aggressive repurchases and bolt-on acquisitions, in our view.
  • ​Installed Building Products, Inc. is a leading distributor and installer of insulation and complementary building products for residential and commercial end markets in the U.S. Performance was helped by a pronounced decline in mortgage rates during the fourth quarter, which made new residential home purchases more affordable and improved the prospects for the residential end market. Continued strong operating and financial results also helped boost the share price. We remain investors. Installed Building Products is poised to benefit from ongoing growth across U.S. residential construction. In our view, its durable cost advantage enables it to expand faster than the market through share gains and accretive acquisitions and mitigates disintermediation risk.


  • Shares of specialty insurer Kinsale Capital Group, Inc. gave back some gains from earlier this year after the company reported slower premium growth in the third quarter. Earnings beat Street expectations, with EPS doubling and ROE exceeding 34%. However, investors focused on the slowdown in gross written premiums to 33% growth from 58% growth in the prior quarter, which management attributed to normal seasonality for property insurance. Additionally, we believe some of the share price weakness resulted from a sector rotation away from defensive stocks to more speculative stocks following a decline in interest rates. We continue to own the stock because we believe Kinsale is well managed and has a long runway for growth in an attractive segment of the insurance market.
  • Chart Industries, Inc. is a global leader in design, engineering, and manufacturing of process and storage technologies and equipment for gas and liquid handling. Shares fell after the company missed analyst earnings forecasts on project revenue recognition timing. Chart also held an investor day in which it provided mid-term financial targets instead of further detail on its 2024 outlook, falling short of some analyst expectations. We remain investors. Business fundamentals are strong, in our view, with management seeing solid demand across the portfolio and cost synergies from the Howden acquisition ahead of company targets. Chart also has a much larger than normal backlog supporting growth in 2024, providing good visibility. We believe the integration of Howden is proceeding well, with the combined company on track to become a globally diversified, high-quality, high-growth industrial business with proprietary technology and solutions serving the growing hydrogen, carbon capture, LNG, and other end markets. Valuation remains attractive against Chart's growth and margin profile, in our view.
  • The Beauty Health Company is a skin care and beauty company that sells the flagship HydraFacial machine and related consumables. Shares declined after reporting disappointing results that showed execution issues associated with the roll out of Syndeo, the latest generation of the HydraFacial machine. While the features and functionality of this new device far surpassed the prior version, the machine also had several defects that caused potential buyers to delay their purchase. Additionally, to remedy the defects, the company had to incur added costs to repair and replace existing Syndeos in the field. Lastly, the company announced that the CEO was leaving. Due to the continued uncertainty surrounding the defects with Syndeo and heightened management turnover, we exited the position.

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.