Review and Outlook

as of 03/31/19

U.S. equity indexes gained meaningfully during the quarter, erasing last quarter’s steep losses and marking the best start to a year since 1998, as measured by the S&P 500 Index. Markets shrugged off many of the concerns that had roiled stocks last quarter. Rather than focus on challenges to earnings growth or weakening economic data, investors cheered perceived progress on U.S.-China trade negotiations, attractive stock valuations, and indications that Federal Reserve policies would become more dovish. Growth stocks led the market higher, representing a reversal from the previous quarter when value stocks led.

Against this backdrop, Baron Asset Fund gained 20.40%. All sectors contributed to performance, led by Information Technology (IT), Health Care, and Industrials. With 12 out of 14 holdings increasing by double-digits, IT had a strong quarter. Sector performance was topped by third largest contributor Gartner, Inc. Electronic payment technology company Worldpay, Inc. was another notable contributor after its stock increased on robust quarterly results and 2019 guidance. Subsequent news of its agreement to be acquired also boosted the stock. Health Care performance was led by IDEXX Laboratories, Inc. and Mettler-Toledo International Inc., respectively the top and second largest contributors in the quarter. All Industrials holdings advanced, led by Verisk Analytics Inc. Shares of this data and analytics vendor to the insurance and energy industries increased on solid earnings results and optimistic guidance.

Throughout the past decade’s bull market, the popular press has been rife with reasons from market commentators and strategists to sell equities. But, investors that have pursued a long-term “buy and hold” strategy have generally been richly rewarded. We believe this straightforward method remains the best approach for investors to follow.

We remain optimistic that the prospects for U.S. equities are bright.  We believe that the economy remains generally robust and that the outlook for continued earnings growth from the companies in our portfolio is solid. The U.S. unemployment rate remains near historic lows, and most leading economic indicators remain positive. Inflation is muted, and we believe this makes it less likely that the Federal Reserve will increase interest rates meaningfully any time soon.

We believe that our portfolio of well-managed, competitively advantaged, fast growing companies will continue to perform well, although we cannot guarantee that they will. We continue to believe that high-quality, mid-sized growth stocks represent a compelling long-term investment opportunity.

Top Contributors/Detractors to Performance

as of 03/31/19

Contributors

  • Shares of veterinary diagnostics leader IDEXX Laboratories, Inc. increased after the company reported robust financial results. In the core companion animal business, competitive trends are outstanding, highlighted by instrument installed base growth of 21%, domestic lab growth more than twice that of competitor VCA, and improving sales productivity. We think new proprietary innovations and field sales force expansion should be meaningful contributors to growth. Margins are moving significantly higher, and we believe they can approach 30% over the next several years.
  • Shares of weighing instruments manufacturer Mettler-Toledo International, Inc. contributed to performance due to strong sales and earnings growth and solid 2019 guidance. Management commentary regarding the company’s demand environment was positive, with sales, orders, and leads looking strong. Mettler has not seen a slowdown in China and has taken steps to mitigate the impact of tariffs, although the company still stands to benefit from their reduction or removal. Mettler's board authorized an increase in balance sheet leverage to buy back more stock.
  • Shares of Gartner, Inc., a provider of syndicated research, contributed to performance. We believe forward-looking metrics in Gartner’s IT research business are excellent, and we observe signs of traction in the acquired CEB business, with solid uptake of seat-based model sales, particularly to new customers. Seat-based contracts come with higher price points, better retention rates, long-term pricing power, and the ability to capture follow-on sales. Success is currently being obscured by legacy CEB enterprise contracts, although we expect this headwind to abate over 2019.

Detractors

  • Shares of ANGI Homeservices Inc., an online marketplace connecting home service professionals and homeowners, appreciated during the period held. Upside was capped by guidance that ANGI would reinvest EBITDA growth into early-stage initiatives like home warranty and the acquired Handy platform. We believe these are the right long-term strategic decisions, so we initiated a position during the quarter.
  • DexCom, Inc. sells a continuous glucose monitoring device for patients with diabetes. Although the company reported fourth quarter results that were well above market expectations, investors sold the stock ahead of the FDA’s pending approval of Abbott's Libre 2, a product some investors expect to close the performance gap with the DexCom G6. We retain conviction, as we believe the market is large enough for two players to generate attractive growth. We are also excited about DexCom's next generation product, the G7, which is being developed with Verily.
  • CarMax, Inc. is the nation’s largest used car retailer, with $18 billion in annual sales. Shares detracted due to concerns of online competition within the company's used vehicle niche. We are confident in CarMax's advantaged business model, which includes 200 stores, owned auctions, and unmatched inventory breadth. Management has invested heavily in digital initiatives that we think will allow the company to further grow its market share. We believe CarMax can add 12 to 15 locations per year and deliver high-single-digit revenue growth and double-digit earnings growth.

Quarterly Attribution Analysis (Institutional Shares)

as of 03/31/19

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 03/31/19

Baron Asset Fund was up 20.40% in the first quarter, performing roughly in line with the Russell Midcap Growth Index as favorable stock selection was mostly offset by the negative impact of cash exposure in a sharp up market.

Outperformance of investments in Health Care, Industrials, and Real Estate and lack of exposure to the lagging Consumer Staples sector contributed the most to relative results. Stock selection in Health Care added over 80 basis points to relative results, driven by life sciences tools & services companies Bio-Techne Corporation and Mettler-Toledo International, Inc. Shares of Bio-Techne were up sharply after the company reported strong financial results, highlighted by 11% organic revenue growth. Mettler was the second largest contributor to absolute performance after reporting strong sales and earnings growth and providing solid guidance for 2019. Performance in the sector was also bolstered by gains from life sciences software solutions provider Veeva Systems Inc. and novel drug developer Sage Therapeutics, Inc. Industrials holdings outperformed after increasing nearly 24%, led by real estate information and marketing services company CoStar Group, Inc. and industrial technology company Roper Technologies Inc. Shares of CoStar were up after 2019 guidance beat investor expectations. Business trends remained excellent, with the company’s bookings improving by approximately 15% year-over-year. Roper’s shares benefited from the completed acquisition of Foundry, as well as investor appetite for quality, growth industrial companies in a time of general economic uncertainty. Strength was broad based in Real Estate, led by data center REIT Equinix, Inc. and commercial real estate services and investment firm CBRE Group, Inc. These stocks appreciated due to robust fourth quarter financial results and attractive business prospects.

Apart from cash, underperformance of Consumer Discretionary and Financials investments hurt relative results. Weakness in Consumer Discretionary came from ski resort operator Vail Resorts, Inc. and online travel leader Booking Holdings, Inc. Vail’s shares lagged after destination visitation and revenue missed investor expectations. However, Vail reported season pass sales that increased double digits for the year. Combined with recent acquisitions in the Pacific Northwest, Colorado, and the Northeast, we believe this increase in pass sales will drive more visitation and spend over time. Booking’s stock underperformed due to weakness in Europe, which accounts for almost two thirds of the company’s room nights by our estimates. The largest position in Financials, brokerage firm The Charles Schwab Corp., weighed on relative results. Schwab’s shares underperformed due to concerns that the company’s positive investment thesis had largely played out, and that balance sheet growth could slow, rate hikes could pause, and strong markets could falter. We remain positive about all of the aforementioned companies.

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.