Review and Outlook

as of 03/31/19

The year is off to a good start with the market climbing significantly during the quarter, erasing essentially all of its losses from the fourth quarter of last year. The gains were broad-based as the market rebounded following the Fed’s pivot on interest rates, talking back its auto pilot approach to one that is data sensitive and accommodative for longer if necessary, accompanied by hopes for a trade-war resolution.

Baron Durable Advantage Fund increased in the quarter. All sectors contributed, led by Information Technology (IT), Health Care, Financials, and Communication Services. IT's strong showing included top contributor Mastercard Incorporated. Microsoft Corporation was another noteworthy contributor within the sector. Shares of this software mega-cap company increased on reports of growing margins and strong results in Microsoft's cloud business, which grew by 48% year-over-year. Third largest contributor Danaher Corporation was the primary driver of positive performance within the Health Care sector. Financials benefited from double-digit returns in the share prices of second largest contributor Moody's Corporation and S&P Global, Inc. Shares of S&P Global, which is the world's largest credit agency, climbed as interest rates fell and credit spreads narrowed, leading to a more positive outlook on new debt issuance. Communication Services' solid performance was led by Electronic Arts Inc., a global leader in digital entertainment.

We do not attempt to predict when the next recession will occur or if the market will be up or down over the next 3, 6, or 12 months. We do know however, that over the last 40 years or so, the stock market has outperformed bonds approximately 73% of the time based on monthly rolling five-year returns, and while history doesn’t repeat itself, it often rhymes.  Our goal is to invest in large-cap companies with strong and durable competitive advantages, proven track records of successful capital allocation, high returns on invested capital, and high free cash flow generation, a significant portion of which is regularly returned to shareholders in the form of dividends or share repurchases. We hope to maximize long-term returns without taking significant risks of permanent loss of capital. We are optimistic about the prospects of the companies in which we are invested and will always continue to search for new ideas and opportunities.

Top Contributors/Detractors to Performance

as of 03/31/19

Contributors

  • Mastercard Incorporated is a leading global payment network. Shares appreciated after the company reported quarterly results and 2019 guidance that exceeded investor expectations. Cross-border volume growth slowed and FX remains a headwind, but management still expects 2019 revenue growth in the low-teens. Management also provided three-year guidance calling for revenue growth in the low teens and EPS growth in the high teens. We continue to own the stock due to Mastercard’s long runway for growth and exceptional management team.
  • Moody’s Corporation is the second largest credit rating agency, providing research, professional services, and risk management software for financial institutions. After declining during the prior quarter, shares appreciated as interest rates fell and credit spreads narrowed, leading to a more positive outlook for new debt issuance. Management provided 2019 guidance that exceeded investor expectations. We continue to own the stock because we see a long runway for growth and strong competitive advantages.
  • Danaher Corporation is a diversified life sciences tools company. Shares appreciated after the company announced the acquisition of GE's bioproduction business for $21 billion. The newly acquired business is a leader in the fast-growing, attractive bioproduction market, and the transaction brings scale to Danaher's existing bioproduction business. We expect the transaction to elevate Danaher's growth rate and to be accretive to earnings, and it increases our conviction in our investment thesis.

Detractors

  • CME Group, Inc. is the world’s largest and most diversified derivatives marketplace. After appreciating during the prior quarter, shares fell due to lower trading volume as market volatility abated. After raising short-term interest rates four times last year, the Federal Reserve is now widely expected to keep rates flat for an extended period, which tends to depress CME’s trading volumes.  We continue to own the stock, as we expect volume growth to improve eventually.
  • AbbVie Inc. is a multi-national pharmaceutical company known for the commercialization of Humira, the best-selling biologic drug in the industry’s history. Recent share price declines are due almost exclusively to the Humira patent cliff, the various legal battles related to the cliff, and outstanding questions related to AbbVie’s potential future pipeline. Given our view that the company will not be able to fill the enormous $18 billion hole left by Humira’s genericization, we are no longer invested in AbbVie.

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.