Review and Outlook

as of 03/31/19

In the first quarter of 2019, domestic markets recovered almost all the decline suffered late last year, with the S&P 500 Index posting its best quarter since 2009. Investors fretted about interest rates and trade during the fourth quarter of 2018, and found relief on both fronts to start the year. Subdued inflation and softer global economic growth motivated the Fed to reverse course on interest rates and the magnitude of its balance sheet roll-off. The status of ongoing trade negotiations between the U.S. and China continues to resemble a game of “telephone” where each participant strains to perceive and relay the true state of affairs without being privy to the actual discussions. The message currently being received by the market is more upbeat, with an agreement and the elimination of most tariffs perhaps coming as soon as this spring. While the details remain to be seen, any improvement in trade relations between the world’s two largest economies is favorable.

Against this backdrop, Baron Discovery Fund advanced in the first quarter. All sectors contributed to performance, led by Information Technology (IT), Health Care, and Industrials investments. All holdings but one within IT advanced. Trade Desk, Inc. and Yext, Inc., respectively the top and third largest contributors, led performance within the sector. ForeScout Technologies, Inc. was another noteworthy contributor after its stock price increased more than 60% on strong earnings and guidance. ForeScout has developed agentless technology that discovers devices in real time as they connect to an IT network and continuously monitors and assesses their security posture. The solution provides security customers with visibility to 30% more devices on their network after installation. As penetration is low relative to the market opportunity, we continue to hold the stock. TherapeuticsMD, Inc. added the most to performance of the Health Care sector after one of the company’s drugs demonstrated strong prescription growth. Second largest contributor Mercury Systems, Inc. led gains within the Industrials sector.

We believe we have a significant number of stock specific catalysts that we expect to take place through the remainder of the year. We are also excited by the number of small, fast growing companies in our new idea funnel. We continue to work to process these ideas to discover the next great small growth companies.

Top Contributors/Detractors to Performance

as of 03/31/19

Contributors

  • The Trade Desk is the leading internet advertising demand-side platform. The company enables agencies to efficiently purchase digital advertising through PC, mobile, and online video channels. Shares contributed to performance due to robust fourth quarter results, with particular strength in international markets and the fast-growing connected TV business. We remain positive on the company given its technology, scale, and estimated 10% share in the $10 billion programmatic advertising market.
  • Shares of Mercury Systems, Inc., a leading defense electronics contractor in the U.S., contributed to performance after the company posted strong fourth quarter results and offered promising 2019 guidance. Mercury laid out its M&A strategy, which outlined multiple paths to accelerate growth beyond its organic rate while maintaining a solid strategic focus. 
  • Yext, Inc. is a software provider enabling companies to control and manage their information as shown by public online business listings. Yext shares were up in the quarter due to robust financial results and strength in the enterprise business, which added 350 new logos in fiscal year 2019. We continue to believe Yext is in the early innings of growth, and we think the company enjoys a large market opportunity with a high-visibility, recurring revenue model.

Detractors

  • Shares of Sientra, Inc., a medical device company, declined sharply due to the company’s slight delay in ramping up a breast implant facility and industry concerns over textured implant safety that have dampened overall procedure volume. In the quarter, the FDA convened a panel to examine rare incidences of cancer involving textured implants. We are not overly concerned, as Sientra’s textured implants have far fewer incidents per implant than competitors, and the textured business represents only about 1% to 2% of Sientra’s sales.
  • Shares of Ra Medical Systems, Inc., which designs and manufactures disposable catheters and the Dabra laser system, detracted from performance in the quarter. Ra Medical's revenue fell short of investor expectations due to issues with manufacturing and the onboarding of qualified sales personnel. The company’s stock is valued at less than the cash on its balance sheet, and we believe it possesses substantial upside if management can execute effectively.
  • Shares of Hudson Ltd., a leading North America travel retailer, fell following the abrupt departure of its CEO and earnings/guidance that missed Street estimates due to a slowdown in duty free sales and weaker net new business growth.

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.