Review and Outlook

as of 03/31/19

After steep losses to end the year, global equity markets rallied sharply, and U.S. large-cap equities participated fully, registering the best start to the year since 1998. Investors appeared to have shrugged off concerns over declining earnings growth, weakening economic data, and the continued lack of a resolution in U.S.-China trade negotiations, choosing instead to focus on more attractive valuations. Federal Reserve Chairman Powell abruptly reversed course, returning the U.S. monetary policy back to its “data dependent” path and, in the process, signaling more accommodative interest rates for the foreseeable future. We would argue that it was that change, more than anything else, that caused the first quarter equity rally.

Against this backdrop, Baron Fifth Avenue Growth Fund increased in the quarter. All sectors added to performance, with Information Technology (IT), Consumer Discretionary, and Health Care holdings contributing the most. With 10 out of 12 investments posting double-digit gains, IT had a strong quarter. Performance was led by electronic payment vendor Worldpay, Inc., global payment network Mastercard Incorporated, and outsourced software development provider EPAM Systems, Inc. Shares of each rose after the company reported quarterly results and 2019 guidance that exceeded investor expectations. In addition, Worldpay’s late March announcement of its intent to be acquired by Fidelity National Information Services drove share price gains in that company. Amazon.com, Inc. and Alibaba Group Holding Ltd. led positive performance of the Consumer Discretionary sector. Amazon and Alibaba were the top and second largest contributors, respectively. Third largest contributor Veeva Systems Inc. led gains in Health Care. Sage Therapeutics, Inc., which develops novel drugs for central nervous system disorders, was another noteworthy contributor after its share price increased more than 66% on news of several positive developments, including promising clinical trial results for lead assets in postpartum depression and major depression.

Every day we live and invest in a world full of uncertainty. The constant challenges we face are real and serious, with clearly uncertain outcomes.  History would suggest that most will prove passing or manageable. The business of capital allocation (or investing) is the business of taking risk, managing the uncertainty, and taking advantage of the long-term opportunities that those risks and uncertainties create. We are confident that our process is the right one, and we believe that it will enable us to make good investment decisions over time.

Our goal remains to maximize long-term returns without taking significant risks of permanent loss of capital. We focus on identifying and investing in what we believe are unique companies with sustainable competitive advantages that have the ability to compound capital at high rates of return for extended periods of time. We are optimistic about the long-term prospects of the companies in which we are invested and continue to search for new ideas and investment opportunities.

Top Contributors/Detractors to Performance

as of 03/31/19

Contributors

  • Shares of e-commerce behemoth Amazon.com, Inc. contributed to performance due to strong business results supporting the company's focus on more profitable growth. E-commerce penetration is rising rapidly, and Amazon continues to grow its total addressable market at an unprecedented pace. We believe Amazon will continue to build out a robust advertising business that could grow to $30 billion over the next four years and substantially improve Amazon's core margins. Amazon Web Services remains the leader in the vast cloud infrastructure market by a wide margin.
  • Alibaba Group Holding Limited, the largest retailer and e-commerce company in China, owns and operates shopping platforms Taobao and Tmall. Alibaba also owns 33% of Ant Financial, which owns Alipay, the largest third-party online payment provider in China. Shares appreciated in the first quarter due to solid business results and positive commentary surrounding Chinese consumption trends. We believe Alibaba's core business remains extremely profitable and continues to grow rapidly, with tailwinds to the company driven by strong mobile and advertising growth.
  • Veeva Systems Inc. is a cloud software provider focused primarily on the life sciences market, with products including multi-channel customer relationship management (CRM) and enterprise content management offerings. During the quarter, Veeva presented sustainable growth in its CRM business while generating rapid growth in in its newer Vault business. New product development, maturing product offerings, and a loyal customer base are adding confidence in Veeva’s unique position and in its ability to support growth while generating significant free cash flow.

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.
  • Tesla, Inc. designs, manufactures, and sells fully electric vehicles, solar products, and energy storage solutions. Shares declined due to recent news surrounding complexities in new geographies, price changes, changes in Tesla’s go-to-market approach, and additional headcount reduction. We believe the company is trying to maximize profitability and the $35,000 Model 3 and the new Model Y are attractive product offerings that can support significant growth for Tesla over the coming years.
  • Biogen, Inc. is a large-cap biotechnology company with a lineup of multiple sclerosis products and a new product for spinal muscle atrophy, among others. Shares fell after the company announced the discontinuation of the development of aducanumab, its lead asset in Alzheimer’s disease. This was a major setback for the company, and given pending legal issues involving another important multiple sclerosis asset and a dearth of near-term meaningful catalysts, we decided to exit 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 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.