Review and Outlook

as of 06/30/20

It almost feels like we’ve lived through a full market cycle in six months. The market went from vast optimism in January to extreme pessimism in March and back to one of the biggest rallies in history in the second quarter. Through it all, we continue to believe “what we don’t know is greater than what we do know.” We are still in the very early stages of understanding the long-term implications of COVID-19.

Baron Global Advantage Fund increased 46.39% in the quarter. With just a single slight detractor in the portfolio, all four sectors in which the portfolio is invested contributed, with returns ranging from 66.53% to 42.37%. Information Technology (IT) had a strong showing, with triple-digit gains in six holdings and double-digit gains in all but one of the remaining holdings within the sector. Gains were led by top contributor Wix.com Ltd. and second largest contributor Twilio, Inc. Within Consumer Discretionary, third largest contributor MercadoLibre, Inc. led performance. Biotechnology firm argenx SE led performance within Health Care after reporting positive results from its Phase 3 trial of Myasthenia Gravis, a long-term neuromuscular disease, that helped de-risk the investment. ZoomInfo Technologies, Inc., which operates a cloud-based sales and marketing intelligence platform, led gains within Communications Services after its successful IPO in June.

Reflecting on the last six months, we have several observations: 1) The heightened level of uncertainty will likely significantly increase the range of possible outcomes; 2) Market participants appear to be even more short-term focused than usual; and 3) Stock performance has been largely bimodal. If the company is perceived as a beneficiary of COVID-19 or even just a survivor, its valuation seems less important.

The first two observations play into what we believe are our structural competitive advantages: our focus on long-term ownership and our investment process in which we think of everything probabilistically. We believe understanding the range of outcomes and their respective probabilities and consequences is more important than knowing the best or the worst or the most likely outcome. We can’t always anticipate every possible outcome, but it is our job to be as prepared as possible.

The third observation raises the probability there will be a period in which we will underperform. Sooner or later, there will be a vaccine and/or herd immunity and at that time airlines, casinos, hotels, energy companies, and banks will rally hard at the expense of the digital transformation companies we invest in. As we do not rotate sectors or eschew big ideas for the holders of value, there will inevitably come a time when our investment style will be out of favor. We are OK with that. Our goal remains to maximize long-term returns without taking significant risks of a permanent loss of capital. We are optimistic about the long-term prospects of our investments and continue to search for new ideas and investment opportunities while remaining patient and investing only when we believe companies are trading significantly below their intrinsic value.

Top Contributors/Detractors to Performance

as of 06/30/20

Contributors

  • Wix.com Ltd. provides software to help micro-businesses build and maintain websites and operate their businesses. Wix has over 170 million registered users and 4.5 million premium users. Shares were up in Q2 as Wix's business benefited from the accelerating pace of digitization due to COVID-19. We remain investors as Wix expands its platform to target professional website builders and agencies in addition to its core do-it-yourself customers, increasing its total addressable market multi-fold while continuing to rapidly introduce new features and products.
  • Twilio Inc. is a leading Communications-Platform-as-a-Service (CPaaS) company offering a set of application programming interfaces that help developers embed communications into their software through its cloud platform. Shares were up during the quarter as Twilio's business accelerated due to increasing digitization trends as a result of COVID-19. We believe these trends are driving enterprises to increasingly embed communications into their software, creating a potential multi-billion-dollar market opportunity for Twilio.
  • MercadoLibre, Inc., a leading ecommerce and digital payments platform in Latin America, contributed to performance. The company reported earnings results and trading trends that exceeded investor forecasts. Growth in gross merchandise value sharply accelerated in April as more consumers shopped online during lockdowns. Off-platform total payment volume growth  also accelerated in April despite high offline exposure. We think MercadoLibre is an exciting growth story that is benefiting from rising ecommerce penetration and growth of digital payments in Latin America.

Detractors

  • Arco Platform Limited is a Brazilian education technology company providing educational content and software solutions to K-12 private schools. Its solution is a one stop shop for schools replacing several publishing and system vendors. Shares of Arco detracted from performance as the Brazilian Real depreciated during the quarter. We remain confident in Arco as it is in the early stages of disrupting a legacy industry -- book publishers -- with a modern learning platform, and we believe it would grow rapidly for years to come while maintaining high profitability.

Quarterly Attribution Analysis (Institutional Shares)

as of 06/30/20

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 06/30/20

Baron Global Advantage Fund (Institutional Shares) increased 46.39% in the second quarter and significantly outperformed the MSCI ACWI Index by 27.17% primarily due to stock selection. Relative sector/sub-industry weights and an assortment of style biases were also tailwinds to relative performance in the quarter.

Favorable stock selection in developed markets accounted for over three quarters of the Fund’s outperformance in the period, driven by investments in the U.S., Israel, Netherlands, Canada, and the U.K. Investments in emerging markets also added value due to higher exposure to strong performing Argentinian equities and positive stock selection in China and Brazil.

On a sector level, investments in Information Technology (IT), Consumer Discretionary, and Health Care and lack of exposure to the lagging Financials and Consumer Staples sectors contributed the most to relative results. Stock selection in IT accounted for a significant portion of outperformance in the period, driven by triple-digit gains from internet services & infrastructure companies Wix.com Ltd., Twilio Inc., and Shopify Inc., whose businesses accelerated due to increasing digitization trends as a result of COVID-19. Several other holdings also performed well in the sector, such as software companies Bill.com Holdings, Inc., CrowdStrike, Inc., Datadog, Inc., and Splunk, Inc. Lastly, meaningfully higher exposure to IT also added value as the sector drove the market higher in the period. Within Consumer Discretionary, outperformance of internet & direct marketing retailers Fiverr International Ltd., MercadoLibre, Inc., and Pinduoduo Inc. and significantly higher exposure to this strong performing sub-industry added nearly 600 basis points to relative results. Shares of online freelance services marketplace Fiverr were up sharply as investors appreciated the company’s strong quarterly earnings, improved business model strength during COVID-19, and robust product pipeline. Shares of e-commerce platforms MercadoLibre of Argentina and Pinduoduo of China more than doubled after earnings results exceeded Street forecasts, driven by accelerating gross merchandise value growth as more consumers shopped online during lockdowns. Strength in Health Care was broad based, led by biotechnology company argenx SE and health care technology firms Schrodinger, Inc. and Veeva Systems Inc. Argenx’s shares rose sharply following the company’s successful Phase 3 trial in Myasthenia Gravis, where the data quality all but ensures regulatory approval and commercial launch over the next 12 months. Schrodinger’s stock price continued to advance as investors increasingly recognized it as a unique and competitively advantaged business, while Veeva’s shares appreciated as the rapid announcement of several new products demonstrated the company’s ability to support the life sciences industry as digital transformation accelerates.

Cash exposure in a sharp up market detracted the most from relative results.

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.