Review and Outlook

as of 12/31/19

2019 was an excellent year for most investors. The majority of U.S. stocks recorded double-digit gains, and every asset class recorded positive returns. International and emerging markets stocks showed solid gains too, while bonds were up as well. This does not happen very often. But gold, oil, and other commodities also rose, and the dollar was up against all major currencies. We do not think this has ever happened during our lifetime. We do not spend a lot of time analyzing the macro environment but basically, it was hard NOT to make money in 2019, unless one simply chose…not to invest.

Against this backdrop, Baron Global Advantage Fund had a strong fourth quarter to finish an exceptional year. During the quarter, Information Technology (IT), Consumer Discretionary, and Health Care holdings contributed the most. No sector detracted. Third largest contributor Splunk, Inc. led positive performance within IT. Consumer Discretionary advanced on share price gains in 10 out of 11 holdings, including top contributor Alibaba Group Holding Limited. TAL Education Group was another noteworthy contributor within Consumer Discretionary. Shares of this leading K-12 after-school tutoring company in China appreciated after the company guided for accelerating capacity additions, improved margins, and continued strength in the rapidly growing online business. Second largest contributor argenx SE led gains within Health Care. Also within the sector, shares of biotechnology company Acceleron Pharma Inc. rose after lead asset Luspatercept was approved to treat anemia in adults who require regular red blood cell transfusions with beta thalassemia.

We do not believe it is possible to forecast how events will unfold, much less how the market will respond to them. To us they appear to be manageable macro risks that will likely get resolved and pass. We continue to do what we do, which is focus on fundamental, company-specific research and analysis.

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 reinvest 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 12/31/19

Contributors

  • Alibaba Group Holding Limited is the largest retailer and e-commerce company in China. Alibaba operates shopping platforms Taobao and Tmall and owns 33% of Ant Financial, which operates Alipay, the largest third-party online payment provider in China. Shares of Alibaba were up in the quarter on healthy revenue growth helped by traction in less developed areas, continued cost discipline, and an aggressive reinvestment strategy. We believe Alibaba's core business remains extremely profitable and continues to grow rapidly, with tailwinds from strong mobile and advertising growth.
  • Argenx SE is a Dutch biotechnology company dedicated to developing biologics to treat immunological disorders and cancer. Investor enthusiasm about the company’s pipeline of new treatments for patients with autoimmune diseases and cancer drove share price gains. We believe that argenx’s FcRn platform is one of the most valuable assets in the biotechnology development space, and we retain conviction.
  • Splunk, Inc. produces software for searching, monitoring, and analyzing machine-generated big data, via a Web-style interface. After a volatile three quarters, Splunk contributed to performance due to an acceleration of the lengthy transition to ratable financials and additional metrics management provided in the quarterly report that helped investors gain visibility into the underline growth of the business and post-transition cash generation.

Detractors

  • Sage Therapeutics, Inc. is a biopharmaceutical company focused on developing novel drugs for central nervous system disorders. Shares fell after the company reported a setback in developing a drug to treat major depressive disorder that called into question the magnitude of treatment effects. Simultaneously, a competitor released more compelling data in the same indication. We remain invested in Sage given the unmet need in treating depression disorders but have this investment under review pending updates from the FDA.
  • PagSeguro Digital, Ltd. is a financial technology company in Brazil providing payment solutions and banking services. Shares declined after PagSeguro announced a secondary offer by its controlling shareholder to sell 5% of the company. Earnings results for the third quarter suggested the company is facing some margin pressure due to higher investment costs associated with the roll-out of new products. We retain conviction given PagSeguro's focus on the underserved micro-merchant segment, marketing advantage, and revenue opportunities from its financial ecosystem.
  • Twilio, Inc. is a leading Communications Platform as a Service (CPaaS) company offering a set of APIs (application programming interfaces) that help developers embed communications into their software through its cloud platform. Shares declined during the quarter in conjunction with a market correction in high-growth software. We retain conviction as Twilio benefits from digital transformation trends that are leading enterprises to increasingly embed communications into their software, creating a potential multi-billion dollar market for the company.

Quarterly Attribution Analysis (Institutional Shares)

as of 12/31/19

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 12/31/19

Baron Global Advantage Fund was up 12.26% in the fourth quarter, outperforming the MSCI ACWI Index by 331 basis points due to a combination of stock selection and relative sector weights.

Stock selection in developed markets added over 225 basis points to relative results, driven by holdings in the Netherlands, the U.K., and the U.S. Investments in emerging markets also performed well, led by those in China, the United Arab Emirates, and India. Higher exposure to China also added value as equities in the country responded favorably to the U.S.-China Phase One trade agreement.

On a sector level, outperformance of Consumer Discretionary investments, significantly higher exposure to the top performing Information Technology sector, and lack of exposure to the defensive Consumer Staples, Utilities, and Real Estate sectors added the most value. Stock selection in Consumer Discretionary contributed nearly 200 basis points to relative performance, driven by sharp gains from Chinese companies Alibaba Group Holding Limited and TAL Education Group. Shares of retailer and e-commerce company Alibaba rose on healthy revenue growth helped by traction in less developed areas, continued cost discipline, and an aggressive reinvestment strategy. Shares of after-school tutoring company TAL were up after guiding for accelerating capacity additions, better margins, and continued strength in the rapidly growing online business. Several other holdings also performed well in the sector, led by Trainline Plc, the U.K.’s leading independent rail and coach travel platform. Trainline’s stock price appreciated after the company’s financial results featured strong ticket volumes driven by increased app and e-ticket adoption in the U.K., healthy international customer growth, and the launch of new ancillary revenue streams.

Cash exposure in a rising market was the only notable detractor from relative performance.

as of 12/31/19

Yearly Attribution Analysis (for year ended 12/31/2019)

Baron Global Advantage Fund increased 45.45% for the year and outperformed the MSCI ACWI Index by 18.85% largely due to stock selection.

Stock selection in developed markets accounted for over 60% of the Fund’s outperformance, driven by investments in the U.S., the U.K., Netherlands, Israel, and Canada. Investments in emerging and frontier markets also outperformed in the period, led by those in China, Brazil, Argentina, and South Africa.

On a sector level, investments in Information Technology (IT), Consumer Discretionary, Health Care, and Communication Services and lack of exposure to the underperforming Energy sector contributed the most to relative results. Strength in IT was widespread, led by outsourced software development providers EPAM Systems, Inc. and Endava plc, Brazilian payment platform PagSeguro Digital Ltd., and electronic payment solutions provider Worldpay, Inc. Shares of EPAM and Endava benefited from strong quarterly results and full-year guidance, while Worldpay’s stock price appreciated after the company announced its intent to be acquired by Fidelity National Information Services. PagSeguro’s shares rose sharply after earnings results showed the company's product pricing was resilient. The company also unveiled its banking strategy (Pagbank) to offer financial services to underserved retail customers, expanding the size of the revenue opportunity. Additionally, higher exposure to application software stocks, which were up more than 36% in the index, and outperformance of Globant, S.A. of Argentina and Constellation Software, Inc. of Canada added value. Favorable stock selection in Consumer Discretionary came from Chinese retailer and e-commerce company Alibaba Group Holding Limited and Argentinian e-commerce and digital payments platform MercadoLibre, Inc. Alibaba was the top contributor on an absolute basis after reporting solid business results throughout the year, while MercadoLibre’s stock price rose after the company’s financial results surpassed Street expectations due to an acceleration in off-platform payments growth. Within Health Care, outperformance of biotechnology company argenx SE added value, but this positive effect was somewhat offset by higher exposure to this lagging sub-industry. argenx was the second largest contributor to absolute performance due to a previously undisclosed milestone payment from AbbVie on an underfollowed asset in argenx’s pipeline and the signing of an exclusive licensing deal with Halozyme to utilize the company’s subcutaneous technology. Life sciences software solutions provider Veeva Systems, Inc. and liquid biopsy leader Guardant Health, Inc. also performed well in the sector. Performance in Communication Services was bolstered by social network Facebook, Inc., whose shares increased after reporting better-than-expected 2020 financial guidance and a moderating capex outlook.

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

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.