Review and Outlook

as of 06/30/19

Gains in global equities moderated from the first quarter pace, albeit with a return to significant volatility. Slowing global growth and inflation, as well as trade uncertainties, allowed the U.S. Federal Reserve to complete its pivot to an easing cycle, which is now being discounted as certain in the forward interest rate markets. This generally provides cover for coincident easing measures by central bankers worldwide, a clear support for global equities, and suggests an improvement in risk conditions for international economies and currencies. On the other hand, leading indicators suggest slowing growth in U.S. and global economies may continue into early 2020, while geopolitical risks remain heightened. In our view, these factors may offset and could possibly overwhelm central bank accommodation as the year progresses. We believe whether and how the U.S./China trade and strategic confrontation progresses is likely the most important variable in the near term.

Conditions in the developed international markets continue to reward stock selection, as the macroeconomic and political environment remains challenged; most of Europe and Japan remain quite weak, and negative bond yields suggest that markets expect such conditions to sustain for some time. In the U.K., the Brexit drama took a turn for the worse, with Theresa May’s plan finally invalidated and with it her tenure as Prime Minister. We believe the most likely outcome is a somewhat more abrupt version of Brexit; yet with the British pound near all-time lows and businesses in the U.K. and Europe taking precautions, we suspect a near-worst case outcome is likely already priced-in. Many domestic-facing U.K. businesses carry discounted valuations, and we have increased our exposure though most of our holdings here are high quality, international-facing businesses. We have reduced our exposure to Japan, as we suspect this market is most challenged by a return to subpar growth and inflation expectations. We have generally reduced our holdings of domestic businesses that have delivered on expectations, but where tailwinds appear to have peaked, such as our Japan wage inflation theme.

Brazil made progress towards a wholesale reform of its Social Security program, which we have viewed as a necessary precondition for sustained investor confidence in the country's longer-term prospects. We expect to add to our exposure in this dynamic market. Narendra Modi secured a second five-year term in a landslide victory, suggesting ongoing reforms are likely in India. While liquidity conditions remain challenged in the near term, we anticipate an improving economic and investment cycle is likely to take root in coming quarters. We also are encouraged by evidence of stabilization in China, particularly in the consumer and value-added sectors which comprise the bulk of our exposure, after many months of stimulus, regulatory easing and tax relief. We believe we are nearing the end of a protracted period of international underperformance and are confident we own a portfolio of quality growth companies poised to benefit from competitive advantages and long-term tailwinds.

Top Contributors/Detractors to Performance

as of 06/30/19

Contributors

  • Shares of Endava plc, a provider of outsourced software development to business customers, appreciated after reporting excellent quarterly results and raising full-year guidance.  In March, revenue grew 25% and EPS grew 46% due to strong client demand and significant margin expansion. The share price also likely benefited from a secondary offering that increased liquidity, removed an overhang from pre-IPO shareholders, and increased awareness to new investors. We believe Endava will continue gaining share in a large global market for IT services.
  • Arco Platform Limited is a Brazilian education technology company providing educational content and software solutions to K-12 private schools. Arco has grown rapidly and currently serves more than 4,500 schools throughout Brazil. Shares appreciated in the second quarter after the company announced the transformative Positivo acquisition, more than doubling its scale. We remain excited about Arco's future, as it remains in the early stages of disrupting legacy book publishers with a modern learning platform, generating better results for students and higher rankings for schools.
  • Opera Limited is a leading browser company in several emerging markets. Shares contributed to performance due to strong user growth and regulatory tailwinds from Google’s agreement with the European Union to offer browser choices on Android phones. Opera has over 150 million monthly active users of its newsfeed product globally, which we believe could double in the next three to five years, with runway for meaningfully improved monetization. Furthermore, given Opera’s relatively low cost base, we expect the company to drive improving profitability going forward.

Detractors

  • Futu Holdings Limited is a China-based financial technology company with an online brokerage platform that enables individual investors in China, Hong Kong, and the U.S. to trade securities listed in China and abroad. Shares of Futu declined during the quarter as the company reported weak first quarter financial results, and growth in the number of active users and margin finance balances lagged Street expectations set during the IPO.
  • InflaRx N.V. is a German biotechnology company developing a drug to treat patients with hidradenitis suppurativa, a painful skin disease. Shares detracted from performance, as the quarter saw a failure of InflaRx's asset in Phase 2 trials that called into question the thesis for future investments in the development of its treatment for this disease.
  • Encana Corp. is a Canada-based energy producer with primary operations in Western Canada, Texas, and Oklahoma. Shares fell due to a decline in oil and natural gas liquids prices. Encana has restructured its portfolio and has one of the top positions in the lowest cost oil and natural gas basins in the Permian, Anadarko, and Montney. In our opinion, Encana is one of the most attractively valued exploration & production companies, and we believe investors still underappreciate the company’s free cash flow and returns potential.

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.