Review and Outlook

as of 03/31/19

Our year-end 2018 review and outlook proved prescient as we posited that, in the near term, a rally in global equities was more likely than a further decline, as markets begin to anticipate a de-escalation of protectionist measures and improving global trading conditions as well as a more flexible Fed mandate. We also suggested that, should the outlook for trade policy reduce pressure on China and Fed policy shift to a more accommodative stance, many of our investments offered material upside from levels at that time. During this year’s first quarter, many of the most impaired equities and currencies staged impressive recoveries as the above catalysts materialized much as we had anticipated, though most remain well below their highs. We view the recent reversal as largely justified, as policy and economic tail risks have de-escalated and China has incrementally introduced targeted stimulus measures and broad reforms.

While we are increasingly confident that we are at or near an inflection point in market leadership where emerging market and currencies can begin a period of sustained outperformance, we are less confident in the near-term outlook for the U.S. economy, corporate earnings, and equities. While global equities have repriced to reflect declining policy tail risks and now discount forward Fed rate cuts, we suspect the Fed’s shift to neutral also suggests rising risks to the U.S. economy and corporate earnings, and believe capital markets may need to retest lower levels to coax the Fed into full-scale easing mode. In our view, China’s increasingly aggressive response to weak domestic conditions suggests a bottom and enhanced forward-looking earnings, while U.S. corporate earnings expectations are moving through a peaking process. The U.S. equity market has outperformed its international peers on the strength of domestic consumption, fiscal stimulus, and tax-incented investment, and we believe we are likely entering a period where the waning of such effects will lead to a mean reversion in equity performance.

Regarding the outlook for the international markets, we believe the near-term resolution of at least a portion of Brexit uncertainty would be a welcome catalyst for U.K. as well as European equity markets, as valuation discounts in many cases are extreme and economic expectations remain quite low. While we agree with consensus that earnings growth in such markets will likely remain uninspiring in the near-term, for these markets the larger question is whether this outlook is more than discounted in the price. We believe that in general, the developed international markets favor bottom-up stock selection-based strategies such as ours, where active managers can identify companies, entrepreneurs, and themes with attractive value creation potential in a low macroeconomic growth environment, thereby driving outperformance. In short, while we would not be surprised by, and perhaps expect, some near-term retracement of recent gains, we also believe we are likely entering a significant phase of international equity outperformance.

Top Contributors/Detractors to Performance

as of 03/31/19

Contributors

  • Argenx SE is a Dutch biotech company developing innovative antibody therapies for cancer and auto-immune diseases. Recent strong performance comes from 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 Halozyme’s subcutaneous technology that practically assures argenx’s lead in the FcRn market. We believe argenx’s FcRn platform is one of the most valuable assets in the biotechnology development space.
  • Constellation Software, Inc. is a holding company that owns and operates approximately 200 small- and medium-sized software businesses. Shares rose after Constellation reported a record year of capital deployment at stable returns, along with a special dividend, indicating the company is open to returning excess capital to shareholders. We believe Constellation will have ample opportunity to deploy capital, as it has more than 30,000 acquisition targets in its funnel and a motivated, decentralized employee base that can leverage unique niche industry relationships over time.
  • Shares of PagSeguro Digital Ltd., a payment processor and merchant acquirer, rose in the quarter due to improving sentiment in Brazil and minimal competitive intensity among the company’s micro-merchant customer base. We retain conviction, as we believe PagSeguro will continue to build out a product ecosystem allowing the company to offer digital banking products to its customers.

Detractors

  • Shares of Sony Corporation detracted during the quarter due to concerns over gaming growth sustainability following a record year in its Playstation network segment. In addition, competing platforms launching next generation streaming created uncertainty around Sony's leadership in the ever-changing world of digital entertainment. We continue to believe in Sony's ability to adapt to new market environments, and we remain confident in the stock's long-term prospects.
  • Cimpress N.V. is an e-commerce company selling mass customized printing products at a lower unit cost and at higher gross margins than other printing companies. Shares declined in the quarter after the company reduced its annual guidance due to execution difficulties on its marketing initiatives, increasing competition on ads, and pricing competition on products. We sold our shares as we believe the growing competitive intensity could result in continuing lower returns.
  • Horizon Discovery Group plc is a U.K.-based diagnostics company organized around the marketing of CRISPR-based solutions for experimental biologists. Recent weak performance cannot be attributable to much beyond fund flows. With the appointment of a new CEO, a turnaround specialist, and a completely undeveloped end market that is ripe for growth, we think Horizon is in the early phases of its business cycle.

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.