Baron Generational Growth Fund™* Now Is the Time!

August 2026 | Download PDF

Baron Generational Growth Fund invests in businesses with exceptional management teams we believe will likely create long-term sustainable growth. The Fund’s investments are identified by Baron Capital’s fundamental research. Baron’s approach has been our Fund’s foundational strategy. This strategy has generated strong outperformance for Baron Generational Growth Fund on an annualized basis since the Fund’s inception in 1994 (Exhibit 1).

Baron Generational Growth Fund has since inception experienced discrete periods, about a third of the time, when returns have lagged its Russell 2000 Growth Index benchmark. Similarly, Berkshire Hathaway has outperformed over the long term, but has also had periods, about a third of the time, when its performance has lagged its benchmark index.1 That is because both Baron Capital and Berkshire Hathaway attempt to outperform the market by a lot over the long term—not by trying to beat the market by a little every year. Baron Capital has achieved its objective by investing in unique businesses, often founder-led, with significantly faster growth prospects than the economy. Berkshire focuses its investments on large, consistently growing, sustainably advantaged businesses.

A Recent Negative Environment for “High Quality” Offers Opportunity

From the end of July 2016 through November 2023, Baron Generational Growth Fund rose 133.6%.² This was more than double the return of the Russell 2000 Growth Index. As of end November 2023, Baron Generational Growth Fund was the top performing Fund in the Morningstar Mid-Cap Growth Category and the Morningstar Small Growth Category since its inception. Over the next 16 months, however, the Fund trailed the Index by over 800 basis points. Returns lagged significantly beginning in April 2025, while U.S. equity markets rallied. This underperformance continued into the first half of 2026. Since June 22, however, Baron Generational Growth Fund has risen more than 10% while the category average and the Index declined (Exhibit 2).

Baron Generational Growth Fund invests in “high quality”³ growth businesses. This means, in many instances, investing in businesses with consistently recurring revenues. This long-term strategy was out of favor for most of 2025 and 2026. As factor analysis makes clear, investors during that period chose to invest in cyclical technology businesses, not those we define as “quality.” In addition, and even more unusual, the performance of multiple factors that are ordinarily not present in our most successful investments—high beta, residual volatility, and momentum—hit extreme levels simultaneously.⁴ There have been few periods of such sustained disparities in factor performance.

In 2026, the Fund’s underperformance was driven mainly by active industry weights. Investors increasingly viewed accelerating AI capabilities as an existential threat to a range of industries. The Fund’s investments in internet software and IT services, as well as various Financials-linked industries (e.g., insurance brokers and reinsurance), negatively impacted performance. Lack of exposure to computer energy and electrical equipment also impeded relative results. Starting in late June, however, this positioning supported Fund performance as previously penalized areas of the market outperformed.

Baron Generational Growth Fund’s Historical Performance Shows a Pattern

Baron Generational Growth Fund’s recent short-term performance has been consistent with historical precedent. The Fund has underperformed for seven periods since inception more than 30 years ago. This was mostly when the Index increased dramatically (+25% cumulative or higher).

The Fund also typically underperformed in “risk-on” market environments. The leaders in these markets often exhibit cyclical revenues and high measures of beta, residual volatility, and momentum. This was in contrast to the Fund’s higher-quality, lower-beta profile.

Historically, periods of underperformance for the Fund have been followed by much longer periods of meaningful outperformance. The periods of outperformance lasted over two years on average (Exhibit 3), resulting in strong absolute and relative returns for the Fund since inception.

During the most recent period of underperformance—which we believe is characterized by extreme undervaluation—many companies in which we are shareholders repurchased and retired their shares. They obviously believed, as did we, that their share prices were significantly undervalued. We made material purchases as well, which have helped drive recent outperformance.

Owning Better Businesses at Compelling Valuations

We believe the holdings in Baron Generational Growth Fund offer unusual value. This reflects substantial declines in their stock prices relative to the growth in their businesses’ earnings and asset values.

We believe earnings and asset values of businesses in which we are invested can continue to grow at faster-than-expected rates for longer-than-expected periods of time. Despite recent outperformance, the portfolio’s margins, cash flow, and returns on capital remain materially higher when compared to its historical composition and the Index (Exhibit 4).

Outlook

We are even more optimistic than normal about the outlook for Baron Generational Growth Fund—more so because of the Fund’s recent underperformance. Among the periods in the Fund’s history that we believe are analogous to the current market environment are the dot-com bubble, 1999 to 2000, the post-COVID rally in late 2020, and the large-cap growth/Magnificent Seven AI Technology Rally. During those periods, the Index rose sharply for a relatively brief time, and our underperformance during those periods was driven in large part by style-related headwinds. The Fund subsequently significantly outperformed.

In addition, as extreme as factor performance has been, it also reveals an important pattern: factor-driven performance has never been sustained. The earnings quality factor, for example, typically rebounds when markets transition from speculative, momentum-driven phases to environments where fundamentals, balance sheet strength, and cash flow sustainability reassert themselves.

During those factor-driven underperformance periods, markets tend to favor high-beta, story-driven, or cyclical names. But when volatility rises, liquidity often tightens, or earnings dispersion widens, high-quality earners historically outperform as investors seek durability, transparency, and reliability.

The Fund’s underperformance in 2026 was principally due to concern about negative AI impact. We expect patient, selective investing in this environment will generate attractive long-term returns as the market ultimately distinguishes between genuine AI losers and the misperceived ones. We believe recent outperformance may indicate that this is already happening.

A New Name and an Enhanced Approach

Baron Growth Fund changed its name to Baron Generational Growth Fund as of June 1, 2026. In addition, the Strategy modified its investment approach: Portfolio Managers Ron Baron and Neal Rosenberg are now able to add to investments in companies that have grown beyond the portfolio’s small- to mid-cap market capitalization limits. The new name better reflects the updated Strategy’s long-term, multigenerational wealth-building focus. The greater flexibility brings the Firm’s objectives and the Strategy’s process into closer alignment. It also empowers portfolio managers to reinvest in family-owned and -controlled, entrepreneur-led businesses—and participate in the companies’ continuing growth. We believe the current environment offers extraordinary opportunities: Now is the time!