Letter from Ron | Q2 2025
Letter from Ron
August 4, 2025 | Download PDF
"From Schwab to SpaceX: Ron Baron's Lifetime of Bold and Patient Investing." "From its 1982 founding, Baron Capital developed its reputation and exceptional track record through its long-term, fundamental, active approach to growth investing."
Précis. Ron Baron's Keynote Interview by Morningstar Senior Analyst Adam Sabban. Morningstar 37th Annual Investment Conference. Navy Pier. Chicago. June 26, 2025.
"Decades of data show Baron's approach has provided consistent and unusually strong, long-term performance decade after decade" according to Morningstar.
One example? Since Morningstar's May 2005 IPO, Baron Capital has been one of that company's three largest "active" shareholders. During this 20-year period, Morningstar's share price increased 17.0 times, 15.1% per year. That is despite the company's substantial annual investments in its business that penalize its current profitability in order to enhance its competitive advantages… and growth prospects. Which we believe means that as Morningstar scales, its profits will increase at a much faster rate than its revenues.
Morningstar now represents 0.9% of Baron's $44.2 billion AUM. We regard this as an affirmation of our idea to teach our consistently increasing staff of 44 research businesses run by terrific executives. The big lesson? As long as fundamentals of those businesses remain favorable, don't worry about the "macro." And, DON'T SELL! Further, illustrative of the concept "what goes around comes around," Joe Mansuetto, Morningstar's entrepreneurial then CEO, founder, and largest shareholder, was a speaker at the 2005 Baron Investment Conference. This was soon after Morningstar's initial public offering… and, since turnabout is fair play, current CEO Kunal Kapoor invited me to speak at Morningstar's Investment Conference this year!
Among the speakers at the 2025 Morningstar Conference in Chicago were senior executives of Blackrock, Vanguard, Apollo, Morningstar and Dodge & Cox… and me. The serious fundamental elements of my talk were well received by the audience of consultants, advisors, and other investors in the room. Further, since my wife says that I think everything is a joke, I definitely got more laughs during my interview than other speakers. Adam ended his interview with me after I described how my grandparents emigrated to America more than 100 years ago penniless, not speaking English and leaving behind their families in Ukraine… in Poland near the WWII Auschwitz concentration camp… and from the Pale in Russia. One of my grandpas, my mom's dad, became a peddler of shoes from a pushcart on the Lower East Side of New York. My dad's father was a foreman of a candle factory in Brooklyn. They both emigrated to America to escape religious persecution. I then told the room that I am so thankful for their sacrifices and try to say a prayer for them every day.
Among the "thank you" emails I received from Morningstar executives was one I especially liked. "That was such an amazing session with Ron. I've never teared up at a conference before. He got me at the end there. I wish we had more than half an hour. But that was fantastic." Linda Baker. Associate Director of Manager Selection who focuses on small-cap growth.
"Make the Call."
General Stanley McChrystal.
Joint Special Operations Command. (JSOC).
Afghanistan. 2003-2008.
37th Annual Morningstar Investment Conference. June 26, 2025.
I thought perhaps the most interesting Morningstar interview that afternoon was of General Stanley McChrystal. General McChrystal had been chosen to lead the Joint Special Operations Command (JSOC) in Afghanistan. That counterterrorism command was charged with eliminating terrorists in that country. For any who heard the General speak and who might have amid chaos doubted the capabilities of our armed forces, listening to General McCrystal on Chicago’s Navy Pier should have alleviated those concerns.
When McChrystal assumed JSOC control, he told the 2,000 Morningstar conference attendees, Al-Qaeda was "kicking our butts." McChrystal adapted JSOC's operations to precision target high value terrorists. Similar to the effective counterterrorism force he led in Iraq credited with killing Abu Musab al Zarqawi, Al-Qaeda's leader in that country.
Daily meetings with his several hundred soldier counterterrorism force and sharing intelligence through the Internet were initiated. McChrystal's idea was to push down decision making to officers in the field, not just make decisions "top down." Further, his objective was to eliminate terrorists AND to win the hearts and minds of Afghan citizens by protecting them.
The General told his field command, "Your responsibilities are to make certain your counterterrorism force knows how to eliminate the enemy… not whether or not they have accomplished their mission." It worked. In large part since the strategy was great. But really because his efforts were intelligence driven which enabled rapid decision making, and since JSOC was a meritocracy where diverse talent is critical for success.
Finally, the biggest lesson? The General told his wife Annie initially that he had agreed to a two-year tour of duty. He then informed her two more times that he needed one-year extensions to complete the task. Annie reluctantly accepted his decisions. When the General concluded he needed a fifth year to complete the task he chose to avoid asking for Annie's approval. NOT a good decision! Which became a terrible decision when Annie attended a cocktail party at the Pentagon and learned from a friend that her husband was doing great and going to remain in Afghanistan another year!
As I noted at the beginning of this paragraph, the big lesson? If you've got bad news for your wife, you better not hide it. MAKE THE CALL!!!!
"You can buy insurance on a building that's on fire if you are willing to pay enough."
Dinos Iordanou. Co-Founder. Arch Capital. 2001.
Goldman Sachs' bankers introduced us to Dinos Iordanou in 2001. Dinos had been a senior insurance company executive at Berkshire Hathaway and AIG… and was so successful he was able to co-found property and casualty (P&C) insurer Arch Capital Group Ltd. Baron had not previously invested in property and casualty insurers when we met Dinos in 2001. Dinos' "house on fire" analogy outlined his belief that property and casualty insurers could consistently price policies to earn an underwriting profit… if they were disciplined and priced based upon ultimate profitability of insurance policies… and chose not to increase insurance in force if rates understated costs. P&C insurance reprices annually, is well positioned to grow significantly faster than inflation and the U.S. economy, and benefits from inflation, entropy, and chaos. Accordingly, when we studied it, we considered P&C an attractive inflation hedge. Further, due to natural disasters caused by climate change, fires, floods and earthquakes, as well as instances of corporate misfeasance, malfeasance and runaway juries, insured property values and awards have generally increased significantly above the rate of inflation.
Baron has been investing in Arch Capital P&C, reinsurance and mortgage insurance businesses since 2002. That was soon after we met Dinos. When Dinos outlined industry fundamentals to us in 2001, he told us insurance reserves had fallen 30% from peak levels a few years prior depressing industry profits… and surprisingly premium rates had not yet increased! It seemed so obvious that if there were one more calamity, rates would increase a lot. After Dinos described Arch’s niche businesses, diversified insurance portfolio and "secret sauce" cycle management, soon after 9/11 Baron began to invest in Arch. We were right. Since 2002, Arch policy premium rates and profitability have increased dramatically. Arch's share price has since multiplied 33.5 times, 16.3% annually. Arch is now Baron's 3rd largest holding and represents 3.9% of our AUM.
Also, at the suggestion of Dinos, we researched and then invested in Kinsale Capital Group, Inc., another unique P&C insurer. Kinsale's strong growth profile and consistent underwriting profits are principally derived from small business owner clients. Those clients purchase insurance not to protect assets but because regulators require them to have such insurance. Kinsale clients are principally small family businesses like restaurants, motels, boardwalk amusement rides and trucks. Terms and conditions for Kinsale policies are as a result very favorable for Kinsale. Since we purchased Kinsale shares in 2016, its share price has increased 27.2 times, 44.8% annually… and this is just an insurance company! Kinsale is now Baron's 11th largest holding. Kinsale represents 1.8% of Baron's AUM.
Finally, Dinos recommended we study unique insurance company contributory database Verisk Analytics, Inc. Verisk’s business began as a not-for-profit mutual insurance co-op before becoming a for-profit business initially owned by its clients. As a result of this structure, Verisk has no direct competitors. Verisk data and analytics are critical to all insurance businesses' operations. Verisk continues to increase services for its clients, enabling it to regularly increase its fees. Verisk fees represent a very small percentage of insurance company revenues. Verisk has increased in value 11.9 times since 2009, an annualized return of 17.1%. Verisk represents 0.8% of our Firm's assets. It is our 23rd largest holding.
Baron Capital invests for the long term on behalf of our clients… our co-workers… and ourselves… in growth companies we believe are exceptionally well managed and competitively advantaged. These investments are made principally through commingled Baron Funds. Baron investments in unique growing businesses are based upon our Firm's 44 research analysts' expectations about what those businesses will become… not only what they are at present. "Seeing around corners" … "seeing what is not yet there"… and "being right" is how we represent our process to clients and co-workers. This is as we have done since the founding of our Firm on March 15, 1982, in order to fulfill our Mission of "Changing Lives"… of our clients and co-workers. Which is conceptually similar to the process of the 117-year-old, unusually successful, Scottish based investment advisor Baillie Gifford. Baillie's investments are also based on their research analysts' assessments of "businesses' outlooks for decades not quarters."
Accordingly, "macro" current news cycle developments such as politics… Federal Reserve interest rate decisions… tariffs… near-term economic trends… sex scandals… wars… commodity prices… and public company next quarter earnings are not important factors in either Baillie's process or ours. That is since "macro" trends which are so interesting to follow are, we believe, unpredictable. And, even if we could predict "macro" outcomes… we, like everyone else… could not know if they were already reflected in stock prices.
Accordingly, the only "macro" about which we are certain is inflation. That is since elected government officials… both Republicans and Democrats… are addicted to spending more than they collect in annual tax revenues. This to please the individuals who vote them in or out of office every two or four or six years. As a consequence, we believe the price of virtually everything we purchase will about double every 14-15 years. Which means that 4% to 5% annual inflation will continue to be the case in the United States… just as it has been for my entire 82-year lifetime.
So, to preserve and enhance the buying power of savings… and to participate in America's economic expansion… Baron invests in growth businesses… The United States economy and stock market approximately double in size about every 10 or 12 years. Baron invests in businesses we believe have the potential to grow faster and double in size about every 5 to 7 years. That's the Baron Algorithm.
"If you don't contribute to politicians, how do you get anything done?"
President-Elect Donald J. Trump. Lunch conversation with Ron Baron.
Trump International Golf Club.
West Palm Beach. November 10, 2016.
Soon after his electoral victory in 2016, President-elect Trump invited me to sit with him for lunch in a crowded dining room at his West Palm Beach golf club. He then asked me, "Did you ever think this could happen?" I answered that I was surprised. I then commented that I hoped, and I was certain that almost all-American citizens, whether red or blue, also hoped, his term would be a very successful one.
The President-elect then asked whether I had supported either candidate financially. I answered that I don't contribute to political campaigns since I don't want my business to ever be accused of "pay to play." "Then how do you ever get anything done?" "I don't regard it as my job to 'get anything done’" was my answer to the President-elect, for whom I had managed money for several years. "I just try to follow the rules, guidelines and laws that exist… and treat people with whom we do business fairly."
When Baron was informed soon afterwards that we needed to resign management of the Trump investment account in 2016 to avoid potential conflicts, we had invested about 10% of that account in Tesla. I then spoke to his business' CFO. I told that individual that while I thought the next President's entire portfolio would do really well as it was structured, if it were possible to continue to hold one stock, that would be Tesla. I said I thought Tesla's share price could increase more than 20-fold over the next several years. Tesla shares have actually increased in value about 25 times during the past nine years!
"Baron's young analysts are brilliant, Ron. But when you are in a meeting, you are the one asking hundreds of questions."
Lee Shevel. CEO. Verisk.
That was Lee's response when I asked him recently whether other analysts asked the sort of questions about the competitive advantages and growth opportunities for Verisk's contributory insurance company database that we do.
Telephone conversation with Lee and Ron. July 2025.
In a June forum meeting in Baron's New York City office with our firm's 44 analysts and 50 plus client facing marketing and distribution executives, I reported Lee's remark to the group. I then told our analysts, portfolio managers and executives that they need to consider meetings with senior executives of companies in which we have invested or are considering investing, as well as meetings with clients, as if we were in a "college, law school, medical school or business school class."
The primary purposes we meet with business executives are to learn more about the character of those executives, their values and talent and to assess their leadership skills… as well as to learn what makes their businesses strategically distinct from potential competitors over the long term. What are their strengths and vulnerabilities? And long-term growth prospects? To imagine what has not yet taken place. And to be right. These meetings are not to discern what businesses' earnings or prospects are in the next quarter.
During those visits, I told our team, "You should not stop typing notes on your iPads. You should not stop asking questions. There are no dumb questions. And when the meetings end, you need to edit your notes and post in our FactSet research notebooks… after analyzing with AI tools."
In addition to Baron visiting businesses regularly in their offices and factories and data centers, senior executives of businesses in which we have invested visit us or at least speak with us every quarter. Notice I say "at least." This after their quarterly update calls with Wall Street analysts following publication of quarterly results. I commented to Baron employees that I find the public post earnings calls with analysts and managers dreadfully boring. Mostly about the next quarter, not about long-term strategies and opportunities. What is interesting to us? How do they do things? How do things work? What do they deem important? Why?
Similarly, meetings with clients and potential clients are for the purpose of us learning about THEIR businesses. Not just telling them about ours. This is so we can determine how we can help them provide even better performance and enhance returns for THEIR clients. I want Baron to be embedded in the workflow and processes of our clients. Helps our clients. Helps our business. Meets our firm's MISSION of "Changing Lives"… of both our clients and our Firm's fellow employees.
How have we performed? And, how do we structure portfolios to achieve strong returns and limit risk?
Baron Focused Growth Fund is invested in a portfolio of stocks whose businesses' prospects are not highly correlated with other portfolio investments. For the 12 months ended March 31, 2025, the average intra-stock correlation of the Fund's holdings was 0.182. This was slightly better than the average intra-stock correlation of the Russell 2500 Growth Index of 0.184.
"This is remarkable" according to Claudia Pagazani, our firm's Director of Portfolio and Risk Analytics in a July 2025 letter to Adam Sabban, Senior Analyst, Morningstar. That is since "the Fund consists of 30 stocks while the Russell 2500 Growth Index consists of 1,258 stocks which implies an unexpected diversification advantage for the Fund!"
Adam is Morningstar's senior analyst who reviews Baron Partners Fund, Baron Growth Fund, and Baron Focused Growth Fund. Adam and I frequently do not agree on the rating he attributes to those Funds. We believe as the NUMBER ONE or NUMBER TWO top-performing funds in their categories since their respective inceptions (or conversion dates, where applicable)… with the longest tenured portfolio managers… and lower beta, i.e. risk, than the Index… Baron should receive the highest possible ratings.
Morningstar opines that since Baron's annual 1% management fee is above the category average of 0.8%, our Funds' ratings should be penalized. This despite the long-term annualized performance of all three Funds being hundreds of basis points, i.e. 400-500 basis points annualized higher than their primary benchmarks, with significantly lower risk, in our view. So, we will continue to argue that we deserve the highest possible ratings, not one that suggests "average."
Morningstar has also, in our opinion, not given credit deserved to David Baron and Michael Baron as it relates to the performance of these Funds. David and Michael have extensive experience with me as co-managers and contributors to Baron's 44-person analyst team and both have 20-plus years of experience as analysts who have worked closely with me, their dad, since they joined Baron. David and Michael also have senior roles as leaders of Baron, exceptional educations and a "first in office every day and last to leave" mentality. I’m incredibly proud of their contributions.
$7.3 billion Baron Partners Fund is the Number One performing U.S. equity mutual fund of 1,972 share classes since its conversion to a mutual fund from a partnership in 2003*; $2.6 billion Baron Focused Growth Fund is the Number One performing mid cap growth fund in the U.S. since its conversion to a mutual fund from a partnership in 2008; and $5.8 billion Baron Growth Fund is the Number Two small cap growth fund since its inception in 1994!
One more thing. In our correspondence and interviews with Morningstar, regarding Baron Focused Growth Fund as well as the other two funds mentioned, we point out that the Fund is invested in "buckets" of stocks. To us this means in business categories that are not highly correlated with each other. That is the intent of our portfolio construction. We assume "less risk" with the majority of our portfolio investments provided they can still achieve double digits annual growth. This allows us to take greater risk with 25% to 30% of our portfolio where we expect to earn the greatest long-term returns.
In addition, to further reduce perceived risk, generally 15% to 20% of Baron's portfolio investments are penalizing their current earnings investing to become much larger in the future. They are not stair stepping increased value in the short term. Further, 35% to 40% or more of AUM is often invested in capital light or irreplaceable assets businesses purchased at multiples of book value. Those last investments, often financial businesses, if we are right in our analysis, will be valued more highly as a multiple of earnings per share or ebitda over the long term… if they demonstrate the consistent growth and high returns we expect.
"Our mission is to accelerate the world's transition to sustainable energy."
Tesla Impact Report.
Extended Version. '24. July 2025.
It's big. 194 pages. Lots of pictures. Read it. Not that many paragraphs. So looks intimidating. But not hard to get through it. When you do, you will be proud that you have an investment in this business and are supportive of its extraordinary founder. I promise. Oh yeah. When SpaceX issues its annual '24 Impact Report, don’t miss reading that either. I bet you'll feel the same way. (I only bet on what I regard as "sure things."… and limit my bets to one dollar ($1) on anything!)
See you on Friday, November 14, 2025 at the 32nd Annual Baron Investment Conference. Lincoln Center. New York City. As usual, expect to learn a lot about your investments… and, another promise, I guarantee you'll be entertained.
Respectfully,
P.S. Baron Capital was founded March 15, 1982. At that time we had $10 million under management. In 1992, Firm AUM was $100 million. Firm AUM currently approximates $45 billion. Since 1992, Baron has earned realized and unrealized profits of more than $50 billion! It is unusual for mutual funds or any other investors for that matter to consistently outperform benchmark indexes over the long term. Since their respective inceptions, 17 of 19 Baron mutual funds, representing 96.5% of Baron Funds’ AUM, have outperformed their primary benchmarks and 13 Funds, representing 93.9% of Baron Funds’ AUM, rank in the top 10% of their respective Morningstar categories. Eight Funds, representing 60.2%% of Baron Funds’ AUM, rank in the top 5% of their categories. And, as mentioned above, Baron Partners Fund is the Number One performing U.S. equity mutual fund of 1,972 share classes since its conversion to a mutual fund from a partnership in 2003.