Baron Asset Fund | Q3 2025

U.S. equities were broadly higher in the third quarter, building on last quarter’s gains. The primary driver behind the market strength was the increased likelihood that the Federal Reserve (the Fed) would cut interest rates. The Fed resumed its rate-cutting cycle at its September meeting, lowering its policy rate by 25 basis points. Generally, healthy corporate earnings, reduced trade tensions, resilient consumer spending, increased M&A and IPO activity, and continued optimism about AI also contributed to market strength.

The returns of large-cap stocks were dominated by the Magnificent Seven complex for a second consecutive quarter, accounting for 62% of the S&P 500 Index’s quarterly gains. Information Technology (IT), Communication Services, and Consumer Discretionary were the only sectors to outperform the broader market thanks to the heavy influence of the Magnificent Seven. Consumer Staples was the only sector to decline in the period. Other laggards included Real Estate, Financials, Health Care, Industrials, Energy, and Materials.

The returns of the Russell Midcap Growth Index (the Index) continued to be dominated by a small number of largely lower-quality, richly valued stocks. As demonstrated in the table below, the performance of just 10 stocks contributed approximately 90% of the Index’s 12.84% return during the first three quarters of 2025. The other 343 stocks in the Index collectively contributed just 1.35% of the Index return, half of which (178 out of 343 stocks) posted negative returns during the period.

In addition, the 10 stocks that drove almost all of the Index’s return were disproportionately high in certain factors described below, most notably volatility and valuation. For example, on September 30, 2025, Palantir traded at nearly 250 times next-twelve-month (NTM) earnings, and Cloudflare traded at over 200 times NTM earnings. Roblox had a negative 2025 EPS and Alnylam Pharmaceuticals traded at 110x NTM earnings. Palantir and Cloudflare were also trading at lofty valuations (164 and 138 times NTM earnings, respectively) entering the year, while Roblox and Alnylam Pharmaceuticals were unprofitable.

In addition, these stocks were disproportionately low in Earnings Quality. In fact, according to MSCI Barra, a leading provider of market and portfolio analysis tools, during the past quarter, companies with high-quality earnings underperformed those with lower-quality earnings by the widest margin since their data became available in 1975. The six-month and one-year results for these high-quality companies have also been the weakest on record. These unusual market dynamics created challenging headwinds for the Fund’s longstanding investment approach – purchasing high-quality, competitively advantaged companies trading at what we deem to be reasonable valuation levels.

Baron Asset Fund® (the Fund) underperformed for a second consecutive quarter as U.S. equities continued their strong rally from the market lows reached on April 8. The Fund declined 4.23% (Institutional Shares) in the third quarter, trailing the Index’s gain of 2.78%. Similar to the prior quarter, the relative shortfall was mostly related to the Fund’s underexposure to the styles described in the chart above. The Fund’s underexposure to Momentum, Beta, and Residual Volatility proved especially costly, as stocks with elevated exposure to these factors continued to lead the market higher in the period. The Fund’s overexposure to Earnings Quality also hampered performance given the ongoing rally in lower quality stocks during the quarter. The Earnings Quality factor suffered its worst three-month performance in history during the quarter, exemplifying how challenging the market environment was given the Fund’s higher quality profile.

From a sector perspective, stock selection in IT and Communication Services was responsible for about three-quarters of the underperformance in the period, with much of the weakness attributable to sharp declines from syndicated research provider Gartner, Inc. and global ticket marketplace StubHub Holdings, Inc. Both holdings are discussed in detail below.

Stock selection in Consumer Discretionary, Financials, and Industrials also hampered relative results. Weakness in Consumer Discretionary was broad based, led by double-digit declines from lodging franchisor Choice Hotels International, Inc. and premium footwear and apparel brand On Holding AG. Choice shares fell amid investor concerns over continued revenue per available room (RevPAR) weakness at the company’s lower-end economy and midscale brands. While the slowdown in RevPAR is disappointing and bears monitoring, Choice continues to grow its more revenue-intensive units at a strong pace, helping offset the softness. The company is also increasing royalty rates, particularly across its Radisson brands, further supporting revenue and margin expansion. Choice generates strong cash flow and maintains a solid balance sheet, providing flexibility to pursue acquisitions, reinvest in the business, and repurchase shares. We believe the stock’s valuation continues to reflect a significant discount to intrinsic value, and management’s disciplined capital allocation and commitment to returning capital to shareholders position the company for upside as growth reaccelerates following the recent economic slowdown.

On Holding’s stock price was pressured by macroeconomic uncertainty and concerns about rising competition in the global sportswear industry. Despite these headwinds, the company delivered strong quarterly results, with revenue up 38% and broad-based growth across regions and categories. Management also raised its revenue and profitability expectations for the year. We maintain conviction in On’s ability to gain market share in the attractive global sportswear segment through its premium brand positioning and innovative product offerings, and we believe shares remain undervalued at current levels.

Performance in Financials was hindered by financial data businesses FactSet Research Systems Inc. and Morningstar, Inc., whose share prices were hurt by a combination of industry-wide concerns about the potential impacts of AI, cautious commentary from several financial data and software peers, and factor rotation as investors shifted from high-quality, defensive names to higher-growth stocks. We remain investors in these high-quality businesses. Data and analytics vendor Verisk Analytics, Inc. was mostly responsible for the relative shortfall in Industrials, which is discussed further below.

Somewhat offsetting the above was solid stock selection in Health Care along with higher exposure to Real Estate, which was the second best performing sector in the Index. Solid stock selection in Health Care was driven by strong performance from veterinary diagnostics leader IDEXX Laboratories, Inc., whose share price was lifted by better-than-expected financial results, as discussed below.

Veterinary diagnostics leader IDEXX Laboratories, Inc. contributed to performance after reporting better-than-expected financial results. Foot traffic to veterinary clinics in the U.S. continued to improve modestly from depressed levels, contributing to roughly 10% constant currency revenue growth in its core Companion Animal segment – its best result in two years. In addition, the company installed 2,400 of its inVue Dx cellular analyzers, exceeding investor expectations, and boding well for the associated future consumable revenue stream. IDEXX also continued aggressively to repurchase its shares, signaling management’s confidence that favorable dynamics should continue. We see increasing evidence that long-term secular trends around pet ownership and pet care spending have structurally accelerated, and we expect IDEXX’s long-term growth rate and margin profile to improve.

Amphenol Corporation, a leading global supplier of advanced interconnect systems for data centers, gained during the quarter. Its shares rallied as expectations for data center capital spending continued to rise with the accelerating adoption of AI. In addition, Amphenol announced its largest-ever acquisition—CommScope’s Connectivity and Cable Solutions business for $10.5 billion—which was well received by investors. Amphenol has demonstrated consistent shareholder value creation through prudent capital deployment and disciplined acquisitions. We remain shareholders given the company’s durable competitive advantages, favorable tailwinds from AI-driven data center construction, and its proven long-term track record of both organic and inorganic growth.

Space Exploration Technologies Corp. (SpaceX) is a high-profile private company founded by Elon Musk. The company’s primary focus is on developing and launching advanced rockets, satellites, and spacecrafts, with the ambitious long-term goal of making life multi-planetary. SpaceX is generating significant value through the rapid expansion of its Starlink broadband service. The company continues to successfully deploy a vast constellation of Starlink satellites in Earth’s orbit, reporting substantial growth in active users, and regularly deploying new and more efficient hardware technology. Furthermore, SpaceX has established itself as a leading launch provider by offering highly reliable and cost-effective launches, leveraging the company’s reusable launch technology. SpaceX capabilities extend to strategic services such as human spaceflight missions. Moreover, SpaceX is making tremendous progress on its newest rocket, Starship - the largest, most powerful rocket ever flown. This next-generation vehicle represents a significant leap forward in reusability and space exploration capabilities. We value SpaceX using the prices of recent stock transactions.

Gartner, Inc., a provider of syndicated research primarily related to the IT sector, detracted from performance after reporting disappointing second quarter earnings. Contract value growth, a leading indicator of the company’s future revenue, decelerated from 6.7% to 4.9% in the prior quarter, and this figure was below investor expectations of around 6%. We attribute most of the slowdown to ongoing cost cutting in the U.S. public sector, which represents around 5% of revenue, as well as more challenging business conditions in industries dependent on public sector funding, such as education. We also believe companies with meaningful exposure to tariffs tightened cost controls, resulting in longer sales cycles and slightly higher attrition.

While the market expressed concern about the impact of AI on Gartner’s business, we see no evidence that this is negatively impacting its value proposition. We believe that Gartner has a vast and growing set of proprietary data, generated by hundreds of thousands of interactions with buyers, sellers, and consumers of technology. Gartner’s proprietary insight extends to corporate technological roadmaps, enabling the company to assess future trends. Gartner also delivers tangible ROI (Return on Investment) for its customers through its contract review program; we estimate that for every dollar spent with Gartner, a customer can save up to $10 in lower procurement costs. In addition, we estimate that almost 95% of Gartner’s research business comes from customers that want to talk with or meet with an analyst or former CIO to have a partner help guide their decisions. We believe that AI should provide a tailwind for Gartner at this point, as every company in the world seeks help and insight to understand the risks and opportunities poised by AI. As a result, we believe growth trends should improve next year as U.S. public sector headwinds abate and sales force productivity strengthens. We believe that the looming, uncertain impact of AI on most businesses should lead to additional interest in Gartner’s proprietary research, insights, and analysis.

We also expect the company to be aggressive in repurchasing stock to capitalize on its discounted valuation. We estimate that Gartner repurchased approximately $800 million in July and August, and it then added $1 billion to its outstanding share repurchase authorization in early September. Given the roughly $2 billion of cash on its balance sheet, ample debt capacity, and its significant ongoing free cash flow generation, we believe the company could potentially repurchase nearly 20% of its market cap over the next 18 months. We believe the current valuation is attractive for this largely subscription-based business with substantial recurring revenue.

StubHub Holdings, Inc., the leading marketplace for the resale of live event tickets, detracted from performance following its September IPO. The company has been investing heavily both to expand its market share and to develop its capabilities to sell tickets in the primary market - tickets sold directly by sports teams to fans. Its near-term results were also affected by challenging annual revenue comparisons after the outsized success of Taylor Swift tour ticket sales last year. Despite these temporary headwinds, we remain optimistic that StubHub’s revenue growth and profitability are poised to accelerate meaningfully.

Verisk Analytics, Inc. is a leading data and analytics vendor focused primarily on providing critical information to the property and casualty insurance industry. The stock detracted from performance after management issued a conservative outlook for the second half of 2025. Verisk also announced the $2.35 billion acquisition of AccuLynx, cloud-based construction management software for the roofing industry, which is expected to be modestly dilutive to earnings in the first year. Lastly, shares suffered from concerns about a slowing property and casualty insurance pricing backdrop and broader industry-wide uncertainty about the impact of AI. Nonetheless, Verisk reported strong quarterly earnings and CEO Lee Shavel sounded upbeat on the company’s growth potential moving forward. We maintain conviction in the competitive positioning, long-term growth, margin expansion, and capital deployment prospects for the business.

As of September 30, 2025, the Fund held 55 positions. The Fund’s 10 largest holdings represented 47.2% of net assets, and the 20 largest represented 69.4%. The Fund’s largest weighting was in the IT sector at 24.9% of net assets. This sector includes application software companies, electronic components businesses, and IT consulting firms. The Fund held 23.6% of its net assets in the Industrials sector, which includes investments in aerospace & defense firms, research & consulting services businesses, and construction & engineering companies. The Fund held 14.7% of its net assets in Health Care, which includes investments in health care equipment, life sciences companies, and health care technology companies. The Fund also had significant weightings in Financials at 11.6% and Consumer Discretionary at 9.4%.

As the chart below shows, the Fund’s largest investments have mostly been owned for significant periods – 6 of the 10 largest holdings have been owned for longer than a decade. This is consistent with our approach of investing for the long term in companies benefiting from secular growth trends with significant competitive advantages and best-in-class management teams.

We recently initiated a position in Loar Holdings Inc., a niche manufacturer of aerospace parts. Loar boasts an 85% proprietary product portfolio, with over 50% of its revenues derived from aftermarket replacement sales. We believe this is perhaps the best market in the aerospace and defense industry, as evidenced by the experience of TransDigm, a similar company that has been a successful long-term investment for Baron Capital.

We believe this market is especially attractive for several reasons. First, the aerospace industry is growing, with passenger miles increasing at a multiple of global GDP, or approximately 4% annually. Second, Loar benefits from strong pricing power due to the critical nature of its components, the absence of substitute products (owing to high proprietary content), and high barriers to entry. These components are both high risk and relatively low cost for airlines, which are reluctant to compromise safety for minimal cost savings. Most Loar parts cost less than $1,000. In addition, these parts require lengthy and costly approval by the Federal Aviation Administration. Given the high-variability, low-volume nature of aircraft components (millions of parts per aircraft, each with low production volumes), it is difficult for competitors to produce these parts.

The aerospace supply chain is fragmented with many components supplied by smaller privately owned businesses that, in turn, sell to system integrators, Tier 1 or Tier 2 manufacturers, or large original equipment manufacturers. Loar has acquired many of these smaller firms with the goal of doubling their EBITDA over a three- to five-year time frame. Loar will continue to seek deals with a focus on: 1) aerospace and defense businesses; 2) proprietary content and processes; 3) significant aftermarket exposure; 4) niche markets or products with strong market positions; 5) the opportunity to cross-sell an existing portfolio of products; and 6) long-standing customer relationships. Loar’s strong M&A track record has been integral to its growth, with revenue and EBITDA compounding 17% and 18%, respectively, over the last five years, and 26% and 35% over the last decade. Given the strength of its business model and management team, we see a long opportunity for Loar to compound EBITDA organically in the mid-teens with a double-digit addition from M&A.

During the quarter, we invested in private company Skyryse, Inc. The company’s mission is to make aviation safer and more accessible. To realize its objectives, the company is developing and deploying SkyOS—a comprehensive, universal flight operating system designed to leverage software and AI to simplify piloting by automating complex in-flight controls. Extending beyond just software innovation, SkyOS incorporates proprietary actuators and flight control computers that replace legacy mechanical controls. These components enable software-based flight controls, or fly-by-wire, and incorporate additional redundancies to augment each aircraft’s safety. Applicable to rotary- and fixed-wing platforms alike, the system can be retrofitted into an existing fleet or incorporated into production lines. By infusing modern technology into aviation, SkyOS should be able to improve safety, simplify pilot training, expand an aircrafts operational envelope, and lower maintenance costs. Skyryse has already showcased an integration on the Robinson helicopter—a leading global manufacturer—and the company is currently collaborating with the U.S. Army to embed SkyOS in its fleet of Black Hawks.

We managed down the Fund’s weightings in several of our largest longtime holdings, including veterinary diagnostics company IDEXX Laboratories, Inc., insurance software provider Guidewire Software, Inc., insurer Arch Capital Group Ltd., and IT research firm Gartner, Inc. Dayforce, Inc., a provider of software for human capital management, reached an agreement for sale to a prominent private equity firm during the quarter.

After outperforming during this year’s first quarter amid a sharp downdraft in the equity markets, the Fund’s relative performance continued to be challenged in the third quarter amid the unusual market environment. As discussed above, this quarter was among the most difficult relative periods in history for the types of high-quality companies in which the Fund seeks to invest.

Throughout the Fund’s nearly 40-year history, particular types of stocks have moved in and out of investors’ favor. The recent market has rewarded many businesses that we consider to be speculative, assigning extraordinary valuations to some. The Fund has faced other challenging periods when its approach has been out of sync with prevailing market trends. However, we have found that investors eventually appreciate and reward the types of high-quality businesses we favor.

We believe that our businesses’ growth opportunities and competitive positions have continued to improve, while their absolute and relative valuations have become more compelling.

Thank you for your continued confidence and support.