Baron Emerging Markets Fund | Q3 2026

Baron Emerging Markets Fund (the Fund) declined 3.39% (Institutional Shares) during the third quarter of 2026, while its primary benchmark, the MSCI Emerging Markets Index (the Benchmark), retreated 0.37%. The MSCI Emerging Markets IMI Growth Index (the Proxy Benchmark) declined 3.10% for the quarter. The Fund underperformed the Benchmark while performing roughly in line with the Proxy Benchmark during a quarter in which rising energy prices and a breakout in global bond yields favored value and commodity-oriented stocks over growth, evidenced by the MSCI Emerging Markets IMI Value Index outperforming the comparable Growth Index by 577 basis points.

In our view, the prevailing catalysts giving direction to markets were the increasingly pervasive influence of AI, which is now "crowding out" credit, economic resources and public attention well beyond equity portfolios; the resumption of hostilities with Iran alongside an escalating Russia/Ukraine war; and a resulting breakout in nominal and real bond yields, which we believe is the critical variable for equity returns in the near term. While we are never comfortable trailing our Benchmark, we suspect the recent historic rise in yields is likely overdone, while any reduction in energy risk premium, for which the upcoming U.S. mid-term elections could prove a trigger, would in our view drive a healthy mean reversion in relative returns. Further, just days into the new quarter, a surprise swing to the right in Brazil's elections delivered a potentially significant new catalyst that we believe could help sustain emerging markets (EM) equity outperformance. As always, we remain optimistic that our fundamental, theme-driven, and bottom-up approach can continue to deliver solid results over the long term.

For the third quarter of 2026, we underperformed the Benchmark, while performing similarly to our all-cap EM growth Proxy Benchmark. From a sector or theme perspective, poor stock selection effect in the Information Technology sector, primarily attributable to a few investments in our semiconductors/AI (Montage Technology Co., Ltd., Taiwan Semiconductor Manufacturing Company Limited, and Samsung Electronics Co., Ltd.) theme, was the largest detractor from relative performance this quarter. In addition, adverse stock selection in Financials, owing to a handful of holdings in our India wealth management/consumer finance (Bajaj Finance Limited, Nippon Life India Asset Management Limited, and Cholamandalam Investment and Finance Company Limited) theme, was also a notable drag on relative results. Lastly, our overweight positioning together with weak stock selection effect in Industrials, driven by select positions in our sustainability/ESG (Contemporary Amperex Technology Co., Limited and Ceres Power Holdings plc), global security/supply chain diversification (Cummins India Limited), and China value-added (Jiangsu Hengli Hydraulic Co., Ltd.) themes, also weighed on relative performance. Partially offsetting the above was favorable allocation effect combined with good stock selection in the Health Care sector (Divi's Laboratories Limited, WuXi AppTec Co., Ltd., and Zai Lab Limited).

From a country perspective, adverse allocation effect together with weak stock selection in Taiwan was the largest detractor to relative performance this quarter (though a good portion of this was related to mark-to-market pricing relative to the Benchmark pricing in real time). In addition, poor stock selection effect in China and our overweight positioning in India were also notable drags on relative results. Partly offsetting the above was favorable allocation effect in Russia, which added the most to relative performance. During the quarter, we opportunistically monetized our stub position in Sberbank of Russia PJSC that had previously been marked down to near-zero in the aftermath of the Ukraine war. Lastly, solid stock selection in Mexico and positive allocation effect combined with good stock selection in Greece also bolstered relative results. We retain our long-term conviction in our India holdings, which in our view, are attractively valued at current market prices and have recently entered an earnings upgrade cycle. Forward-looking economic indicators have turned favorable in India with the recent implementation of government fiscal reforms and monetary stimulus measures. Despite the ongoing Middle East conflict and elevated energy prices, India’s real GDP growth continues to sustain above 7% with bank credit currently growing nearly 20% year-over-year, further supporting economic activity and consumer spending.

Divi's Laboratories Limited is a leading global manufacturer of active pharmaceutical ingredients (APIs) and intermediates. The stock contributed to performance, driven by stronger-than-expected quarterly revenue and profit and supported by shipments of GLP-1 API validation batches. In our view, the company is a key beneficiary of global supply chain realignment as innovator and generic customers diversify API sourcing away from China. We are encouraged that Divi’s has been onboarded by large global pharmaceutical companies as a supplier of complex intermediates and custom-manufactured peptides for oral and injectable GLP-1 therapies. This opportunity underscores Divi’s strengths in large-scale, late-stage commercial manufacturing and provides multi-year revenue visibility as GLP-1 demand continues to expand globally. We are also encouraged by the company’s commitment to capacity expansion and sustained focus on research and development. We retain conviction and expect Divi’s to deliver mid-teens compounded revenue growth and 20% earnings growth over the next three to five years.

Shares of Sberbank of Russia PJSC contributed to performance during the quarter. Following Russia’s invasion of Ukraine in 2022, the U.S. Treasury placed Sberbank under full blocking sanctions, which prohibited U.S. investors from transacting in the shares and left them effectively untradeable. As a result, the Fund’s position had been marked at close to zero. During the quarter, a path to liquidity emerged when select financial institutions obtained specific licenses from the U.S. Treasury’s Office of Foreign Assets Control (OFAC), together with approval from Russian regulators, to sell Sberbank shares held by foreign investors to non-sanctioned buyers. We took advantage of this opportunity to sell our shares, realizing proceeds well above the position’s carrying value, which added to the Fund’s performance.

WuXi AppTec Co., Ltd. is China’s leading contract research, development, and manufacturing organization (CRDMO) for small-molecule and peptide drugs. Shares rose after the company reported strong first-half results in early August and nearly doubled its full-year revenue growth guidance, raising the range to 35% to 39%. Results were supported by the largest sequential backlog addition on record and 40% growth in new orders. Small-molecule development and manufacturing grew 73%, driven by increasing drug-manufacturing complexity, while the peptide business continued to scale into the obesity supply chain. Roughly 80% of new late-stage projects originated from WuXi’s earlier-stage work, providing further evidence that its follow-the-molecule strategy continues to work as intended. Separately, a federal court blocked enforcement of the U.S. Department of Defense’s “Chinese military company” designation that had weighed on shares, finding WuXi likely to succeed on the merits. We remain shareholders and continue to view WuXi as one of the best ways to gain exposure to the structural growth of outsourced drug chemistry.

South Korean semiconductor company SK hynix Inc. is a leading manufacturer of advanced memory chips. Shares declined sharply amid a broader sell-off in memory stocks as second-quarter results missed lofty forecasts, even as revenue more than tripled year-over-year and operating margin reached a record 76%. The shortfall was partly due to shipments of HBM4 high-bandwidth memory for AI chips slipping into later quarters. Management responded by launching a 40 trillion won share buyback and cancellation program in August and pledging to return more than half of cumulative free cash flow through 2027, with long-term agreements with around 10 key customers adding revenue visibility. We retain long-term conviction in SK hynix given its position as the current leader in high-bandwidth memory, large net cash position, and growing base of contracted customers.

Samsung Electronics Co., Ltd. is the world’s largest memory-chip maker, with major smartphone, display, and contract-manufacturing businesses. After a historic run, memory stocks bore the brunt of the quarter’s AI sell-off, with Samsung shares falling as the market debut of a fast-growing Chinese memory maker added to concerns about the outlook for memory pricing. Despite the share price decline, Samsung reported the most profitable quarter in its history. Second-quarter operating profit rose roughly 19-fold year-over-year, driven almost entirely by the chip division, while Samsung scaled up sales of its HBM4 high-bandwidth memory for AI processors and shipped the industry’s first samples of next-generation HBM4E. Management expects the memory shortage to persist through 2028 and plans to place most capacity under long-term contracts, providing greater revenue visibility. We retain conviction in Samsung as a core long-term holding, viewing its leadership in advanced memory and increasingly contracted revenue base as durable advantages supporting multi-year earnings growth.

* Individual weights may not sum to the displayed total due to rounding.

During the third quarter, we added a few new investments to our existing themes, while also increasing exposure to various positions that we established in earlier periods. We continue our endeavor to add to our highest conviction ideas.

We increased exposure to our semiconductors/AI theme by initiating a position in MediaTek Inc., the world's largest supplier of consumer and mobile system-on-chips. The company is undergoing a vector change in its growth trajectory as it transforms into one of the leading custom silicon partners for AI data centers. As AI workloads mature, the largest buyers increasingly require silicon designed around their proprietary workloads rather than a general-purpose merchant graphics processing unit. MediaTek sizes the market for this custom silicon, known as application-specific integrated circuits (ASICs), at approximately $70 billion to $80 billion by 2027, and expects to garner 15% to 20% market share. Designing ASICs demands exactly the capabilities MediaTek has spent decades building for its core business: leading-edge process expertise, high-speed interface and serializer/deserializer related intellectual property born out of its connectivity heritage, and a design centric organization that can tape out complex chips efficiently and at cost. That combination is rare. Two U.S. players have dominated the ASIC market globally, and a major U.S. cloud provider, widely reported to be Google, has anointed MediaTek as the credible third. MediaTek's first accelerator for this customer enters production in the fourth quarter, and management expects more than $2 billion of data center revenue this year, with a second, more powerful chip reaching volume production in early 2028. Management also expects the ASIC business to lift operating margins as it scales. Beyond the AI data center, the company also stands to benefit from the proliferation of AI on mobile devices, smart TVs, smart homes, and autonomous mobility related applications.

During the quarter, adding to our global security/supply chain diversification theme, we accumulated positions in Zijin Gold International Company Limited and Data Patterns (India) Limited. Zijin Gold, the overseas gold mining subsidiary of China’s Zijin Mining Group, operates mines across South America, Central Asia, Africa, and Australia. We are positive on gold prices, as central banks continue to diversify reserves and geopolitical tensions keep demand for safe-haven assets elevated, and we also expect a decline in real yields. Zijin Gold has a strong track record of acquiring distressed or underperforming mines and turning them around, as it did in Colombia, Guyana, and Suriname. We attribute that success to an in-house ecosystem spanning exploration, engineering, construction, and refining, along with faster decision-making than other state-owned peers and Western miners. Upgrades at five key operating sites should lift production to 67 to 70 metric tons by 2028 from 47 metric tons in 2025, and management targets 100 tons by 2030 through tuck-in acquisitions in existing operating regions. Zijin Gold’s all-in sustaining cost of roughly $1,700 per ounce in the first half of 2026 leaves wide margins at current gold prices of above $4,000 per ounce, with underlying unit costs declining 3% year-over-year excluding higher gold-linked royalties. Management also underwrites new projects at conservative gold prices, and the company has a strong balance sheet with net cash. Gold-related equities can be volatile even in a rising gold market, so we favor miners with visible production growth and dependable execution. We believe Zijin Gold offers both, which bodes well for long-term shareholder returns.

Data Patterns is a leading designer and manufacturer of mission-critical electronics for the defense and aerospace sectors in India. With over four decades of technological expertise, Data Patterns has developed a core competency in radar systems and electronic warfare, while it also actively engages in other applications, including avionics, communication systems, and automatic test equipment. The company is a trusted supplier to key Indian government entities, including the Defense Research and Development Organization and the Indian Space Research Organization, as well as Defense Public Sector Undertakings, including Hindustan Aeronautics and BrahMos Aerospace. In our view, Data Patterns is well positioned to benefit from the Indian government’s “Make in India” initiative, which encourages domestic manufacturing of electronic products and components by providing attractive tax subsidies and logistics infrastructure. In addition, amid escalating global geopolitical tensions, we see further upside from India’s accelerated efforts to localize the design, development, and production of defense equipment. Data Patterns has already emerged as a winning bidder across flagship programs, including the indigenously developed Tejas Light Combat Aircraft, for which it provides avionics systems and cockpit display systems, and the BrahMos supersonic missile program, for which it provides seekers and testing systems. We are also encouraged by Data Patterns’ strategic vision to move up the value chain from a subsystem supplier to a full system integrator, which should support higher business growth and margin expansion. We expect the company to deliver above 20% compound earnings growth over the next three to five years.

We added to several of our existing positions during the quarter, including Divi's Laboratories Limited, Prio S.A., Astra Microwave Products Limited, Vista Energy, S.A.B. de C.V., Godrej Properties Limited, HD Hyundai Marine Solution Co., Ltd., Ceres Power Holdings plc, Nu Holdings Ltd., and China Mengniu Dairy Company Limited.

During the quarter, we also exited several positions including SK Square Co., Ltd., Kotak Mahindra Bank Limited, Banco Bradesco S.A., Tencent Music Entertainment Group, Sberbank of Russia PJSC, Reliance Industries Limited, S.F. Holding Co., Ltd., The Japan Steel Works, Ltd., HD Hyundai Heavy Industries Co., Ltd., and Tata Communications Limited, as we continue our endeavor to allocate capital to our highest-convictions ideas.

The third quarter of 2026 proved a period of consolidation for EM equities, with the Benchmark finishing roughly flat following an exceptionally strong first half. In our view, the prevailing catalysts giving direction to markets were the increasingly pervasive influence of AI, the resumption of hostilities with Iran alongside an escalating Russia/Ukraine war, and a resulting breakout in global bond yields. Just days into the new quarter, a surprise swing to the right in Brazil's elections offered a potentially significant new catalyst for the asset class.

AI remained front and center, though in our view the impact is shifting from a market phenomenon to a regulatory and macroeconomic one. As we noted last quarter, AI fever has "crowded out" many attractive industries, stocks, and even entire countries; this crowding out now extends well beyond equity portfolios. AI-related investment is estimated to account for a quarter to a third of U.S. GDP growth this year, competing with the broader economy for capital, power, memory/compute, and skilled labor. Morgan Stanley estimates that AI-related debt issuance is on pace to approach $570 billion this year, more than double last year's pace—a meaningful new source of duration supply which in our view is helping drive bond yields higher. We remain convinced of AI's transformative potential, and EM remains the principal supplier of leading-edge logic, memory, and other critical components necessary to deliver compute capacity. However, when a single theme represents this much of economic growth, credit demand, market weight, and investor and public attention, we believe it is wise to remain onguard with respect to the various emerging political, regulatory, and commercial developments that could temper market enthusiasm, while also prioritizing prudent portfolio diversification in the near term.

Regarding geopolitics, last quarter we cautioned that risk premium and oil prices might not fall as far or as fast as anticipated following the cease-fire between the U.S. and Iran. Indeed, hostilities resumed in July, and Iran's de facto closure of the Strait of Hormuz and a retaliatory U.S. blockade remain in place, while Brent again hovers near $100 per barrel. Meanwhile, Ukraine's campaign against Russian refining has cut processing to its lowest level since 2005, halting Russian fuel exports and tightening global diesel markets. The result, in our view, is an unsustainable equilibrium of "neither war nor peace," with energy anxiety feeding directly into inflation expectations and bond yields. We suspect the November 3 U.S. mid-term elections could likely prove a trigger for resolution. The Administration's sensitivity to energy prices is evident in President Trump's public pressure on Ukraine to halt refinery strikes, as well as his signal that renewed action against Iran is possible after the vote. Meanwhile, Trump’s leverage may soon diminish should the anticipated shift in Congressional balance manifest—arguing for a resolution sooner than later. Whether through negotiation or escalation, a reduction in energy risk premium would be a meaningful positive for EM and growth equities in general, and in our view, would likely trigger some mean reversion in relative performance.

This brings us to what we believe is the critical variable for equity returns in the near term: the breakout in nominal and real bond yields. In our year end letter, we suggested 2026 could represent a major test of Fed independence. After months of merely threatening the will to do what is necessary, Fed Chairman Warsh has gestured at orthodoxy over accommodation, raising rates in September for the first time since 2023—in our view as a result of the year-to-date inflationary impact of the Iran war and, to a lesser extent, tariffs. Meanwhile, the U.S. 10-year Treasury yield has breached its 20-year resistance to reach 5.3%. The move has been driven predominantly by real yields, now approaching 3%, while measures of breakeven inflation remain contained. In other words, markets are pricing not an untethering of longer-term inflation expectations but a structurally higher cost of capital, which challenges equity valuations broadly, and long-duration growth assets in particular. Should energy prices ease post-election or should circumstances slow or defer the growth in capital investment related to AI data center development, we would expect yields to retrace meaningfully, broadening market participation and driving a healthy mean-reversion in relative returns. For now, we are watching the bond market closely as we suspect the recent historic rise in yields is likely overdone.

Finally, a word on Brazil, where the first round of elections delivered a genuine surprise. Senator Flávio Bolsonaro topped President Lula da Silva by roughly 47% to 45%, confounding pre-election polls, while right-of-center candidates also outperformed and gained a host of governorships and Senate seats. The Ibovespa Index rallied roughly 8% to a record high on the result, and while the October 25 presidential runoff remains, a Lula victory is highly unlikely, while the breadth of the rightward swing suggests that Brazil's fiscal challenge will more than likely moderate. Readers may recall that in our December 2024 letter, we pointed to increasing odds of a regime change in 2026, which we believed would likely trigger a major reduction in risk premium and substantial upside for Brazil's currency and equities, a scenario that now appears solidly in view. With real policy rates among the highest in the world, a credible fiscal anchor could unlock a substantial easing cycle, with Brazil equities among the most levered to declining rates. We believe Brazil, and Latin America more broadly, is well positioned to help sustain EM equity outperformance.

We look forward to our next communication and thank you for investing in the Baron Emerging Markets Fund.

Sincerely,