Baron Emerging Markets Fund | Q4 2025

Baron Emerging Markets Fund® (the Fund) retreated 1.26% (Institutional Shares) during the fourth quarter of 2025, while its primary benchmark, the MSCI Emerging Markets Index (the Benchmark), appreciated 4.73%. The MSCI Emerging Markets IMI Growth Index (the Proxy Benchmark) gained a more modest 2.99% for the quarter. The Fund underperformed the Benchmark and the Proxy Benchmark during the quarter, reversing the outperformance gained in the first three quarters. For the full year 2025, the Fund gained 30.14%, while the Benchmark appreciated 33.57% and the Proxy Benchmark gained 32.03%. While disappointed with our fourth quarter results, which largely resulted from a healthy correction in several of our strongest performing stocks heading into the quarter, we are satisfied with our full-year results particularly in light of our large and long-term overweight in India, a market which was roughly flat for the year and in our view, is poised to begin contributing again from a forward-looking perspective.

More specifically, weak fourth quarter relative results were partially driven by a correction in China-related equities, as the much anticipated November meeting between Presidents Trump and Xi, aimed at de-escalating trade tensions, led to a “sell the news” event. Chinese equities had already run up in anticipation, and in our view, the lack of specific reference to a resumption in the flow of semiconductor-related content and/or wafer fabrication equipment to China likely disappointed some expectations; we were not surprised and remain undeterred given the political realities, and in recent weeks evidence of such flow has surfaced and China-related equities, particularly technology-related, are again rallying. In addition, in the final quarter various holdings in India lost ground as an expected bilateral trade deal with the U.S. failed to materialize as expected in November. We retain conviction in our investments in India and believe this jurisdiction not only offers value after trading sideways in the past year in a strong EM equity market, but more importantly, we believe it is poised to deliver a growth recovery and positive earnings inflection. We are encouraged by the strong absolute performance of the Fund over the past year, as well as the solid outperformance of EM equities in general, and remain optimistic that our fundamental, theme-driven and bottom-up approach can continue to deliver results in a rapidly evolving technological and geopolitical environment.

Entirely driven by an unusually difficult fourth quarter, for the full-year 2025 we underperformed the Benchmark while more modestly trailing our all-cap EM growth Proxy Benchmark. From a sector or theme perspective, adverse stock selection effect in the Consumer Discretionary sector was the principal factor, primarily driven by a handful of investments across multiple themes, namely Swiggy Limited and Trent Limited, and to a lesser extent BYD Company Limited and Coupang, Inc. In addition, weak stock selection effect in the Real Estate sector (KE Holdings Inc., Godrej Properties Limited), Health Care sector (Zai Lab Limited, Max Healthcare Institute Limited) and Communication Services sector (Kuaishou Technology, Tata Communications Limited, Indus Towers Limited) also contributed modestly to relative underperformance. Partly offsetting the above was our large overweight together with strong stock selection effect in the Industrials sector, owing to various holdings in our sustainability (HD Korea Shipbuilding & Offshore Engineering Co., Ltd., HD Hyundai Heavy Industries Co., Ltd., Doosan Enerbility Co., Ltd.), global security (Hanwha Systems Co., Ltd., Korea Aerospace Industries, Ltd.), and China value-added (Jiangsu Hengli Hydraulic Co., Ltd., Contemporary Amperex Technology Co., Limited, Zhejiang Sanhua Intelligent Controls Co., Ltd.) themes. In addition, favorable allocation effect combined with good stock selection in the Energy sector (Reliance Industries Limited) also bolstered relative performance during the year.

From a country perspective, for calendar year 2025, our large overweight together with adverse stock selection effect in India was the largest detractor to relative performance. After delivering stellar performance over the 2020-2024 period, Indian equities experienced a phase of consolidation in 2025, which we believe was driven by a temporary deceleration in economic growth and a related loss of earnings momentum. In our view, India is now on the cusp of an earnings upgrade cycle, supported by a recovery in government infrastructure spending, targeted tax relief for the middle class, benign inflation trends, a normal monsoon benefitting rural demand, and the rollout of "GST 2.0⁴,” which is expected to further stimulate consumption and economic activity. We believe this sets the stage for India to play catch up with EM peers that enjoyed a breakout year in 2025. Weak stock selection effect in Poland and China also detracted modestly from relative performance for the full year, and we discuss the fourth quarter correction in China in further detail in the Outlook section of this letter. We remain encouraged by the continued recovery in Chinese equities during the year as investors have gained increasing respect for the country’s vast AI and advanced manufacturing potential. Partially offsetting the above was solid stock selection effect in Taiwan related to our advanced semiconductor/AI theme, as well as our lack of exposure to Saudi Arabia and other energy-sensitive jurisdictions that generated negative returns in a year of strong absolute gains for EM equities. Our overweight allocation in Korea, the world’s top performing sizeable equity market in 2025, also notably bolstered relative performance during the year.

Poor stock selection effect in China, Korea, and India were the key detractors to relative performance during the period. Partly offsetting the above was our lack of exposure to Saudi Arabia and positive stock selection effect in Chile. From a sector or theme perspective, poor stock selection effect in Information Technology and Industrials detracted the most from relative results, though in our view this largely represented a correction in several strong-performing stocks entering the quarter. Our overweight positioning combined with weak stock selection effect in the Consumer Discretionary sector also weighed. Partially offsetting the above was favorable allocation effect and good stock selection in the Consumer Staples sector. Though disappointed by our performance in the fourth quarter, we are encouraged by the strong double-digit absolute gains delivered for the full year. As we enter 2026, we are enthusiastic regarding our positioning and remain optimistic that we are entering a multi-year upcycle for EM equities.

Semiconductor giant Taiwan Semiconductor Manufacturing Company Limited (TSMC) contributed to performance during the quarter, driven by robust demand for AI chips. We retain conviction that TSMC’s technological leadership, pricing power, and exposure to secular growth markets—including AI and high-performance computing, automotive, 5G, and Internet of Things—will allow the company to sustain strong double-digit earnings growth over the next several years.

South Korean memory semiconductor company SK hynix Inc. contributed to performance, as strong AI-driven demand, combined with tight industry supply, has resulted in a dramatic increase in dynamic random-access memory (DRAM) and NAND flash memory pricing and profitability. Memory is a core pillar of the data economy and benefits from structural demand growth as servers, smartphones, PCs, and other devices become increasingly computationally intensive. We believe SK hynix will remain a key beneficiary of rising adoption of High Bandwidth Memory (HBM), which leverages advanced packaging to vertically stack DRAM chips, delivering higher bandwidth, improved power efficiency, and a smaller form factor. SK hynix has emerged as the industry leader in cutting-edge HBM due to its superior performance, durability, and heat dissipation. We expect the company to generate strong earnings growth over the next several years, with significant upside from incremental long-term memory demand driven by AI applications.

Shares of South Korean conglomerate Samsung Electronics Co., Ltd. increased during the quarter on surging DRAM and NAND flash memory pricing, improved execution in DRAM and HBM technology development, and a stronger outlook for the company’s logic semiconductor foundry business. We are confident Samsung will remain a key beneficiary of long-term growth in global semiconductor demand and a leader in memory chips, 5G smartphones, and semiconductor foundry services.

Alibaba Group Holding Limited is the largest retailer and e-commerce company in China. The company operates shopping platforms Taobao and Tmall, and has businesses spanning logistics, local services, digital media, and cloud computing. Shares fell during the quarter amid a broader pullback in Chinese equities following the prior AI rally and some renewed macroeconomic concerns. Even so, Alibaba's fundamentals remain broadly intact. The company accelerated cloud revenue growth, driven by AI adoption and improving unit economics in its quick commerce business. Alibaba is also ramping capital expenditures over the next three years, with plans to invest at least $53 billion to expand its cloud infrastructure layer and embed AI capabilities across its ecosystem, including consumer search. Within commerce, quick commerce has demonstrated strong early traction and management has reiterated its commitment to further enhancing profitability. We retain conviction that Alibaba is well positioned to benefit from China's ongoing growth in e-commerce and cloud, although competitive concerns remain.

Kaynes Technology India Limited is a leading electronics manufacturing service player in India, offering solutions across the automotive, industrial, railway, medical, and aerospace and defense industries. Shares declined during the quarter amid concerns around working capital management and the company’s ability to generate cash flow, as well as questions regarding certain financial reporting practices, which management subsequently clarified. We retain conviction in Kaynes, as we believe the company is well positioned to benefit from the Government of India’s “Make in India” initiative, which promotes domestic electronics manufacturing through attractive tax incentives and investments in manufacturing infrastructure. We expect Kaynes to deliver compounded EBITDA growth of more than 30% over the next three to five years.

Tencent Holdings Limited operates China’s leading social network and messaging platforms (WeChat and QQ), its largest online gaming business, and one of the country’s dominant online entertainment and media ecosystems. Shares declined amid a broader sell-off in Chinese equities following strong performance in the third quarter. Even so, fundamentals remain solid. Core gaming and advertising revenue growth continued to exceed expectations, with profitability growing faster than overall revenue. Tencent also noted that AI is already improving its core advertising technology through better targeting, content ranking, and new forms of engagement such as AI-powered search. We remain confident in the company’s ability to compound earnings over time, supported by its diversified growth structure, massive scale, and operational efficiency. Longer term, we believe Tencent could be a leading beneficiary of generative AI in China, given its ability to enhance existing products and enter adjacent markets through its extensive platform ecosystem. We continue to monitor the regulatory environment.

* The Fund’s exposure to Russia was less than 0.1%.

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

We initiated positions in Absa Group Limited and FirstRand Limited as we believe South African banks are at the cusp of a favorable banking cycle. Across sectors, loan growth is accelerating in both corporate and retail segments, asset quality remains stable with credit loss ratios within or below through-the-cycle ranges, and easing monetary conditions are improving affordability and activity, creating the potential for a rebound in net interest margins as volumes recover. Importantly, the South African Reserve Bank’s shift to a lower inflation target (announced in November 2025) is contributing to a decline in long-term bond yields, which should support better loan affordability, stimulate investment, and lower the cost of equity, providing tailwinds for revenue and valuation multiples. Within this backdrop, Absa offers strong leverage to improving domestic growth through its leading corporate and transactional banking franchises and operating leverage as revenue growth outpaces costs, while FirstRand stands out for its structurally higher returns, diversified earnings streams, and disciplined asset-liability management that positions it well to defend margins through the cycle. With bank stocks offering undemanding valuations, improving earnings momentum, and the potential for multiple re-rating as macro conditions normalize, we believe Absa and FirstRand represent attractive investment opportunities.

During the quarter, we re-established a position in Nu Holdings Ltd., the leading digital bank in Latin America with operations in Brazil, Mexico, and Colombia, as we see the company emerging from a benign credit cycle with its long-term competitive advantages intact and its growth opportunity enhanced. Founded in 2014 to provide Brazilian consumers better access to financial services, Nu is disrupting an oligopolistic banking system plagued with high fees, poor service, and limited credit availability. Leveraging a tech-first, user-friendly platform, and core focus on customer experience, the company has attracted over 100 million users with minimal marketing spend. We believe its success rests on four key advantages: a digital platform that drives engagement and lowers costs, disciplined credit underwriting, a retail deposit-based funding model, and a strong, trusted brand. Nu continues to scale rapidly, gaining traction in new markets and expanding its product suite. In Brazil, the company already commands a 13% share of the credit card market, and we see similar potential in adjacent products. We see a long runway for growth given the structural underpenetration of financial services in Nu’s core markets. In Brazil, roughly 30% of adults remain underbanked, and credit card penetration is only around 35%, compared to 70%-plus in developed economies. Retail credit penetration (consumer loans as a % of GDP) is about 30%, versus 50% to 60% in mature markets. In Mexico and Colombia, the gaps are even wider: more than half the population is unbanked or underbanked, and credit penetration is below 20% of GDP. Cash still accounts for over 50% of personal consumption expenditures, underscoring the opportunity to digitize payments and expand credit access. Nu is uniquely positioned to capture this opportunity with its scalable platform and cost advantage. Looking ahead, we expect strong balance sheet growth and rising return on equity over the medium term, driven by operating leverage and balance sheet optimization. We are confident that this combination of robust growth and improving profitability positions Nu for strong long-term stock performance.

Finally, we added to several of our existing positions during the quarter, most notably Samsung Electronics Co., Ltd., Kuaishou Technology, HDFC Bank Limited, Bharat Electronics Limited, Alibaba Group Holding Limited, Tata Communications Limited, and InPost S.A. During the quarter, we also exited positions in Gold Fields Limited, KE Holdings Inc. and Dino Polska S.A. due to high valuation and/or uncertainties over durability of earnings growth or competitive positioning going forward.

During the final quarter of 2025, global equities extended prior year gains and delivered solid full-year returns. Notably, emerging market (EM) equities significantly outperformed their U.S. and global counterparts for first time in several years. We believe the year 2025 likely represented the beginning of a sustainable period of EM and international equity outperformance. The year was marked by a largely unexpected U.S. withdrawal from the decades-long multilateral security and trade equilibrium, which triggered a variety of defensive policy responses around the world. When the U.S. subsequently negotiated, or relented, and materially diluted tariff and other protectionist measures, the monetary, fiscal and reform stimulus already in the pipeline led to solid global economic growth and, as the year progressed, various signs of excess liquidity and speculation. While geopolitics and financial markets exhibited volatility during the year, political, economic and financial constraints reigned in tail risks and, in our view, ultimately resulted in a much more constructive backdrop for EM equities than was envisioned entering the year.

While EM returns were quite impressive for the year, fourth quarter returns were more modest, as China, the largest weight in the Benchmark, suffered a correction and consolidated prior year gains. After a significant summer rally in anticipation of the scheduled October meeting between Presidents Trump and Xi, ostensibly set to de-escalate trade tensions, China equities (particularly technology-related) retreated into the year-end. We believe the market was likely disappointed with a lack of specific reference to the resumption of some form of technology/semiconductor/WFE flow to China, while the U.S. did make specific reference to the resumption of rare earth metal exports from China. We were undeterred and not surprised by the lack of detail in the initial read-outs, given the political sensitivities, believing there would ultimately be further signs of improvement as part of the detente. As we stand in early 2026, such signs have emerged in recent weeks, and Chinese equities tied to AI/data centers, robotics, semiconductors, and technology in general are recovering. We continue to believe that global investors are underestimating the capabilities and potential of China’s emerging technology/AI ecosystem, which appears particularly advantaged in terms of power supply and cost, open-source large language models, and overall capital requirements.

On this point, during the quarter, the U.S.-based hyperscaler capex commitments continued to rise, with an estimated $550 billion to be spent in 2026 on AI data center (AIDC) development (up from earlier estimates closer to $450 billion). This arms race has captivated the attention of global investors while dominating equity market returns, though during the quarter we believe some yellow flags have surfaced. First, Google/Gemini’s momentum and market share gains vs. OpenAI/ChatGPT, while relying on lower cost TPUs, has raised questions around the sustainability of competitive advantage and NVIDIA’s longer-term market share and pricing power. Second, this uncertainty may challenge what has been a largely open-ended debt and equity funding environment for AIDC development, which calls into question whether current expectations for over $3.0 trillion in cumulative capex through 2030 will be met. While we do not have a particular view, we simply note that expectations are high, and that given the current S&P 500 Index weighting and disproportionate share of global equity portfolios represented by this broader U.S. AI ecosystem, any downward estimate revision would likely result in further outperformance by non-U.S. equities.

Just a few days into the new year, the U.S. conducted a military operation in Venezuela termed “Operation Resolve,” which involved extracting sitting President Nicolas Maduro and his wife and transporting them to the U.S., where they had been indicted on multiple charges. This operation evidences the Trump Administration’s foreign policy pivot away from global/multilateral peace, security, and trade towards an “America First” agenda, with an emphasis on bilateral negotiations, raw power, and the Monroe Doctrine, prioritizing the consolidation of U.S. interests within its “sphere of influence” in the Western Hemisphere. In our view, coupled with its previous and unconventional moves regarding Europe/NATO and apparent appeasement of Russia’s pursuit of territory from the Ukraine, we believe the weight of evidence likely points to less direct intervention in Russia and China’s respective spheres of influence. Both Russia and China have been conspicuously quiet in the aftermath of the U.S. operation, which would represent a direct affront, and we believe this silence may signal that the recent détente between the U.S. and China, with a priority around improving trade and mutual economic benefit in the near/intermediate term, remains the base case. We currently remain of the view that further signs of technology/semiconductor flow to China, in exchange for assurances from China on rare earths, Taiwan abeyance, increased imports and potentially investment in U.S.-based manufacturing is likely. Further, we are intrigued by the U.S. emphasis on the Monroe Doctrine and believe that any wholesale “rightward shift” by Latam countries could unlock material gains in the region’s bonds, equities, and currencies as risk premium would likely materially adjust.

We see solid global economic and market performance as we enter the new year as an indication that financial conditions remain constructive. The U.S. Federal Reserve (the Fed) confirmed a global central bank easing cycle during the third quarter of 2025, with additional rate cuts anticipated. Last year, authorities around the globe rolled out monetary, fiscal, and reform measures as emergency/insurance policies out of fear of the impact of aggressive U.S. trade policy. While in most cases the threat was later dialed down as a byproduct of both bilateral trade negotiations and political and economic constraints, the insurance policy support remained in the pipeline. This led to better-than-expected global economic and earnings momentum, and by late in the year, various signs of robust liquidity, if not exuberance. In the U.S., the Trump Administration has shifted emphasis towards this year’s mid-term elections, also sparking incremental fiscal and policy easing as well as ongoing “national service” by large corporates. We believe 2026 could likely represent a major test of Fed independence, as we are getting late in a global economic expansion cycle, implying less slack in the system, with the forward-looking path for inflation expectations in our view more likely higher than lower. Normally, this would trigger a more hawkish Fed, though should this scenario present in the year ahead, a yet to be determined new Fed Chairman may have difficulty in delivering on expectations given the Trump Administration’s clear bias for lower rates. Should inflation tick up and longer-term bond yields rise/steepen, any waiver by the Fed would near certainly set off a new round of dollar weakness, and if history is any guide, extend or amplify non-U.S. equity outperformance.

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

Sincerely,