Baron Fifth Avenue Growth Fund | Q2 2025

Dear Baron Fifth Avenue Growth Fund Shareholder:

We had a great quarter.

Baron Fifth Avenue Growth Fund® (the Fund) gained 24.9% (Institutional Shares) during the second quarter, which compares to gains of 17.8% for the Russell 1000 Growth Index (R1KG) and 10.9% for the S&P 500 Index (SPX), the Fund’s benchmarks.

Year to date, the Fund is up 8.2%, compared to gains of 6.1% and 6.2% for the Fund’s benchmarks, respectively.

After a blockbuster two-year run for U.S. large-cap growth equities that saw the R1KG appreciate over 90%, we thought 2025 was shaping up as a challenging year. Tariffs, DOGE, the pace of interest rate cuts (or lack thereof), the geopolitical uncertainty the world over – were all pointing towards a wide range of outcomes and increased volatility. We pretty much got that in the first quarter, which ended with a broad-based pullback across all market caps. But then, sometime early in the second quarter, the script flipped. We cannot tell you why (which is not at all unusual for us), because tariffs, DOGE, the pace of interest rate cuts (or lack thereof), and the geopolitical uncertainty the world over – remain largely unchanged as far as we can see. Nevertheless, the Fund had an excellent quarter in both absolute and relative terms, posting a 24.9% gain. From the start of 2023, when the market recovery began, the Fund has appreciated 134.8% which compares favorably to the returns of 101.9% for R1KG, and 67.7% for SPX, the Fund’s benchmarks.

Relative to the R1KG Index, the Fund’s outperformance in the quarter was driven entirely by stock selection, which contributed 743bps, while sector allocation detracted modestly. Performance was excellent in Information Technology (IT) and Consumer Discretionary, where our holdings appreciated 34.0% and 23.6%, respectively, compared to gains of 25.0% and 14.2%, respectively, for the Index, though the relative allocation to both sectors was a modest headwind. Stock selection was also strong in Financials (+19.6% versus +5.9%) and in Health Care (+5.2% versus -2.0%), while our Industrials holdings underperformed. Not holding investments in Consumer Staples, Energy, Materials, and Real Estate contributed 104bps to relative returns.

From an absolute return and stock specific perspective, the second quarter saw a V-shaped recovery as many of our biggest losers from the March quarter were among the biggest winners in June. NVIDIA was our largest detractor, costing the Fund 176bps in the March quarter, and it was our largest contributor this quarter, adding 407bps. Amazon and ServiceNow, which were among our worst detractors in the first quarter (-223bps combined), bounced back nicely in the second quarter, contributing 252bps combined. Overall, we had 25 gainers against only 4 losers and none of the losers were large enough to matter (all down mid single-digits performance wise). NVIDIA, Cloudflare, MercadoLibre (MELI), Snowflake, Taiwan Semiconductor (TSMC), Coupang, Datadog, CrowdStrike, Trade Desk, and Grail all appreciated over 30% during the quarter, and were among 20 Fund holdings (out of 32) that appreciated more than the R1KG.

Despite a strong market recovery, investors continue to be hyper-focused on the day-to-day news flow. The significant drawdowns experienced around “Liberation Day” and the subsequent recovery to new highs are the most recent examples of the stock market’s momentous volatility and short termism. We can state with a high degree of confidence that the fundamentals of our businesses, while not immune, are much more stable. Many of our core holdings saw significant declines in their stock prices in the first half of this year, while their business fundamentals AND our estimates of their intrinsic values continued to rise. A couple of glaring examples:

• NVIDIA’s stock price had a 37% drawdown during the first half of 2025. The “DeepSeek moment” was misunderstood or misinterpreted by investors. We argued in the last quarterly letter that it will actually drive an expansion in demand for inference reasoning AI. On its most recent earnings call, Microsoft’s CEO stated: “We processed over 100 trillion tokens this quarter, up 5x year-over-year, including a record 50 trillion tokens last month alone.” After spending the better part of a week at NVIDIA’s developer conference (you can read details about it in the last quarterly letter) we were all bulled up with “a line of sight to projects requiring tens of gigawatts of NVIDIA AI infrastructure in the not-too-distant future⁵” with every gigawatt representing a “$40 billion to $50 billion opportunity for NVIDIA.” Finally, scaling laws have expanded from the original pre-training scaling (the model’s quality improves with more compute, more data, and a larger model size) to post-training (teaching models to be more task-specific) and time-test scaling (thinking longer on more complex questions) – which all drive demand for graphics processing units (GPUs). Our conviction that NVIDIA is at the epicenter of the most transformative technology of our lifetime (which is saying a lot since we have all experienced the Internet, the Smart phone, and the Cloud) remains unshaken.
• Samsara had a maximum drawdown of 45% during the first half, despite continuing to report robust financial results with annualized recurring revenue (ARR) growth of 31% (in constant-currency) and operating margins of 13.9%, up over 1,150bps year-on-year. The company also raised its annual guidance across all metrics. Tariff disruption notwithstanding, Samsara grew net new ARR (NNARR) by 8% (versus the aggregate public software industry NNARR declining 29% over the same period) and delivered the highest organic growth rate (32% year-over-year) of any public software-as-a-service (SaaS) company again, confirming the company’s strong business resilience and continued market share gains. Samsara ended the quarter with a record pipeline, while continuing to expand with existing customers, who adopt increasingly more of its products (38% of core customers now use three or more products, up from 34% a year ago). Finally, at its annual User Conference, Samsara introduced a host of new products, including AI Predictive Maintenance, AI Safety Intelligence, and Commercial Routing, seeding significant growth opportunities for the future.
• Shares of Cloudflare had a maximum drawdown of 45% during the first half, while we believe the intrinsic value of the business has only grown. Cloudflare is rapidly becoming a more important vendor for its customers with $1 million and $5 million customers growing 48% and 54% year-over-year, respectively, while the company also booked a milestone contract of over $130 million during the quarter. The company is seeing strong early success with its AI offering enabling customers to run AI models on top of Cloudflare’s global network. Cloudflare has a strategic advantage in having its network closer to end consumers, reducing latency which is critical for AI inferencing. Cloudflare Workers AI inference requests were up “nearly 4,000% year-on-year.” While the stock is expensive by any measure, we continue to believe that Cloudflare is an important company whose fundamentals continue to get stronger.
• Datadog’s shares had a correction of 43% during the first half. At the same time, we judged their reported financial results to be strong and improving. The company demonstrated success expanding into the lucrative enterprise segment with new logo annual contract value up 70% year-on-year and gross retention of existing logos exceeding 99%. Datadog is seeing success with AI native companies, serving 8 of the top 10 AI companies including OpenAI, Anthropic, Cursor, Scale AI, and Replit. Four of these customers tripled spending with Datadog in 2024. Datadog’s innovation velocity helps strengthen its platform, and underpins a long duration of growth, supported by continual annual share gains.

Separating Signal from Noise and Alpha versus Beta

We live in the Information Age. It has become increasingly more challenging to filter out irrelevant information directed at us from every conceivable channel. It is estimated that the amount of information created every two days is equivalent to all information created from the beginning of human civilization to 2003⁶ and that data is doubling every three years⁷.

On the one hand, having more data is great! Accurate, high-quality data enables better analysis and expands our circle of competence. We can learn new subjects and master new areas faster, and in more detail, than ever before, which expands our opportunity set across all market caps and geographies. On the other hand, the constant flow of information creates significant risks. It is time consuming (just going over emails probably detracts as much value as it adds), it can create a false sense of confidence (leading to confirmation bias and general overconfidence), and it makes it harder to separate the signal from the noise – which is so critical in decision making. In short, the wide availability of high-quality data makes the investing world more competitive, while information overload makes it even harder to earn Alpha.

Long-term investors must hone their ability to separate the signal from the noise. During periods of heightened market and stock price volatility it is easy to confuse the deterioration in the sentiment and the overall investing environment for a structural change in companies’ fundamentals. It is harder to have the courage of conviction and not to overreact to news that has clear short-term consequences but uncertain long-term effects. We try to filter out the noise by focusing our time and research on what matters for the long-term value creation of the business. How unique is it? Does it solve real and difficult problems for its customers? Is it a beneficiary of disruptive change? How big is the opportunity? Is it run by a management team that thinks and acts like long-term owners of the business? Does it have competitive advantages that are sustainable? Does it demonstrate attractive unit economics? Does it have pricing power? And so on, and so forth…

We believe that over the last 25 years, overemphasis of short-term, news driven, macro-focused, data points and events caused many investors to sell the biggest winners of our generation too early, or to avoid them altogether. Many investors choose to keep away from highly volatile stocks in an effort to “manage” market volatility or to lower the Beta of a portfolio. It certainly paid off when the dotcom bubble burst and Amazon’s stock went to 30 cents (split adjusted), losing more than 94% of its value. But it did not hold up to the test of time with Amazon trading at $225 per share now. Since its IPO in January 1999, NVIDIA lost more than half of its value SEVEN times, before becoming the most valuable company on the planet worth over $4 trillion. Amazon had four such drawdowns but is up 10-fold in the last decade, while MELI had two declines of more than 50% and is up 18 times over the same timeframe. Many of our investments have endured and will likely continue to endure heightened volatility on their journeys. Cloudflare (up 12 times since the IPO less than six years ago), Intuitive Surgical (10 times over the last decade), argenx (33 times since IPO eight years ago), and of course, Tesla, a super volatile stock since its public debut in June of 2010, up nearly 300 times since then. Over our 30-plus years of allocating capital, these are just a handful of examples where we have experienced significant short-term beta, translating into real long-term Alpha.

Once again, we believe the range of outcomes is as wide as we have seen in a long time, and that means extreme market volatility is likely on tap. Once again, we have looked into what we could potentially do to mitigate its impact on the portfolio, and once again, we have concluded that it would lead to exchanging opportunities to generate significant Alpha over full market cycles for efforts to reduce the Fund’s short-term volatility. An exchange we are not willing to make. We do not have a crystal ball or any particular insight into how the economy and the markets will react to this current bout of fear, uncertainty, and doubt. Fear drives markets over the short term (both down, AND up), but it is fundamentals that drive wealth creation over time. Really big opportunities come if you are willing to invest when other people are not!

NVIDIA Corporation is a fabless semiconductor company specializing in compute and networking platforms for accelerated computing. Its dominant position in AI infrastructure with a comprehensive portfolio spanning GPUs, systems, software, and high-performance networking solutions, continues to drive strong performance. Shares rose 45.8% during the quarter as increasing data points emerged that the AI cluster buildout is likely to be durable, with NVIDIA maintaining its leadership, driven by scaling laws expanding outside of pre-training, demand for reasoning-based inference accelerating following the DeepSeek moment, and AI factory investments starting to materialize. The company also removed all AI-related revenue contributions from China from its guidance going forward, effectively de-risking that part of the business. We maintain a long-term constructive view, as leading AI labs show growing confidence in their ability to achieve human-level intelligence and deploy AI products in enterprise settings. All the industries bottlenecked by intelligence will leverage AI, unlocking trillions of dollars in value. Most of these AI workloads will be supported by large language models running in data centers. NVIDIA is uniquely positioned to power this transformation through its full-stack approach, spanning silicon, systems, software, and developer ecosystem, and hence its competitive moat continues to widen.

Cloudflare, Inc. offers enhanced security and performance for websites, applications, and SaaS, and is increasingly well positioned to help power AI-enabled applications at the edge. Shares increased 74.1% after Cloudflare reported solid quarterly results, with revenues rising 27% year-over-year, slightly above expectations. Results were boosted by a $130 million-plus deal, the largest in the company’s history, driven by demand for its Workers platform, which allows developers to build and deploy custom applications at the edge for faster performance. The deal represented a competitive win, with the customer choosing Cloudflare over a major hyperscaler due to faster development time and better total cost of ownership. Cloudflare also continued to improve its go-to-market execution, including stronger sales productivity, improved pipeline attainment, and solid customer growth. Management noted record additions of customers spending over $1 million and $5 million annually, while churn remained stable and dollar-based net retention held steady at 111%. We continue to have high conviction in Cloudflare, given its differentiated platform, capable management team, and significant long-term growth opportunity.

Shares of Meta Platforms, Inc., the world’s largest social network, rose 28.1% this quarter on impressive top-line growth with revenues growing 19% year-on-year in constant currency and solid forward guidance. Meta is already seeing returns on its AI investments across its core business, with improved content recommendations driving increased time spent on the platform, and enhanced ad targeting and ranking delivering higher conversion rates and stronger return on ad spend. Our industry checks also suggest strong advertiser adoption and satisfaction, including in newer areas such as AI-powered creative tools and business messaging. Meta continues to manage costs effectively and remains focused on profitable growth. Over the long term, we believe Meta is well positioned to leverage its leadership in mobile advertising, massive user base, innovative culture, strength in generative AI research, and technological scale, with additional monetization opportunities ahead.

Argenx SE is a biotechnology company best known for developing Vyvgart, the leading FcRn inhibitor for the treatment of autoimmune conditions. Shares declined 6.8% after Q1 Vyvgart sales came in below elevated investor expectations due to a combination of seasonal factors (such as insurance reverification) and higher Medicare Part D utilization and associated discounts. Our conversations with management and neurologists continue to reinforce Vyvgart’s value as an important treatment option with strong long-term growth potential. The drug continues to launch well in both generalized myasthenia gravis and chronic inflammatory demyelinating polyneuropathy. Over time, we expect Vyvgart to demonstrate efficacy across an expanding range of autoantibody-driven autoimmune conditions, supported by encouraging Phase 2 myositis data recently presented by argenx at a major medical conference.

Eli Lilly and Company is a global pharmaceutical company currently best known for its GLP-1 treatments for diabetes and obesity. Shares declined 5.9% in Q2 after competitor Novo Nordisk signed a formulary deal with CVS, prompting investor concerns about a potential price war. Based on our discussions with both management teams and our review of historical formulary agreements, we believe neither company has an incentive to start a price war. Regulatory uncertainty, including potential sector tariffs and “Most Favored Nation” drug pricing risks, also weighed on investor sentiment. We believe these risks are manageable and view Lilly as one of the least exposed pharmaceutical companies to such policy changes. We continue to think Mounjaro and Zepbound are important treatments and expect Lilly to remain a leader in next-generation therapies that are more effective and convenient, including oral orforglipron, which demonstrated strong Phase 3 results in diabetes. Additional obesity-related data is expected later this year. In our view, GLP-1 adoption is still in its early innings, and we believe continued uptake will drive a doubling of Lilly’s revenues by 2030.

Atlassian Corporation is a market-leading provider of planning and team collaboration software. Shares declined 4.3% following softer-than-expected cloud revenue growth of approximately 25% year-over-year, down from nearly 30% in the prior quarter. Management attributed the slowdown to delayed deal timing in the enterprise segment, while expansion among small- and mid-sized business customers remained stable. We retain conviction in the stock. Paid seat expansion and customer migrations exceeded expectations, and metrics like product cross-sell, customer retention, premium plan adoption, and new customer interest were broadly in line with estimates. We believe cloud growth can improve over the next year as remaining migration blockers are resolved. To date, over 85% of customers transitioning from data center deployments to the cloud have upgraded to higher-priced product tiers, resulting in pricing uplift of 40% to 80%. Feedback from partners and customers at Atlassian’s 2025 user conference suggests these uplifts could be even greater among the largest accounts. We continue to view Atlassian favorably, given its strong product positioning and significant long-term growth opportunity in cloud. We also believe that its unique data with its teamwork graph that is comprised of deep data into how work is being done in companies across teams, should enable it to benefit from AI, as it utilizes the density of its data to increasingly power AI solutions for its customers in Atlassian Intelligence and Rovo.

The Fund is constructed on a bottom-up basis with the quality of ideas and level of conviction playing the most significant role in determining the size of each investment. Sector weights tend to be an outcome of the portfolio construction process and are not meant to indicate a positive or a negative view.

As of June 30, 2025, the top 10 holdings represented 58.0% of the Fund’s net assets, and the top 20 represented 85.0%. The total number of investments in the portfolio was 32 at the end of the second quarter.

IT, Consumer Discretionary, Communication Services, Health Care, and Financials made up 98.0% of net assets. The remaining 2% was made up of SpaceX and GM Cruise, two of our three private investments classified as Industrials (the other one is xAI which is included in Communication Services), and cash.

During the second quarter, we took advantage of market volatility to add to eight existing positions: Eli Lilly, Samsara, Illumina, TSMC, ASML, Datadog, KKR, and Trade Desk. We funded the purchases by reducing 13 other holdings where we felt the need to manage position sizing or our perceived risk/reward had become less attractive.

Our largest addition in the quarter was Eli Lilly and Company. Lilly is a global pharmaceutical company best known for its GLP-1 medications for diabetes and obesity. The most recent generation of GLP-1 drugs (Mounjaro and Zepbound are Lilly’s brands) offer not only superb blood sugar control for diabetics, but can also drive over 20% weight loss and likely improve cardiovascular outcomes in both diabetic and non-diabetic obese patients. These drugs have the potential to prevent a number of weight-related comorbidities and to transform patients' lives. Of the more than 130 million people in the U.S. who have diabetes or obesity, we estimate only approximately 9 million patients are on FDA-approved GLP-1 drugs today. We think these drugs will continue to launch well as awareness and insurance coverage grows, and as Lilly and its competitors generate more data to show the dramatic impact GLP-1 drugs can have on medical comorbidities. We think that these drugs will become the standard of care in a $150 billion-plus category. Lilly is the leader in this market, setting a high efficacy bar, and continuing to innovate and develop next-generation medications that are more effective and more convenient. Mounjaro and Zepbound are the most effective drugs approved today and now have a majority share of the market. We are excited about the opportunity for once-daily oral orforglipron, which recently showed Phase 3 data in type 2 diabetes that rivaled Novo Nordisk's injectable Ozempic. We expect Phase 3 orforglipron in obesity this summer to also be competitive with Novo Nordisk's injectable Wegovy. Beyond orforglipron, Lilly is also studying a high efficacy injectable (retatrutide) in Phase 3 that we think will drive 25% weight loss, an amylin hormone analogue (eloralintide) that can be combined with Zepbound in Phase 2, and a muscle-preserving drug, bimagrumab, which can also be combined with Zepbound, in Phase 2. We believe this market is in the early innings of uptake, and the adoption of GLP-1s will drive Lilly to double its total revenues by 2030, and that Lilly has the pipeline of drugs to sustain its leadership position for years to come.

Our second largest addition in the quarter was Samsara Inc., which provides a cloud software platform for commercial vehicle telematics, video-based driver safety, driver workflow automation, and industrial equipment monitoring. Its software collects and analyzes data from sensors and cameras installed in its customers’ commercial trucks, construction equipment, warehouses, and other assets, helping companies visualize and improve the state of their operations. We took advantage of the sell-off in the stock, which declined from a peak of $61 in February into the $30s on investor concerns related to the potential headwinds from tariffs and a market downturn, to add to our investment. Samsara has proven to be resilient during past downturns due to its high and quick ROI to customers and its exposure to essential services (e.g. waste management and food delivery). Even if there was a cyclical impact to the business, we believe the company’s uniqueness and long runway for growth create an opportunity to invest in a great business at an attractive valuation for investors with a long enough time horizon.

We also attended Samsara’s annual User Conference and Analyst Day in San Diego in July where we spoke with dozens of customers. These conversations reinforced our thesis that Samsara’s leading video-based safety monitoring continues to drive higher win rates against telematics-only competitors, and that Samsara is reaching a data scale that makes it tough for any video-based safety alternative to catch up. At the Analyst Day, management noted that Samsara has “now built one of the world’s largest operational data assets with over 14 trillion data points processed annually, representing over 50% year-over-year growth.” These data points span 80 billion miles traveled (25% year-over-year growth) across 99% of the major roads in the U.S., and 120 billion API calls (50% year-over-year growth). As its data moat widens, Samsara continues to drive better safety, cost savings, and financial outcomes for customers. For example, the company prevented 250,000 accidents, digitized 300 million workflows, and reduced 3 billion pounds of CO2 emissions in fiscal year 2025 alone. Moreover, we believe that Samsara has a long runway for growth as video-based safety products are currently attached to just 10% of total commercial vehicles on the road, and new growth drivers like asset tags and AI-based Samsara Intelligence are just getting started.

We added to our position in the leading DNA sequencing platform, Illumina, Inc. Illumina is the dominant next generation sequencing tools provider, a technique that enables massive amounts of genetic analysis in both research and clinical diagnosis. The stock has come under heavy pressure recently due to a confluence of factors including: 1) Pricing pressure from transition to the next-gen ‘X’ platform; 2) China business at risk after getting caught up in U.S./China trade tensions; 3) The new administration’s focus on cutting National Institutes of Health (NIH) funding for life sciences; and 4) Roche’s competitive launch coming next year.

We believe, however, that the risk/reward is quite attractive for long-term investors. The transition to the new ‘X’ platform masks strong underlying growth of 30% to 40% in recent quarters due to the lower per-genome price – and historically lowering the price of sequencing has been a positive driver of industry growth despite volatility during transition periods; China represents only 5% of the business; and NIH is only 10% to 12%. The new Roche tool has not been launched yet – but we believe that given the long runway for growth in the industry and Illumina’s strong end-to-end competitive moat, it should maintain a leading positioning in the market.

Fewer than 1% of human beings and 0.1% of earthly species have been sequenced to date. We believe the opportunity is over $40 billion just within the clinical diagnostics segment (with the research market representing an additional multi-billion-dollar opportunity), driven by new ways of testing for disease like liquid biopsy (blood-based testing for cancer). Even in a scenario in which Illumina loses ground significantly compared to their current monopoly position due to competition from the likes of Roche, capturing just 50% of this total addressable market would imply a $20 billion revenue opportunity (about five times the size of the entire business in fiscal year 2024.). Nevertheless, we believe that Illumina is well positioned to maintain their market share at high levels thanks to the high quality of its offering, its end-to-end workflow and the ecosystem around its offering, from sample prep to sequencing and bioinformatic analytics. Illumina’s platform is especially sticky in clinical diagnostics, which face regulatory hurdles and high switching costs. Over a 10-plus year time horizon, we believe that the U.S. will continue to be the premier location for life science research and innovation. And that this innovation in the lab will translate into biopharma and clinical applications in increasingly impactful ways. Demographic trends mean populations will continue to age and require more care, and genetic sequencing will become an increasingly important part of personalized diagnostics and medicine.

We continued to build our investment in Taiwan Semiconductor Manufacturing Company Limited. We believe that while near-term uncertainty due to tariffs and macro remains heightened, TSMC’s competitive positioning in leading-edge semiconductor manufacturing remains unmatched. We also believe that TSMC will benefit from a long duration of growth as the adoption of AI proliferates across industries – and the recent developments in the space which we discussed above (e.g., removal of the AI Diffusion rule, accelerated adoption of reasoning-based AI inference, and the expansion of scaling laws) will serve to further accelerate the adoption of AI. We also like the fact that TSMC will benefit regardless of the ultimate market share split between GPUs and application-specific integrated circuits. It’s the ultimate ‘arms dealer’ to AI.

We also added to ASML Holding N.V. ASML designs and manufactures photolithography equipment for semiconductor production with leading market share, including being the only company selling extreme ultra-violet (EUV) lithography tools, which are critical for enabling continued improvement in semiconductor chip performance over time. While the stock has been volatile due to cyclical near-term demand concerns, we do not believe there has been any change to ASML’s intrinsic value or longer-term growth opportunity as the company remains the only provider of EUV technology critical to enabling continued node migration in leading edge semiconductors to drive more energy efficient and performant processing capabilities fueled by demand for AI. ASML also continues to invest in improving the productivity of its tools to drive down the cost per wafer layer exposure, which will also continue support an increase in the layer count in leading edge logic and memory semiconductors over time, driving a long duration of growth.

While we continue to believe that Cloudflare, Inc., ServiceNow, Inc., Intuitive Surgical, Inc., Snowflake Inc., and Veeva Systems Inc. are high-quality businesses with significant opportunities ahead, we took advantage of market volatility during the quarter to manage position sizing and to add to other attractive long-term ideas.