Baron Growth Fund | Q3 2025

Baron Growth Fund® (the Fund) declined 8.69% (Institutional Shares) for the quarter ended September 30, 2025. This trailed the return of the Fund’s benchmark, the Russell 2000 Growth Index (the Benchmark), which gained 12.19% for the quarter. The Russell 3000 Index, which measures the performance of the 3,000 largest publicly traded U.S. companies, gained 8.18% for the quarter.

Our strategy of owning a portfolio of competitively advantaged smaller and medium-sized growth businesses remained out of favor this quarter. Investors have aggressively reduced their exposure to the high-quality stocks (as defined by MSCI Barra) that exclusively populate our Fund to bid up relatively more volatile, riskier stocks. We estimate that this has been the single worst six-month period for high-quality stocks since data started being tracked in 1975. While our performance has and will be variable across quarters, we are confident that our focus on owning a portfolio of sustainably differentiated businesses with exceptional management teams and owning them for the long term will continue to generate attractive returns over time.

The Fund has endured an unusually challenging six-month period. Since March 31, the Fund has declined (7.90%), which compares to a 25.62% gain in the Benchmark. We attribute approximately two-thirds of our relative underperformance to our focus on owning leading businesses in their sectors, which has been the foundation of our strategy since inception. We attribute around 20% of our relative underperformance to several positions where the market’s assessment of AI risk differed from our own. We attribute the residual 15% of our underperformance to a combination of industry exposures and other factors that tend to fluctuate across quarters.

We believe that the largest positions in the portfolio, such as Arch Capital Group Ltd., MSCI Inc., and CoStar Group, Inc., epitomize the attributes that we search for when allocating capital in the Fund. These businesses, like all of those owned by the Fund, boast characteristics such as large and growing addressable markets, favorable secular trends, and high and growing barriers to entry. These companies have developed exemplary business models with durable revenue growth prospects, leverageable margin structures, and robust free cash flow conversion. All are run by uniquely talented management teams that have demonstrated operational excellence over time. The 24 names currently owned by the Fund possess similar attributes, creating a portfolio that is exclusively composed of very profitable growth businesses.

We believe that our practice of exclusively investing in businesses with superior characteristics has been the primary driver of the Fund’s favorable long-term results, which has exceeded the performance of the Benchmark by 372bps annually since inception. However, the strategy has not worked in all periods and in all market types. The Fund has tended to outperform in what we would consider “normal” markets, or markets that appreciate less than 15%, as well as in declining markets. However, it has been more challenging for the Fund to outperform in “up” markets, which we define as markets that rise more than 15%. This is because such markets tend to be driven by relatively more volatile, and relatively riskier stocks, as measured by beta and residual volatility. These are not attributes that are well represented in our portfolio.

The current market is characterized by these same attributes. Investors have been selling higher-quality investments like those that we own to buy riskier stocks. The magnitude of this shift has been historically notable. According to data from MSCI Barra, the six months ended September 30, 2025 represent the single worst period for earnings quality since 1975, which is when data first became available. Conversely, the positive performance of beta and residual volatility for the six-month period are in the 2nd and 4th percentiles, respectively, since the Fund’s inception. The few instances where beta and residual volatility have performed better occurred mostly during the dotcom and post-COVID rallies.

We also experienced declines in several stocks where the market’s assessment of AI’s impact differed from our own. Most notable was Gartner, Inc., where shares declined significantly after the company reported its second quarter results. Contract value growth, a leading indicator of the company’s future revenue, decelerated to 4.9% from 6.7% in the prior quarter. 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 for Gartner.

While the market has linked Gartner’s growth deceleration to concerns about the impact of AI on its 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 a tangible 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 in-person interactions with an analyst or former CIO to serve as a partner to help guide decisions. We believe that AI is presently a tailwind for Gartner, as every company in the world seeks insights and assistance in understanding the risks and opportunities posed by AI.

As a result, we expect growth trends to improve next year as U.S. public sector headwinds abate and sales force productivity strengthens. 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 added an additional $1 billion to its outstanding share repurchase authorization in early September. Given approximately $2 billion of cash on its balance sheet, ample debt capacity, and ongoing free cash flow generation, we believe the company could potentially repurchase nearly 20% of its market cap over the next 18 months.

The sustainably differentiated businesses that we already own have become more attractively valued as their stock prices failed to keep pace with their business growth. We have actively elected to concentrate our exposure to these companies with the view that earnings can continue to grow at faster than expected rates for longer than expected periods of time. As a result, we believe that the portfolio generates higher margins, cash flow, and returns on capital compared to its historical composition and our Benchmark, while targeting the same attractive growth profile that we have always pursued. Specifically, the operating margin of the portfolio has improved to 27.6%, which is 640bps above our historical average and 1,880bps above our Benchmark. We do not presently own any businesses that are unprofitable. Similarly, the free cash flow margin of the Fund has expanded to 29.6%, which is 1,290bps above our historical average and 1,940bps above the Benchmark. Finally, the return on invested capital (ROIC) of the portfolio has risen to 18.6%, which is 530bps above our historical average. The average ROIC of our Benchmark is dismal at (0.6%). We are optimistic that investors will eventually recognize the attractive opportunities that these businesses offer, leading to higher valuations and compelling returns for the Fund.

Despite recent challenges, we are optimistic about the outlook for our strategy. Since the Fund’s inception, we have identified three periods that we consider to be analogous to the current market environment. Those periods include the dot-com bubble, a period from September 2002 through January 2004, and the post-COVID rally in late 2020. During all three periods, the Russell 2000 Growth Index rose sharply over a relatively brief time and our underperformance was driven in large part by style-related headwinds. Those three periods lasted for an average of 10 months, and we underperformed by an average of 27% annualized, or 31% cumulatively. Encouragingly, during the subsequent periods of outperformance, the Fund outperformed for an average of 27 months, and outperformed by an average of 37% cumulatively. While we don’t know when our style will again be in favor, we are confident that our strategy of owning a portfolio of businesses with attractive growth rates, large addressable markets, and durable competitive advantages will continue to generate attractive returns over time.

The table below groups our portfolio based on our assessment of the attributes that best characterize each investment. While this does not perfectly correlate to the Global Industry Classification Standard, the industry standard nomenclature, we believe it provides added transparency into our thought process.

* Individual weights may not sum to displayed total due to rounding.
** Represents the blended return of all share classes of the Fund.
Sources: Baron Capital, FTSE Russell, and FactSet PA.

Our investments in Real/Irreplaceable Assets, Core Growth, and Financials represent between 18.2% and 54.3% of the Fund’s net assets, and aggregate to 96.3%. Another 1.7% of net assets is invested in businesses that we consider to be Disruptive Growth businesses, which we believe offer greater growth potential, albeit with more risk relative to other investments. We believe this balance appropriately reflects our goal to generate superior returns over time with less risk than the Benchmark. As shown in the table above, our disruptive growth investments outperformed the Benchmark, while the other three categories underperformed due to their higher quality and lower perceived risk, which were temporarily out of favor.

Performance data quoted represents past performance. Past performance is no guarantee of future results. The indexes are unmanaged. Index performance is not Fund performance. Investors cannot invest directly in an index.

The Fund has meaningfully outperformed its Benchmark over the long term. The Fund has gained 11.82% on an annualized basis since its inception on December 31, 1994, which exceeds that of the Benchmark by 3.72% and the Russell 3000 Index by 0.80%. This represents robust absolute and relative returns across a variety of market environments, driven primarily by favorable stock selection. We attribute this result to not losing money during periods of significant market drawdowns. While the Fund did not make much money from December 31, 1999, through December 31, 2008, a period which includes the highs of the Internet Bubble and the lows of the Financial Panic, it did generate a positive annualized return of 2.46%. Conversely, a hypothetical investment in a fund designed to track the Fund’s Benchmark would have declined in value by 4.71% on an annualized basis over the same time. Similarly, a hypothetical investment in a fund designed to track the Russell 3000 Index would have declined 2.95% annualized. (Please see Performance in Challenging Times table–Millennium Internet Bubble to Financial Panic). From the Financial Panic to present, the Fund generated an annualized return of 13.04%, which has exceeded that of its Benchmark by 1.79% annualized.

We believe that the power of compounding is better demonstrated by viewing these returns in dollar terms. A hypothetical investment of $10,000 in the Fund at its inception on December 31, 1994 would be worth $310,635 on September 30, 2025. This is approximately 2.83 times greater than the $109,739 the same hypothetical investment made in a fund designed to track the Benchmark would be worth, and 25% more than a hypothetical investment in the Russell 3000 Index. Hypothetically, our returns were achieved with approximately 29% less volatility than the Benchmark, as represented by its beta. (Please see Performance in Challenging Times and Performance Characteristics tables.) Importantly, we believe that the returns in the portfolio have come primarily through the compounded growth in the revenue and cash flow of the businesses in which we have invested rather than increases in valuation multiples.

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. remains under pressure, which has continued to hamper aggregate revenue growth. Even so, IDEXX’s excellent execution has enabled the company to maintain strong performance. We believe IDEXX’s competitive trends are outstanding, and we expect new proprietary innovations and field sales force expansion to be meaningful contributors to growth this year. We see increasing evidence that long-term secular trends around pet ownership and pet care spending have structurally accelerated, which should support IDEXX’s long-term growth rate.

Red Rock Resorts, Inc. is a casino owner and operator focused on the Las Vegas Locals market. Shares rose during the quarter as investors reacted positively to incremental visitation from new customers and accelerating spend-per-visit trends, despite concerns about a market slowdown. The company continues to report strong visitation and robust slot and table game play, along with improving activity from uncarded and non-rewards customers. Red Rock is regaining business at its flagship resort following some initial cannibalization from the opening of its Durango property, with management expecting a full recovery next year and trends already improving faster than anticipated. The new property is generating robust returns, and performance across the company’s six core casinos has strengthened as the Las Vegas Locals market absorbs Durango and returns to its historical low-single-digit growth rate. Given the strength of the market, management continues to ramp up capital investment, which we believe should support ongoing revenue and EBITDA growth over the next several years.

FIGS, Inc. designs and sells scrubwear for health care professionals using a digitally native, direct-to-consumer strategy. Shares rose after the company reported better-than-expected quarterly results and raised its revenue and profitability guidance for the remainder of the year. Despite intentionally reducing promotional activity, FIGS achieved nearly 6% revenue growth during the second quarter and delivered stronger-than-expected margin improvement driven by efficiency gains at its new fulfillment center. After several years of industry pressure, the company is experiencing more normalized purchasing and replenishment patterns, supported by product and marketing initiatives that continue to resonate with customers. Looking ahead, we retain conviction in FIGS’ ability to gain share given its high-quality, needs-based products and exposure to the fast-growing U.S. health care industry. We expect continued growth fueled by the company’s efforts to expand its retail footprint, increase business-to-business revenue, and grow internationally.
 

Gartner, Inc., a provider of syndicated research, detracted from performance following disappointing quarterly earnings. Contract value growth, a leading indicator of future revenue, decelerated by approximately 2%. We attribute most of the slowdown to ongoing cost cutting in the U.S. public sector, which represents about 5% of revenue, as well as more challenging business conditions in industries dependent on public-sector funding. In addition, companies with meaningful exposure to tariffs appear to be reducing costs, resulting in longer sales cycles and slightly higher client attrition. While the market expressed concern about the impact of AI on Gartner’s insights business, we see no evidence that this is negatively impacting its value proposition. The company continues to benefit from a vast and expanding set of proprietary data generated through hundreds of thousands of interactions with buyers, sellers, and technology consumers. Gartner bought back approximately $800 million worth of stock in July and August and authorized an additional $1 billion in September, and we expect the company to continue repurchasing shares aggressively to capitalize on the discounted valuation.

FactSet Research Systems Inc. is a leading provider of investment management tools. Shares fell during the quarter due to a combination of industry-wide concerns about AI, uncertainty surrounding the ongoing CEO transition (which prompted a more conservative preliminary fiscal 2026 outlook), and cautious commentary from several financial data and software peers. The company nevertheless reported solid fiscal fourth-quarter 2025 earnings results, its best quarter ever for new sales, and discussed at length how AI is benefiting the business. We retain long-term conviction in FactSet given its large addressable market, strong execution across both new product development and financial results, and robust free cash flow generation.

Morningstar, Inc. is a leading data provider to the investment community. Despite solid second-quarter results, shares declined on slowing organic growth in PitchBook, the company’s private markets data and research platform. The broader financial information services sector also underperformed during the quarter, partly due to factor rotation as investors shifted from high-quality, defensive names to higher-growth stocks. Additionally, investor concerns have emerged that AI and large language models could disrupt the industry. However, we believe Morningstar’s long track record of managed investment data, along with proprietary insights from PitchBook, will remain highly valuable to clients, regardless of how that data is accessed. We expect PitchBook’s growth to reaccelerate over time, particularly as capital markets activity improves. We remain investors in the stock.

We seek to invest in businesses with attractive fundamental characteristics and long-term growth prospects. These attributes include high barriers to entry, sustainable competitive advantages, large and growing addressable markets, and durable secular tailwinds. We invest in business models that have recurring or predictable revenue, generate attractive incremental margins, are cash generative, and are not dependent on third-party financing. We invest with management teams that seek to consistently reinvest into their businesses to raise barriers to entry and pursue long-term profitable growth. We work with our growing team of analysts to conduct iterative and holistic due diligence by interacting with representatives of all company stakeholders. In addition to visiting regularly with a company’s management team, we join our analysts in speaking with a company’s existing and potential customers, key suppliers, and large competitors. We use such findings to refine our understanding of a business and its industry, assess its growth trajectory, test the durability of its competitive advantages, and ultimately reinforce or refute our investment thesis. We do this in an iterative manner and ultimately spend as much time researching long-held positions as we do when researching new potential investments.

We hold investments for the long term. As of September 30, 2025, our weighted average holding period was 18.7 years. This strategy is dramatically longer than most other small-cap growth funds, which, according to Morningstar, turn over about 67% of their portfolios annually based on an average for the last three years. The Fund’s portfolio is designed to significantly outperform over the long term. Accordingly, it is much different than other funds that align more closely to index compositions. The portfolio’s 10 largest positions have a weighted average holding period of 20.1 years, ranging from an 8.8-year investment in Kinsale Capital Group, Inc. to investments in Choice Hotels International, Inc. and Vail Resorts, Inc. that are approaching 29 years. We have held 17 investments, representing 83.6% of the Fund’s net assets, for more than 10 years. We have held 7 investments, representing 14.4% of the Fund’s net assets, for fewer than 10 years. We believe that Table VII and Table VIII quantify the merits of our long-term holding philosophy.

The cohort of investments that we have held for more than 10 years earned a weighted average annualized rate of return of 15.5% since we first purchased them. This exceeded the performance of the Fund’s Benchmark by 6.7% annualized. Two of these investments have achieved annualized returns that exceeded the Benchmark by more than 10% per year.

The cohort of investments that we have held for fewer than 10 years has returned 25.2% annually on a weighted average basis since our initial purchase, exceeding the Benchmark by 15.4% annualized. Two of these investments have achieved annualized returns that exceeded the Benchmark by more than 15% per year.

As of September 30, 2025, we owned 24 investments. The top 10 holdings represented 76.4% of the Fund’s net assets, all of which have been held for a minimum of eight years. All were small-cap businesses at the time of purchase and have become top 10 positions through stock appreciation. Our holdings in these stocks have returned 17.7% annually based on weighted average assets since our initial investment, exceeding the Benchmark by an average of 9.0% annually. We attribute much of this relative outperformance to the superior growth rates and quality exhibited by these businesses relative to the Benchmark average. We believe all our positions offer significant further appreciation potential individually, and that the Fund’s diversification offers potentially better-than-market returns with less risk than the market as measured by beta. Note that diversification cannot guarantee a profit or protect against loss.