Baron Growth Fund | Q4 2025

Baron Growth Fund® (the Fund) declined 2.69% (Institutional Shares) for the quarter ended December 31, 2025. This trailed the return of the Fund’s benchmark, the Russell 2000 Growth Index (the Benchmark), which gained 1.22% for the quarter. The Russell 3000 Index, which measures the performance of the 3,000 largest publicly traded U.S. companies, gained 2.40% for the quarter.

Our strategy of owning a portfolio of competitively advantaged small and medium-sized businesses remained out of favor for most of this quarter. We observed an improvement in early December, as investors showed some renewed enthusiasm for the high-quality stocks (as defined by MSCI Barra) that exclusively populate our Fund. We believe that the valuation of the portfolio is particularly compelling given the significant divergence between its consistent earnings growth and its recent performance.

The Fund endured an unusually challenging year. Since March 31, the Fund declined 10.37%, which compares to a 27.15% gain in the Benchmark. We attribute approximately 60% of our relative underperformance to several positions where the market’s assessment of AI risk differed from our own. We attribute most of the remaining relative underperformance to our focus on owning leading businesses in their sectors, which has been the foundation of our strategy since inception.

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 354 basis points annually since inception. In 2025, this strategy was out of favor, as investors elected to sell higher-quality investments like those that we own to buy riskier stocks. The magnitude of this shift was historically notable. According to data from MSCI Barra, performance for the Earnings Quality factor during the nine-month period ended December 8, 2025 was in the 100th percentile since 1975, which is when data first became available. Conversely, the positive performance of the Beta and Residual Volatility for this period are in the 1st and 6th percentiles, respectively. 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. This cohort, which includes stocks such as Gartner, Inc., CoStar Group, Inc., Clearwater Analytics Holdings, Inc., FactSet Research Systems Inc., MSCI Inc., and Guidewire Software, Inc., presently represents approximately 42% of our portfolio. On average, these stocks declined 15% in 2025 despite producing 10% revenue growth and 15% EPS growth. This significant divergence between growth and stock performance represents valuation compression, primarily due to investor concerns that AI will disrupt these companies in the future. We remain optimistic that all boast vast total addressable markets (TAM), sustainable competitive advantages, and attractive and durable growth prospects. We expect their valuations to expand as these characteristics are again recognized by the market.

We were encouraged by the improvement in our relative performance in December, as our style started to come back into favor and the market began to re-evaluate some of the names that it had previously deemed AI losers. We observed a change in the market in early December following mixed earnings results from AI-high fliers Oracle and Broadcom. From December 8 through December 31, the Fund outperformed by 635 basis points, with the Fund’s style biases, specifically Earnings Quality, Beta, and Residual Volatility being positive drivers of results. The average return for the cohort of stocks in the portfolio that had been deemed AI-losers outperformed the market by approximately 7% over that period. While that condition has not sustained early in 2026, we believe it demonstrates the significant potential for outperformance when our style is in favor.

We believe that the recent performance of Clearwater exemplifies the impact of the “AI narrative” on stock prices and demonstrates the dramatic upside potential of these investments as the market rethinks its assumptions. Clearwater is a leading provider of investment accounting and analytics services delivered via cloud-native software. Clearwater serves a vast TAM that is at least 10 times larger than its current scale. Management has built a remarkable financial model, underpinned by 20% organic revenue growth, margins in the mid-30% range, robust free cash flow generation, and near-perfect retention rates. In late 2024, shares of Clearwater peaked around $33 per share, up almost 80% from its IPO price just three years before. In early 2025, the company announced acquisitions that further expanded its TAM, bolstered its product portfolio, and positioned it to sustain or accelerate its earnings growth over time. Despite bright long-term prospects, investors began to view Clearwater as a generic AI-loser. Shares declined consistently over the course of 2025, reaching a low below $16 in early November. This represented a 50% peak-to-trough decline in share price despite the company growing its EBITDA almost 33% organically and almost 70% when including acquisitions.

Despite the stock’s decline, we assessed the likelihood of portfolio accountants choosing to write their own software as minimal. Clearwater’s financial results continued to prove this out, and the stock began to rally off its lows, although the price remained significantly disconnected from our assessment of fair value. In December, a consortium of private equity firms announced a deal to acquire Clearwater for $8.4 billion, which we view as a high-conviction refutation of the AI-loser narrative. The takeout is coming at a 47% premium to Clearwater’s pre-deal price and an approximately 55% premium to its November low, although we still believe that this price undervalues the business. We are optimistic that all our AI-impacted investments will develop similarly to Clearwater.

We believe that the portfolio is well positioned to generate compelling returns on a go-forward basis. Over time, we believe that the performance of stocks closely tracks the growth of the underlying businesses. In 2025, we estimate that the portfolio grew its earnings by 12% on average. However, the Fund declined 14% for the year, which implies that the portfolio’s aggregate valuation contracted by 26%. This is despite the Fund generating higher margins, cash flow, and returns on capital versus its historical composition and our Benchmark. We are optimistic that as the market’s appreciation for high quality businesses returns and its perspective on AI’s impact more closely aligns with our own, the Fund’s valuation will expand, enhancing the returns we already expect from consistent compounded earnings growth. We believe that the 635 basis points of outperformance generated in just three weeks demonstrates the significant pent-up potential currently embedded in the portfolio.

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 companies represent between 14.4% and 62.1% of the Fund’s net assets, and aggregate to 101.0%. Another 3.6% of net assets are 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 significantly outperformed the Benchmark, while the other three categories underperformed due to their higher quality and lower perceived risk, which were out of favor for much of the quarter.

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 11.62% on an annualized basis since its inception on December 31, 1994, which exceeds that of the Benchmark by 3.54% and the Russell 3000 Index by 0.61%. 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 the Performance in Challenging Times table–Millennium Internet Bubble to Financial Panic).

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 $302,294 on December 31, 2025. This is approximately 2.7 times greater than the $111,073 the same hypothetical investment made in a fund designed to track the Benchmark would be worth, and 19% 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 the 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.

FIGS, Inc. designs and sells scrubwear for health care professionals through a digitally native, direct-to-consumer strategy. Shares rose after the company reported quarterly results that beat expectations and raised its outlook for revenue and profits for the remainder of the year. FIGS’ revenue grew 8% due to robust customer demand for its health care apparel, supported by improving execution and normalizing industry trends. Demand for health care apparel remains largely non-discretionary and replenishment driven. The company also delivered stronger-than-expected profitability, benefiting from meaningful operating leverage while continuing to invest in the business. In addition, FIGS continues to expand its three key growth initiatives: international markets, TEAMS (its enterprise and group ordering business), and retail. Internationally, the company refined its growth strategy and is targeting 60 planned markets by year-end, up from 33. Within TEAMS, FIGS continues to add talent and develop new technology solutions to support growth. In retail, the company plans to open three stores (New York, Houston, and Chicago) with further expansion anticipated into 2026.

Shares of specialty insurer Arch Capital Group Ltd. rose on strong earnings results and active capital management. Third-quarter earnings per share beat Street expectations due to improved underwriting margins and very low catastrophe losses, as there were no landfall hurricanes in the U.S. this season for the first time since 2015. Return on equity of 18% exceeded management’s long-term target, driving 9% growth in book value per share, or 18% growth when adjusted for a special dividend. In addition, a faster pace of share repurchases reduced the share count by 4% year to date, signaling management’s confidence in the company’s valuation. We continue to own the stock due to Arch’s strong management team and our expectation for continued growth in earnings and book value over time.

Veterinary diagnostics leader IDEXX Laboratories, Inc. contributed to performance after again reporting better-than-expected financial results. Foot traffic to veterinary clinics in the U.S. remains modestly negative but is poised to recover over the next several years. Even so, IDEXX’s excellent execution has enabled the company to continue delivering robust performance. We believe IDEXX’s competitive trends are outstanding, and we expect new proprietary innovations—such as InVue, MultiCue, and CancerDX—to be meaningful contributors to growth in the years ahead. We also see increasing evidence that long-term secular trends around pet ownership and pet care spending have structurally accelerated, which should help support IDEXX’s long-term growth rate.

CoStar Group, Inc. is the leading provider of information and marketing services to the commercial and residential real estate industries. Shares fell as the company’s net new sales came in below expectations. The stock has been weighed down by significant growth investment in CoStar’s residential product, where sales performance has remained modest. That said, we are encouraged by improving momentum as the company builds out its dedicated residential sales force, enhances its customer targeting, and potentially benefits from changes in Multiple Listing Service practices. We also expect growth in CoStar’s non-residential business to accelerate as sales productivity ramps and the sales team refocuses on core offerings, a trend likely to be amplified by 20% sales force growth in 2025 alone. We believe the value of CoStar’s core non-residential business exceeds the current share price of the stock, suggesting that investors are ascribing little value to the long-term residential opportunity.

Shares of specialty insurer Kinsale Capital Group, Inc. fell during the quarter due to concerns about moderating growth amid a cyclical slowdown for the property and casualty insurance industry. While third-quarter revenue growth improved sequentially, the pace of improvement was more modest than suggested by monthly data from state insurance commissioners. Nevertheless, Kinsale reported quarterly earnings that exceeded Street expectations, driven by higher earned premiums, very low catastrophe losses, and favorable reserve development. We continue to own the stock because we believe Kinsale is well managed and has a long runway for growth in an attractive segment of the insurance market.

Choice Hotels International, Inc. is a global franchisor of economy and midscale hotels across a portfolio of well-known brands. Shares declined amid investor concerns over continued revenue per available room (RevPAR) weakness at the company’s lower-end brands. However, Choice continues to grow through unit expansion, albeit at a slightly slower pace, by adding larger and more upscale hotels that generate higher RevPAR and carry higher royalty rates, helping offset near-term pressure. Developers are also accelerating new franchise signings with Choice, indicating that the company’s brands continue to resonate. In addition, Choice is managing costs effectively and generating strong cash flow, which it is using to support increased dividend payments, share repurchases, and potential tuck-in acquisitions. The company also maintains a strong balance sheet, with financial leverage below its targeted levels, providing additional flexibility to accelerate share repurchases at current valuation levels.

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 December 31, 2025, our weighted average holding period was 18.6 years. This is dramatically longer than most other small-cap growth funds, which, according to Morningstar, turn over about 72% 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 19.7 years, ranging from an 9.1-year investment in Kinsale Capital Group, Inc. to an investment in Choice Hotels International, Inc. that exceeds 29 years. We have held 12 investments, representing 85.9% of the Fund’s net assets, for more than 10 years. We have held seven investments, representing 18.7% of the Fund’s net assets, for fewer than 10 years. We believe that the two tables below 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 15.8% since we first purchased them. This exceeded the performance of the Fund’s Benchmark by 7.1% 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 23.3% annually on a weighted average basis since our initial purchase, exceeding the Benchmark by 13.4% annualized. Two of these investments have achieved annualized returns that exceeded the Benchmark by more than 10% per year.

As of December 31, 2025, we owned 19 investments. The top 10 holdings represented 87.2% of the Fund’s net assets, all of which have been held for a minimum of nine 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 18.0% annually based on weighted average assets since our initial investment, exceeding the Benchmark by an average of 9.3% 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.