Baron India Fund | Q3 2026

Baron India Fund (the Fund) declined 2.95% (Institutional Shares) during the third quarter of 2026, while its relevant benchmark, the MSCI AC Asia ex Japan/India Linked Index (the Linked Benchmark), was down 5.61%. As a reminder to investors, effective September 1, 2024, the legacy Baron New Asia Fund was converted into Baron India Fund, necessitating a Linked Benchmark to allow the predecessor track record to attach to the new Fund. In essence, our reported performance represents the return of Baron New Asia Fund from July 30, 2021 (Fund inception date) through August 31, 2024 and that of the reconstituted Baron India Fund beginning thereafter. Similarly, the Linked Benchmark, effective September 1, 2024, will reflect the performance of the MSCI India Index, the primary benchmark of Baron India Fund, while the period from July 30, 2021 through August 31, 2024 will reflect the performance of the MSCI AC Asia ex Japan Index.

Since Fund conversion (effective September 1, 2024), Baron India Fund has outperformed the MSCI India Index by 7.24% on an annualized basis and ranked as one of the best performing India dedicated strategies by Morningstar during the period (2^nd percentile). Year to date (as of September 30, 2026), the Fund is also highly ranked with top decile performance.

For the third quarter, we comfortably outperformed our MSCI India Index, generating 266 basis points of relative outperformance. We are equally pleased with our year-to-date results, having outperformed the MSCI India Index by 12.10% during a period characterized by heightened market volatility and geopolitical uncertainty. We attribute our superior performance to the continued effectiveness and validation of our proprietary risk management frameworks—especially our thematic investment approach and “S-curve analysis” (refer to Portfolio Structure section)—which have played a critical role in providing downside protection during volatile periods while delivering attractive upside capture metrics in a rising market environment.

Indian equities underperformed emerging market (EM) peers during the third quarter, owing to a re-escalation of the conflict in West Asia that drove Brent crude prices up by more than 40% during the period. An inflationary energy environment remains a near-term overhang, given that India imports over 85% of its oil requirements. In addition, the U.S. Federal Reserve’s first interest rate hike in over three years, alongside a spike in global bond yields, weighed on EM equities. On a more positive note, despite the ongoing West Asia crisis, underlying economic fundamentals in India are improving. Real GDP grew 7.8% in the June quarter, domestic auto volumes are up more than 25% year-to-date, and bank credit continues to grow at over 18% year-over-year. Another key catalyst we are closely monitoring is the durability of the multi-trillion-dollar global AI capex cycle, particularly as funding challenges emerge in a rising-rate environment, public backlash against data center rollouts grows in local communities, and calls within the industry to recalibrate the pace of frontier AI model development become more widespread, driven in part by security risks highlighted by recent agentic AI misadventures. With the MSCI India Index trading below 19 times one-year forward price-to-earnings as of quarter end, or approximately two standard deviations below its five-year average, we believe forward-looking risk-adjusted returns have become “extremely attractive.” This is particularly true as investor enthusiasm for the AI theme begins to moderate and/or an eventual resolution of the Iran war leads to a normalization of energy prices.

From a sector or theme perspective, strong stock selection effect in the Industrials sector, driven by a few holdings in our Make in India/supply chain diversification (Precision Wires India Limited, KSH International Limited, and INOX India Limited) theme, was the largest contributor to relative performance during the quarter. In addition, our material overweight together with solid stock selection effect in the Health Care sector, primarily attributable to our investment in Divi's Laboratories Limited, as part of our Make in India/supply chain diversification theme, was also a notable contributor to relative results. We believe Divi’s is entering a multi-year earnings growth cycle as it transforms into a global contract development and manufacturing organization (CDMO) for peptide-based therapeutics. By utilizing a vertically integrated business model, the company positions itself as a strategic, cost-effective alternative to Chinese CDMOs that currently dominate the market. Lastly, favorable allocation effect combined with good stock selection in Information Technology, owing to select positions in our national security (Centum Electronics Limited and Aditya Infotech Limited) theme, also bolstered performance during the quarter. Partly offsetting the above, adverse stock selection effect in the Financials sector (Kotak Mahindra Bank Limited, Cholamandalam Investment and Finance Company Limited, and Nuvama Wealth Management Limited) detracted the most from relative performance. Negative allocation effect together with weak stock selection in Utilities and Materials also weighed on relative results.

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

Shares of Precision Wires India Limited contributed to performance during the quarter. Precision Wires is the largest manufacturer of enameled copper winding wire in India, with roughly 30% market share. Its products, which are critical inputs for power transformers, generators, and electric motors, are supplied to the automotive, aerospace and defense, power, electronics, home appliance, and infrastructure end markets. The company’s shares rose on strong sales growth and profitability. We believe Precision Wires is well positioned to benefit from India’s power-sector upcycle, as accelerated power generation capacity additions should drive sustained demand for winding wire. Growth in India’s electric vehicle (EV) market should also support rising demand for EV-grade winding wire, reinforcing our expectation that the company can deliver 15% to 20% compounded annual revenue growth over the next three to five years. Over the long term, we think Precision Wires will continue to benefit from its original equipment manufacturer (OEM) relationships, scale of operations, and strong innovation capabilities.

Shares of Centum Electronics Limited contributed to performance during the quarter. Centum is a leading electronics manufacturing services provider in India, offering design and manufacturing solutions for mission-critical applications across the defense, aerospace, industrial, and automotive industries. The shares rose on robust quarterly results. We remain investors, as we believe Centum is well positioned to benefit from the Indian government’s “Make in India” initiative, which encourages domestic manufacturing of electronic products and components through tax incentives and manufacturing infrastructure. In addition, amid escalating global geopolitical tensions, we see further upside from India’s accelerated efforts to indigenize the design and production of defense equipment, which should benefit electronic system providers like Centum. We expect Centum to deliver about 25% compounded annual growth in both revenue and EBITDA over the next three to five years.

HDFC Bank Limited is India’s largest private-sector bank, offering retail and commercial banking, lending, deposit, payments, and wealth management services through a broad branch and digital network across the country. The company’s shares declined during the quarter as investors focused on weaker-than-expected profitability, leadership uncertainty, and a broader selloff in Indian equities. Results for the quarter ended June 30, 2026, showed further sequential compression in net interest margin as funding costs remained elevated, raising questions about profitability despite healthy loan growth. Sentiment deteriorated further after CEO Sashidhar Jagdishan decided not to seek reappointment, adding uncertainty around leadership and strategy at a time when the bank was already navigating the unexpected resignation of its chairman. These company-specific issues were compounded by foreign investor outflows and a sharp September decline in Indian equities, driven largely by macro headwinds from higher global oil prices. The October 1, 2026 announcement of Anup Bagchi as the new CEO should mitigate some of these headwinds. Mr. Bagchi is a well-respected industry veteran with more than 30 years of experience at ICICI. We continue to view HDFC Bank as a solid long-term investment in India’s structural financial penetration story, supported by its strong franchise, deposit base, and broad distribution network.

Shares of Bajaj Finance Limited, a leading non-bank financial company in India, declined due to two key headwinds. A proposal from the Insurance Regulatory and Development Authority of India (IRDAI) to revise insurance commission structures weighed on the stock given Bajaj’s exposure to insurance distribution, while the company’s planned equity capital raise through a Qualified Institutional Placement (QIP) raised dilution concerns. We retain conviction in Bajaj given its best-in-class management team, robust long-term growth outlook, and conservative risk management framework. We believe the company is well positioned to benefit from growing demand for consumer financial services, including mortgages, personal loans, credit card loans, and related products.

Shares of Max Healthcare Institute Limited detracted from performance during the quarter. Max Healthcare is a leading hospital chain in India, operating more than 6,000 beds across a network of 21 healthcare facilities. The shares declined after the Supreme Court recommended the government to scrutinize medicine and consumables prices, raising concerns about profitability across the hospital industry. We remain investors. Under the leadership of CEO and restructuring specialist Abhay Soi, management has focused on cost optimization at mature facilities, improving profitability at greenfield projects, and realizing synergies at recently acquired hospitals. These efforts have helped Max Healthcare stand out among peers with best-in-class EBITDA margins, average revenue per occupied bed, and return on invested capital. We are optimistic about the multi-year growth opportunity in Indian hospital services and retain conviction in Max Healthcare as a key beneficiary of ongoing industry consolidation. We expect the company to more than double EBITDA and sustain mid-teens revenue growth over the next three to five years.

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

We combine a bottom-up investment approach with a thematic overlay to construct and manage a portfolio of high-quality, competitively advantaged companies located in India. Consistent with the “Baron Approach,” we invest behind value-creating, private sector entrepreneurs with significant ownership stakes, whose businesses are either gaining market share, disrupting, or consolidating their respective industries. We leverage our deep relationships in India to discover and invest in growth-oriented businesses for the long term.

The Fund is a diversified, all-cap strategy with the flexibility to invest across market caps, especially in small- and mid-cap stocks where we see significant mispricing due to limited sell-side coverage and/or those that remain “under the radar.” We typically invest across 30 to 50 stocks and concentrate capital toward our highest conviction ideas. As of September 30, 2026, we held 40 positions with our 10 largest investments comprising 50.6% of net assets.

Our principal investment themes with respective weightings (as of September 30, 2026) are as follows:

• Make in India/Supply Chain Diversification (29.0% of net assets): Tectonic shifts in geopolitics are accelerating supply chain diversification (ex-China); significant opportunity for Indian players to gain market share in global supply chains
• Consumer Finance (18.7%): Low penetration levels; industry poised to grow mid-teens over the next several years; well-managed private sector players to gain market share
• Formalization of the Economy (16.4%): Economic reforms are accelerating formalization leading to market share gains for organized, branded players across various industries
• National Security (15.2%): Rising global conflicts and recent military skirmishes with neighboring countries are leading India to accelerate defense spending, with an increased focus on domestic manufacturing
• Power Reforms (10.4%): Market friendly reforms along with growing demand for electricity in India (real estate, manufacturing, data centers, AC penetration) is necessitating a multi-year investment cycle in power generation and transmission
• Digitization (6.6%): India’s rising middle class and growing smartphone penetration, with more than 700 million smartphone users, are creating significant opportunities across e-commerce, food tech, digital streaming, and fintech
• Financialization of Savings (5.4%): Structural shift in household savings from gold/real estate into financial products such as equities/mutual funds/life insurance savings policies; capital market proxies along with asset managers/life insurers to benefit

We also segment the portfolio based on a S-curve analysis to serve as a form of risk management framework with respective weightings (as of September 30, 2026) as follows:

• Phase 1 (28.2% of net assets): “Under the Radar” or in “Investment Mode” – a phase of market mispricing/time arbitrage and an opportunity for significant alpha generation as these businesses enter Phase 2
• Phase 2 (18.7%): “Disruptors” or “Scale Builders” – this is a period when our holdings should generate non-linear growth and continued alpha capture on price discovery, earnings upgrades, and/or market disruption
• Phase 3 (47.7%): “Compounders” – post scale up, our companies have gained durable competitive moats and are well positioned to compound capital and earnings over the next several years
• Phase 4 (7.1%): “Market Performers/Mature Businesses” – period of stable growth with good earnings visibility; allocation to this segment will be viewed from a risk management/portfolio beta perspective

During the third quarter, we added a few new investments to existing themes while also rebalancing weights of some holdings based on company-specific fundamentals. As always, we strive to concentrate capital toward our highest conviction ideas.

We were active in adding to our Make in India/supply chain diversification theme by initiating positions in Laurus Labs Limited, Sona BLW Precision Forgings Limited (Sona Comstar), and Sudeep Pharma Limited. Laurus Labs is a leading pharmaceutical and biotechnology company in India, providing integrated development and manufacturing services across the drug lifecycle. The company is the largest manufacturer of generic anti-retroviral APIs globally⁴, supplying approximately one-third of the global HIV population. Leveraging its integrated development and manufacturing capabilities, Laurus Labs is actively migrating its product mix from generic APIs toward high-margin CDMO services, with revenue contribution of the vertical increasing from 13% in fiscal year 2019 to 31% in 2026. As Laurus Labs works toward its internal target of over 50% CDMO revenue mix by 2030, we believe the company will continue to show improvement in profitability and enjoy better revenue visibility as CDMO entails long-term contracts. In our view, the company’s ongoing capacity expansion provides additional comfort to growth in the medium term, as investments are contingent on firm customer backlogs. As new capacity becomes operational, Laurus Labs will further diversify its product lines across several high-value segments, including peptides, antibody-drug conjugates, fermentation, and cell and gene therapy, setting the stage for longer-term growth. We expect Laurus Labs to deliver 15% to 20% compounded revenue growth and 20% to 25% compounded earnings growth over the next three to five years.

Sona Comstar is one of India's leading auto component manufacturers, supplying driveline systems and components to global OEMs, with a legacy business in differential gears and starter motors. The company is a dominant player in the domestic market, garnering 55% to 60% market share in differential gears for passenger vehicles and 80% to 90% share in commercial vehicles.⁵ Globally, it supplies to seven of the world's top ten passenger vehicle OEMs, three of the top ten EV OEMs, and three of the world's top ten two-wheeler OEMs. We are encouraged by the company's diversification strategy, with an expanding traction motor business and a recently acquired railway division which reduces revenue volatility associated with EV demand. We are also excited by the recently announced landmark partnership with Denso—the world's second-largest auto component manufacturer—to form two India-based JVs, which bridges Sona Comstar's gap in high-value electric powertrain systems, meaningfully expands its addressable market, and opens access to Toyota and Suzuki's India supply chains. Additionally, the company's newly established Robotics and Physical AI segment adds long-term earnings optionality, given Sona Comstar's rare ability as an ex-China supplier to provide complete actuator assemblies for humanoid robots. Based on our estimates, we expect Sona Comstar to deliver 15% to 20% compounded revenue growth and 20% to 25% compounded earnings growth over the next three to five years.

Sudeep Pharma is a manufacturer of high-purity mineral-based excipients and specialty ingredients, serving over 1,000 customers globally across the pharmaceutical, food, and nutrition industries, including marquee clients such as Pfizer, Merck, and Danone. The company is uniquely positioned as the first and only Indian manufacturer with USFDA certification for mineral-based ingredients, and one of only nine companies globally with European CEP certification for calcium carbonate.⁶ Leveraging this technical expertise, Sudeep Pharma is actively migrating its product mix from conventional mineral-based excipients toward higher-value specialty ingredients, including micronutrient premixes and differentiated delivery formats such as encapsulated, liposomal, spray-dried, and granulated ingredients, driving an improvement in profitability. We are also excited by the company's expansion into the global EV and energy storage system supply chains as a vendor of battery-grade iron phosphate, a critical precursor for the fast-growing lithium iron phosphate (LFP) batteries. China currently dominates global LFP precursor material production, accounting for nearly 100% of global supply. In our view, Sudeep Pharma is a key beneficiary of the structural "China Plus One" shift, as global manufacturers seek to diversify their sourcing away from China toward alternative suppliers. We estimate Sudeep Pharma to deliver over 20% compounded EBITDA growth over the next three to five years.

During the quarter, we also increased exposure to our formalization of the economy theme by accumulating a position in Lenskart Solutions Limited, a technology-driven manufacturer and retailer of prescription eyeglasses and sunglasses, with a network of over 2,700 retail stores in India and over 700 outlets internationally. Underpinning the business is a vertically integrated manufacturing operation spanning frames and lenses, as well as dedicated logistics infrastructure, which together enable next-day deliveries across over 50 cities in India. Lenskart is India's largest omnichannel eyewear retailer with 8% to 10% market share, in an industry that remains highly fragmented, with small, unorganized opticians commanding over 75% market share.⁷ In our view, Lenskart is a key beneficiary of the ongoing structural shift in Indian eyewear from unorganized to branded retail and is well positioned to gain share from informal players driven by its superior product quality, consistency, and value proposition. We are encouraged by management's ambition to expand its domestic store network to 10,000 locations, supported by the company's proprietary site-selection technology. We also expect Lenskart to deliver improving profitability, driven by manufacturing capacity expansion that reduces dependence on imported components, operating leverage through technology such as remote optometry, and a product mix shift toward premium frames and lenses. We expect Lenskart to deliver 20% to 25% compounded revenue growth and above 30% compounded EBITDA growth over the next three to five years.

Finally, we added to several of our existing positions during the quarter, most notably Divi's Laboratories Limited, Eternal Limited, Bajaj Finance Limited, Astra Microwave Products Limited, InterGlobe Aviation Limited, Aditya Infotech Limited, and Titan Company Limited.

During the quarter, we also exited positions in Kotak Mahindra Bank Limited, SBI Life Insurance Company Limited, GMR Power and Urban Infra Limited, and Amber Enterprises India Limited, due to uncertainties over durability of earnings growth and/or competitive positioning going forward.

As we enter the final stretch of 2026, we are increasingly convinced that markets are moving past “peak optimism” surrounding the AI theme, while Indian equities are coincidentally on the cusp of entering a new phase of market leadership. As we write this letter, shares of CoreWeave, a leading neocloud operator with significant debt-fueled investments in AI data centers, have corrected more than 40% over the past six months, with its 2032 bonds trading below 80, a level typically considered distressed. While we are in no way suggesting that the AI capex cycle is coming to an abrupt end, we do expect global allocators to begin diversifying their portfolios, which have likely become “AI heavy” over the past three to four years given the almost one-way direction of market appreciation since OpenAI first publicly released ChatGPT in November 2022.

This phenomenon helps explain India’s historic underperformance over the past two years, with the MSCI India Index trailing the MSCI Emerging Markets Index by approximately 74%, or over 35% annualized, during the period. Unlike Korea and Taiwan, India has limited exposure to companies such as Taiwan Semiconductor Manufacturing Company, SK hynix, and Samsung Electronics—all large constituents in the MSCI Emerging Markets Index—which have disproportionately benefited from the multi-trillion-dollar AI capex cycle. As funding challenges emerge in a rising-rate environment, public backlash against data center rollouts grows in local communities, and calls within the industry to recalibrate the pace of frontier AI model development due to security risks become more widespread, we believe the cycle is turning in India’s favor.

The recent re-escalation of the conflict in West Asia, which has driven Brent crude prices up by more than 40% since June, remains a near-term overhang for Indian equities. While we cannot predict geopolitical outcomes, we expect rising bond yields—which increase the cost of servicing U.S. government debt and home mortgages—and mounting economic pressures on U.S. consumers, particularly from elevated gasoline prices, to eventually lead to a diplomatic resolution of the West Asia crisis. Despite the ongoing conflict, on-the-ground economic fundamentals in India are improving: real GDP grew 7.8% in the June quarter, domestic auto volumes are up more than 25% year-to-date, and bank credit continues to grow at nearly 20% year-over-year. With forward-looking economic indicators turning favorable, we believe Indian equities are in the early innings of an earnings upgrade cycle, which should further support our view of India’s favorable risk-adjusted return potential going forward.

A key pushback we have typically heard from prospective investors is, “We really like India, but it is too expensive.” With the MSCI India Index trading below 19 times one-year forward price-to-earnings as of quarter-end, or approximately two standard deviations below its five-year average, we view current valuations as extremely attractive, particularly as earnings begin to inflect and investor enthusiasm for the AI theme begins to moderate, as discussed above. Ironically, when Indian equities peaked in September 2024, valuations were two standard deviations above the five-year average, and earnings were entering a period of downward revisions. The current environment is quite the opposite.

Finally, as it relates to the Fund, we continue to identify and invest in attractively valued, high-growth businesses that remain underappreciated by the broader market, particularly within the small- and mid-cap segments. These investments have been a key driver of the Fund’s strong year-to-date performance and returns since its conversion to an India dedicated strategy.

Thank you for investing in the Baron India Fund. We truly appreciate your partnership.

Sincerely,