Baron Partners Fund | Q1 2026

Dear Baron Partners Fund Shareholder,

Baron Partners Fund® (the Fund) declined 5.33% (Institutional Shares) in the quarter. While disappointed in the absolute return, this result did exceed both its benchmark, the Russell Midcap Growth Index (the Index), and the Morningstar Large Growth Category Average (the Peer Group).* Those two comparative benchmarks declined 6.35% and 8.44%, respectively. The broader Russell 3000 Index (the Market Index) declined slightly less, falling 3.96% for the quarter.

Over the prior 12 months, the Fund has performed quite well on both an absolute and relative basis. In that period, the Fund returned 43.06%. That performance again compares very favorably to the Index, the Market Index, and Peer Group returns of 9.56%, 18.09%, and 16.53%, respectively.

The Fund’s returns exceeded those of the Index in 4 out of the last 5 calendar years and 8 of the last 10. It is ranked in the 2nd percentile of its Peer Group for its 1-year ranking, and its 3-year ranking is in the 18^th percentile. Longer-term rankings remain outstanding, with the Fund ranked in the top percentile for the 10-, 15-, and 20-year, and since conversion periods. The Fund has performed well on both an absolute and relative basis over many important time periods and market cycles. Since its conversion to a mutual fund over 20 years ago, the Fund’s annual return of 17.45% compared to the Index’s return of 11.25%. We are very proud of these achievements and long-term investors have been rewarded.

The Fund is non-diversified with much of its assets concentrated in the top 10 positions. We aim to achieve diversification, despite this concentration, by investing in companies with unique characteristics that perform differently in different market environments. We categorize investments as Disruptive Growth, Core Growth, Financials, and Real/Irreplaceable Assets investments. Much of the relative outperformance in early 2026 (and over the prior 12 months) is attributed to Disruptive Growth holdings. The Fund’s largest holding, Space Exploration Technologies Corp. (SpaceX), appreciated 24.5% in the quarter. SpaceX announced the merger with X.AI Holdings Corp. (xAI) in February. As a result of the deal, the implied value of SpaceX increased to $1 trillion while xAI remained constant to its last financing round at a $250 billion valuation. The combined company is now valued at $1.25 trillion. The implied current market value of the Fund’s SpaceX position is $3.89 billion while the cost of the Fund’s stake, which we started accumulating in 2017, is only $292 million.

As we spoke about last quarter, we believe the returns could have been even greater over the prior year. That situation continued at the start of 2026. A sizable portion of the portfolio is currently reinvesting back into its business or perceived suffers from potential AI disruption. The financial results exacerbate this narrative. Many companies held in the portfolio are penalizing near-term earnings for longer-term potential. And some customers are temporarily refraining from entering into large deals until they have a better understanding of the AI impact. Investors have attributed lower valuation multiples given this perceived uncertainty. It’s a double impact to equity values. This group in the quarter includes companies across Financials (FactSet Research Systems Inc.), Core Growth (Gartner, Inc.) and Real/Irreplaceable Assets (CoStar Group, Inc.), and even Disruptive Growth (Tesla, Inc.). We spoke about much of these issues in our prior quarterly letter. And despite the stocks remaining under pressure, we see improved fundamentals. A few examples:

Tesla, the electric vehicle (EV) manufacturer, has been under pressure as investors weigh the likelihood of a successful outcome from increased capital expenditure (capex) spend. After capex was $8.5 billion in 2025, the company announced it could spend more than $20 billion in 2026 on new products, vehicles, batteries, and compute. This high spend would still exclude investment associated with the Terrafab chip facility and solar panel manufacturing. The higher expenses could pressure near-term profits, increase leverage, and weigh on free cash flow. Additionally, demand for vehicles could be challenged as tax incentives in the U.S. and China are reduced. And finally, the Robotaxi rollout is slower than some have expected. It is understandable why some short-term traders are hesitant.

We, however, believe this capex cycle will solidify the vertical integration cost and functionality advantage of many of the Tesla lines. Progress is being made on autonomous driving and Robotaxi production, which would transform the company into a highly profitable software business. We believe the company will improve its offerings substantially in the coming years.

FactSet, a leading provider of investment management tools, has continued to be under pressure due to a combination of industry-wide concerns about AI and management transition. We maintain conviction in FactSet due to the large addressable market, sticky customer base (95%-plus retention rates), consistent execution on both new product development, financial results, and robust free cash flow generation. The most recent results have exceeded investors’ expectations for revenue growth, free cash flow generation, and stock repurchases. As clients utilize AI, they are becoming more (not less) reliant on FactSet’s trusted and high-quality data sets. This value makes the company less dependent on seat-based contracts, which has been reduced to less than 20% of annual subscription value (ASV). We continue to believe that new CEO Sanoke Viswanathan is a highly capable leader who is focused on reaccelerating growth and driving a stronger sense of urgency across the organization. A key part of Sanoke’s plan is to enhance the company’s product development efforts with areas of emphasis on completing the portfolio lifecycle, embedding AI functionality across the product suite, deep sector data, real-time data, and front-office capabilities like order/execution management. Despite improved metrics like client retention and strong ASV retention, investors remain skeptical about AI’s impact. Once that sentiment reverses with more sustained results, we expect the stock to perform well.

Gartner, a provider of syndicated research, also continued to be under pressure. Again, this downturn is the result of a perception that AI will displace the business. We attribute most of the slowdown in contract value growth to cost cutting in the U.S. public sector, which is around 5% of revenue. Industries that are dependent on public-sector funding, such as education, also saw a more challenging business environment. The significant reduction in contract renewals is unsustainable, in our opinion. We believe many of these contracts will be reinstituted in the coming quarters and years. Despite these headwinds, the company continues to improve its margins.

The market is concerned about the impact of AI on Gartner’s insights business. We do not see indication that this is negatively impacting the company’s value proposition. Instead, prospective clients are assessing their needs. 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 tangible return on investment for its customers through its contract review program. AI should be an accelerant for future contracts, and Gartner’s proprietary data is well insulated from AI displacement, in our opinion.

We expect growth trends to improve as public sector headwinds abate and the company’s sales force quantity and productivity improves. Contract value growth is expected to accelerate throughout 2026. The product is also improving to become more impactful, boarder in scope, and faster to market. Gartner is repurchasing stock to take advantage of the discounted valuation.

CoStar is the leading provider of information and marketing services to the commercial and residential real estate industries. The stock has been weighed down by significant growth investment in CoStar’s residential product, where sales performance has remained modest and competition is intense. 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.

We have endured similar periods when many of the Fund’s holdings were reinvesting in their businesses to enhance future growth and been subject to investors questioning the long-term thesis. When those issues are resolved, the stocks tend to perform extremely well. We provided examples of such periods and stocks in prior letters. While the Fund exceeded the Index’s return in the current quarter because of only a few select investments, we believe that depressed investments will contribute to performance in the coming years once initiatives that are penalizing earnings are realized and negative sentiment shifts.

* 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.
Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk. Past performances is not a guarantee of future results.

Space Exploration Technologies Corp. (SpaceX) is a high-profile private company founded by Elon Musk. The company's primary focus is on developing and launching advanced rockets, satellites, and spacecrafts, with the ambitious long-term goal of making life multi-planetary. SpaceX is generating significant value with the rapid expansion of its Starlink broadband service. The company is successfully deploying a vast constellation of Starlink satellites in Earth's orbit, reporting substantial growth in active users, and regularly deploying new and more efficient hardware technology. Furthermore, SpaceX has established itself as a leading launch provider by offering highly reliable and cost-effective launches, leveraging the company's reusable launch technology. SpaceX capabilities extend to strategic services such as human spaceflight missions. Moreover, SpaceX is making tremendous progress on its newest rocket, Starship, which is the largest, most powerful rocket ever flown. This next-generation vehicle represents a significant leap forward in reusability and space exploration capabilities. We value SpaceX using prices of recent financing transactions.

Global hotel franchisor Choice Hotels International, Inc. contributed to performance during the quarter as the company saw a slight acceleration in revenue per available room across its portfolio. Choice continues to grow units at a low-single-digit rate and is benefiting from higher royalty rates on new franchise contracts, driving mid-single-digit growth in earnings and free cash flow. The company is using this cashflow to return capital through share repurchases. We continue to believe the stock offers compelling value, trading at a roughly five multiple-point discount to its historical average. Choice maintains a strong balance sheet, providing flexibility for additional share buybacks, particularly when the stock trades below the company’s view of intrinsic value. Choice’s steady growth profile, both domestically and internationally, should further support attractive shareholder returns over time.

Specialty insurer Arch Capital Group Ltd. contributed to performance as property and casualty (P&C) insurance stocks broadly outpaced the market amid heightened volatility. P&C insurance stocks tend to be resilient during turbulent markets and are less exposed to the AI-related concerns weighing on other sectors. In addition, Arch reported better-than-expected quarterly earnings, and management expects a continuation of double-digit growth in book value per share. We continue to own the stock due to Arch’s strong management team and our expectation of continued growth in earnings and book value over time.

Tesla, Inc. designs, manufactures, and sells fully EVs, solar products, and energy storage solutions, while developing advanced real-world AI technologies. Following robust gains in late 2025, shares fell as investors awaited progress on robotaxis and assessed the company’s sizable investments in manufacturing and AI. Operationally, Tesla delivered strong quarterly results amid a challenging EV environment. Automotive gross margins improved sequentially and beat expectations, the energy storage business maintained robust momentum with best-in-class margins, and battery cell production ramped. The company continues to advance its AI and autonomous driving initiatives at a rapid pace. Management anticipates meaningful robotaxi expansion in 2026 and continues to finalize the Optimus Gen 3 design and build out large-scale manufacturing capacity for humanoid robots. Tesla is also releasing major Full Self-Driving (FSD) enhancements, scaling AI training compute, and deepening vertical integration in semiconductor design and production. These initiatives, while increasing near-term capital spending, underscore Tesla’s pivot toward becoming a leader in physical AI.

CoStar Group, Inc. is the leading provider of information and marketing services to the commercial and residential real estate industries. Shares fell due to multiple compression driven by rising AI fears. The market has come to view AI as an existential risk for a growing number of industries—including software, business services, information services, and video games—despite no evidence of any fundamental impact to these sectors. This “shoot first and ask questions later” dynamic has resulted in meaningful share price declines. We continue to own CoStar given its differentiated data assets and significant growth opportunities in providing enhanced real estate information, analytics, and marketplace offerings. CoStar boasts an enviable business model with high levels of recurring revenue and meaningful cash flow generation potential. While near-term cash flow is obscured by elevated investment in Homes.com, we expect spending to moderate and cash flow to improve over the next several years. The company also maintains a substantial cash balance, which we are hopeful will be used to aggressively repurchase shares at current depressed valuation levels.

Syndicated research provider Gartner, Inc. detracted from performance as valuation multiples compressed amid rising concerns around AI. Investors have increasingly viewed AI as a potential existential risk across a widening range of industries—including software, business services, information services, and video games—despite no evidence of any fundamental impact to these sectors. This “shoot first and ask questions later” dynamic has driven meaningful share price declines across the group. Against this backdrop, shares of Gartner came under pressure after the company reported contract value growth that was just 0.5% below expectations, underscoring the dramatic valuation compression at play. We continue to own Gartner given its large addressable market, significant competitive advantages, and robust free cash flow generation, which we expect management to deploy toward share repurchases at depressed valuation levels. We also view Gartner as an AI beneficiary, as it can leverage emerging tools to extract deeper insights from its vast trove of proprietary data and deliver it to customers in chatbot-type formats that meaningfully enhance its value proposition.

We seek to invest in businesses we believe can double in value within five or six years. We invest for the long term in a focused portfolio of appropriately capitalized, well-managed growth businesses at attractive prices across market capitalizations. We attempt to create a portfolio of no more than 30 securities diversified by GICS sectors, but with the top 10 positions representing a significant portion of net assets. These businesses are identified by our analysts and portfolio managers using our proprietary research. We think these well-managed businesses have sustainable competitive advantages and strong, long-term growth opportunities. We use leverage to enhance returns, which increases the Fund’s volatility. 

As of March 31, 2026, we held 24 investments. The median market capitalization of these growth companies was $13.6 billion. The top 10 positions represented 82.6% of total investments. Leverage was 13.4%. 

The long-term absolute and relative performance of the Fund has been excellent. The Fund has returned 17.45% annualized since converting to a mutual fund on April 30, 2003, exceeding the Index by 6.20% per year. Those relative results have come largely from alpha. Since inception annualized alpha has been 5.77 while beta is only 1.11.

The Fund’s performance has also meaningfully exceeded the Index over the prior 3-, 5-, 10-, 15-, and 20-year periods. 

But in addition to viewing the Fund’s returns over these various SEC mandated trailing annual periods, we believe it is helpful to understand how the Fund has performed over economic cycles. 

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 appreciated considerably in good times…

There have been two distinct periods over the life of the Fund with significant economic growth. The nearly 8-year period from the Fund’s inception through the Internet Bubble (1/31/1992 to 12/31/1999) and the more recent 11-year period Post-Great Recession to the start of the COVID Pandemic (12/31/2008 to 12/31/2019). During both periods, the Index had strong returns; however, the Fund’s returns were even better. The Fund’s annualized return during the most recent robust economic period was 17.44% compared to the Index’s 16.84%. The Market Index had an annual return of 14.70% during that time.

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 retained value in challenging times…

We believe what especially sets the Fund apart from other growth funds is its historic ability to outperform in more challenging economic periods. The nine-year period from the Internet Bubble collapse through the Great Recession (12/31/1999 to 12/31/2008) saw lower returns for the Fund. It had annualized returns of 1.54%. However, the Index declined substantially. A $10,000 hypothetical investment in the Fund at the start of this period would have been worth $11,479 after those nine years. A $10,000 hypothetical investment in a fund designed to track the Index would be worth only $6,488, more than a 35% cumulative decline. The Fund preserved (and slightly grew) capital during this difficult economic time because its investments in a diverse set of high-quality growth businesses could weather the environment and enhance their competitive positioning.

The COVID-19 (COVID) pandemic and its lingering macroeconomic issues have caused excessive market volatility. Over the course of three years, there were two sizable market corrections during which most major indexes fell more than 25%. But the Fund has performed admirably in both protecting and growing clients’ capital. During the COVID pandemic and its aftermath (12/31/2019 to 12/31/2022), the Fund had an annualized return of 23.65%. The Index’s annualized return was significantly lower at only 3.85%.

The Fund is off to a good start in the current period…

Since the COVID-Pandemic and subsequent market downturn ended, the Fund has performed even better on an absolute and relative basis. Since December 31, 2022, the Fund has an annualized return of 28.46% compared to the Index’s annualized return of 14.75%. The Market Index had an annual return of 18.88% during that time. While this is only a partial cycle, we believe we are off to a good start.

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.

Over the longer term, this combination of exceeding the Index if various market environments has been rewarding for clients. A $10,000 hypothetical investment at the inception of the Fund on January 31, 1992, would have been worth $1,425,435 on March 31, 2026. That same $10,000 hypothetical investment in a fund designed to track the Index would now be worth $253,719, only approximately 18% of what it would have been worth if invested in the Fund.

Thank you for joining us as fellow shareholders in Baron Partners Fund®. We continue to work hard to justify your confidence and trust in our stewardship of your hard-earned savings. We remain dedicated to giving you the information we would want if our roles were reversed. We hope this letter enables you to make an informed decision about whether this Fund remains an appropriate investment.

Sincerely,