Baron Partners Fund | Q2 2025

Baron Partners Fund® (the Fund) rebounded meaningfully after a tough initial start to the year. Over the prior quarter, the Fund appreciated 12.14%. This result trailed its benchmark, the Russell Midcap Growth Index (the Index), but exceeded the broader Russell 3000 Index (the Market Index), which rose 18.20% and 10.99%, respectively. Its peer category, the Morningstar Large Growth Category Average, appreciated 17.09%.

Over the prior 12 months, the Fund has returned 34.14%. That compares very favorably to the Index and the Market Index’s returns of 26.49% and 15.30%, respectively.

As of 6/30/2025, Morningstar Large Growth Category consisted of 1,084, 954, and 754, share classes for the 1-, 5-, and 10-year periods. Morningstar ranked Baron Partners Fund in the 4th, 1st, 1st, 1st, 1st , and 1st percentiles for the 1-, 5-, 10-, 15-, 20-year, and since inception periods, respectively. The Fund converted into a mutual fund on 4/30/2003, and the category consisted of 696 share classes.

Morningstar calculates the Morningstar Large Growth Category Average performance and rankings using its Fractional Weighting methodology. Morningstar rankings are based on total returns and do not include sales charges. Total returns do account for management, administrative, and 12b-1 fees and other costs automatically deducted from fund assets.

Markets have continued a streak of significant volatility and abrupt changes in direction. The prior three years have been marked by geopolitical, macroeconomic, and industry specific shocks. While the Fund performed well on an absolute basis during this period, it has trailed its benchmarks. The Fund’s sizable gains in calendar years 2023 and 2024 have been bookended by declines in late 2022 and in the first half of 2025. In 2022, the market rotated away from COVID era favored growth investments. And a changed political landscape in early 2025 has created investor uncertainty. The Fund’s low turnover makes it temporarily susceptible to these sudden changes in market sentiment. Over the prior three years, the Fund had an annualized return of 15.93% while the Index was up 21.46%.

But while the Fund has trailed the Index and Market Index over the prior 3-year period, it is ranked in the top percentile of its Morningstar category over the prior 5-, 10-, 15-, and 20-year periods, as well as since conversion. The rapid market shifts that caused this finite period of underperformance have much less impact on long-term absolute and relative returns. Since its conversion to a mutual fund, the Fund’s annualized return of 16.80% compared to the Index’s return of 12.04%. We are very proud of the Fund’s long-term track record.

We believe the recent year-to-date results should not be viewed in isolation and remind investors how the portfolio has performed over the entire cycle. Year-to-date results in 2025 follow a period of a surprise and drastic change in the U.S. political landscape. The business and investor euphoria experienced because of the Presidential election at the end of 2024 was met with the realities of policies enacted (and in some cases, enacted, paused, and/or withdrawn) at the start of 2025. Investors had believed that President Trump would usher in a pro-business era of less regulatory burdens, falling interest rates, and lower taxes. However, these same investors remain concerned about tariffs hindering international trade, inflation harming discretionary spending, federal spending cuts impacting economic growth, and the latest political wrangling. It has been a whipsaw of forecasts.

We did not attempt to predict the 2024 election outcome, nor investor reaction to it. And we likewise are not attempting to predict current policy. We believe that our investments should achieve their goals regardless of political outcomes. Reduced regulatory burdens should enable more disruptive growth businesses to meet their objectives more quickly. And we find that more challenging economic environments tend to favor our core growth quality, competitively advantaged businesses, which are well represented in the Fund. These businesses should face less competition from new entrants in such economies. And the executive teams should position their business to thrive. The Fund’s portfolio turnover remained low throughout this period. A transitional period is often volatile, and that has once again been the case. But the Fund is weathering this entire period very well. Since the U.S. election on November 5, 2024 when the macroeconomic and political environment shifted, the Fund has gained 22.85%, while the Index has gained only 14.02% through the end of the quarter.

Investor concerns about tariffs and government spendings cuts subsided in the most recent quarter. There has been a trickle of positive news on trade deals and the expectations that more agreements will transpire. A relatively short and decisive war with Iran had minimal economic impact and (we are hopeful) could improve long-term regional stability.

Tesla, Inc. is the largest position in the Fund and experienced one of the most significant rebounds because of the improved macroeconomic backdrop and improved company prospects. Elon Musk, Tesla founder and CEO, wound down his direct involvement with the polarizing Department of Government Efficiency. His sole focus has returned to the businesses he helms. But even in his (perceived) absence, Tesla has positioned itself to be a dynamic leader in an expanding platform. The refresh of the company’s widely successful Model Y has exceeded expectations. The company updated the Model Y’s exteriors, improved its battery range, and enhanced the driving experience by making it quieter, which should be well received by customers who paused purchases of soon-to-be outdated equipment. And most importantly, the company re-ramped production faster than most anticipated. Tesla is now well positioned to accelerate deliveries of its core product.

But even more significant for Tesla’s future profitability has been the rollout of its Robotaxi in Austin, Texas. Despite naysayers’ focus on limited and trivial incidents, we believe early operations are smooth. Coupled with the ability to produce vehicles quickly, inexpensively, and at scale, the company could rapidly expand the service over the next few years in other jurisdictions. Its broad accessibility and unrivaled price should produce sizable market share. It will completely alter the economics of the parent company, transforming it from a hardware-oriented business to a software-dominant model. It should be more profitable and more reliable and garner a higher valuation. Additionally, the company’s industrial energy business and nascent humanoid lines could provide significant growth options for the company in the decades to come.

While Tesla had the most meaningful impact on the Fund’s quarterly return, several other holdings appreciated considerably during the quarter. Seven out of the Fund’s 21 holdings appreciated more than 20% in the period. It was not limited to a certain segment, but rather spanned the Fund’s Disruptive Growth, Core Growth, and Real/Irreplaceable Assets investment categories. Spotify Technology S.A., IDEXX Laboratories, Inc., and Red Rock Resorts, Inc. led the way in these categories. These companies are realizing the benefits of years of investments that had previously penalized profitability. Financials was the only segment that failed to participate in the market rally during the quarter (although financial brokerage company The Charles Schwab Corporation increased 16.9%).

Spotify’s subscription platform is well insulated from tariff threats. It is meaningfully growing users, revenue, and margins. Its newly built products are proving their importance to artists and enabling better terms with music labels. Spoken word content is also becoming more profitable. Advertising and tiered super premium service should facilitate future growth and higher margins.

Newly developed products should contribute to meaningful revenue growth for IDEXX, a pet diagnostic health care company. Another instrument should be released in 2026. The business, which had temporarily been reliant on veterinary visit growth, should be able to increase prices, improve test utilization, and take market share in the growing field.

And finally, Red Rock has proven that its premium locals Las Vegas casinos can generate impressive returns. The company’s newest property, Durango, has had a return on capital in the high teens, net of other resort cannibalization. It has given the company increased confidence to expand that property as well as improve other resorts to this new standard. The Las Vegas demographics remain compelling and Red Rock should capture a large share of the growing market.

While large gainers in the portfolio were prevalent, conversely, there were only two companies, Gaming and Leisure Properties, Inc. and Arch Capital Group Ltd., that declined by more than 5%. Both companies were hampered by an unfavorable macroeconomic environment and cyclical industry pressures. Gaming and Leisure Properties’ 6% dividend yield is less appealing as interest rates stay higher for longer. After years of an extended hard pricing market, the insurance segment is seeing excessive capital flowing into the space. As a result, Arch’s growth has recently slowed, and margins have peaked. The business fundamentals remain attractive as we believe the company can write profitable business over the course of an entire cycle.

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

Tesla, Inc. designs, manufactures, and sells electric vehicles, solar products, and energy storage solutions, while also developing advanced real-world AI technologies. Despite ongoing macroeconomic challenges and regulatory complexities, shares climbed after Tesla completed a limited commercial rollout of its highly anticipated robotaxi business in Austin—following more than a decade of development and billions of dollars in investment. This milestone signals a potentially transformative shift in the automotive industry and opens up a sizable new market beyond the company’s core operations. Investor sentiment also improved after Elon Musk stepped back from government-related engagements, boosting confidence in Tesla’s near-term execution. Tesla introduced a refreshed Model Y globally, featuring design and performance upgrades, and outlined plans to unveil new mass-market models starting next quarter. Meanwhile, the company is progressing toward scaling production of its humanoid robot, adding another dimension to its long-term growth story.

Shares of veterinary diagnostics leader IDEXX Laboratories, Inc. contributed to performance for the quarter 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. Despite macroeconomic challenges, IDEXX’s excellent execution has enabled the company to maintain strong performance. We believe competitive trends are outstanding, and we expect new proprietary innovations and field sales force expansion to be meaningful contributors to growth in 2025. We 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.

Discount brokerage house The Charles Schwab Corporation contributed to performance during the quarter, supported by solid execution and improving fundamentals. The company continued to pay down short-term funding, which contributed to stronger net interest margin and earnings growth. Net new asset growth also improved to 5.5%, in line with Schwab’s long-term target range of 5% to 7%, as attrition tied to the Ameritrade acquisition continued to decline. After retaining capital in recent years to meet regulatory requirements, Schwab is now in a position to resume returning capital to shareholders. Overall, the quarter marked a meaningful step forward in both balance sheet strength and earnings momentum, which we believe is being recognized by the market. We remain shareholders given Schwab’s dominant position in retail brokerage and its ability to drive earnings growth through both organic expansion in assets under management and improved funding efficiency as it continues to pay down high-cost borrowings.

Specialty insurer Arch Capital Group Ltd. gave back some of its gains from earlier in the year, following slower growth and broader weakness across insurance stocks during the second quarter. In the first quarter, premium growth came in below forecasts and slowed relative to the prior quarter due to rising competition and lower pricing in certain business lines. Even so, earnings beat expectations due to stronger underwriting margins and lower tax rates. We continue to own the stock due to Arch’s strong management team and our expectation of significant growth in earnings and book value over time.

Global ski resort company Vail Resorts, Inc. detracted from performance on investor concerns about slowing visitation levels and the potential impact on early season pass sales for the upcoming ski season. The return of former CEO Rob Katz added uncertainty about the company’s future strategic direction, further pressuring shares. We remain investors. Vail continues to deliver consistent revenue and earnings, with roughly a third of revenue already secured in advance of the season, providing strong financial visibility and enabling more effective operational and strategic planning. We view Katz’s return positively and expect his emphasis on guest experience, pricing, and targeted acquisitions to reignite growth. Combined with a well-covered mid-single-digit dividend yield and a strong balance sheet that supports strategic growth through M&A, reinvestment in the portfolio, and share repurchases, we see an attractive long-term opportunity and the potential for multiple expansion from multi-year lows.

Gaming and Leisure Properties, Inc. is a triple net REIT that owns and leases casino properties. Shares declined during the quarter amid investor concerns that interest rates would remain higher for longer, making the company’s 6% dividend yield relatively less attractive. We remain shareholders. Gaming and Leisure Properties is collecting 100% of its rent, increasing rental rates by 2% annually, and growing its dividend at a low- to mid-single-digit rate per year. With a robust balance sheet and strong free cash flow profile, we believe the company is well positioned to continue making acquisitions and returning capital to shareholders through dividends. In our view, the current yield remains compelling and, when combined with earnings growth, should drive attractive returns over time.

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 6/30/2025, we held 21 investments. The median market capitalization of these growth companies was $31.1 billion. The top 10 positions represented 86.9% of total investments. Leverage was 8.7%.

During the quarter, we disposed of approximately 14% of our Tesla position via redemption in-kind. As explained previously in this letter, we are extraordinarily confident in the company’s prospects and ability to become a significantly more valuable business. The Fund completed its purchase of Tesla shares in 2016 with an ending portfolio weight of 9.6% of total investments. Its current average cost in the Fund is only $12.60 per share. Due to significant appreciation in the stock, the position increased to 30.6% of the portfolio’s total investments at the start of the recent quarter. Despite offsetting some of the volatility caused by the position’s weight with more stable and uncorrelated investments, Tesla’s stock movements caused increased variability in the entire portfolio. We entered into an agreement with a large investment bank to dispose of a portion of the holdings through a redemption in-kind because, we believe, it would have minimal impact on the share price and no transaction costs. Tesla remains the Fund’s top holding, by far. The disposition was a portfolio construction decision rather than a reflection of reduced confidence in the business.

The long-term absolute and relative performance of the Fund has been very good. The Fund has returned 16.80% annualized since conversion to a mutual fund on April 30, 2003, exceeding the Index by 4.76% per year.

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

But the distinct composition of the portfolio could result in periods of underperformance. The past 3-year period is one of those periods. And while we are disappointed with that distinct period, we are not alarmed by the modest relative underperformance. The low turnover strategy implemented by the Fund has previously resulted in similar stretches. And we have not only endured analogous periods throughout the Fund’s history but have also typically emerged with strong absolute and relative performance in subsequent years. Although we have no guarantees of continued success, we believe this trend will continue.

While we present the Fund’s absolute and relative returns over the SEC mandated periods, we believe it is also important to discuss how the Fund performs over the course of different market environments. Over the prior two years, the economy and markets have transitioned, in our opinion. The three-year period ended
12/31/2022 was a difficult time for growth investors. It was a period punctuated by a global pandemic, geopolitical instability, and macroeconomic headwinds. The VIX index was trading at above-average levels, while Barra factor returns for Beta and Growth were low. And the Index’s annual return over this period was below its historical rate. Despite these challenges, the Fund’s high quality growth portfolio weathered the period well.

However, the transition from that market environment to a more constructive environment has been (temporarily) challenging. We believe lower quality, value-oriented businesses tend to be sought by investors along with mega-cap growth companies. This occurred at the end of 2022 and into 2023. It resulted in one calendar year (2022) when the Fund lagged its Index. Customers at many service businesses had retreated causing revenue growth to moderate. Suppliers had increased prices causing margins to be pressured. Higher interest rates increased financing costs and raised the discount on future earnings. Investors gravitated towards large, steady value-oriented businesses, which are largely not held in the Fund. The underperformance during the last six months of 2022 and in the first half of 2025 is responsible for the Fund’s three-year return trailing the Index. And as discussed earlier in this letter, there is a current change in the macro and political environment.

Therefore, 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 Russell 3000 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 well on an absolute and relative basis. Since December 31, 2022, the Fund has an annualized return of 25.63% compared to the Index’s annualized return of 23.27%. While this is only a partial cycle, we believe we are off to a good start.

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 $1,117,421 on June 30, 2025. That same $10,000 hypothetical investment in a fund designed to track the Index would now be worth $273,734, only about 24% 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.