Baron WealthBuilder Fund | Q4 2023

Baron WealthBuilder Fund^® (the Fund) performed well in the volatile three months ended December 31, 2023. The Fund appreciated 11.42% (Institutional Shares) in the fourth quarter. The Fund’s absolute returns during 2023 were also strong. In 2023, the Fund gained 25.73%.

The S&P 500 Index (the Benchmark), which measures the performance of publicly traded large-cap U.S. companies, slightly exceeded the Fund’s performance during the quarter as well as the full year. The Benchmark increased 11.69% in the quarter and 26.29% for 2023. Larger, dividend paying, slower growing, financially strong companies with lower valuations and large-cap technology companies are heavily weighted in the Benchmark. During the year, larger-cap and profitable businesses generally outperformed smaller businesses that invest a substantial part of their profits to accelerate their growth.

The S&P 500 Index is one of two benchmarks for the Fund. The other is the MSCI ACWI Index (the Global Index). The Fund’s performance for both the quarter and 2023 exceeded the Global Index’s performance. The Global Index increased 11.03% for the quarter and 22.20% for the year.

The Fund also outperformed the Morningstar Aggressive Allocation Category (the Peer Group), both for the quarter and the year. The Peer Group increased 10.48% for the quarter and 17.66% for 2023. The Fund’s performance ranked in the top 5% of its Peer Group for 2023.*

The Fund trailed both the Benchmark and the Global Index (following the Fund’s exceptionally strong performance in 2021) during 2022. As a result of that difficult year, the Fund’s performance was penalized during the past three years, both in absolute and relative terms. This was because the Fund’s investments in the underlying Baron mutual funds (the Baron Funds), which have historically outperformed their benchmarks, underperformed in 2022. Baron Funds own growing, innovative businesses, and those businesses lagged indexes that year.

Despite a tough 2022, the Fund’s performance for the past five years is in the top 1% of its Peer Group...and in the top 1% of its Peer Group since the Fund’s inception six years ago. Share prices of many businesses in which several Baron Funds’ have invested are again outperforming.

It is unusual that mutual funds, or most investors for that matter, have outperformed passive indexes like the Benchmark or the Global Index. The Fund’s goal is to outperform both passive indexes and its Peer Group over the long term. We hope to accomplish our goal by investing for the long term in a diversified portfolio of Baron Funds that outperform their respective indexes. Our Funds have historically outperformed by investing in what we regard as well managed, competitively advantaged growth businesses.

Since their respective inceptions as mutual funds, 16 funds, representing 98.6% of Baron Funds’ AUM, have outperformed their benchmarks and 14 funds, representing 96.6% of Baron Funds’ AUM, rank in the top 20% of their respective Morningstar categories. Five funds, representing 46.5% of Baron Funds’ AUM, rank in the top 1% of their categories.

Investments for the Baron Funds are selected using the same investment process and criteria, regardless of their respective category or sector. During 2023, larger-cap holdings outperformed smaller and mid-sized businesses. Investor interest has lately begun to broaden. As a result, performance disparities between larger and smaller companies have narrowed. This should benefit Baron Funds, since they have substantial investments in smaller and mid-sized growth businesses.

The Fund’s portfolio of top performing Baron Funds owns shares in approximately 400 businesses looking through the Fund to the underlying Baron Funds portfolios. Despite this, only 30 long-term holdings represent 51% of the Fund’s net assets. Those investments have become significant holdings because they have increased substantially in value...not because we made large initial investments in those businesses.

* Not annualized. 
†Performance is calculated from the time the Fund was added to Baron WealthBuilder Fund: Baron Durable Advantage Fund – 3/13/2018; Baron Global Advantage Fund – 1/9/2018; Baron FinTech Fund – 2/27/2020; Baron Health Care Fund – 10/18/2018; and Baron Real Estate Income Fund – 5/17/2021. 
Performance data quoted represents past performance. Past performance is no guarantee of future results. The indexes are unmanaged. The index performance is not Fund performance; one cannot invest directly into an index.

Our exceptionally talented, long-tenured, and consistently growing 45-person portfolio managers and research analysts identify and research businesses in which we invest. Baron research analysts are supported by more than 160 awesome, hardworking individuals including senior executives, risk managers, lawyers, compliance, client service, traders, accountants, human resources...and the nicest assistants you could ever imagine.

In the current period, Baron Funds’ ownership of specialty insurer Kinsale Capital Group, Inc. and satellite business Iridium Communications Inc. penalized our results. Those two investments in aggregate represent about 2.2% of the Fund’s net assets. Kinsale had modestly slower premium growth in the quarter. While continuing to demonstrate extraordinary ROE statistics and earnings growth, Kinsale’s gross written premiums increased only 33%. They had increased 58% in the preceding quarter. Enabled by proprietary data and technology sets, we believe Kinsale will continue to win market share due to its ability to quote business quickly. The timeline for Iridium’s direct-to-device offering has been extended. Iridium’s exclusive relationship with Qualcomm ended in the fourth quarter, and Iridium is now seeking other partners with whom to integrate its communications chip. While this expands Iridium’s addressable customer base, it has delayed its realization of revenue. While other elements of its business including the internet of things, voice & data, and government services have stable growth prospects, their upside potential is less than direct to device.

While just a few holdings penalized performance, Baron Funds held a lot more winners than losers in the period; 245 holdings had positive double-digit returns. Among the leaders were a diverse set of investments including Gartner, Inc., IDEXX Laboratories, Inc., and Space Exploration Technologies Corp. (SpaceX).

Gartner’s information technology consulting business experienced improved growth. Advising its clients on their significant artificial intelligence opportunities provides Gartner additional potential. Gartner’s net new contract revenue for both its technology and human resources consulting were above expectations.

IDEXX is a veterinary diagnostic company. Although veterinary visits remain inconsistent, increased clarity on instrument introductions provides growth potential. The first of two anticipated new IDEXX instruments will launch in early 2024. Consumables attached to IDEXX instruments offer long-term recurring revenue streams. IDEXX contracts last five to six years with minimum annual commitments and price escalators. Additionally, new devices provide access to new accounts. New accounts historically produce large cross sales of existing chemistry equipment. Chemistry is the most profitable aspect of IDEXX’s in-clinic revenue stream.

SpaceX is a high-profile private company founded by Elon Musk that designs, manufactures, and launches rockets and satellites. Shares contributed to performance in the wake of another record-breaking year. The company closed 2023 with a record 96 Falcon rocket launches, nearly twice a week on average, substantially more than the 61 launches in 2022 and surpassing all its private and government program peers. Starlink, SpaceX’s satellite constellation, also achieved remarkable milestones, including operating over 5,500 satellites, the majority of active satellites in space, and now providing connectivity services to 2.3 million active customers, more than doubling its customer base during the year. Starship, SpaceX’s groundbreaking new rocket, successfully performed its second test flight this quarter. Over time, SpaceX expects Starship to both reduce costs and expand the company’s operational capabilities, including supporting SpaceX’s long-term goal to enable human beings to inhabit Mars. We value SpaceX using a proprietary valuation model and recent financing transactions, which trended positively even through a more complex funding environment.

The various Baron Funds quarterly letters provide you with a more comprehensive description of their portfolio holdings and strategies.

Baron WealthBuilder Fund’s portfolio is composed of top performing Baron Funds and provides broad equity exposures. We do not attempt to mimic benchmark indexes. We also do not structure portfolios to conform to views of macro developments. That is since we regard such developments and their impacts to be unpredictable. We focus exclusively on business fundamentals. This includes our assessment of executives’ talent and ethics...and the growth prospects and competitive advantages for their distinctive businesses long term.

We believe small- and mid-cap growth businesses offer extremely attractive return potential relative to their risk over the long term. Small- and mid-cap businesses represent 65.4% of the Fund compared to 17.8% for the Benchmark. While Baron Funds’ investments in such companies have been successful over our Firm’s 42-year history, that has not always been so every year. As we noted, large-cap stocks generally outperformed smaller companies in 2023 as well as in the prior five years.

Over the past five years, one-year rolling monthly returns of the large-cap Russell 1000 Growth Index outperformed the small-cap Russell 2000 Growth Index 71% of the time. That includes four of the past five calendar years. That has also been the case in five of the six calendar years since the Fund’s inception.

Regardless, the Fund has outperformed its benchmark indexes during the past five years and since its inception six years ago.

Source: FactSet SPAR. Except for Standard Deviation and Sharpe Ratio, the performance based characteristics above were calculated relative to the S&P 500 Index.

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

Respectfully,