Baron Durable Advantage Fund | Q1 2025

Dear Baron Durable Advantage Fund Shareholder:

Baron Durable Advantage Fund® (the Fund) declined 7.0% (Institutional Shares) during the first quarter, compared to the 4.3% decline for the S&P 500 Index (the Index), the Fund’s benchmark.

We were off to an excellent start to the year with the Fund posting a 4.4% gain for the month of January, which followed an exceptional run that saw the Fund post an 85% cumulative gain over the prior two years. This could only be characterized as a favorable investing environment with the Index advancing 2.8% in January, and 58% over the prior two years and the Morningstar Large Growth category reporting a January gain of 3.3% on top of the 74% cumulative gain in 2023 and 2024. Obviously, these were very strong returns for the Fund on both an absolute and relative basis. We believe, in no small part, these results were set up by a meaningful correction experienced by the market in 2022. While every correction, pullback, or bear market is different, at their core, they are always driven by fear, uncertainty, and doubt. It is easy and tempting to get lost in the details because they change every time, but fundamentally, markets depend on stability and predictability. Every time stability and predictability are threatened – markets pull back. In 2022, rapidly increasing inflation forced the Federal Reserve (the Fed) to aggressively raise interest rates. It destabilized the markets, created uncertainty in how much, how fast, and for how long, and most importantly, whether it would cause the U.S. economy to go into a (prolonged?) recession. It dramatically increased the range of possible outcomes – and the markets sold off. We are simplifying of course, but if we zoom out, from the 30,000 foot view – we believe this is right. In the second half of this quarter, investors realized that DOGE, tariffs, and this administration’s policies in general, were going to be disruptive and unpredictable and that the range of possible outcomes was dramatically larger than what the investors were pricing in before – and the markets sold off. The Fund ended the quarter down 7.0%, while the Index declined 4.3% and the Morningstar Large Growth category was down 8.5%.⁴

From a performance attribution perspective, all of the relative underperformance can be attributed to poor stock selection in Health Care and Financials. In Health Care, our stocks did not fare badly per se, but lack of exposure to biotechnology, pharmaceuticals, and health care equipment (which were among the best performing sub-industries in the Index) hurt relative returns. In Financials, Apollo, Blackstone, and Brookfield all underperformed given their leverage to short-term cyclical market movements. Not having exposure to Energy, Utilities, and Materials accounted for approximately 30% of the relative shortfall. From the absolute return perspective, we simply did not have enough winners, which was not terribly surprising given the broad market sell-off in the second half of the quarter. The biggest absolute detractors were all members of the trillion dollar club: Broadcom, Amazon, NVIDIA, Microsoft, and Alphabet, and we have a high degree of confidence that it will not result in permanent losses of capital.

We believe that the businesses we own are well positioned for a wide range of outcomes. This is not to suggest that they are immune from cyclical downturns or that we expect them to defy the economic forces of gravity. This is to say that as leaders of their industries they are likely to come out stronger should the current instability and uncertainty cause a more serious or prolonged downturn. Most of our companies are asset light. They do not sell physical goods. They sell critical services to their customers which are exempt from tariffs. Think cloud based software providers like Microsoft and Intuit, alternative asset managers like Apollo, Blackstone, and Brookfield, financial exchanges and data providers like S&P Global, Moody’s, CME, and MSCI, or real estate data platform CoStar. Most of our companies are NOT significant importers and have limited direct exposure to tariffs. Thermo Fisher, Danaher, and Mettler-Toledo have some production outside the U.S. with limited exposure to China that has been declining steadily over the past few years. A significant portion of their revenue is derived from recurring sources (such as consumables) which increases switching costs and ensures pricing power. Speaking of pricing power, Visa and Mastercard operate in a duopoly market and since their fees are linked to the notional amounts charged that travel over their rails, they are excellent hedges against inflation. Many of our businesses have meaningful secular growth drivers that we believe will provide tailwinds for years to come. From AI enablers NVIDIA, Taiwan Semiconductor, Alphabet, Broadcom, and Monolithic Power Systems to senior housing provider, Welltower, that is benefiting from a structural shortage of premium senior housing facilities, to the alternative asset managers (mentioned above) that are consolidating and benefiting from increased allocations to alternatives. Finally, most of our businesses have fortress balance sheets and capital return programs that will benefit should they be able to buy back their stock at more attractive valuations. Having said all that…

We are preparing for a challenging year. The range of outcomes is as wide as we have seen in a long time and that means extreme market volatility is likely on tap. In fact, we have experienced it already. We want to remind investors that this Fund was designed with high volatility in mind. We are razor focused on minimizing the probability and the possibility of permanent losses of capital. However, we do not view our mission as outperforming a benchmark each quarter, or even every year. Were that the case, we would have a completely different approach to portfolio construction. It would also lead to exchanging opportunities to generate significant alpha over full market cycles for efforts to reduce the Fund’s short-term volatility. An exchange we are not willing to make. While past performance is no guarantee of future results, we have built a solid track record of taking advantage of market opportunities. In 2018, the Fund’s inaugural year, it posted a decline of 7.3%. In the next three years, the Fund rebounded with gains of 41.1%, 20.3%, and 32.2% (124.4% cumulatively, versus 100.4% for the Index). Then came a correction in 2022 with the Fund recording a 24.8% loss, which was followed by gains of 45.5% and 27.1% in the next two years (85.0% cumulatively, versus 57.9% for the Index). We do not have a crystal ball or any particular insight into how the economy and the markets will react to this current bout of fear, uncertainty, and doubt. Fear drives markets over the short term, but it is fundamentals that drive wealth creation over time. Really big opportunities come if you are willing to invest when other people are not!

We believe we have made sensible investments into companies where the reward far outweighs the risk. If we make good decisions, our process should lead to returns that exceed the Index over time, while exhibiting demonstrably less risk of permanent loss of capital.

Shares of global payment network, Visa Inc. rose 11.1% in the first quarter, after the company reported strong results with accelerating payment volumes. In the recent quarter, revenue grew 10% and EPS grew 14%, both of which exceeded Street expectations. Payment volume growth improved to 9% on a constant currency basis with a more meaningful acceleration in cross-border volume. Management reaffirmed annual guidance despite incremental currency headwinds. In addition, shares likely benefited from the relative stability of Visa’s business model in a risk-off market. We continue to own shares due to Visa’s durable growth characteristics and significant competitive advantages, operating in a duopoly market.

HEICO Corporation, a technology-driven aerospace, industrial, defense, and electronics company, contributed to performance in the quarter, with shares up 13.4% on the back of strong quarterly results with 15% year-on-year revenue growth, 22% EBITDA growth, and 46% EPS growth. On a segment basis, the electronic technologies segment, which had previously been affected by inventory-related headwinds, reported robust organic growth of 11% and 16% overall growth, signaling that the business was turning a corner. Similarly, the flight support group saw revenue growth of 13% on an organic basis and 15% overall. HEICO is also expected to benefit from an anticipated increase in defense spending, especially by European countries, to combat threats. The company could also benefit from DOGE-related initiatives to promote cost efficiencies, which aligns with HEICO’s value proposition to customers. We continue to hold shares and believe the company would continue benefiting from durable growth and significant competitive advantages, compounding earnings in the mid-teens rate over the long term.

Welltower Inc. owns senior housing, life science, and medical office real estate properties. Shares increased 22.1% during the quarter on robust cash flow growth in its senior housing portfolio, driven by strong occupancy and rent growth, a strong 2025 growth outlook, and execution on highly accretive, proprietarily sourced capital deployment opportunities. We remain investors. We are optimistic about the prospects for both cyclical and secular growth in senior housing demand against a backdrop of muted supply. We view Welltower as a best-in-class operator with a high-quality curated portfolio and a management team of astute capital allocators who have demonstrated the ability to capitalize on both organic and inorganic growth opportunities over time.

Broadcom Inc. is a leading fabless semiconductor and enterprise software company, with approximately 60% of revenue generated from semiconductors and 40% from software. The company is strategically positioned at the intersection of high-performance AI compute and networking infrastructure while also demonstrating disciplined execution in software, particularly following its VMware acquisition. Shares declined 27.5% largely due to investor concerns around the durability of AI cluster build outs by hyperscalers and AI labs, reflecting broader skepticism about the pace and sustainability of capex in AI infrastructure. We maintain conviction in the long-term thesis. Broadcom’s three mega-cap customers remain on track, with robust roadmaps in place, including hardware design, compiler development, and the broader software stack necessary for scalable AI cluster architecture. We expect Broadcom to capture a majority share of the estimated $60 billion to $90 billion market across these engagements by fiscal 2027.

Amazon.com, Inc. is the world’s largest retailer and cloud services provider. Shares declined 13.3% this quarter, following higher-than-expected 2025 capital expenditure guidance of $105 billion driven by AI. Shares also declined due to a broader technology sell-off driven by uncertainty around the timing and return on investment in AI as well as general macroeconomic concerns as investors awaited Liberation Day. Profitability across core North American retail, Amazon Web Services (AWS), and international retail continued to improve, driven by better cost discipline and operational optimizations. It was also another solid quarter for AWS as generative AI use cases are beginning to ramp. While we are monitoring progress across the cloud hyperscalers, we believe AWS will ultimately be competitive in generative AI, given its scale and technical infrastructure advantages. Longer term, Amazon has more room to grow in e-commerce, where it has less than 15% penetration. Amazon also remains the clear leader in the vast and growing cloud infrastructure market, with large opportunities in application software.

NVIDIA Corporation is a fabless semiconductor leader specializing in compute and networking platforms for accelerated computing. Its dominant position in AI infrastructure, with a comprehensive portfolio that spans GPUs, systems, software, and high-performance networking, has driven significant stock appreciation in an era of exponential AI demand. Despite strong quarterly financial results with 78% year-on-year revenue growth at a massive scale (revenue run rate is $160 billion), driven by 94% growth in datacenter revenues, shares fell 19.3% on investor concerns around the durability of compute infrastructure spending by hyperscalers and the leading AI labs, particularly in light of uncertain return on invested capital for frontier model development. We remain positive on NVIDIA’s long-term trajectory. We believe scaling laws in AI will hold, enabling linear improvements in compute to drive super-linear gains in model performance and utility. As value creation increasingly accrues to model developers, their incentive to invest in advanced infrastructure should persist, anchoring NVIDIA’s central role in the AI value chain. All the industries bottlenecked by intelligence will leverage AI, unlocking trillions of dollars in value. Most of these AI workloads will be supported by large language models running in the datacenters. NVIDIA is uniquely positioned to power this transformation through its full-stack approach, spanning silicon, systems, software, and developer ecosystem, and hence its competitive moat continues to widen.

The portfolio is constructed on a bottom-up basis with the quality of ideas and conviction level, rather than benchmark composition and weights, determining the size of each individual investment. Sector weights tend to be an outcome of the stock selection process and are not meant to indicate a positive or a negative view.

As of March 31, 2025, our top 10 positions represented 50.6% of the Fund’s net assets, the top 20 represented 79.8%, and we exited the quarter with 32 investments, down from 34 at the end of 2024. Financials and Information Technology represented 61.5% of the Fund, while Communication Services, Consumer Discretionary, Health Care, Industrials, and Real Estate represented another 37.0%, with the remainder held in Consumer Staples (Costco) and cash.

During the first quarter, we initiated a new position in the casual dining restaurant chain, Texas Roadhouse.

We also took advantage of stock market volatility to add to 6 existing investments: fabless semiconductor company Monolithic Power Systems, the independent broker dealer, LPL, the premium senior housing owner, Welltower, the tax and small business software provider, Intuit, the AI leader, NVIDIA and the derivatives marketplace, CME.

To finance these purchases, we exited three investments: Adobe, Booz Allen, and Agilent, and reduced 11 existing positions.

During the quarter, the Fund initiated a new position in the casual dining chain, Texas Roadhouse, Inc. The company and its franchisees operate 784 restaurants systemwide in 49 states and 10 foreign countries, including 722 Texas Roadhouse restaurants, 49 Bubba’s 33 restaurants, and 13 Jaggers restaurants. Its main brand, Texas Roadhouse, is known for “Legendary Food, Legendary Service” and their operating strategy is designed to position each restaurant as the local hometown favorite for a broad segment of consumers seeking high quality, affordable meals served with friendly, attentive service. The company’s competitive moat is multi-faceted. First, it has a unique incentive structure such that local restaurant operators are partners in the business via the Managing Partner program, under which restaurant managers put up their own capital as an investment and earn a base salary plus a percentage of the pre-tax profits of the restaurant they manage. Second, the company’s operating strategy of high quality food at moderate price points, which are often lower than competitors, creates a sticky customer base and improves resiliency to more challenging economic environments. As a result of its differentiated Managing Partner program, lower price points, and higher quality, made-from-scratch food, the company has consistently gained market share from both larger and smaller chains.

We expect Texas Roadhouse to grow units at a mid-single-digit rate annually as they expand their core Texas Roadhouse brand to 1,000 units over time. We also expect the company to accelerate unit growth of its Bubba’s 33 Restaurants. The company’s growth profile is supported by strong unit economics as restaurants cost around $8 million to build with mature stores generating close to $8.5 million in revenues at over 17% restaurant-level margins on average. As a result, the company generates a very healthy ROI.

Compared to other discretionary businesses, Texas Roadhouse tends to do well in most macroeconomic environments and while restaurants in general are more resilient as compared to Consumer Discretionary more broadly, Texas Roadhouse tends to gain market share during more challenging times thanks to its lower price points. The company also has very limited direct exposure to tariffs.

We expect Texas Roadhouse to increase profits at a high single-digit to low double-digit rate annually as they carefully expand margins and leverage fixed costs in the business. Texas Roadhouse has a clean balance sheet, and it generates strong free cash flows. We expect shareholder returns to be further bolstered by dividends and share repurchases.

We took advantage of market volatility to add to several of our existing positions, with the largest addition to Monolithic Power Systems, Inc. (MPS). MPS is a high-performance fabless analog and power semiconductor company serving diverse end markets across the semiconductor industry. We took advantage of stock weakness to add to it in the quarter. Despite consistently growing 10% to 15% above the industry for many years, MPS is still a relatively small player in the broader analog and power management industries and leverages its deep system-level and applications knowledge, strong design expertise, and innovative process technologies to provide highly integrated, energy-efficient, cost effective, and easy-to-use monolithic products to its customers. The company continues to expand its addressable market and drive strong revenue growth by taking advantage of areas where competition fails to innovate, driving an even deeper integration of its products, including a greater emphasis on modules that further improve performance while increasing MPS’s content. The company has several specific design wins that will drive revenue growth even in cyclical downturns, including in next-generation servers, automotive, and communications end markets. Management has executed at a high level, consistently outperforming their goals over time, recently reaching a $2 billion revenue run-rate, with eyes on a $4 billion business in the coming years (and even larger longer term). As customers continue to turn to MPS for its innovation and performance advantages, we believe the company will achieve its growth ambitions and become an increasingly important player in the power and analog semiconductor industry over time.

Our second largest addition during the quarter was to LPL Financial Holdings Inc. due to our growing conviction in LPL’s growth profile and ability to continuously gain market share. LPL is the largest independent broker-dealer in the U.S., with $1.7 trillion in client assets as of the end of 2024. LPL is winning share due to its breadth of offerings and the range of affiliation models it provides. This is complemented by increasingly larger enterprise deals in which LPL wins a large pool of advisors and assets under management in bulk as companies outsource advisor technology and compliance to LPL. 2024 was marked by a $63 billion partnership with Prudential Advisors, the retail wealth management business of the insurance company, Prudential. LPL has augmented its organic growth with acquisitions, driving synergies by achieving better economics on cash balances and asset-based fees, while removing duplicative costs. LPL reinvests profits back into improving its advisor offerings, and with time, we believe this should make the firm a more attractive choice for a wider range of advisors. This in turn should lead to growth in net new assets and profits, creating a virtuous cycle. Our analysis of historic advisor turnover shows that this approach has worked well, as we believe that LPL has been the #1 destination for advisors in motion for at least the last three years. Looking forward, we believe that LPL will continue to be a share gainer. While asset- based fees and net new assets might be impacted negatively by the current market volatility, we believe that LPL remains competitively advantaged, and may even improve its positioning, offsetting some of those broader possible headwinds with better economics from its cash balances (which often rise during periods of uncertainty), which not all peers monetize to the same extent. As a result, we think that LPL remains a compelling investment over a long-term time horizon.

We continued to build our position in the premium senior housing provider, Welltower Inc., which we believe offers both “offensive” and “defensive” investment attributes in the current uncertain environment. Given most of the company’s cash flows are derived from senior housing, “defensive” characteristics are underpinned by a “needs based” service offering. Welltower owns senior housing properties in some of the best micro-markets with substantial pricing power given the company serves a higher net worth demographic. As we have articulated in the past, we remain optimistic about the prospects for both cyclical growth (a recovery from depressed occupancy levels following COVID-19) and secular growth (seniors are the fastest growing portion of the population and people are living longer) in senior housing demand against a backdrop of muted that will lead to many years of compelling organic growth. Several of these characteristics were on display in the most recent quarter as Welltower continued to report above industry rent and occupancy growth. We regard management as highly astute capital allocators, which was further cemented with the recently announced C$4.6 billion acquisition of Amica, an ultra-luxury irreplaceable portfolio in Canada, which was accretive to existing shareholders, acquired well-below replacement cost and enhanced the overall quality of the portfolio.

We also added to the following names in the portfolio:

• Tax and small business software provider, Intuit Inc. – Intuit checks all the boxes we look for in an investment. It has durable competitive moats thanks to the breadth of its data, stickiness of its customers and the standardized nature of its software, an attractive business model with recurring revenues, high margins, and limited capital requirements, a durable runway for growth, and a great management team that in our view can execute on the vision over the long term. Stock volatility enabled us to add to this great business at a discount.
• The AI systems provider, NVIDIA Corporation – We attended the annual NVIDIA developer conference, GTC 2025, and came out with a greater conviction that AI is the biggest disruptive change we have seen in our careers. As models continue moving up and to the right on the intelligence curve, and down on the cost curve, new markets and opportunities open. We attended a discussion with Noam Brown from OpenAI, who described the progress and opportunity: “The pace of progress has exceeded everyone’s expectations in the last 5 years… we need to look at the trajectory. Have very good reasons to be optimistic. Need to think about it as intelligence per token… the intelligence versus the cost curve… as even the most expensive models are much cheaper than humans... and the top human expert in a field is paid a lot.” Jensen Huang, NVIDIA’s founder and CEO, similarly described how the opportunity is in the trillions of dollars for NVIDIA, calling the DeepSeek development (which led to investor concerns that AI would not require as much compute as previously expected) “profoundly misunderstood… as reasoning models require over 100x more compute than previously thought”. NVIDIA’s progress in AI across the stack, in hardware and software, and across industry domains remains unmatched. Similarly to how we were able to initiate a position in the company in late 2022, stock price volatility once again provided an opportunity for us to buy this remarkable business at a discount.
• The largest derivatives marketplace, CME Group, Inc. – We slightly added to our position in CME during the quarter. We believe that CME enjoys unmatched competitive positioning, operating the largest marketplace for derivatives in the world. The depth of its platform drives customer adoption, who in turn, bring liquidity to the marketplace, further improving its depth, creating a virtuous cycle that would be very hard for competitors to dislodge.

As mentioned above, we sold our holdings in Adobe Inc., Booz Allen Hamilton Holding Corporation, Agilent Technologies, Inc., as well as in 11 other existing investments, and reallocated to ideas that, in our view, have more positively skewed risk/reward for the long term.

“Buy when there is blood in the streets, even if the blood is your own.” – Baron Rothschild, the famous 19th century banker⁵

Despite the gory imagery this quote resonates with us two centuries later. Here is more contemporary wisdom from Ron Baron sent to all of our portfolio managers and research analysts after our most recent meeting:

“I don’t expect anyone to have answers about tariffs, dollar weakness, recession, etc. We do expect all analysts and portfolio managers to be completely knowledgeable and up to date on current and most importantly long-term growth prospects for the businesses we own. Note long term. No one knows what will happen short term ... and we should not be trying to take advantage of short -term volatility. Not what we do. The reason we have outperformed forever is because of our long-term focus on people and business fundamentals. MACRO had Zero impact on our 43-year record. You got to remember John Lennon premise: ‘in the end, everything will work out. And if it doesn’t. It’s not the end.’ Nothing truer.”

We could not agree more or say it better ourselves. We believe that this Fund offers investors the opportunity to take a long-term view without assuming significant risk of permanent loss of capital along the way. The Fund invests exclusively into high quality businesses. The weighted average company in the portfolio earned 7.5% higher operating margins than the weighted average company in the S&P 500 Index, while earnings per share grew about 4% faster⁶. During the last cyclical downturn with the fastest Fed hiking cycle in four decades, the weighted average company in our portfolio saw its revenue growth decelerate only slightly, from 15.1% 2022, to 14.7% growth in 2023⁷. Not surprisingly, our portfolio companies have also seen relative stability in their fundamentals to start this year, with revenue expectations for 2025 increasing by 0.7% during the first quarter⁸, operating income expectations rising by 0.2%, and operating margins down just 14bps.

The entirety of the Fund’s drawdown in the March quarter was due to multiple contraction, which was down 8.4%⁹, as opposed to any change in fundamentals – which are the more important driver for long-term returns. From a historical perspective, the weighted average multiple of the portfolio is now 11% below its average over the last 5 years¹⁰.

Every day, we live and invest in an uncertain world. Well-known conditions and widely anticipated events, such as Federal Reserve rate changes, ongoing trade disputes, government shutdowns, and the unpredictable behavior of important politicians the world over, are shrugged off by the financial markets one day and seem to drive them up or down the next. We often find it difficult to know why market participants do what they do over the short term. The constant challenges we face are real and serious, with clearly uncertain outcomes. History would suggest that most will prove passing or manageable. The business of capital allocation (or investing) is the business of taking risk, managing the uncertainty, and taking advantage of the long-term opportunities that those risks and uncertainties create. We are confident that our process is the right one, and we believe that it will enable us to make good investment decisions over time.

Our goal is to invest in large-cap companies with, in our view, strong and durable competitive advantages, proven track records of successful capital allocation, high returns on invested capital, and high free-cash-flow generation, a significant portion of which is regularly returned to shareholders in the form of dividends or share repurchases. It is our belief that investing in great businesses at attractive valuations will enable us to earn excess risk-adjusted returns for our shareholders over the long term. We are optimistic about the prospects of the companies in which we are invested and continue to search for new ideas and investment opportunities.

Sincerely,