Baron Mid Cap Growth Strategy | Q2 2025

U.S. equity markets rose against the backdrop of heightened volatility stemming from U.S. tariff policies and war in the Middle East. Risk-off sentiment in early April was driven by President Trump’s “Liberation Day” tariff announcement, which was viewed as more severe than expected. The S&P 500 Index fell more than 12% over the next four trading days. After bottoming on April 8, U.S. equities rebounded largely in response to favorable trade developments. Other positive market catalysts included generally strong corporate earnings, dovish signals from the Federal Reserve, and ongoing momentum around the "AI trade." By the quarter’s end, many market indexes were at or near record highs.

After generating solid outperformance during the "risk off" environment that characterized last quarter’s market, Baron Mid Cap Growth Strategy failed to keep pace as the Russell Midcap Growth Index (the Index) rebounded sharply from its April 8 low to the end of June. The Strategy was up 7.86% in the second quarter, trailing the Index, which appreciated 18.20%.

The Strategy invests in high-quality companies benefitting from long-term secular growth drivers with highly visible and growing earnings streams that trade at valuations we believe will allow us to compound our investments at mid-teens rates. The Strategy’s investment approach results in a portfolio that is meaningfully underexposed to stocks with certain style factors - most notably stocks characterized by high levels of Beta, Residual Volatility, and Momentum. These are the types of stocks that fared best amid this quarter’s “risk on” market environment. In fact, the Beta factor experienced its second-best three-month period of performance in the last quarter century.

A second key contributor to the Strategy’s underperformance stemmed from not owning Palantir Technologies Inc., a software company focused on big data analytics, which rose 55% during the quarter. Palantir’s impact on relative performance was over six times higher than we have seen historically for any single security unique to the Index. The company did not meet our investment criteria. At quarter end, Palantir was valued at approximately 225 times its expected 2025 earnings with a market cap exceeding $300 billion.

After multiple quarters of strong gains, Palantir’s weight exceeded 8% in the Index prior to its removal on June 27 following the conclusion of the latest Index rebalance. No security has approached Palantir’s Index weight over the last 25-plus years - the highest previous weight for a security was 4.2%, achieved by VIAVI Solutions (formerly JDS Uniphase) in early 2000 amidst the dotcom bubble. The company’s share price has since fallen approximately 98%.

These same two issues - the Strategy’s style biases and not owning a small number of technology stocks - has had a meaningful negative impact on the Strategy’s relative underperformance versus the Index during the past two and a half years (since 12/31/2022), as the Index reached new highs in the post-COVID era.

About half the underperformance during this period is attributable to style-related headwinds, as its investment approach left the Strategy consistently underexposed to stocks characterized by high- levels of Beta, Residual Volatility and Momentum. Underexposure to these three factors accounted for almost 90% of the overall impact from styles during this period.

Most of the remaining underperformance during this period can be attributed to stock specific factors, of which three-quarters came from not owning just two stocks - Palantir and AppLovin Corporation, another highly valued technology company that did not meet our investment criteria. Shares of Palantir and AppLovin gained 1,936% and 3,070%, respectively, in this period. The two stocks started the period accounting for only 0.4% of the Index and, prior to their exit from the Index on June 27, 2025, had combined weight of nearly 11%.

As discussed, poor stock selection in Information Technology (IT) was exacerbated by not owning the largest company in the Index, Palantir. Modest declines from the Strategy’s sizable positions in Gartner, Inc. and Roper Technologies, Inc. also contributed to relative weakness in the sector. Syndicated research provider Gartner was negatively impacted by reductions in government spending in its public sector business. We estimate U.S. federal exposure accounts for about 5% of Gartner’s total research contract value, with about half from the Department of Defense and intelligence organizations, and half from civilian agencies. While federal budget scrutiny remains high, we believe Gartner’s services deliver significant value to users, including the potential for hard dollar savings. Its private sector business appears well positioned for sustained growth, and management is adept at exercising cost controls to support margins and free cash flow generation. The company’s balance sheet is in excellent shape, and we expect management to take advantage of this drawdown through aggressive share repurchases

Roper owns a portfolio of businesses with market-leading software and technology-enabled products with the goal of compounding cash flow over time. The company has a high percentage of recurring revenue and maintains high cash returns on investment in defensible niche businesses. After outperforming in the first quarter when investors rotated into more defensible growth businesses in a period of heightened market volatility, Roper’s shares underperformed as higher growth segments of the market recovered swiftly.

The remaining underperformance came from disappointing stock selection in Financials, Industrials, Communication Services, and Real Estate. Specialty insurer Arch Capital Group Ltd. was the principal detractor in Financials after reporting premium growth below Street expectations and slowed from the prior quarter due to increased competition and lower pricing in certain business lines. Nevertheless, earnings beat expectations due to better underwriting margins and a lower tax rate. We continue to own the stock given Arch’s strong management team and our expectation of significant growth in earnings and book value.

Weakness in Industrials was broad based. Space Exploration Technologies Corp. (SpaceX) has been a consistent contributor to our performance over the years. During the quarter, the company’s shares were unchanged, maintaining their value in a rising market. We value SpaceX using prices of recent transactions. Verisk Analytics, Inc. stock lagged alongside other defensive stocks during the quarter. There was no materially negative company specific news in the period. Verisk reported solid Q1 2025 earnings and CEO Lee Shavel sounded upbeat about the company’s growth potential. We maintain conviction in the competitive positioning, long-term growth, margin expansion, and capital deployment prospects for the business.

Performance in Communication Services was hindered by another private investment, AI and social media company X.AI Holdings Corp. (xAI), whose unchanged share price during the period negatively impacted relative results. We also value xAI based on recent share transactions. Real estate information and marketing services platform CoStar Group, Inc. was responsible for most of the relative losses in Real Estate. The company’s recent performance has been tempered by significant investment in its residential product, Homes.com, and mixed net new sales. We remain encouraged by growth in both traffic and brand awareness for the new product and are optimistic that momentum will build as the company expands its dedicated residential sales force, enhances its customer targeting, and potentially benefits from changes in Multiple Listing Service practices. Growth in CoStar’s non-residential business also appears poised to accelerate as the sales team refocuses on core offerings—a trend we expect to continue as headcount increases by 20% or more this year. We believe the value of CoStar’s core non- residential business alone exceeds the current share price of the stock, suggesting that investors are ascribing little value to the long-term residential opportunity.

Somewhat offsetting the above were favorable impacts from active sector weights. The Strategy benefited from being underexposed to the lagging Energy, Consumer Discretionary, Consumer Staples, and Materials sectors.

Shares of veterinary diagnostics leader IDEXX Laboratories, Inc. gained after reporting better-than-expected financial results. Although foot traffic into veterinary clinics in the U.S. remained depressed, management‘s excellent execution enabled the company to maintain strong performance. We believe IDEXX’s dominant competitive position remains unchallenged, and we expect new proprietary testing equipment and diagnostic solutions will meaningfully contribute to growth in 2025 and beyond. We see increasing evidence that long-term secular trends around pet ownership and pet care spending have structurally accelerated. We expect this to lead to a reacceleration in veterinary visits, which should support IDEXX’s long-term growth rate.

Amphenol Corporation, a leading global supplier of advanced interconnect systems, contributed to performance during the quarter. The company reported robust results in April, with organic growth exceeding its prior guidance primarily because of strength in its data center end market. Shares continued to perform well as investors became more optimistic about increased capital spending on data infrastructure, partly driven by AI-related investments. We view Amphenol as a best-in-class industrial technology company with a strong track record of creating value through both organic and inorganic growth over time.

Shares of property and casualty (P&C) insurance software vendor Guidewire Software, Inc. gained on strong fiscal Q3 2025 financial results and an upward revision to its full-year earnings guidance. The company’s annual recurring revenue (ARR) continued to benefit from new customer wins and migrations of its existing customer base to InsuranceSuite Cloud. We expect the company to shift R&D resources from infrastructure investment to product development, which should help drive cross-sales into its sticky installed base and potentially accelerate ARR growth over time. We are further encouraged by Guidewire’s subscription-based gross margin expansion, which improved by more than 600 basis points in the most recently reported quarter. We believe Guidewire will be the critical software vendor for the global P&C insurance industry, capturing a large share of a potential $30 billion total addressable market while generating margins above 40%.

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 company’s first quarter, premium growth fell below Wall Street forecasts and slowed relative to the prior quarter because of rising competition and lower pricing in certain business lines. Even so, earnings exceeded expectations because of stronger underwriting margins and a lower corporate tax rate. We continue to hold shares because of Arch’s strong management team and our expectation for significant growth in earnings and book value per share over time.

The Cooper Companies, Inc. (CooperCompanies) is a global medical device company with two business units: CooperVision, a leading manufacturer of soft contact lenses; and CooperSurgical, focused on women's health care and fertility. The stock detracted from performance following mixed fiscal Q2 results. While CooperCompanies’ 7% organic growth rate exceeded expectations, the results were overshadowed by management’s acknowledgment of softening contact lens end markets due to macroeconomic headwinds and tighter channel inventories across the industry. Still, CooperCompanies maintained its expectation to outpace the market by approximately 150 basis points in fiscal 2025, driven by robust contact lens demand and stable pricing. Management cited ongoing margin expansion as another bright spot and projected continued strength throughout the year due to efficiency gains and favorable product mix. The global contact lens market benefits from long-term secular trends, including sustained demand for premium lenses, and CooperCompanies, which offers the industry’s broadest portfolio of specialty lenses, continues to gain share.

Bio-Techne Corporation is a leading developer and manufacturer of reagents, instruments, and services for the life sciences research, diagnostics, and bioprocessing markets. Its stock fell due to weakness in academic research spending following cuts to National Institutes of Health (NIH) funding. The U.S. academic research market accounts for roughly 12% of Bio-Techne’s revenue, with about half of that tied to NIH grants. Broader biotechnology funding has also been soft amid policy uncertainty and weak capital markets. As a result, management guided to low single-digit organic revenue growth for the June quarter, down from its prior expectation of high single-digit growth. While the challenging environment for U.S. academic research may persist in the near-term, we retain conviction in the stock. Bio-Techne’s overall exposure to this end market remains limited, and we believe the current valuation is attractive.

As of June 30, 2025, the Strategy held 53 positions. The Strategy’s 10 largest holdings represented 49.1% of net assets, and the 20 largest represented 71.5%. The Strategy’s largest weighting was in the IT sector at 27.6% of net assets. This sector includes application software companies, IT consulting firms, and electronic components companies. The Strategy held 22.3% of its net assets in the Industrials sector, which includes investments in research & consulting services businesses, aerospace & defense firms, and construction & engineering companies. The Strategy held 14.3% of its net assets in the Health Care sector, which includes investments in life sciences companies and health care equipment, technology, and supplies companies. The Strategy also had significant weightings in Financials at 12.9% and Consumer Discretionary at 7.8%.

Samsara Inc. was a new addition to the Strategy during the quarter. The company provides a cloud-based software platform for commercial vehicle telematics, video-based driver safety, driver workflow automation, and industrial equipment monitoring. Its software collects and analyzes data from sensors and cameras installed in its customers’ commercial trucks, construction equipment, warehouses, and other assets, helping companies visualize and improve the state of their operations. More than 20,000 customers in the transportation, field services, construction, utilities, and other industries have adopted Samsara, and the company recently became one of the fastest software companies ever to reach $1.5 billion in ARR.

Samsara has been winning share from competitors in the $51 billion market for connected fleet software because of its superior cloud native architecture, ability to address multiple use cases in a single platform, and its rapid product release cycle. Importantly, as Samsara continues to expand its connected asset base, we believe it is building an unmatched data asset that drives better outcomes for its customers relative to its competitors. Capturing more than 14 trillion data points from over 80 billion miles driven spanning roughly 99% of major U.S. roads, Samsara uses AI to help companies optimize their vehicle routes, prevent accidents, improve asset utilization, conduct predictive maintenance, and lower insurance premiums. In fiscal year 2025, across its customer base, the company prevented 250,000 accidents and reduced carbon emissions by 3 billion pounds. Seeing a fast and tangible return on investment, customers have renewed and expanded their Samsara subscriptions at a healthy rate.

We anticipate a long runway for growth as Samsara expands into existing accounts and wins new customer logos. Samsara is less than 50% penetrated in its existing customers’ vehicle fleets and has a significant opportunity to cross-sell newer non-vehicle products (which already account for more than $200 million of ARR) into its base. The company has also increased its customer count by approximately 20% year-over-year every quarter and identified hundreds of thousands of potential new accounts to win. As it has scaled, Samsara has delivered healthy operating leverage, and we think free cash flow margins can expand to more than 20% longer term.

The Strategy established a position in LPL Financial Holdings Inc., the largest independent broker-dealer (IBD) in the U.S. LPL uses technology to help independent financial advisors run their practices more efficiently and service their clients more successfully. LPL should continue to benefit from secular growth in the demand for financial advice, and a shift among financial advisors away from large wire houses towards independent practices. We believe LPL, as the largest IBD, is well placed to continue gaining market share, as it offers its advisors high-quality technology, a range of affiliation models, and best-in-class financial incentives.

LPL invests more than its competitors in developing the technologies that allow advisors to run their practice smoothly. The company has also developed a range of possible outsourcing relationships for advisors to choose among, allowing a high degree of flexibility as they transition their practices to independence. LPL’s scale allows it to spread their costs over a $1.5 trillion-plus asset base. LPL then uses its superior scale to pay industry-leading economics to its advisors, who can earn payouts of over 90% of the revenue they generate. The combination of these benefits enables LPL to continue recruiting more assets onto its platform, which in turn reinforces these scale advantages. LPL also benefits from the long-term trend of rising asset prices, which grows its base of assets under management.

We believe that LPL is well positioned to continue winning new advisors and asset inflows. As it leverages its scale to continue developing its advisor offerings, LPL is gaining share in a growing market. With low teens asset growth and ongoing margin expansion, we believe that LPL can grow EBITDA at a mid-teens rate, and coupled with share repurchases, compound earnings per share at a high teens rate for an extended period.

We managed down the Strategy’s weightings in several of our largest longtime holdings, including precision instruments provider Mettler-Toledo International Inc., brokerage The Charles Schwab Corporation, injectable drug administration leader West Pharmaceutical Services, Inc., IT research firm Gartner, Inc., and veterinary diagnostics company IDEXX Laboratories, Inc.

The Strategy demonstrated strong outperformance during the first quarter of this year amid a sharp downdraft in the equity markets. Many of the factors cited for the markets' pullback - highly volatile U.S. tariff policies, concerns over the federal deficit, rising interest rates, a weakening dollar, geopolitical uncertainty, and extended valuations among the perceived beneficiaries of AI - remain largely unchanged. Yet, investors chose to discount those same concerns this past quarter.

The types of businesses we favor – high-quality companies that benefit from long-term secular growth drivers with highly visible and growing earnings streams – did not perform as well as businesses that we believe to be more speculative and, in many cases, too highly valued to merit investment. This ongoing dynamic has predominated in equity markets throughout the past two- and-a-half years, contributing to among the most challenging periods for the Strategy’s investment approach in its nearly 40-year history.

Although we do not make investments predicated upon our view of changing macroeconomic or market developments, we remain confident that the types of businesses we own will soon be better appreciated - and more appropriately valued - by investors. The dynamic whereby particular types of stocks move in and out of favor has occurred often throughout the Strategy’s long history. We believe that our businesses' growth opportunities and competitive positions have continued to improve, while their absolute and relative valuations have become more compelling.

Sincerely,