Baron Partners Fund | Q1 2025

Dear Baron Partners Fund Shareholder:

Baron Partners Fund® (the Fund) endured a tough start to the year, relinquishing a portion of the excess appreciation achieved at the end of 2024.

Over the past three months, the Fund declined 17.37% (Institutional Shares). This result was meaningfully below its primary benchmark, the Russell Midcap Growth Index (the Index), and the large-cap dominated Russell 3000 Index (the Market Index). Those two benchmarks fell 7.12% and 4.72%, respectively. Its peer group, the Morningstar Large Growth Category, declined 8.49%.*

The prior three-plus years have been marked by macroeconomic and political events that drove significant volatility. The Fund’s sizable gains in calendar years 2023 and 2024 have been bookended by declines in late 2022 and the most recent quarter. This resulted in minimal net asset value change over the prior 3-year period while the Index has had a more typical annualized return. Over the prior three years, the Fund declined 1.19% annualized, while the Index increased 6.16%.

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-year, and since conversion periods. (It is in the third percentile for the prior 20 years.) The finite periods of underperformance have had less impact on long-term absolute and relative returns. Since its conversion to a mutual fund, the Fund achieved an annual return of 16.39%, compared to the Index’s return of 11.33%. We are very proud of the Fund’s long-term track record.

*As of 3/31/2025, the annualized returns of the Morningstar Large Growth Category were 5.01%, 16.99%, 12.61%, and 13.13% for the 1-, 5-, 10-, and 15-year periods, respectively.

As of 3/31/2025, Morningstar Large Growth Category consisted of 1,079, 949, and 745, share classes for the 1-, 5-, and 10-year periods. Morningstar ranked Baron Partners Fund in the 1st, 1st, 1st, 1st, 2nd, 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 699 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.

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As stated in previous letters while enduring analogous periods, we are disappointed, but not alarmed, with the most recent three-month results. And while we attempt to guard against such outcomes by owning a variety of businesses that we believe will react differently in distinct market environments, the concentrated nature of the portfolio has occasionally led to such outcomes. Over the prior 10 calendar years, we have trailed the Index in 3 distinct years (2015, 2016, and 2022). The excess returns earned over the other 7 years resulted in the Fund achieving 10-year annualized returns of 21.34% versus the Index’s 11.54% as of 12/31/2024.

The recent quarter should not be viewed in isolation. It follows a period of surprising and drastic change in the U.S. political landscape. The business and investor euphoria experienced following the conclusion of the U.S. Presidential election at the end of 2024 was met with the realities of policies enacted (and postured) 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 are now concerned about tariffs hindering international trade, inflation harming discretionary spending, and federal spending cuts impacting economic growth. It has been a whipsaw of forecasts. We did not attempt to predict the 2024 election outcome, nor how investors would reaction to it. And we likewise are not attempting to predict current government policy. We believe that our investments should achieve their goals regardless of political outcomes. Reduced regulatory burdens should enable 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, of which we attempt to populate in the Fund. These businesses should face reduced competition in such economies, and the executive teams should position their business to thrive. The portfolio turnover of the Fund remained very low throughout this period. A transitional period could be volatile, and that has once again been the case. But the Fund is weathering this entire period. Since the U.S. election on 11/5/2024 when the macroeconomic and political environment shifted, the Fund has gained 9.54% while the Index has lost 3.53% through the end of the quarter.

While we have historically done well over an entire economic cycle, we are extremely focused on our investments managing and emerging from the current challenges. Elon Musk, Tesla founder and CEO, may be the mostly closely associated individual (not named Trump) with the new administration. He is officially a “special government employee” and leads the newly created Department of Government Efficiency (DOGE). Like anything in U.S. politics recently, it appears that half the country supports his work while the other half is in opposition. Some in the opposition have vowed to withhold purchases of Tesla products. Other extremists have destroyed vehicles and intimidated potential buyers. This interference is occurring during a manufacturing and product change for the company. Its wildly successful Model Y is undergoing a refresh, which has temporarily paused some production, suspended the supply chain, and paused customer interest in legacy vehicles. Additionally, proposed industry tariffs may inflate prices and curtail purchases. The key word for most issues, however, is “temporarily.” We believe refreshed vehicles will spur pent-up demand. New manufacturing processes instituted at facilities will further reduce production costs to unrivaled and unachievable levels for competitors. A new model rollout in the middle part of the year will open the brand to a new audience. And an autonomous vehicle service is on the horizon that has the potential to serve an exceptionally large addressable market while earning high profitability. While we acknowledge the shortfall in current results, we have increased confidence in the company servicing a larger share of the transportation market and delivering high profitability. And other verticals like robotics and energy will provide new areas of growth and potential upside over time.

While Tesla, Inc. suffered the greatest decline in the period and is the Fund’s most substantial holding, it is not the only company to face near-term macro and policy pressures. Macro concerns hampered financial technology companies, like FactSet Research Systems Inc. and MSCI Inc. Investors are concerned about the health of end markets. Travel oriented leisure properties declined due to a cautious consumer. We value the high barriers to entry for companies like Vail Resorts, Inc., Red Rock Resorts, Inc., and Hyatt Hotels Corporation, and believe they typically provide ballast in the growth portfolio. However, the near term is choppy for the industry and these businesses. Airlines have indicated that consumers are limiting travel and increasingly price sensitive. Construction at half of the Red Rock properties is also curtailing revenue. Vail had a labor dispute (subsequently favorably resolved) during the key holiday period. And Hyatt would be harmed by a pullback in leisure and business travel. We continue to believe that this cyclicality will pass and the businesses are well positioned to gather increasing market share of a growing industry while also expanding profitability.

The Trump administration has also been vocal about its desire to both rein in government spending and also raise taxes from trading partners. Gartner, Inc., a leading independent provider of research and advisory services on information technology, is potentially a victim of federal budget cuts. We estimate the company’s U.S. federal revenue to be worth approximately 5% of total contract value. About half of that revenue stems from Department of Defense and Intelligence organizations, agencies prime for a reduction in third party spending. While any cut will reduce growth and impact margins in the high fixed cost research business, the market reaction and long-term effect seems overblown.

We always strive to provide diversification in the Fund based on business type and end market despite the concentrated nature of the portfolio. While some of the more disruptive growth businesses experienced a valuation reset and certain segments of the economy have cautionary outlooks, we have seen success at our more stable growth businesses and traditional financial companies. Guidewire Software, Inc. and CoStar Group, Inc., which provide technology solutions and information to the insurance and real estate industries respectively, were unimpacted by the macro environment. Guidewire continues to migrate customers onto its more profitable and highly scalable cloud system. CoStar is revamping its sales force to better focus on its nascent residential opportunity after spending years developing the systems, gathering the required information, and positioning it to capture a large segment. This segmentation of the sales group should also revitalize growth in its established commercial business who had been distracted with new product offerings and different end clients. Traditional financial companies The Charles Schwab Corporation and Arch Capital Group Ltd. provided the ballast that we are used to in such market environments. Insurance trends and pricing for Arch remain steady, which should result in a continued high return on equity. Market and rate moves resulted in Schwab clients increasing their cash positions. This holding breakdown enabled the company to reduce high-cost borrowing and improve the important net interest margin. Organic growth also continued for the company.

Additionally, we believe the federal cost reduction policies may benefit investments in low-cost producers. HEICO Corporation provides aftermarket replacement parts for the aerospace and defense industries that tend to be 40% cheaper than the original equipment manufacturer’s price. It had a resumption of growth in its electronic technologies group as client inventory was reduced. And its flight support division continued to grow steadily as acquisitions were integrated and spurred cross-sales opportunities. We believe the company could win an increasing share of the defense repair budget as the federal government prioritizes cost reductions.

We continue to believe that many of the headwinds created by a change in the macroeconomic outlook and governmental policies should be temporary, while the products of the businesses held in the Fund increase market share. While the policies have caused some near-term confusion and reduced outlook, we still believe that a leaner government and less regulatory burden should benefit market leading growth businesses that populate the Fund.

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.

CoStar Group, Inc. is the leading provider of information and marketing services to the commercial and residential real estate industry. Shares rose on an increase in the productivity of CoStar's sales force and signs of a start to the recovery of the commercial real estate market. Mixed results around net new sales following CoStar's significant investment in residential product Homes.com had pressured shares. We remain encouraged by growth in both traffic and brand awareness for the new product and are optimistic that the build out of a dedicated sales team as well as the potential benefits of changes in Multiple Listing Service practices will improve residential sales momentum. We also believe growth in CoStar’s non-residential business is poised to accelerate. Sales productivity has begun to improve as salespeople return to exclusively selling their core product, and we expect this to be amplified as the sales force expands by 20% or more in 2025. We believe the value of CoStar’s core non-residential business exceeds the share price, implying that investors ascribe negative value to the residential opportunity.

X.AI Holdings Corp. (xAI)* is developing an AI model “to understand the true nature of the universe.” In a short period since its inception, xAI launched its AI model and product, including the third version of the model, Grok 3, which demonstrated top scores in evaluation tests, ahead of other industry-leading AI models. The company also opened the Colossus data center, operating more than 100,000 Graphical Processing Units and considered at the time to be the largest coherent training center in the world. Grok 3 was the first model trained on xAI’s Colossus, leveraging more than 10 times the compute used to train Grok 2. Most recently, xAI acquired X, formerly Twitter. The acquisition is expected to improve alignment of corporate objectives, enhance resource allocation, and integrate data, compute, and products. In addition, it provides xAI access to X’s vast, real-time, multimodal data generated by 600 million users worldwide. We value the stock based on recent share transactions, including the recently announced merger.

* On March 28, 2025, X.AI Holdings Corp. (X.AI Holdings) acquired social media platform X Holding Corp. (X) and artificial intelligence company X.AI Corp. (xAI) in an all-stock transaction. The deal valued X at $33 billion and xAI at $80 billion, making the combined X.AI Holdings entity worth $113 billion.

Shares of specialty insurer Arch Capital Group Ltd. rebounded from weakness in the prior quarter due to favorable operating trends and the relative stability of insurance stocks in a risk-off market. In the most recent quarter, the company reported better-than-expected earnings, and returns on equity remained strong in the high teens despite elevated catastrophe losses from Hurricane Milton. Management targets a 15% return on equity over a full cycle and expects to exceed the target in 2025 given firm market conditions. We continue to own the stock due to Arch’s strong management team and our expectation of significant growth in earnings and book value.

Tesla, Inc. manufactures electric vehicles (EVs), solar products, and energy storage solutions alongside the development of advanced real-world AI technologies. Shares fell due to declining analyst expectations for auto delivery volume and margins in 2025 as a result of: 1) a refresh of the Model Y, its highest volume vehicle and the world’s best selling car in 2024; 2) Elon Musk’s controversial role in the Trump administration; and 3) regulatory changes that could pose potential operational challenges. Despite these headwinds, we remain confident in Tesla’s long-term growth, underpinned by secular trends in EVs and energy storage adoption, a compelling product line, its leading cost structure, and cutting-edge technology. A Model Y refresh alongside the debut of new mass-market models should boost demand. Over time, we expect the political pressure to fade, while Tesla’s AI ambitions – a robotaxi service launching this year and a fast-growing humanoid program – hold the promise of transforming its growth story.

Shares of global hotelier Hyatt Hotels Corporation detracted as Trump’s tariff policies generated heightened uncertainty around the macroeconomic environment. While the volatility during the first quarter is a concern, we believe it will be short duration. Business fundamentals were strong, with solid forward bookings numbers as the business transient segment continued its post-pandemic recovery and the group business segment paced up by mid-single digits this year. We expect double-digit EBITDA growth in 2025. The company has a strong balance sheet. The planned acquisition of Playa Hotels should be accretive to earnings, especially as Hyatt sells the underlying real estate properties. Once the sale is complete, over 90% of revenue will be fee-based, which should help close Hyatt’s multiple discount compared to peers.

Shares of Gartner, Inc., a provider of syndicated research, fell on uncertainty around the impact of government spending reductions on the business. We estimate U.S. federal exposure is 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 DOGE-driven cost scrutiny is high, we believe Gartner’s services deliver significant value to users, including the potential for hard dollar savings. The private sector business appears well positioned for sustained growth, and management is adept at exercising cost controls to sustain or enhance margins and free cash flow. The company’s balance sheet is in excellent shape, and we expect management to take advantage of this drawdown with aggressive share repurchases.

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, 2025, we held 21 investments. The median market capitalization of these growth companies was $32.2 billion. The top 10 positions represented 88.1% of total investments. Leverage was 15.2%.

The long-term absolute and relative performance of the Fund has been very good. The Fund has returned 16.39% annualized since conversion to a mutual fund on April 30, 2003, exceeding the Index by 5.06%.

The Fund’s performance has also 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 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 one had 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 nine months of 2022 and in the first quarter of 2025 is responsible for the Fund’s three-year return trailing the Index. And as discussed earlier in this letter, the macro and political environment are undergoing a change.

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-19 (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 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 22.46% compared to the Index’s annualized return of 17.14%. 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 in 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 $996,403 on March 31, 2025. That same $10,000 hypothetical investment in a fund designed to track the Index would now be worth $231,582, only approximately 23% 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.

Respectfully,