Baron Asset Fund: Latest Insights and Commentary

U.S. equities delivered a steady finish to an otherwise turbulent year in the fourth quarter of 2025, with moderate gains across most indexes amid easing economic pressures and holiday-season stability. Large caps outperformed, while mid caps lagged and small caps delivered more modest advances. Market participation broadened beyond technology, with value stocks faring better than growth across all size segments. Multiple record highs were reached during the quarter, with the S&P 500 Index and Dow Jones Industrial Average peaking on December 24, the NASDAQ Composite reaching several all-time highs earlier in the quarter, and the Russell 2000 hitting a fresh peak on December 11. Volatility spikes in mid-October and mid-November proved short-lived, and the CBOE Volatility Index reached a 2025 low by late December, supported by resilient economic data.

Fourth-quarter gains were underpinned by moderating tariff impacts, robust corporate earnings, and continued monetary easing. Following a 25-basis-point rate cut in September, the Federal Reserve lowered rates twice more during the quarter, with additional 25-basis-point cuts in October and December. Investor sentiment reflected optimism, as Bank of America’s mid-December Global Fund Manager Survey showed the most bullish outlook in three-and-a-half years, with record-low cash levels and elevated allocations to equities and commodities, though concerns persisted around AI bubbles, private credit events, and elevated hyperscaler capital spending. While a prolonged government shutdown introduced some uncertainty, resilient labor market conditions and the absence of major inflation spikes helped support the rally.

The Magnificent Seven complex posted another positive quarter, rising 3.6%, though gains moderated meaningfully from prior quarters. The group outperformed the broader S&P 500 Index and accounted for nearly half of the Index’s gains. Performance within the group was mixed, led by Alphabet, which surged 28.8%, followed by Apple and Amazon. Tesla edged higher but trailed the broader market, while Meta, Microsoft, and NVIDIA declined during the period.

Looking ahead, we remain focused on well-managed companies with durable competitive advantages and attractive growth prospects. While macroeconomic and policy uncertainty persists, we believe maintaining a disciplined, long-term perspective and emphasizing company fundamentals will be essential to navigating the evolving landscape.

CONTRIBUTORS

• Space Exploration Technologies Corp. (SpaceX) is a high-profile private company founded by Elon Musk. The company's primary focus is on developing and launching advanced rockets, satellites, and spacecrafts, with the ambitious long-term goal of making life multi-planetary. SpaceX is generating significant value with the rapid expansion of its Starlink broadband service. The company is successfully deploying a vast constellation of Starlink satellites in Earth's orbit, reporting substantial growth in active users, and regularly deploying new and more efficient hardware technology. Furthermore, SpaceX has established itself as a leading launch provider by offering highly reliable and cost-effective launches, leveraging the company's reusable launch technology. SpaceX capabilities extend to strategic services such as human spaceflight missions. Moreover, SpaceX is making tremendous progress on its newest rocket, Starship, which is the largest, most powerful rocket ever flown. This next-generation vehicle represents a significant leap forward in reusability and space exploration capabilities. We value SpaceX using prices of recent financing transactions.

• X.AI Holdings Corp. was formed in early 2025 through the merger of X (formerly Twitter) and xAI, an AI company founded by Elon Musk in March 2023 with the mission to "understand the true nature of the universe." This strategic union paired xAI's large language models with X's real-time data and worldwide distribution, speeding Grok's development while providing X with transformative AI tools for search, personalization, and user engagement. Shortly after its founding, xAI released its AI model, Grok, which swiftly emerged as a top-tier contender. Fueling Grok’s performance was the rapid deployment of xAI's data centers: Colossus 1 became operational in just 122 days with 100,000 GPUs, while Colossus 2's first 100,000 GPUs deployed even faster, positioning xAI to pioneer a 1-gigawatt training facility. The upcoming 5th version of Grok will use Colossus 2’s expanded resources and is expected to mark further improvement in the model's capabilities. Such early results demonstrate xAI’s innovation prowess and its prospects for enduring leadership in the highly competitive AI field. We value the stock based on material transaction in shares, leading to stock appreciation.

• Amphenol Corporation is a leading global supplier of high-technology interconnect, sensor, and antenna solutions serving a diverse set of end markets. The company operates a highly decentralized, entrepreneurial model, with more than 140 general managers exercising autonomy over their individual business units. Amphenol is also highly acquisitive, having completed more than 50 acquisitions over the past decade. Shares rose during the quarter as the company reported better-than-expected earnings, led by its IT Datacom segment serving AI applications, alongside solid growth across its other end markets. Amphenol holds strong market share in interconnect solutions within NVIDIA’s AI server racks, and we expect its content to continue to increase as speeds and system complexity rise. This organic momentum, combined with the pending acquisition of CommScope’s Connectivity and Cable Solutions business—Amphenol’s largest acquisition to date, expected to close in early 2026—should continue to drive strong revenue and earnings growth in the coming years.

DETRACTORS

• CoStar Group, Inc. is the leading provider of information and marketing services to the commercial and residential real estate industries. Shares fell as the company’s net new sales came in below expectations. The stock has been weighed down by significant growth investment in CoStar’s residential product, where sales performance has remained modest. That said, we are encouraged by improving momentum as the company builds out its dedicated residential sales force, enhances its customer targeting, and potentially benefits from changes in Multiple Listing Service practices. We also expect growth in CoStar’s non-residential business to accelerate as sales productivity ramps and the sales team refocuses on core offerings, a trend likely to be amplified by 20% sales force growth in 2025 alone. We believe the value of CoStar’s core non-residential business exceeds the current share price of the stock, suggesting that investors are ascribing little value to the long-term residential opportunity.

• Shares of property and casualty (P&C) insurance software vendor Guidewire Software, Inc. declined during the quarter following strong gains earlier in the year, as the broader software sector came under pressure. After a multi-year transition period, we think Guidewire’s cloud migration is largely complete. We believe cloud will be the sole path forward, with annual recurring revenue benefiting from new customer wins and migrations of the existing customer base to InsuranceSuite Cloud. This progress is best exemplified by Guidewire’s landmark 10-year agreement with Liberty Mutual, the fifth-largest U.S. insurer with $45 billion in direct written premiums, to migrate its entire on-premise deployment of ClaimCenter and adopt PolicyCenter in the cloud. The deal should also help drive adoption among other Tier 1 carriers—now that Liberty Mutual has fully embraced the cloud, others are likely to follow. We believe that Guidewire will be the critical software vendor for the $2.5 trillion global P&C insurance industry, capturing 30% to 50% of its $15 billion to $30 billion total addressable market and generating margins above 40%.

• Shares of Veeva Systems Inc., a cloud platform serving the life sciences industry, declined. After a strong performance for much of the year, the stock came under pressure following Veeva’s November quarterly update, in which management tempered expectations for customer retention. The company now expects only 14 of the top-20 global pharmaceutical companies to adopt its next-generation Vault CRM product—below prior internal expectations and down from the 18 customers using the legacy Veeva CRM built on Salesforce. While Veeva’s 2023 decision to terminate its long-standing partnership with Salesforce has given the company full control over its product roadmap, enabling faster innovation and expanding its long-term market opportunity, it has introduced head-to-head competition with Salesforce. Since then, Salesforce has announced its own product development efforts and secured several high-profile wins among the top-20 pharmaceutical accounts, prompting the market to reassess the magnitude and duration of near-term competitive risks. We retain long-term conviction in the stock as Veeva continues to emphasize favorable secular tailwinds and confidence in its 2030 financial targets.

When reviewing performance attribution on our portfolio, please be aware that we construct the portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio if it meets our rigorous investment criteria. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to achieve a target sector allocation or to approximate an index. Our exposure to any given sector is purely a result of our stock selection process.

In a difficult quarter for mid-cap stocks, Baron Asset Fund (the Fund) rose 7.89% (Institutional Shares), meaningfully outperforming the Russell Midcap Growth Index (the Index), which fell 3.70%, by 11.59% due to strong stock selection. 

Strength in Industrials was responsible for approximately half of the Fund’s outperformance in the period, driven by Space Exploration Technologies Corp. (SpaceX), a high-profile private company founded by Elon Musk. The company's primary focus is on developing and launching advanced rockets, satellites, and spacecrafts, with the ambitious long-term goal of making life multi-planetary. SpaceX is generating significant value with the rapid expansion of its Starlink broadband service. The company is successfully deploying a vast constellation of Starlink satellites in Earth's orbit, reporting substantial growth in active users, and regularly deploying new and more efficient hardware technology. Furthermore, SpaceX has established itself as a leading launch provider by offering highly reliable and cost-effective launches, leveraging the company's reusable launch technology. SpaceX capabilities extend to strategic services such as human spaceflight missions. Moreover, SpaceX is making tremendous progress on its newest rocket, Starship, which is the largest, most powerful rocket ever flown. This next-generation vehicle represents a significant leap forward in reusability and space exploration capabilities. We value SpaceX using prices of recent financing transactions.

 Favorable stock selection in Communication Services was responsible for another large portion of the Fund’s outperformance in the quarter, thanks to gains from X.AI Holdings Corp. The company was formed in early 2025 through the merger of X Holdings Corp. (“X”) (formerly Twitter) and X.AI Corp. (“xAI”), an AI company founded by Elon Musk in March 2023 with the mission to "understand the true nature of the universe". This strategic union paired xAI's large language models with X's real-time data and worldwide distribution, speeding Grok's development while providing X with transformative AI tools for search, personalization, and user engagement. Shortly after its founding, xAI released its AI model, Grok, which swiftly emerged as a top-tier contender. Fueling Grok’s performance was the rapid deployment of xAI's data centers: Colossus 1 became operational in just 122 days with 100,000 GPUs, while Colossus 2's first 100,000 GPUs deployed even faster, positioning xAI to pioneer a 1-gigawatt training facility. The upcoming 5th version of Grok will use Colossus 2’s expanded resources and is expected to mark further improvement in the model's capabilities. Such early results demonstrate xAI’s innovation prowess and its prospects for enduring leadership in the highly competitive AI field. We value the stock based on material transaction in shares, leading to stock appreciation.

Investments in Information Technology (IT), Health Care, and Financials also boosted relative results. Strength in IT came from high-technology interconnect, sensor, and antenna solutions provider Amphenol Corporation and consumer data and analytics company Fair Isaac Corporation. Shares of Amphenol rose during the quarter as the company reported better-than-expected earnings, led by its IT Datacom segment serving AI applications, alongside solid growth across its other end markets. Amphenol holds strong market share in interconnect solutions within NVIDIA’s AI server racks, and we expect its content to continue to increase as speeds and system complexity rise. This organic momentum, combined with the pending acquisition of CommScope’s Connectivity and Cable Solutions business—Amphenol’s largest acquisition to date, expected to close in early 2026—should continue to drive strong revenue and earnings growth in the coming years. Fair Isaac shares increased on strong fourth quarter earnings and solid preliminary FY ’26 guidance. The company also launched their new Direct Licensing Program for mortgage lending, which gives the company more flexibility to monetize their intellectual property going forward and was well received by FHFA director Bill Pulte. While some areas of near-term uncertainty persist, we retain conviction and believe that Fair Isaac will be a strong earnings compounder, which should drive solid returns for the stock over a multi-year period.       

Strength in Health Care was driven by precision instruments provider Mettler-Toledo International Inc., while favorable stock selection in Financials came from specialty insurer Arch Capital Group Ltd.  Mettler’s stock contributed to performance due to improving sentiment toward life sciences tools companies. This followed drug pricing agreements reached between large biopharmaceutical companies and the Trump administration, which investors viewed as unlikely to have a material financial impact on pharmaceutical businesses. This development was also viewed as positive for life sciences tools providers that supply products and services to pharmaceutical companies for research and development. In addition, the Trump administration appears to have scaled back some of its tariff threats against China. We believe Mettler-Toledo is well positioned heading into 2026 as tariff headwinds fade, China stabilizes, and broader end-market demand accelerates. We continue to expect the company to compound earnings at a mid-teens or better rate over the long term, supported by underlying GDP growth, exposure to faster-growing emerging markets, market share gains, and price increases.

Shares of Arch rose on strong earnings results and active capital management. Third-quarter earnings per share beat Street expectations due to improved underwriting margins and very low catastrophe losses, as there were no landfall hurricanes in the U.S. this season for the first time since 2015. Return on equity of 18% exceeded management’s long-term target, driving 9% growth in book value per share, or 18% growth when adjusted for a special dividend. In addition, a faster pace of share repurchases reduced the share count by 4% year to date, signaling management’s confidence in the company’s valuation. We continue to own the stock due to Arch’s strong management team and our expectation for continued growth in earnings and book value over time.

Partially offsetting the gains above were investments in Consumer Discretionary and Real Estate. Weakness in Consumer Discretionary stemmed from not owning strong performing benchmark securities such as Carvana Co. and Expedia Group, Inc., along with lower exposure to hotel company Hilton Worldwide Holdings Inc., whose share price rose nearly 11% in the quarter. Adverse stock selection in Real Estate came from real estate data and marketing platform CoStar Group, Inc. Shares of CoStar fell as the company’s net new sales came in below expectations. The stock has been weighed down by significant growth investment in CoStar’s residential product, where sales performance has remained modest. That said, we are encouraged by improving momentum as the company builds out its dedicated residential sales force, enhances its customer targeting, and potentially benefits from changes in Multiple Listing Service practices. We also expect growth in CoStar’s non-residential business to accelerate as sales productivity ramps and the sales team refocuses on core offerings, a trend likely to be amplified by 20% sales force growth in 2025 alone. We believe the value of CoStar’s core non-residential business exceeds the current share price of the stock, suggesting that investors are ascribing little value to the long-term residential opportunity.

Yearly Attribution Analysis (for year ended 12/31/2025)

Baron Asset Fund (the Fund) increased 8.20% (Institutional Shares) for the year, performing in line with the Russell Midcap Growth Index, which rose 8.66% as positive stock selection offset the negative impact of style biases, specifically lower exposure to the better performing Momentum, Beta, and Residual factors and higher exposure to the poor performing Earnings Quality factor. 

On a sector level, investments in Industrials and Communication Services, along with lack of exposure to the worst performing Consumer Staples and Energy sectors aided relative results. Strength in Industrials was largely due to private rocket, satellite, and spacecraft manufacturer Space Exploration Technologies Corp. (SpaceX), whose shares were revalued higher during the period based on prices of recent stock transactions. The company is generating significant value with the rapid expansion of its Starlink broadband service. Performance in Communication Services was driven by AI model development private company X.AI Holdings Corp. (xAI). With rising demand for AI-enabled solutions and products, we believe xAI's focused strategy and innovative approach position it to become a key player in the AI space. 

Offsetting the gains above was unfavorable stock selection in Information Technology (IT) and Consumer Discretionary. Adverse stock selection in IT was driven by syndicated research provider Gartner, Inc.Shares of Gartner declined in response to disappointing quarterly earnings. Contract value growth, a leading indicator of future revenue, decelerated by approximately 2%. We attribute most of the slowdown to ongoing cost cutting in the U.S. public sector, which represents about 5% of revenue, as well as more challenging business conditions in industries dependent on public-sector funding. In addition, companies with meaningful exposure to tariffs appear to be reducing costs, resulting in longer sales cycles and slightly higher client attrition. While the market expressed concern about the impact of AI on Gartner’s insights business, we see no evidence that this is negatively impacting its value proposition. The company continues to benefit from a vast and expanding set of proprietary data generated through hundreds of thousands of interactions with buyers, sellers, and technology consumers. Gartner bought back approximately $800 million worth of stock in July and August and authorized an additional $1 billion in September, and we expect the company to continue repurchasing shares aggressively to capitalize on the discounted valuation.

 Within Consumer Discretionary, weakness from hotel franchisor Choice Hotels International, Inc. and global ski resort operator Vail Resorts, Inc. hurt relative results. Choice shares fell during the period amid investor concerns over continued revenue per available room (RevPAR) weakness at the company’s lower-end economy and midscale brands. While the slowdown in RevPAR is disappointing and bears monitoring, Choice continues to grow its more revenue-intensive units at a strong pace, helping offset the softness. The company is also increasing royalty rates, particularly across its Radisson brands, further supporting revenue and margin expansion. Choice generates strong cash flow and maintains a solid balance sheet, providing flexibility to pursue acquisitions, reinvest in the business, and repurchase shares. We believe the stock’s valuation continues to reflect a significant discount to intrinsic value, and management’s disciplined capital allocation and commitment to returning capital to shareholders position the company for upside as growth reaccelerates following the recent economic slowdown.

Vail detracted from performance amid investor concerns about slowing visitation levels, driven by a lack of growth in season pass sales. In response, the company is refining its marketing strategy and investing in new media channels, including social media and influencer partnerships, to attract new skiers and accelerate pass sales. Vail also plans to narrow the pricing gap between lift tickets and season passes to encourage more non-pass holders to join its ecosystem, which should drive stronger pass growth next year. Consumer sentiment toward Vail’s pass products is improving, and management continues to enhance the value of the portfolio. The company maintains strong margins and cash flow, which support both share repurchases and a 6% dividend yield. We believe the stock’s significant discount to its historical valuation should narrow as growth reaccelerates in the coming years.