Baron Durable Advantage Fund: Latest Insights and Commentary

U.S. stocks struggled during the first quarter of 2025 as the shock of Trump’s tariff war erased any optimism that the U.S. stock market or economy would continue to flourish under the new administration, replaced by heightened concerns of a possible recession. The mass layoffs of federal workers added to the confusion. The Magnificent Seven, which had led the market on AI-driven enthusiasm, were even harder hit by tariff uncertainties, as their relatively high valuations made them more exposed to a slowdown. In addition, the January launch of Chinese AI app DeepSeek as a less expensive alternative to U.S.-based AI models had investors questioning whether the massive investments in AI would ultimately produce the expected outsized returns. The S&P 500 Index declined 4.3%, its worst quarter since 2022.

GDP growth is widely predicted to slow during 2025, reflecting weakening consumer demand and more cautious corporate spending. Consumer confidence has plummeted. The March 2025 inflation figure came in above the U.S. Federal Reserve’s target of 2%, as measured by the Consumer Price Index. The Fed has taken a wait-and-see approach as the effects of heightened U.S. policy uncertainty on growth, inflation, and employment play out. It left interest rates unchanged in its first meeting of the year.

Against this challenging backdrop, Baron Durable Advantage Fund declined in the first quarter. Investments within Real Estate, Industrials, and Consumer Staples contributed. Information Technology (IT), Communication Services, and Consumer Discretionary holdings detracted the most. Gains within Real Estate were attributable to third largest contributor Welltower Inc. and CoStar Group, Inc., a provider of marketing and analytics to the real estate industry. Second largest contributor HEICO Corporation led advances within Industrials. Consumer Staples was a slight contributor on a share price increase in sole sector holding Costco Wholesale Corporation. Weakness within IT was led by top detractor Broadcom Inc. and third largest detractor NVIDIA Corporation. The Fund’s two Communications Services holdings, Alphabet Inc. and Meta Platforms Inc., drove declines within the sector. Second largest detractor Amazon.com, Inc. drove depreciation within Consumer Discretionary.

The second quarter may bring with it as much doubt and volatility as the first quarter, given continued elevated uncertainty around tariffs. After reaching a record high of more than $3.3 trillion in corporate profits in the fourth quarter of 2024, U.S. companies are scrambling to estimate the potential impact of the tariff war. As first quarter earnings season approaches, many observers expect businesses to offer weaker earnings guidance for the rest of the year or withdraw guidance completely.

We are closely monitoring current market conditions while staying focused on company fundamentals -- well-managed businesses with durable competitive advantages and compelling growth prospects at attractive prices -- as we believe this is the best way to generate alpha over the long term, although there are no guarantees.

CONTRIBUTORS

• The contributors to performance for period ending March 31, 2025 is not yet available

 

DETRACTORS

• The detractors to performance for period ending March 31, 2025 is not yet available