Baron Durable Advantage Fund: Latest Insights and Commentary

CONTRIBUTORS

• Microsoft Corporation, the global leader in cloud infrastructure and enterprise software, contributed to performance after fiscal fourth-quarter results highlighted strength across the company's vertically integrated AI stack, from custom silicon and cloud infrastructure to data, models, and applications. Azure growth accelerated to 42% year-over-year on a restated basis, and management guided to the mid-40% range in constant currency for the first fiscal quarter of 2027 as demand continues to exceed capacity. Commercial remaining performance obligations grew 84% year-over-year, with all sequential growth coming from customers outside frontier model labs. First-party AI applications also continued to scale, with paid Microsoft 365 Copilot seats surpassing 30 million and net additions more than doubling sequentially, while GitHub Copilot revenue grew more than 60% quarter-over-quarter. We are excited by the roadmap for agents and always-on Autopilots that can handle more work, leverage Microsoft’s data fabric and enterprise context, and route tasks to the best model rather than relying on a single third-party vendor. We maintain conviction in Microsoft as a long-term AI winner.
• Meta Platforms, Inc., the owner of Facebook, Instagram, WhatsApp, and Threads, contributed to performance. Second-quarter results showed strength in the core advertising business, with U.S. advertising growth accelerating to 31% as new AI ranking and recommendation models improved conversions, while Advantage+, Meta’s AI-driven ad suite, surpassed a $75 billion annual run rate. A larger catalyst came in September with the launch of Muse, Meta’s personal AI agent, which became the top-ranked app on the U.S. App Store. At Meta Connect, Meta introduced real-time voice and a Mac app with computer-use capabilities, along with commerce integrations with Stripe, Shopify, PayPal, Walmart, and Best Buy that enable Muse to complete purchases. We believe these capabilities could create a new transaction-based business model and, over time, another platform for intent-based advertising. Meta also expanded Muse to its smart glasses and Charm, a new handheld device. We believe current earnings understate Meta’s potential as it invests ahead of revenue, and we retain strong conviction that its data, compute, distribution, and founder leadership position it to become a leader in consumer AI.
• NVIDIA Corporation is a global semiconductor company designing the systems used to build and deploy AI. Shares rose during the quarter, gaining ground even amid a broader sell-off in semiconductor stocks. Revenue more than doubled, and the company provided guidance for the full year ahead for the first time, projecting roughly 70% revenue growth next fiscal year, far above analyst expectations. Notably, management characterized this outlook as supply constrained, with customers’ own forecasts pointing to growth closer to double that rate. Demand is also broadening, with customers beyond the largest hyperscalers, from sovereign AI and neoclouds to enterprises, now accounting for nearly half of data center revenue. In addition, each new platform captures more revenue per gigawatt as NVIDIA sells central processing units (CPUs), networking, and inference systems alongside its graphics processing units (GPUs). We retain conviction in NVIDIA as a core long-term holding, viewing its full-stack platform, software moat, and visibility into sustained hyperscaler capital spending as durable advantages that support multi-year earnings power.

DETRACTORS

• Lam Research Corporation is a leading supplier of etch and deposition equipment used to manufacture advanced logic and memory chips, positioning it as a key beneficiary of AI-driven semiconductor capacity expansion. Shares declined during the quarter as investors grew concerned that AI-related chip spending may be peaking, while rising interest rates, profit-taking, and the stock’s premium valuation added pressure. Despite the negative sentiment, fundamentals remained strong. Lam delivered record results and guidance well ahead of expectations and continued to gain share in logic and advanced packaging. While the stock is likely to remain volatile given the cyclical nature of the industry, we believe the recent sell-off reflects a reset following a crowded rally and remain confident in Lam’s long-term prospects. We continue to hold the position.
• Taiwan Semiconductor Manufacturing Company Limited (TSMC) is the world's largest contract chipmaker and the leading manufacturer of advanced logic semiconductors used in modern AI accelerators. Shares fell during the quarter as investors focused on higher capital spending and potential margin dilution from the steep ramp of TSMC’s 2-nanometer node, while a late-July unwinding of leveraged positions in Asian chip stocks added pressure. Despite these concerns, underlying business performance remained strong. Second-quarter net income rose nearly 80% year-over-year on a very strong gross margin, and management raised its full-year outlook to dollar revenue growth of slightly above 40%. We retain conviction in TSMC as a core long-term holding, viewing its leading-edge manufacturing monopoly, pricing power, and 2-nanometer roadmap as durable advantages that support multi-year earnings power.
• TransDigm Group Incorporated designs, manufactures, and supplies highly engineered aerospace components, systems, and subsystems used on nearly all commercial and military aircraft worldwide. Shares declined as negative sentiment toward the aerospace aftermarket grew, with fuel prices remaining elevated due to the Iran War. We retain long-term conviction in the stock. TransDigm has de-rated to a below-peer multiple despite having what we believe is the industry’s strongest pricing engine, which should support above-peer growth at leading margins even as industry conditions soften. The company has also worked through recent company-specific destocking issues and should see relatively stable volumes despite the weaker environment.

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.

Baron Durable Advantage Fund (the Fund) rose 2.23% (Institutional Shares) in the third quarter, in line with the S&P 500 Index (the Index), which gained 2.30%. Favorable industry factors and stock selection were offset by style-related headwinds, chiefly overexposure to the weak-performing Beta factor and underexposure to Value, which continued to dominate during the quarter, as it did in the first half of 2026.

From a sector perspective, unfavorable sector weights largely negated positive stock selection in a handful of sectors. Lack of or lower exposure to Energy and Health Care, the Index’s two best-performing sectors, and meaningful overexposure to the lagging Financials sector proved costly. Minimal exposure to the lagging Utilities and Consumer Staples sectors partly offset these effects, contributing approximately 50 basis points.

Stock selection was positive overall, driven largely by solid gains from select holdings in Communication Services (Meta Platforms, Inc.), Consumer Discretionary (Amazon.com, Inc.), Real Estate (Welltower Inc.), and Financials (CME Group, Inc.). 

Meta, owner of Facebook, Instagram, WhatsApp, and Threads, contributed to performance. Second-quarter results showed strength in the core advertising business: U.S. advertising growth accelerated to 31% as new AI ranking and recommendation models improved conversions, and Advantage+, Meta’s AI-driven ad suite, surpassed a $75 billion annual run rate. A larger catalyst came in September with the launch of Muse, Meta’s personal AI agent, which became the top-ranked app on the U.S. App Store. At Meta Connect, Meta introduced real-time voice and a Mac app with computer-use capabilities, along with commerce integrations with Stripe, Shopify, PayPal, Walmart, and Best Buy that enable Muse to complete purchases. We believe these capabilities could create a new transaction-based business model and, over time, another platform for intent-based advertising. Meta also expanded Muse to its smart glasses and Charm, a new handheld device. We believe current earnings understate Meta’s potential as it invests ahead of revenue, and we retain strong conviction that its data, compute, distribution, and founder leadership position it to become a leader in consumer AI.

Shares of Amazon, a global leader in e-commerce and cloud computing, performed well in response to strong quarterly results. Year over year, Amazon Web Services (AWS) revenue grew 37%, marking its fifth consecutive quarter of acceleration and its fastest growth in 18 quarters, while AWS operating margin expanded roughly 650 basis points to 39%. Management noted that Amazon’s AI and custom chip businesses each surpassed $25 billion in annualized run rates, demonstrating that AI infrastructure investment is translating into revenue. Total net sales grew 20%, exceeding $200 billion in a single quarter for the first time, and consolidated operating income rose 43% as retail continued to drive operating leverage alongside record delivery speeds. Management raised planned 2026 capital spending to roughly $220 billion, which we view as reflective of strong underlying demand rather than a risk to returns. We retain high conviction in Amazon given AWS remains a primary beneficiary of enterprise AI adoption, the retail cost base continues to improve structurally, and Amazon Leo, the company’s low-Earth-orbit satellite broadband network, represents an underappreciated long-term growth vector.

Shares of Welltower, a leading owner and operator of senior housing communities across the U.S., Canada, and the U.K., held up well, posting modest gains in a quarter when most real estate securities declined. This extended what was already very strong performance in the first half of the year. Welltower continued to execute, delivering robust cash flow growth driven by strong occupancy gains, healthy rent growth, and ongoing margin expansion, all of which reflect the powerful demographic tailwinds underpinning senior housing demand. We remain optimistic about both cyclical and secular demand growth, set against muted new supply that should support several years of favorable organic and external growth. Welltower is a best-in-class operator with a high-quality, luxury-focused portfolio and astute capital allocators, positioning it to capitalize on these opportunities.

CME operates the world’s largest and most diversified derivatives marketplace. Shares rose during the quarter as global macroeconomic uncertainty and elevated market volatility drove record trading activity. Third-quarter average daily volume increased 16% year-over-year to 29.4 million contracts, an all-time high for the period. Investor concerns about perpetual futures eased as the products appear to appeal primarily to retail speculators, posing little competitive threat to CME’s institutional-grade risk management tools. We continue to own the stock because we believe CME has durable competitive advantages and is well positioned to benefit from the growing adoption of exchange-traded derivatives and periodic spikes in volatility.

This stock-specific strength was partly offset by weakness in Information Technology (IT), largely attributable to the Fund’s semiconductor holdings, particularly the world’s largest chipmaker, Taiwan Semiconductor Manufacturing Company Limited (TSMC), and semiconductor and software company Broadcom Inc. TSMC shares fell during the quarter as investors focused on higher capital spending and potential margin dilution from the steep ramp of TSMC’s 2-nanometer node, while a late-July unwinding of leveraged positions in Asian chip stocks added pressure. Despite these concerns, underlying business performance remained strong. Second-quarter net income rose nearly 80% year-over-year on a very strong gross margin, and management raised its full-year outlook to dollar revenue growth of slightly above 40%. We retain conviction in TSMC as a core long-term holding, viewing its leading-edge manufacturing monopoly, pricing power, and 2-nanometer roadmap as durable advantages that support multi-year earnings power.

Broadcom detracted from performance despite results that were, by almost any measure, extraordinary. AI semiconductor revenue more than tripled year over year, and management guided to further acceleration in AI revenue. The issue was the height of the bar rather than the business: fourth-quarter revenue guidance landed just shy of consensus, and investors questioned whether competition from other ASIC players could limit the pace of growth already embedded in expectations. We retain conviction in Broadcom as a core long-term holding, viewing its custom-silicon partnerships, AI networking leadership, and high-margin software franchise as durable advantages that support multi-year earnings power.

Disappointing stock selection in IT was exacerbated by the Fund’s lack of ownership of Index heavyweight Apple Inc., whose shares rose double digits for the quarter, detracting approximately 85 basis points.