Baron Discovery 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

• Exact Sciences Corporation is a molecular diagnostics company focused on the early detection of colorectal cancer. The company is best known for Cologuard, its non-invasive, stool-based colorectal cancer screening test. Shares contributed to performance after Abbott Laboratories announced an agreement to acquire Exact Sciences for approximately $23 billion in November, representing a premium of more than 50% to the prior closing price. Long term, roughly half of the 106 million adults in the U.S. recommended for colorectal cancer screening are not up to date, and we believe Cologuard offers a compelling combination of non-invasiveness and strong sensitivity and specificity to address this unmet need.
• Establishment Labs Holdings Inc. sells next-generation Motiva breast implants designed to offer meaningful safety improvements and aesthetic benefits compared to competing products. Motiva implants are associated with significantly lower rates of capsular contracture, have no known cancer risk, and offer a more natural Ergonomix shape with a softer feel and the potential for smaller scars. Shares rose during the quarter as Motiva implants continued to gain significant share across international markets, while the U.S. launch is now underway and progressing well, with early penetration of roughly 20% of the U.S. breast augmentation market. We believe Establishment Labs can capture a leading share in the U.S. over the next several years, driving strong revenue growth, improving profitability (free cash flow positive in 2026), and meaningful long-term value creation.
• Clearwater Analytics Holdings, Inc., a provider of portfolio accounting and reporting software, contributed to performance. The company reported solid Q3 2025 earnings and raised 2025 guidance. Clearwater also announced that a consortium of private equity investors intends to acquire the company, which drove a sharp positive market reaction. We retain conviction and believe Clearwater has meaningful competitive advantages and the potential to compound revenue at attractive rates for several years. The company has an efficient business model that should drive 40%-plus adjusted EBITDA margins over time.

DETRACTORS

• Varonis Systems, Inc. is a cybersecurity company focused on classifying and protecting corporate data. Shares detracted from performance. While the company’s core software-as-a-service business (76% of total revenue) remained strong, growing more than 100% year over year on the back of new customer wins and increased data protection by existing customers, results were offset by higher-than-expected churn among on-premise commercial and U.S. federal government customers toward the end of September. This led management to lower its full-year outlook. During the quarter, Varonis also announced plans to sunset its on-premise software by the end of next year. Management believes the transition to a single codebase and subscription revenue model will improve security outcomes, lower customers’ total cost of ownership, and simplify the sales motion, driving greater efficiency for the company over time. While the ongoing transition introduces some uncertainty around 2026 revenue, we believe Varonis will ultimately emerge with accelerating growth, better profitability, and a more predictable business model.
• Liberty Live Holdings, Inc. consists of Liberty Media Corporation's significant interest in Live Nation Entertainment, the world's leading live entertainment and ticketing company. The stock detracted from performance as shares traded sharply lower following Live Nation's third-quarter earnings release. During the quarter, concert segment earnings fell short of investor expectations, marking a departure from a recent string of significant earnings beats in the business. Management also lowered its outlook for ticketing in 2026 due to measures taken in response to regulatory actions around bots, as well as costs associated with the Federal Trade Commission lawsuit. Stepping back from near-term results, Live Nation continues to execute well on owned venue development and the long-term growth opportunity remains attractive. Strong demand for live entertainment and ongoing organic investment in the company’s footprint support steady double-digit earnings compounding. We continue to own the stock due to our favorable view of the Live Nation business and the attractively valued entry point provided at the Liberty holding company level.
• Primo Brands Corporation is a leading seller of bottled water across both retail and home-and-office delivery channels, formed through the merger of BlueTriton and Primo Water. The stock detracted from performance following third-quarter earnings, which revealed a decline in the home-and-office delivery business due to unexpected service disruptions stemming from the execution of merger-related cost-saving efforts. These initiatives included the elimination of redundant manufacturing plants and distribution branches during the first half of 2025. As a result, the company experienced issues with 5-gallon jug availability and challenges related to the rollout of new technology systems used by drivers to manage deliveries, which negatively affected route timing and temporarily reduced on-time, in-full delivery rates. The magnitude of the disruption and associated revenue impact proved greater than expected. We believe Primo Brands will return to its normal growth trajectory in the coming quarters and that the stock will warrant a materially higher valuation once these operational issues are resolved.