Baron Emerging Markets Fund: Latest Insights and Commentary

U.S. equity markets managed gains in a period of heightened volatility, with the CBOE Volatility Index (VIX) briefly spiking above 50 for the first time in over five years before settling back below its long-term average of 20 by quarter end as tariff policy uncertainty and war in the Middle East failed to unnerve investors. Risk-off sentiment early in the quarter centered around President Trump’s “Liberation Day” tariff announcement, which Wall Street strategists viewed as more severe than expected and likely to slow economic growth, boost inflation, and increase the odds of a recession this year. On April 2, President Trump unveiled an unprecedented global tariff regime, placing a 10% baseline tax on imports from all countries, a 34% tariff on Chinese goods, a 25% tariff on all car imports, and a 20% tariff on EU goods. In retaliation, China imposed 34% tariffs on U.S. goods and the EU announced its own countermeasures. The S&P 500 Index fell more than 12% over the next four days, nearly entering bear market territory from its all-time high on February 19, 2025 (down almost 19%). Other prominent benchmarks, such as the NASDAQ Composite Index and Russell 2000 Index, officially entered a bear market in early April, declining more than 20% from their respective all-time highs reached late last year.

After bottoming on April 8, U.S. equities rebounded due to positive trade developments. On April 9, Trump announced a 90-day pause on most reciprocal tariffs to allow for negotiations. China was the only country excluded from the pause, with Trump instead raising tariffs on China to 145%, prompting Chinese officials to increase tariffs on U.S. goods to 125%. However, U.S. and Chinese officials eventually agreed to a de-escalation of tariffs on May 12, alleviating investor concerns and contributing to additional market gains. Other market catalysts were resilient corporate earnings amid tariff-driven pressures, dovish Federal Reserve commentary following muted May inflation, AI tailwinds from NVIDIA’s strong earnings results and Middle East deals, improving consumer sentiment, and a recent ramp in M&A and IPO activity. The sudden Israel-Iran war and subsequent involvement of the U.S. via the bombing of various Iranian nuclear sites threatened to upend market momentum, but a fragile ceasefire was quickly brokered, and the market resumed its advance to close the quarter at a record high.

The Magnificent Seven complex resumed its leadership role during the quarter, accounting for nearly 60% of the S&P 500 Index’s gains. The group appreciated more than 20% in the period, outpacing the Index, which was up 10.9%. NVIDIA (+45.8%), Microsoft (+32.7%), Meta (+28.2%), and Tesla (+22.6%) posted the largest gains. Apple (-7.5%) was the only member of the group to decline and trail the broader Index.

Sector performance mirrored the influence of the Magnificent Seven, as Information Technology, Communication Services, and Consumer Discretionary were among the top performing sectors. Industrials was the only other sector to outperform the Index, helped by strong gains from aerospace & defense companies. Health Care experienced a severe reversal of fortunes during the quarter, as the sector’s 7.2% decline wiped out all year-to-date outperformance versus the broad market. After trailing the S&P 500 Index by more than 50% over the prior two calendar years, Health Care was tracking ahead of the Index this year, outperforming by 750-plus basis points through the end of April. But that all changed in May and June when the sector trailed the Index by approximately 15%. Health Care performance was hampered by multiple factors, including regulatory uncertainty, particularly around drug pricing and Medicare Advantage reimbursement rates, federal investigations involving sector heavyweight UnitedHealth, disruption at the FDA and cancellations/delays of NIH grants for academic research, concerns about tariffs on the pharmaceutical industry, and renewed investor interest in AI-driven technology companies. Energy was another notable laggard, pressured by the sharp decline in oil prices during the quarter.

From a style perspective, small caps failed to lead the way in the market recovery during the quarter, trailing mid- and large-cap stocks. Small caps remain in negative territory this year, down 1.8%, while larger-cap stocks are up about 6%, having recovered all losses from early in the year. Growth stocks outperformed for a third consecutive month to finish the quarter ahead of value by between 400 and 1,400 basis points. The largest differential was in mid and large cap, where sizeable weights in Palantir/AppLovin and Magnificent Seven factored heavily into the strong showing for these growth benchmarks. Growth is now outperforming in most size segments this year, representing a meaningful turnaround from the end of March when value was ahead by a wide margin across the board.

Beyond the U.S., developed and emerging market (EM) equities were up double digits for the quarter, benefiting from the significant allocation shift away from U.S. equities early in the period. Despite modest underperformance in June, developed Europe was a standout for the quarter, bolstered by sharp gains in the Netherlands, Spain, Ireland, Germany, Italy, Finland, and Sweden. Securities in Israel, Hong Kong, Australia, and Canada also contributed to strength in developed markets. EM equities were lifted from semiconductor-related strength in Taiwan and Korea (SK hynix). Solid gains in Mexico and Brazil also contributed to EM outperformance, as investors were relieved about the relatively less punitive tariff approach announced by the U.S. administration.

CONTRIBUTORS

• Semiconductor giant Taiwan Semiconductor Manufacturing Company Limited (TSMC) contributed to performance during the second quarter, driven by robust demand for AI chips and easing investor concerns about tariffs and macroeconomic risks. We retain conviction that TSMC’s technological leadership, pricing power, and exposure to secular growth markets—including AI and high-performance computing, automotive, 5G, and Internet of Things—will allow the company to sustain strong double-digit earnings growth over the next several years.
• HD Korea Shipbuilding & Offshore Engineering Co., Ltd. is the shipbuilding and offshore engineering sub-holding company of HD Hyundai, overseeing key affiliates including HD Hyundai Heavy Industries, a leading global shipbuilder and engine manufacturer. Shares rose during the quarter on improving profit margin visibility, backlog growth, and increasing evidence of a sizable long-term opportunity in the naval and defense business. The stock also benefited from broader strength in Korean equities—particularly among chaebol-affiliated companies (large family-controlled conglomerates)—following the Korean presidential election outcome, which is expected to lead to shareholder-friendly corporate governance reforms. We continue to hold shares and remain confident in the company's long-term outlook.
• HD Hyundai Heavy Industries Co., Ltd. is a leading global shipbuilder and engine manufacturer. Shares rose during the quarter on improving profit margin visibility, backlog growth, and increasing evidence of a sizable long-term opportunity in the naval and defense business, including potential partnerships with the U.S. military. HD Hyundai Heavy Industries also benefited from broader strength in Korean equities—particularly among chaebol-affiliated companies (large family-controlled conglomerates)—following the Korean presidential election outcome, which is expected to lead to shareholder-friendly corporate governance reforms. We continue to hold shares and remain confident in the company's long-term outlook.

DETRACTORS

• Alibaba Group Holding Limited is the largest retailer and e-commerce company in China. Alibaba operates shopping platforms Taobao and Tmall, and has businesses spanning logistics, local services, digital media, and cloud computing. Shares of Alibaba were pressured by quarterly results that were solid but fell short of elevated investor expectations, as well as heightened macroeconomic and geopolitical uncertainty impacting international stocks following Liberation Day. Alibaba is actively pursuing Artificial General Intelligence, ramping its capital expenditures over the next three years to build out its cloud infrastructure layer and add AI capabilities to existing apps (e.g., consumer search). Within its commerce business, the core market is showing continued positive signs of stabilization, and improved profitability should follow. We retain conviction that Alibaba is well positioned to benefit from China's ongoing growth in e-commerce and cloud, although competitive concerns remain.
• Meituan is China’s largest food delivery platform and the leading super app for local services. Shares declined during the quarter amid intensifying domestic competition and increased spending on international expansion. Earlier this year, JD.com—a major Chinese e-commerce company—entered the food delivery space, triggering an industry-wide subsidy war. Meituan and Alibaba’s Ele.me (the second-largest platform in the industry) rolled out aggressive discounts to defend share across food delivery and the fast-growing quick commerce category. Despite Meituan’s deep logistics network, robust technology stack, and proven operational expertise, these initiatives pressured near-term earnings as the company increased support for merchants and couriers. At the same time, Meituan is investing to build its presence in new markets such as the Middle East and Brazil. While we trimmed our position in light of these near-term headwinds, we continue to view Meituan as one of China’s most competitively advantaged and efficiently managed consumer internet companies, with significant long-term growth potential overseas.
• Full Truck Alliance Co. Ltd. (FTA), China’s leading digital freight platform, detracted from performance during the quarter. While FTA delivered strong quarterly results, with solid revenue growth and margin improvement, it reported muted earnings guidance and revised its full-year profit forecast lower to reflect increased AI investment and anticipated losses from planned acquisitions, which disappointed the market. Shares were also pressured by growing concerns over the potential delisting of FTA’s American Depositary Receipts from U.S. exchanges, fueled in part by fears that the Trump administration could take a harder stance on Chinese listings. This is particularly concerning for FTA, which does not yet have a Hong Kong listing, though the company is actively preparing for one. We retain conviction in FTA’s growth outlook, supported by expanding market share, higher take rate potential, and long-term benefits from its strategic investments in AI and logistics technology.

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 Emerging Markets Fund (the Fund) appreciated 15.39% (Institutional Shares) in the second quarter, outperforming the MSCI Emerging Markets Index (the Index) by 340 basis points due to strong stock selection across countries and sectors. 

On a country level, favorable stock selection in Korea together with higher exposure to this better performing country contributed approximately 325 basis points of relative gains or the vast majority of outperformance in the period. Korean equities rose sharply after the country’s recently concluded presidential election solidified a strong mandate for corporate governance and Chaebol reforms. Strong stock selection in India and lack of exposure to Saudi Arabia, which was the worst performing emerging markets jurisdiction during the quarter, also bolstered relative performance. Partially offsetting the above was adverse stock selection in China, where several holdings consolidated prior period gains. The Fund’s underweight positioning in Taiwan, during a period of recovery for global technology and semiconductor stocks, also detracted from relative results.

From a sector or theme perspective, solid stock selection in Industrials, Financials, Consumer Discretionary, and Information Technology (IT) was responsible for most of the relative gains in the period. A portion of the outperformance in Industrials stemmed from the Fund’s significantly higher exposure to this better performing sector, which was up nearly 22% in the Index. Stock selection was the other catalyst thanks to sharp gains from a handful of the Fund’s Korean holdings in the sustainability/ESG (HD Korea Shipbuilding & Offshore Engineering Co., Ltd., HD Hyundai Heavy Industries Co., Ltd., and Doosan Enerbility Co., Ltd.) and global security/supply chain diversification (Hanwha Systems Co., Ltd. and Korea Aerospace Industries, Ltd.) themes. Performance in Financials was bolstered by holdings in the India wealth management/consumer finance theme, namely JM Financial Limited, Nippon Life India Asset Management Limited, Jio Financial Services Limited, Nuvama Wealth Management Limited, and SBI Life Insurance Company Limited. Select positions across Latin America such as Credicorp Ltd., the leading financial services company in Peru, and XP Inc., a Brazil-based digital brokerage firm, also contributed within Financials. The main standouts in Consumer Discretionary were Korean e-commerce company Coupang, Inc., Latin America e-commerce and fintech leader MercadoLibre, Inc., and Indian food delivery platform Swiggy Limited, which are part of the Fund’s digitization theme. Strength in IT was driven by sizable gains from a few of the Fund’s Taiwanese/Korean holdings in the semiconductors/AI theme (ASPEED Technology Inc., Chroma ATE Inc., and Park Systems Corporation). 

Marginally offsetting the above was broad-based weakness in Health Care, Real Estate, and Consumer Staples, where select Chinese holdings in the China value-added (Zai Lab Limited and WuXi Biologics (Cayman) Inc.), digitization (KE Holdings Inc.), and EM consumer (China Mengniu Dairy Co. Ltd.) themes were the largest detractors.