Baron Emerging Markets Fund: Latest Insights and Commentary

During the fourth quarter, global equities extended prior-year gains and delivered solid full-year returns, with emerging market (EM) equities significantly outperforming U.S. and global peers for the first time in several years. In our view, 2025 likely marked the beginning of a more durable period of EM and international equity outperformance. The year was shaped by a largely unexpected U.S. retreat from the long-standing multilateral security and trade framework, prompting defensive monetary, fiscal, and reform responses globally. As U.S. protectionist measures were later diluted through negotiation, this policy support remained in the system, contributing to stronger-than-expected global growth, improving earnings momentum, and increasingly accommodative financial conditions. Despite elevated geopolitical and market volatility, political and economic constraints helped contain tail risks, ultimately resulting in a far more constructive backdrop for EM equities than many anticipated entering the year.

While EM equities continued to outperform global peers in the fourth quarter, returns were more modest than earlier in the year, reflecting consolidation in China, the largest benchmark weight. Chinese equities retreated into year-end amid disappointment over the lack of explicit progress on technology and semiconductor export restrictions, even as rare earth exports resumed. We were not surprised by the limited initial disclosures given political sensitivities and believe subsequent developments have reinforced a gradual détente. Early signs of improvement have since emerged, with Chinese equities tied to AI infrastructure, robotics, semiconductors, and broader technology rebounding. We continue to believe global investors are underestimating the depth and competitiveness of China’s emerging AI ecosystem, which appears advantaged by cost efficiency, power availability, open-source model development, and manufacturing scale.

More broadly, the global AI investment cycle remains a central driver of market performance, though we believe expectations embedded in U.S. equities have become increasingly demanding. Rising hyperscaler capital expenditure plans have intensified scrutiny around competitive dynamics, funding sustainability, and long-term return potential, particularly given the concentration of AI-related exposure in U.S. equity markets. Any moderation in AI capex expectations or pressure on margins would likely favor non-U.S. equities, including EM. Looking ahead, we view the confirmation of a global central bank easing cycle, continued dollar vulnerability, and ongoing geopolitical realignment as supportive of EM assets. Overall, we remain confident that EM equities are in the early stages of a multi-year recovery driven by structural reforms, technological innovation, and favorable policy divergence, and that fundamental, research-driven investors will continue to find compelling opportunities across the asset class.

CONTRIBUTORS

• Semiconductor giant Taiwan Semiconductor Manufacturing Company Limited (TSMC) contributed to performance during the quarter, driven by robust demand for AI chips. 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.

• South Korean memory semiconductor company SK hynix Inc. contributed to performance, as strong AI-driven demand, combined with tight industry supply, has resulted in a dramatic increase in dynamic random-access memory (DRAM) and NAND flash memory pricing and profitability. Memory is a core pillar of the data economy and benefits from structural demand growth as servers, smartphones, PCs, and other devices become increasingly computationally intensive. We believe SK hynix will remain a key beneficiary of rising adoption of High Bandwidth Memory (HBM), which leverages advanced packaging to vertically stack DRAM chips, delivering higher bandwidth, improved power efficiency, and a smaller form factor. SK hynix has emerged as the industry leader in cutting-edge HBM due to its superior performance, durability, and heat dissipation. We expect the company to generate strong earnings growth over the next several years, with significant upside from incremental long-term memory demand driven by AI applications.

• Shares of South Korean conglomerate Samsung Electronics Co., Ltd. increased during the quarter on surging dynamic random-access memory (DRAM) and NAND flash memory pricing, improved execution in DRAM and High Bandwidth Memory (HBM) technology development, and a stronger outlook for the company’s logic semiconductor foundry business. We are confident Samsung will remain a key beneficiary of long-term growth in global semiconductor demand and a leader in memory chips, 5G smartphones, and semiconductor foundry services.

DETRACTORS

• Alibaba Group Holding Limited is the largest retailer and e-commerce company in China. The company operates shopping platforms Taobao and Tmall, and has businesses spanning logistics, local services, digital media, and cloud computing. Shares fell during the quarter amid a broader pullback in Chinese equities following the prior AI rally and some renewed macroeconomic concerns. Even so, Alibaba's fundamentals remain broadly intact. The company accelerated cloud revenue growth, driven by AI adoption and improving unit economics in its quick commerce business. Alibaba is also ramping capital expenditures over the next three years, with plans to invest at least $53 billion to expand its cloud infrastructure layer and embed AI capabilities across its ecosystem, including consumer search. Within commerce, quick commerce has demonstrated strong early traction and management has reiterated its commitment to further enhancing profitability. We retain conviction that Alibaba is well positioned to benefit from China's ongoing growth in e-commerce and cloud, although competitive concerns remain.

• Kaynes Technology India Limited is a leading electronics manufacturing service (EMS) player in India, offering solutions across the automotive, industrial, railway, medical, and aerospace and defense industries. Shares declined during the quarter amid concerns around working capital management and the company’s ability to generate cash flow, as well as questions regarding certain financial reporting practices, which management subsequently clarified. We retain conviction in Kaynes, as we believe the company is well positioned to benefit from the Government of India’s “Make in India” initiative, which promotes domestic electronics manufacturing through attractive tax incentives and investments in manufacturing infrastructure. We expect Kaynes to deliver compounded EBITDA growth of more than 30% over the next three to five years.

• Tencent Holdings Limited operates China’s leading social network and messaging platforms (WeChat and QQ), its largest online gaming business, and one of the country’s dominant online entertainment and media ecosystems. Shares declined amid a broader selloff in Chinese equities following strong performance in the third quarter. Even so, fundamentals remain solid. Core gaming and advertising revenue growth continued to exceed expectations, with profitability growing faster than overall revenue. Tencent also noted that AI is already improving its core advertising technology through better targeting, content ranking, and new forms of engagement such as AI-powered search. We remain confident in the company’s ability to compound earnings over time, supported by its diversified growth structure, massive scale, and operational efficiency. Longer term, we believe Tencent could be a leading beneficiary of generative AI in China, given its ability to enhance existing products and enter adjacent markets through its extensive platform ecosystem. We continue to monitor the regulatory 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.

In a period of continued strong gains for emerging market equities, Baron Emerging Markets Fund (the Fund) declined 1.26% (Institutional Shares), trailing the MSCI Emerging Markets Index, which rose 4.73%, by 599 basis points due to stock selection.

On a country level, adverse stock selection in China, Korea, and India accounted for all the underperformance in the period. Aiding relative results but failing to offset the above was higher exposure to the better performing Korean securities, which were bolstered by semiconductor strength and AI optimism, and lack of exposure to commodity-centric Saudi Arabian equities, hampered by falling oil prices. Positive stock selection in Chile was also a boon during the quarter.

From a sector or theme perspective, investments in Information Technology (IT), Industrials, Consumer Discretionary, and Financials accounted for a majority of the underperformance in the period. Weakness in IT was broad-based sourced primarily from Kaynes Technology India Limited (global security/supply chain diversification), and China value-added holdings Kingdee International Software Group Company Limited and Pony AI Inc.  Within Industrials, broad-based weakness was led by Full Truck Alliance Co. Ltd. (digitization), Contemporary Amperex Technology Co., Limited (sustainability/ESG), and Zhejiang Sanhua Intelligent Controls Co., Ltd. (China value-added). Within Consumer Discretionary, higher exposure to this lagging sector coupled with material declines from several of the Fund’s digitization holdings (Coupang, Inc., Eternal Limited, MercadoLibre, Inc., and Swiggy Limited) hampered performance. Lastly the Fund’s Financials holdings weighed on performance, driven by fintech disruptor Pine Labs Limited and India wealth management/consumer finance holdings Bajaj Finance Limited and JM Financial Limited.

Partially offsetting the above was lower exposure to the lagging Consumer Staples sector. 

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

Baron Emerging Markets Fund (the Fund) was up 30.14% (Institutional Shares) for the year, modestly trailing the MSCI Emerging Markets Index (the Index), which appreciated 33.57%, by 343 basis points. The Fund underperformed due to a combination of adverse stock selection and style related headwinds. Certain value-oriented factors (Earnings Yield, Book-to-Price, and Dividend Yield) performed well in the period, causing a drag on performance given the Fund’s higher growth tilt relative to the Index.

On a country level, overexposure to lagging Indian equities, combined with adverse stock selection in the country accounted for more than the entirety of the underperformance in the period. Stock specific weakness in China and Poland also proved costly. Partially offsetting the above was solid stock selection in Taiwan, lack of exposure to poor performing Saudia Arabian equities, and overexposure to strong performing Korean securities. 

From a sector or theme perspective, disappointing stock selection in Consumer Discretionary weighed the most on relative performance, driven by sharp declines from Swiggy Limited (digitization) and Trent Limited (EM consumer). Adverse stock selection in Real Estate owing to KE Holdings, Inc. (digitization) and Godrej Properties Limited (EM consumer), Health Care driven by Zai Lab Limited (China value-added) and Max Healthcare Institute Limited (best-in-class/high-quality growth), and Communication Services led by digitization holdings Kuaishou Technology, Tata Communications Limited, and Indus Towers Limited also proved costly. Lastly, underexposure to the top performing Materials sector weighed on relative performance, though was somewhat offset by strong selection.

Partially offsetting the above was positive stock selection in Industrials and lower exposure to the lagging Energy. Financials, and Consumer Staples sectors. Strength in Industrials was owed to various holdings in the sustainability/ESG (HD Korean Shipbuilding & Offshore Engineering Co., Ltd., HD Hyundai Heavy Industries Co., Ltd., Contemporary Amperex Technology Co., Limited, Doosan Enerbility Co., Ltd.), global security (Hanwha Systems Co., Ltd., Korea Aerospace Industries, Ltd.), and China value-added themes (Jiangsu Hengli Hydraulic Co., Ltd., Zhejiang Sanhua Intelligent Controls Co., Ltd.).