Baron Emerging Markets Fund: Latest Insights and Commentary

CONTRIBUTORS

• South Korean semiconductor company SK hynix Inc. is the current leader in high-bandwidth memory (HBM), the specialized memory used alongside AI processors, and a leading producer of dynamic random-access memory (DRAM) and NAND flash memory. Shares rose during the quarter as the company provided perhaps the clearest evidence yet of the supply-constrained nature of the AI memory market. Customers have pre-booked more than three years of HBM supply, exceeding what SK hynix can currently produce, and are increasingly focused on securing supply rather than negotiating price. That pricing power drove record profitability in what is typically a seasonally weaker quarter, and management characterized the current cycle as structurally different from the boom-bust patterns of the memory industry's past. We retain conviction in SK hynix as a core long-term holding, viewing its leadership in the HBM market, its position as a key supplier to the leading AI chip maker, and favorable industry supply-demand dynamics as durable advantages that support multi-year earnings power.
• 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 rose during the quarter as investors increasingly recognized that TSMC, rather than any individual chip designer, sits at the center of the AI supply chain. High-performance computing now represents the majority of TSMC's business. AI demand is consuming so much leading-edge capacity that smartphone and PC production is increasingly shifting to older technology nodes, reversing a dynamic that defined the foundry industry for much of the past decade. Management also raised its full-year outlook and increased capital spending to support demand that remains well above available supply. We retain long-term conviction in TSMC and view its leading-edge manufacturing monopoly, pricing power, and 2-nanometer technology roadmap as durable advantages that support multi-year earnings power.
• South Korean technology conglomerate Samsung Electronics Co., Ltd. is the world’s largest memory chip maker and also operates major smartphone, display, and contract manufacturing businesses. Shares rose during the quarter as the company delivered a genuine turnaround in its most strategically important product. After years of trailing its closest rival in the high-bandwidth memory (HBM) that AI systems depend on, Samsung became the first to ship next-generation HBM4 at volume for the leading AI accelerator’s upcoming platform. The result was record memory profitability, driven by sharply higher pricing, even as those same rising memory costs pressured its own smartphone business, a striking illustration of how the company both benefits from and pays for the memory boom. We retain conviction in Samsung as a core long-term holding, viewing its HBM4 leadership, the breadth of its memory franchise, and its advanced foundry optionality as durable advantages that support multi-year earnings power.

DETRACTORS

• Alibaba Group Holding Limited is China's largest e-commerce and cloud computing company. Shares fell after Alibaba reported quarterly results that showed lower group profitability and negative free cash flow as the company ramped investment in AI infrastructure and the buildout of its Qwen model ecosystem. Total spending is now expected to exceed Alibaba's prior three-year capital budget. Persistent weakness in Chinese consumption and intensifying e-commerce competition weighed on the core retail franchise, while losses in its instant-commerce initiative and other new ventures widened. Despite this near-term earnings reset, our conviction in Alibaba remains intact. Cloud revenue growth accelerated, and management for the first time disclosed the scale of its AI business, with model-as-a-service run-rate revenue expected to exceed RMB 30 billion by fiscal year end. We believe this validates the company's differentiated full-stack positioning across proprietary chips, cloud infrastructure, and leading models. We view Alibaba as one of the best-positioned proxies for China's AI supply chain and remain invested.
• ISC Co., Ltd. is a South Korean manufacturer of semiconductor testing equipment and the dominant global supplier of elastomer test sockets. These sockets continue to gain share from traditional pogo-pin solutions, which are approaching their electromechanical limits as semiconductor complexity increases. The stock detracted from performance during the second quarter even as earnings comfortably exceeded expectations. We believe the shares are consolidating gains following ISC's strong first-quarter performance. More recently, trading activity may reflect a broader market rotation away from leading-edge semiconductor technologies and key AI enablers toward more legacy and commodity-oriented segments of the semiconductor supply chain in the wake of the rapid adoption of agentic AI. We see no deterioration in the company's fundamentals and retain long-term conviction.
• BYD Company Limited, a leading Chinese manufacturer of electric vehicles and batteries, detracted from performance in the second quarter. China's domestic new energy vehicle market remained highly competitive as ongoing price competition and weak consumer demand pressured automotive manufacturers across the sector. A reduction in national purchase incentives, which had pulled demand forward into 2025, added to these near-term headwinds. Partially offsetting the softer domestic environment, BYD's international business remained a bright spot, with overseas deliveries increasing more than 80% year over year during the quarter and accounting for more than 40% of total vehicle volume. Looking ahead, BYD's premium model expansion and next-generation battery technology should drive a richer product mix over time. We continue to own the stock, as BYD's cost leadership, vertical integration, and growing export business support our long-term investment thesis, though we continue to monitor domestic pricing competition and the pace of consumer demand recovery.

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) performed exceptionally well in the second quarter, up 19.61% (Institutional Shares), yet struggled to keep pace with the MSCI Emerging Markets Index (the Index), which appreciated 24.05%. The performance shortfall was largely stock-specific given narrow market leadership in the period, as a handful of Korean and Taiwanese securities benefiting from the AI boom accounted for most of the Index’s substantial gains. The Fund was punished for not owning certain securities and having higher exposure to others that failed to participate in the market rally during the quarter.

On a country level, stock selection in Korea and Taiwan was especially costly, detracting 650-plus basis points. About two-thirds of the losses in these countries came from not owning or having lower exposure to MediaTek Inc., Samsung Electro-Mechanics Co., Ltd., SK hynix Inc., and other “AI winners” in semiconductors, electronic components, and technology hardware storage & peripherals, as these segments alone accounted for 85% of the Index’s gains in the period. Somewhat offsetting the above was solid stock selection in India and China, where select holdings in the semiconductors/AI, global security/supply chain diversification, India wealth management/consumer finance, and EM consumer themes were the standouts.

From a sector or theme perspective, stock selection in Information Technology (IT) was a 600-plus basis point drag on relative performance. About three-quarters of the losses came from not owning or having lower exposure to MediaTek, Samsung Electro-Mechanics, SK hynix, Samsung Electronics Co., Ltd., and other stocks in the semiconductors, electronic components, and technology hardware storage & peripherals sub-industries. The remaining deficit was attributable to share price losses from Korean semiconductor testing components manufacturer ISC Co., Ltd. and a few of the Fund’s China value-added holdings (GDS Holdings Limited, Kingdee International Software Group Company Limited, and Pony AI Inc.). Stock selection in Industrials was another material headwind, owing to widespread weakness from holdings in the global security/supply chain diversification (Hanwha Systems Co., Ltd., Korea Aerospace Industries, Ltd., The Japan Steel Works, Ltd., and Bharat Electronics Limited), sustainability/ESG (Contemporary Amperex Technology Co., Limited, Doosan Enerbility Co., Ltd., and Ceres Power Holdings plc), digitization (InPost S.A., Full Truck Alliance Co. Ltd., and S.F. Holding Co., Ltd.), best-in-class/high-quality growth (GPS Participacoes e Empreendimentos S.A. and HYUNDAI Glovis Co., Ltd.), and EM consumer (Localiza Rent a Car S.A.) themes. 

Somewhat offsetting the above was favorable stock selection in Financials, Consumer Staples, and Consumer Discretionary along with lower exposure to the lagging Materials, Financials, Energy, and Communication Services sectors. Strength in Financials came from holdings in the India wealth management/consumer finance theme (Nippon Life India Asset Management Limited, Nuvama Wealth Management Limited, Cholamandalam Investment and Finance Company Limited, and Bajaj Finance Limited), which were up more than 22% in the period. Performance in Consumer Staples and Consumer Discretionary was bolstered by considerable gains from EM consumer holdings d'Alba Global Co., Ltd. and Trent Limited, respectively.