Baron Emerging Markets Fund: Latest Insights and Commentary

Emerging market (EM) equities delivered another quarter of relative outperformance, extending strong momentum from 2025. The first two months of 2026 saw EM markets post solid double-digit gains, driven largely by AI-related technology companies and broad-based strength in industrials. Performance was particularly strong in Korea and Taiwan, where sustained investor demand for AI “picks and shovels” technology, memory chips, and foundry services contributed to market strength. 

Late in the quarter, the U.S. and Israel attacked Iran, triggering a sharp rise in oil prices and an inflection point in global equity markets. This led to increased volatility and a rotation toward energy and U.S. assets. This shift weighed on EM performance into quarter end; however, EM equities still comfortably outperformed the S&P 500 Index for the period, -0.1% versus -4.3% respectively, underscoring the resilience of the asset class despite geopolitical disruption. 

Looking ahead, the principal near-term risk remains the potential for an extended disruption to oil flows and a sustained spike in energy prices, as many Asian economies—including Taiwan, Korea, China, and India—are heavily reliant on Middle East imports. Nevertheless, current market dynamics suggest elevated energy prices are more likely to be temporary than structural. 

Overall, we remain encouraged by the continued relative strength of EM equities. Company fundamentals remain intact, which supports our confidence in the asset class despite an evolving geopolitical backdrop. 

CONTRIBUTORS

• Semiconductor giant Taiwan Semiconductor Manufacturing Company Limited (TSMC) contributed to performance as revenue growth exceeded expectations due to surging demand for AI chips. TSMC dominates the advanced semiconductor foundry market, controlling over 90% share of cutting-edge sub-7 nanometer (nm) nodes that power AI servers, flagship smartphones, and autonomous vehicles. The company benefits from a virtuous cycle in which its massive scale and profitability generate the capital necessary to fund industry-leading R&D and capex, in turn widening its technological moat and reinforcing its pricing power. As the ultimate "picks and shovels" provider of the AI era, TSMC remains insulated from the competitive dynamics of the AI chip design ecosystem. Whether hyperscalers develop custom accelerators or deploy merchant graphics processing units from companies like NVIDIA and AMD, nearly all advanced AI accelerators are manufactured exclusively at TSMC’s 3nm and 5nm nodes. We believe TSMC will deliver 20% earnings growth over the next several years, supported by secular AI-driven demand for leading-edge manufacturing capacity.
• 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

• Bajaj Finance Limited is a leading non-bank financial company in India. Shares declined during the quarter as geopolitical tensions over the past month raised expectations of higher inflation and disrupted India’s easing interest rate environment, which could negatively impact consumption-led credit growth. We retain conviction in the company due to its best-in-class management team, robust long-term growth outlook, and conservative risk management frameworks. We believe Bajaj is well positioned to benefit from growing demand for consumer financial services in India, including mortgages, personal loans, credit cards, and other related products.
• Bharti Airtel Limited is a leading telecommunications company with operations across Asia and Africa. The company’s offerings include wireless services, mobile commerce, and fixed-line broadband. While Bharti Airtel reported strong quarterly earnings and provided visibility into robust future free cash flow generation, shares declined during the quarter due to concerns around capital allocation to the company’s new non-banking financial company venture. In our view, as India’s dominant mobile operator, Bharti Airtel is benefiting from ongoing industry consolidation. In particular, competitor Vodafone Idea appears to be on the verge of bankruptcy amid severe pricing pressure and an unsustainable balance sheet. We retain conviction in Bharti Airtel’s outlook as it transforms into a digital services company and capitalizes on rising mobile tariffs.

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) outperformed by more than 330 basis points when market conditions worsened in March, finishing the quarter modestly ahead of the MSCI Emerging Markets Index (the Index) by 64 basis points (Institutional Shares). Strong stock selection helped overcome headwinds from style factors, notably underexposure to certain value-oriented factors such as Dividend Yield, Earnings Yield, and Book-to-Price. Factor performance was reflective of solid outperformance for value stocks within emerging markets during the first quarter, creating a difficult backdrop for the Fund given its growth bias. The Fund also managed to outperform despite being meaningfully overexposed to India, which was the second worst performing country in the Index, down more than 18%.

On a country level, strong stock selection in Taiwan, Korea, and Poland contributed 330-plus basis points of relative gains, overshadowing stock-specific weakness in China, India, and Brazil (-242 basis points combined). The Fund also benefited from being overexposed to Korea, Peru, Argentina, and Brazil, but these favorable impacts were negated by being significantly overweight India. Indian equities faced headwinds from sustained Foreign Institutional Investor outflows, disappointing corporate earnings, rising geopolitical tensions in the Middle East, and soaring energy prices given the country imports most of its crude oil.

From a sector or theme perspective, strong stock selection in Information Technology contributed 280-plus basis points of relative gains, with the main standouts being various Taiwanese and Korean holdings in the semiconductors/AI theme (ISC Co., Ltd., Taiwan Semiconductor Manufacturing Company Limited, Delta Electronics, Inc., Chroma ATE Inc., eMemory Technology Inc., and ASPEED Technology Inc.). These holdings benefited from ongoing investor demand for AI "picks and shovels" technology, memory chips, and foundry services. Solid stock selection in Industrials and Materials was another source of relative strength in the period. Polish e-commerce enablement platform InPost S.A. and Korean global security/supply chain diversification holdings Hanwha Systems Co., Ltd. and Korea Aerospace Industries, Ltd. led the way in Industrials, while sustainability/ESG holdings Grupo Mexico, S.A.B. de C.V. and Sociedad Quimica y Minera de Chile S.A. performed well in Materials.

Mostly offsetting the above was disappointing stock selection in Financials, Consumer Discretionary, and Communication Services, where holdings in the India wealth management/consumer finance, fintech disruption, and digitization themes accounted for most of the relative losses. Weakness in Financials came from India-based digital payment provider Pine Labs Limited (fintech disruption) and several holdings in the India wealth management/consumer finance theme (Bajaj Finance Limited, JM Financial Limited, SBI Life Insurance Company Limited, Nippon Life India Asset Management Limited, Kotak Mahindra Bank Limited, and Nuvama Wealth Management Limited). Performance in Consumer Discretionary and Communication Services was hindered by investments in the digitization theme, with the largest detractors being Indian food delivery company Swiggy Limited and Chinese online music and audio entertainment platform Tencent Music Entertainment Group, respectively.