Baron Focused Growth Fund: Latest Insights and Commentary

U.S. equity markets were volatile during the quarter, as positive sentiment and strong performance in January were undermined by AI-related disruption fears and geopolitical tensions. Small and mid caps generated positive returns in the first quarter while large caps declined, a margin of outperformance for small and mid caps not seen since the COVID rally in late 2020 and early 2021. 

The year began with positive momentum for U.S. stocks, supported by easing inflation, resilient economic trends, strong corporate earnings, and investor optimism about the Trump administration’s stimulative economic strategy. Market sentiment began to shift in February, with the early catalyst being widespread losses across a range of industries due to fears about AI-driven disruption. Technology and software companies experienced notable pressure as investors worried AI agents could directly replace human-led business workflows. The sell-off worsened after the U.S. and Israel attacked Iran on February 28. Investors became concerned about the potential for sustained inflation and reduced economic growth from surging oil prices and supply chain disruptions. 

Against this backdrop, the dominant market trend was the continued rotation out of the Magnificent Seven, software, and other growth-oriented stocks. The Magnificent Seven complex declined 11.3%, accounting for about 90% of the cap-weighted S&P 500 Index’s losses. Microsoft (-23.3%), Tesla (-17.3%), Meta (-13.3%), Amazon (-9.8%), and Alphabet (-8.1%) suffered the largest losses. The non-Magnificent Seven stocks in the Index were down only 0.6% for the month. 

Looking ahead, we remain focused on well-managed companies with durable competitive advantages and attractive growth prospects. While macroeconomic and policy uncertainty persist, we believe maintaining a disciplined, long-term perspective and emphasizing company fundamentals will be essential to navigating the evolving landscape. 

CONTRIBUTORS

• Space Exploration Technologies Corp. (SpaceX) is a high-profile private company founded by Elon Musk. The company's primary focus is on developing and launching advanced rockets, satellites, and spacecrafts, with the ambitious long-term goal of making life multi-planetary. SpaceX is generating significant value with the rapid expansion of its Starlink broadband service. The company is successfully deploying a vast constellation of Starlink satellites in Earth's orbit, reporting substantial growth in active users, and regularly deploying new and more efficient hardware technology. Furthermore, SpaceX has established itself as a leading launch provider by offering highly reliable and cost-effective launches, leveraging the company's reusable launch technology. SpaceX capabilities extend to strategic services such as human spaceflight missions. Moreover, SpaceX is making tremendous progress on its newest rocket, Starship, which is the largest, most powerful rocket ever flown. This next-generation vehicle represents a significant leap forward in reusability and space exploration capabilities. We value SpaceX using prices of recent financing transactions.
• FIGS, Inc. designs and sells scrubwear for health care professionals through a digitally native, direct-to-consumer strategy. Shares rose following robust fourth-quarter results and upbeat 2026 guidance. Revenue expanded 33% to $201.9 million, reflecting broad-based momentum across categories and geographies and exceeding expectations. Holiday demand was strong throughout the season and remained elevated through quarter-end. U.S. revenue rose 28.7% to $164.2 million, while international revenue accelerated 55% to $37.7 million, with scrubs and non-scrubwear contributing gains of 35% and 26%, respectively. This topline strength translated to profitability, with EBITDA rising 29.8% to $26.7 million. Building on this momentum, revenue is expected to grow in the low-20% range in the first quarter and 10% to 12% for the full year. Additional drivers include accelerating international expansion, new store openings (both the ramping 2025 cohort and four locations planned for 2026), and continued traction in TEAMS (FIGS’ enterprise and group ordering business). The company maintains a strong balance sheet, with no debt and roughly $300 million in cash and marketable securities.
• Global hotel franchisor Choice Hotels International, Inc. contributed to performance during the quarter as the company saw a slight acceleration in revenue per available room across its portfolio. Choice continues to grow units at a low-single-digit rate and is benefiting from higher royalty rates on new franchise contracts, driving mid-single-digit growth in earnings and free cash flow. The company is using this cashflow to return capital through share repurchases. We continue to believe the stock offers compelling value, trading at a roughly five multiple-point discount to its historical average. Choice maintains a strong balance sheet, providing flexibility for additional share buybacks, particularly when the stock trades below the company’s view of intrinsic value. Choice’s steady growth profile, both domestically and internationally, should further support attractive shareholder returns over time.

DETRACTORS

• Tesla, Inc. designs, manufactures, and sells fully electric vehicles (EVs), solar products, and energy storage solutions, while developing advanced real-world AI technologies. Following robust gains in late 2025, shares fell as investors awaited progress on robotaxis and assessed the company’s sizable investments in manufacturing and AI. Operationally, Tesla delivered strong quarterly results amid a challenging EV environment. Automotive gross margins improved sequentially and beat expectations, the energy storage business maintained robust momentum with best-in-class margins, and battery cell production ramped. The company continues to advance its AI and autonomous driving initiatives at a rapid pace. Management anticipates meaningful robotaxi expansion in 2026 and continues to finalize the Optimus Gen 3 design and build out large-scale manufacturing capacity for humanoid robots. Tesla is also releasing major Full Self-Driving (FSD) enhancements, scaling AI training compute, and deepening vertical integration in semiconductor design and production. These initiatives, while increasing near-term capital spending, underscore Tesla’s pivot toward becoming a leader in physical AI.
• CoStar Group, Inc. is the leading provider of information and marketing services to the commercial and residential real estate industries. Shares fell due to multiple compression driven by rising AI fears. The market has come to view AI as an existential risk for a growing number of industries—including software, business services, information services, and video games—despite no evidence of any fundamental impact to these sectors. This “shoot first and ask questions later” dynamic has resulted in meaningful share price declines. We continue to own CoStar given its differentiated data assets and significant growth opportunities in providing enhanced real estate information, analytics, and marketplace offerings. CoStar boasts an enviable business model with high levels of recurring revenue and meaningful cash flow generation potential. While near-term cash flow is obscured by elevated investment in Homes.com, we expect spending to moderate and cash flow to improve over the next several years. The company also maintains a substantial cash balance, which we are hopeful will be used to aggressively repurchase shares at current depressed valuation levels.
• Premium footwear and apparel brand On Holding AG detracted from performance as shares came under pressure from foreign-exchange headwinds and heightened uncertainty surrounding management changes. The recent devaluation of the U.S. dollar is expected to slow reported results, even as management reiterated its outlook for 2026 foreign-exchange-neutral revenue growth of 23%. Leadership turnover also weighed on sentiment, with co-founders David Allemann and Caspar Coppetti returning to serve as co-chief executive officers while Martin Hoffmann steps down. Despite these near-term pressures, the company continued to deliver strong fundamental results. In the fourth quarter of 2025, On generated constant-currency revenue growth of more than 30% as it continued to capture additional market share through its premium, differentiated product lineup, which is expanding beyond footwear into accessories and apparel. Margins also exceeded expectations. We maintain long-term conviction in On’s ability to innovate and strengthen its position within the secularly attractive global sportswear market.

The Quarterly Attribution Analysis for period ending March 31, 2026, is not yet available.