Baron FinTech Fund: Latest Insights and Commentary

U.S. stocks struggled during the first quarter of 2025 as the shock of Trump’s tariff war erased any optimism that the U.S. stock market or economy would continue to flourish under the new administration, replaced by heightened concerns of a possible recession. The mass layoffs of federal workers added to the confusion. The Magnificent Seven, which had led the market on AI-driven enthusiasm, were even harder hit by tariff uncertainties, as their relatively high valuations made them more exposed to a slowdown. In addition, the January launch of Chinese AI app DeepSeek as a less expensive alternative to U.S.-based AI models had investors questioning whether the massive investments in AI would ultimately produce the expected outsized returns. The FactSet Global Fintech Index declined 7.0%.

GDP growth is widely predicted to slow during 2025, reflecting weakening consumer demand and more cautious corporate spending. Consumer confidence has plummeted. The March 2025 inflation figure came in above the U.S. Federal Reserve’s target of 2%, as measured by the Consumer Price Index. The Fed has taken a wait-and-see approach as the effects of heightened U.S. policy uncertainty on growth, inflation, and employment play out. It left interest rates unchanged in its first meeting of the year.

Against this challenging backdrop, Baron FinTech Fund detracted. Consumer Discretionary, Real Estate, and Industrials holdings contributed, while Information Technology (IT) and Financials investments detracted. Gains within Consumer Discretionary were attributable to MercadoLibre, Inc., the third largest contributor and the Fund’s sole sector holding. CoStar Group, Inc. drove gains within Real Estate, after shares of this provider of marketing and analytics to the real estate industry rose on increased productivity of the sales force and signs of a start to the recovery of the commercial real estate market. Industrials was a modest contributor, with gainers slightly outweighing losers in the quarter. Widespread losses within IT pressured sector performance. With the top three detractors within the sector, Financials had a tough quarter as well.

The second quarter may bring with it as much doubt and volatility as the first, given continued elevated uncertainty around tariffs. After reaching a record high in corporate profits in the fourth quarter of 2024, U.S. companies are scrambling to estimate the potential impact of the tariff war. As first quarter earnings season approaches, many observers expect businesses to offer weaker earnings guidance for the rest of the year or withdraw guidance altogether.

We are closely monitoring market conditions while staying focused on the promising long-term opportunities within the fintech space. We construct our portfolio across seven fintech themes, with holdings categorized as Leaders and Challengers and the mix driven by top-down risk considerations and bottom-up opportunities. We believe fintech is in the early innings of growth, as incumbents have a long digitization journey ahead and younger consumers favor digital solutions.

CONTRIBUTORS

• The Progressive Corporation is a leading auto insurance company. Shares increased as the company continued to perform well, growing its auto policy count at a year-over-year rate of more than 20% while earning underwriting margins much higher than its targeted 4%. We do not think these growth rates and margins are sustainable, as peers will eventually re-price their products to be more competitive. However, Progressive continued to win market share on the back of this strong, profitable growth, leapfrogging Geico to become the #2 provider of private auto insurance in the U.S. Shares also benefited from the market rotation into more defensive names in light of heightened volatility in the quarter. We think Progressive is the best-in-class operator in the space and remain shareholders.
• Tradeweb Markets Inc. operates electronic marketplaces for fixed income securities. Shares rose during the quarter due to strong volume trends driven by favorable market conditions and share gains in key products. Credit products saw accelerating growth with trading volume up 39%, while rates products saw stable trends with 14% growth. In credit, Tradeweb continued to grow faster than the market and its primary electronic trading competitor. We believe Tradeweb can achieve solid growth in a variety of macroeconomic conditions and expect further market share gains to drive long-term upside. We continue to own the stock due to Tradeweb’s strong network effects, long track record of innovation, and significant growth opportunities from the ongoing electronification of the capital markets.
• MercadoLibre, Inc., the leading e-commerce marketplace across Latin America, contributed to performance. The company reported solid quarterly results, with better-than-expected revenues and a significant beat in earnings before interest and taxes, as margins rebounded sharply, reversing the decline seen in the previous quarter and alleviating concerns around investment-driven impacts to near-term profitability. MercadoLibre continues to post strong growth in volume indicators, which gives us confidence in its ability to capture a leading share of the structural growth opportunity for e-commerce and fintech in Latin America. We remain shareholders.

 

DETRACTORS

• Following strong 2024 performance, leading alternative asset manager KKR & Co. Inc. detracted in the first quarter due to macroeconomic concerns, particularly as Trump's actions on tariffs and broader economic policy were more sweeping and volatile than expected. Alternative asset managers performed well following the November elections on raised hopes that a wave of deregulation would spur an increase in deals, which would be conducive to fees and carried interest. Investors have since cooled on the prospects for a capital market recovery, pressuring KKR and other alternative asset managers. Although the near-term outlook is uncertain, we think KKR is a winner in the space and its long-term fundraising success should be driven by its breadth of products and strong investment track record rather than the near-term economic outlook.
• Following strong performance throughout 2024, shares of alternative asset manager Apollo Global Management, Inc. detracted in the first quarter, largely stemming from a reversal in sentiment regarding capital markets activity. The group performed well in 2024 and even more so following the November elections on expectations of a recovery in capital markets activity fueled by deregulation and economic growth. Those expectations waned in the first quarter in light of the uncertainty and volatility around Trump's various policy initiatives. As positive capital markets sentiment faded, alternative asset manager stocks gave up much of the post-election gains. We believe Apollo remains a highly differentiated and well-run asset manager. We remain invested in the stock.
• Block, Inc. provides point-of-sale technology to small businesses and operates the Cash App ecosystem of financial services for individuals. Shares fell after the company reported quarterly results and near-term guidance that were softer than expected. In the fourth quarter, gross profit growth of 14% and EPS growth of 51% were strong overall but missed Street expectations. Also, investors might be skeptical of the 15% gross profit growth guidance in 2025 as it implies acceleration throughout the year in an uncertain macroeconomic environment. Nevertheless, management reiterated their expectation of achieving the “Rule of 40” investment framework in 2026 with mid-teens gross profit growth and a mid-20% operating margin. We continue to own the stock due to Block’s long runway for growth, sustainable competitive advantages, and innovative product offering.