Baron FinTech Fund: Latest Insights and Commentary

U.S. equities were broadly higher in the third quarter, building on gains from the prior quarter. The S&P 500 Index and NASDAQ Composite set new record highs, most recently on September 22, and the Dow Jones Industrial Average ended the quarter at an all-time high. Small caps led the market recovery, with the Russell 2000 Index finally surpassing its previous record high achieved almost four years ago on November 8, 2021. Market volatility remained muted during the quarter as the CBOE Volatility Index (VIX) continued to trade in the mid-teens, well below its long-term average of around 20. 

The preeminent driver of market strength was the increased likelihood of Federal Reserve (Fed) rate cuts, prompted by signs of weakness in the labor market and the subsequent emergence of more dovish Fed commentary. Rate cut expectations rose in early August following a much weaker-than-expected July nonfarm payrolls report and significant downward revisions to prior numbers. Dovish Fedspeak intensified as the month wore on, with Chair Powell hinting a possible interest rate cut while delivering remarks at the Fed’s annual Jackson Hole conference. Similarly, Governor Waller continued to advocate for cuts while speaking at the Economic Club of Miami. The Fed eventually resumed its rate-cutting cycle at the September meeting, lowering its policy rate by 25 basis points to a range of 4% to 4.25%, after being on hold since its previous cut last December. Robust corporate earnings, narrowing trade uncertainties, a resilient consumer, increased M&A and IPO activity, and sustained AI optimism also contributed to market gains during the quarter. 

The Magnificent Seven complex dominated market returns for a second consecutive quarter, accounting for nearly two-thirds of the S&P 500 Index’s third-quarter gains. The group appreciated 15.5% in the period, outperforming all other securities in the Index, which were up 4.6%, by a double-digit margin. Tesla (+40.0%), Alphabet (+38.1%), Apple (+24.2%), and NVIDIA (+18.1%) posted the largest gains. Meta and Amazon were essentially flat in the period, trailing the broader Index. 

Most sectors closed higher in the period, with Information Technology, Communication Services, and Consumer Discretionary being the only sectors to outperform the broader market thanks to the heavy influence of the Magnificent Seven. Consumer Staples was the only sector to decline in the period, driven by broad-based weakness across a range of sub-industries, including distillers & vintners, personal care products, food retail, tobacco, and household products. Other laggards were Real Estate, Financials, Health Care, Industrials, Energy, and Materials. From a style perspective, small caps outperformed in the third quarter, rising more than 12% and narrowing the gap with mid- and large-cap stocks this year. Performance was mixed between growth and value, with growth stocks dominating in July, losing out to value in August, and rebounding in September. Despite recent volatility, growth generally remains ahead of value year to date, with the largest differential in the mid- and large-cap segments thanks to the heavy influence of Palantir and the broader Magnificent Seven. 

Beyond the U.S., emerging market (EM) equities meaningfully outperformed in September to finish ahead of their developed market counterparts for the quarter. The rally in Chinese equities was largely responsible for EM outperformance, with gains being driven by investor optimism about AI innovation, which bolstered Chinese technology and internet companies. Targeted government initiatives, easing trade tensions with the U.S., and significant domestic capital inflows also contributed to strength in China. Taiwanese and Korean equities also performed well in the period, overshadowing weakness in India, where equity markets were pressured by underwhelming corporate earnings and concerns about recently enacted U.S. tariffs. Foreign investor flows in Indian markets turned negative in the third quarter after being meaningfully positive in May and June. Performance in developed markets was held back by weakness in continental Europe (Denmark, Germany, Norway, Switzerland, France, and Sweden). European equities were hurt by weak corporate earnings, Trump tariff headwinds, and political instability, particularly in France, where the country’s prime minister resigned after losing a crushing confidence vote in parliament.

CONTRIBUTORS

• Robinhood Markets, Inc., a fintech platform offering commission-free trading and investing tools, contributed to performance during the quarter. Shares rose on strong retail engagement trends and continued product innovation. Compared to last year, trading volumes remained elevated across equities, options, and cryptocurrencies. While the company raised pricing on cryptocurrency trades, we have not seen evidence of any material impact on demand. Robinhood also expanded its prediction market offering, with over 2 billion contracts traded during the third quarter, doubling the total from prior periods. Additionally, the company announced new features such as a social trading platform aimed at boosting user engagement. While some new initiatives may not translate immediately into revenue and earnings growth, the company’s pace of innovation and high engagement levels support multiple avenues for increasing average revenue per user over time. We remain investors given Robinhood's long runway for profitable growth as it evolves into a full-stack brokerage platform for Millennial and Gen Z customers.
• Leading online brokerage house Interactive Brokers Group, Inc. contributed to performance, driven by strong quarterly results. The company continues to grow accounts at a 30%-plus rate year over year, with revenue and earnings remaining robust. Interactive Brokers is also benefiting from favorable market conditions, as elevated asset prices and strong investor trading volumes combine to drive unusually high earnings for the company. We believe Interactive Brokers has a compelling long-term growth path and remain investors.
• Shopify Inc. is a cloud-based software provider for multi-channel commerce. Shares rose during the quarter as the company continued to deliver solid results, with second-quarter revenue up 30% year over year in constant currency, reflecting sustained market share gains driven by 29% growth in gross merchandise volume (GMV). Growth was broad-based across Shopify’s core e-commerce merchant base and supported by successful expansion into offline, international, and business-to-business channels, which grew 29%, 42%, and 101%, respectively. Shares also benefited from progress in agentic commerce, underscored by Shopify’s recently announced partnership with OpenAI, the owner of ChatGPT. We believe the company's maturing product suite is becoming increasingly attractive to merchants of all sizes and geographies, enabling it to further expand its addressable market. We remain shareholders due to Shopify’s strong competitive positioning, innovative culture, and long runway for growth, as it still holds less than a 2% share of the global commerce market.

DETRACTORS

• Tradeweb Markets Inc. operates electronic marketplaces for trading fixed-income securities. Shares declined due to a slowdown in overall trading activity amid lower market volatility and challenging year-over-year comparisons. Nevertheless, trends remain solid, with trading volumes up 12% in the third quarter, which we anticipate will drive 10% organic revenue growth for the period. We continue to own the stock due to Tradeweb’s strong network effects, long track record of innovation, and significant growth opportunities tied to the ongoing electronification of capital markets.
• FactSet Research Systems Inc. is a leading provider of investment management tools. Shares fell during the quarter due to a combination of industry-wide concerns about AI, uncertainty surrounding the ongoing CEO transition (which prompted a more conservative preliminary fiscal 2026 outlook), and cautious commentary from several financial data and software peers. The company nevertheless reported solid fiscal fourth-quarter 2025 earnings results, its best quarter ever for new sales, and discussed at length how AI is benefiting the business. We retain long-term conviction in FactSet given its large addressable market, strong execution across both new product development and financial results, and robust free cash flow generation.
• Morningstar, Inc. is a leading data provider to the investment community. Despite solid second-quarter results, shares declined on slowing organic growth in PitchBook, the company’s private markets data and research platform. The broader financial information services sector also underperformed during the quarter, partly due to factor rotation as investors shifted from high-quality, defensive names to higher-growth stocks. Additionally, investor concerns have emerged that AI and large language models could disrupt the industry. However, we believe Morningstar’s long track record of managed investment data, along with proprietary insights from PitchBook, will remain highly valuable to clients, regardless of how that data is accessed. We expect PitchBook’s growth to reaccelerate over time, particularly as capital markets activity improves. We remain investors in the stock.

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 challenging period for fintech stocks and the broader Financials sector, Baron FinTech Fund (the Fund) declined 4.29% (Institutional Shares), trailing the more comparable FactSet Global FinTech Index (the Benchmark) by 239 basis points and the large-cap oriented S&P 500 Index (the Index) by 1,241 basis points. Underperformance versus the Benchmark was driven by stock selection in Enterprise Software, Information Services, and Tech-Enabled Financials. Challengers comfortably outperformed Leaders for a second consecutive quarter (up 1.1% versus down 6.0%, respectively), which weighed on relative performance given the Fund’s meaningfully lower exposure to Challengers. The relative shortfall versus the Index was again driven by the Fund’s lack of exposure to the Magnificent Seven, as the group dominated market returns for a second consecutive quarter. The group was up 15.5% in the period, accounting for 62% of the Index’s gains. Disappointing stock selection in Financials coupled with significantly higher exposure to this lagging sector were other sources of relative weakness. 

Performance in Enterprise Software was hindered by double-digit declines from accounting software leader Intuit Inc. and investment management tools provider FactSet Research Systems Inc. Intuit’s share price declined after the company issued softer-than-expected revenue guidance for its Global Business Solutions segment, which management attributed to less aggressive QuickBooks pricing and slower growth in the Mailchimp marketing business. In addition, OpenAI announced a more advanced large language model, which the market perceived as a threat to application software broadly. Even so, quarterly results exceeded Street expectations, driven by continued expansion of QuickBooks into larger and more complex mid-market customers, faster adoption of TurboTax Live, and cyclical strength from Credit Karma. Management expects 12% to 13% revenue growth and 14% to 15% earnings-per-share growth in the next fiscal year. We remain shareholders given Intuit’s strong competitive position and numerous long-term growth opportunities.

Despite reporting solid quarterly results, FactSet’s stock was adversely impacted by an assortment of factors, including industry-wide concerns about AI, uncertainty surrounding the ongoing CEO transition (which prompted a more conservative preliminary fiscal 2026 outlook), and cautious commentary from several financial data and software peers. The company nevertheless reported solid fiscal fourth quarter 2025 earnings results, its best quarter ever for new sales, and discussed at length how AI is benefiting the business. We retain long-term conviction in FactSet given its large addressable market, strong execution across both new product development and financial results, and robust free cash flow generation.

Within Information Services, data and analytics companies Fair Isaac Corporation (FICO) and Verisk Analytics, Inc. weighed on performance for a second consecutive quarter. Despite reporting strong quarterly results and raising full-year guidance, FICO’s shares underperformed due to increased regulatory noise from the Federal Housing Finance Agency, with director Bill Pulte pushing for a Lender’s Choice model for credit scores in the conforming mortgage market. While these areas of near-term uncertainty persist, we retain conviction and believe that FICO will be a strong earnings compounder, which should drive solid returns for the stock over a multi-year period. Verisk’s stock detracted from performance due to management’s conservative outlook for the second half of 2025, the announced $2.35 billion acquisition of AccuLynx, which is expected to be modestly dilutive to earnings in the first year, concerns about a slowing property and casualty insurance pricing backdrop, and broader industry-wide AI uncertainty. Nonetheless, Verisk reported strong quarterly earnings and CEO Lee Shavel sounded upbeat on the company's growth potential moving forward. We maintain conviction in the competitive positioning, long-term growth, margin expansion, and capital deployment prospects for the business. Investment research company Morningstar, Inc. and rating agency and data provider S&P Global Inc. also weighed on performance in the category after declining 26.0% and 7.5%, respectively, in the period.

Weakness in Tech-Enabled Financials was widespread, with a portion of the stock-specific deficit attributable to declines from several of the Fund’s insurance-related holdings (The Baldwin Insurance Group, Inc., The Progressive Corporation, TWFG, Inc., Accelerant Holdings, and Kinsale Capital Group, Inc.), which were hurt by concerns about moderating growth and a cyclical slowdown in the broader insurance industry. Leading independent broker-dealer LPL Financial Holdings Inc. was responsible for most of the remaining relative losses in the category. Expectations for accelerated interest rate cuts weighed on the stock, as LPL earns income from floating-rate client cash balances. However, the market’s long-term outlook on rates remains unchanged, leaving the company’s cash earnings largely unaffected. LPL is also digesting its sizable acquisition of Commonwealth Financial Network, another independent broker-dealer. Although the deal could drive stronger growth over time, it currently offers limited near-term earnings upside and requires significant management attention to ensure a successful integration. While investor sentiment has cooled given the lack of immediate catalysts and expectations for lower rates, we believe LPL’s long-term fundamentals and earnings power remain intact. 

Somewhat offsetting the above was unique exposure to Capital Markets, where financial services platform Robinhood Markets, Inc. and leading online brokerage house Interactive Brokers Group, Inc. contributed the vast majority of the relative gains. Robinhood’s stock performed well due to strong retail engagement trends and a continued focus on product innovation. Interactive Brokers benefited from above-consensus quarterly results and favorable market conditions, as elevated asset prices and strong investor trading volumes combine to drive unusually high earnings for the company.