Baron FinTech Fund: Latest Insights and Commentary

U.S. equity markets managed gains in a period of heightened volatility, with the CBOE Volatility Index (VIX) briefly spiking above 50 for the first time in over five years before settling back below its long-term average of 20 by quarter end as tariff policy uncertainty and war in the Middle East failed to unnerve investors. Risk-off sentiment early in the quarter centered around President Trump’s “Liberation Day” tariff announcement, which Wall Street strategists viewed as more severe than expected and likely to slow economic growth, boost inflation, and increase the odds of a recession this year. On April 2, President Trump unveiled an unprecedented global tariff regime, placing a 10% baseline tax on imports from all countries, a 34% tariff on Chinese goods, a 25% tariff on all car imports, and a 20% tariff on EU goods. In retaliation, China imposed 34% tariffs on U.S. goods and the EU announced its own countermeasures. The S&P 500 Index fell more than 12% over the next four days, nearly entering bear market territory from its all-time high on February 19, 2025 (down almost 19%). Other prominent benchmarks, such as the NASDAQ Composite Index and Russell 2000 Index, officially entered a bear market in early April, declining more than 20% from their respective all-time highs reached late last year.

After bottoming on April 8, U.S. equities rebounded due to positive trade developments. On April 9, Trump announced a 90-day pause on most reciprocal tariffs to allow for negotiations. China was the only country excluded from the pause, with Trump instead raising tariffs on China to 145%, prompting Chinese officials to increase tariffs on U.S. goods to 125%. However, U.S. and Chinese officials eventually agreed to a de-escalation of tariffs on May 12, alleviating investor concerns and contributing to additional market gains. Other market catalysts were resilient corporate earnings amid tariff-driven pressures, dovish Federal Reserve commentary following muted May inflation, AI tailwinds from NVIDIA’s strong earnings results and Middle East deals, improving consumer sentiment, and a recent ramp in M&A and IPO activity. The sudden Israel-Iran war and subsequent involvement of the U.S. via the bombing of various Iranian nuclear sites threatened to upend market momentum, but a fragile ceasefire was quickly brokered, and the market resumed its advance to close the quarter at a record high.

The Magnificent Seven complex resumed its leadership role during the quarter, accounting for nearly 60% of the S&P 500 Index’s gains. The group appreciated more than 20% in the period, outpacing the Index, which was up 10.9%. NVIDIA (+45.8%), Microsoft (+32.7%), Meta (+28.2%), and Tesla (+22.6%) posted the largest gains. Apple (-7.5%) was the only member of the group to decline and trail the broader Index.

Sector performance mirrored the influence of the Magnificent Seven, as Information Technology, Communication Services, and Consumer Discretionary were among the top performing sectors. Industrials was the only other sector to outperform the Index, helped by strong gains from aerospace & defense companies. Health Care experienced a severe reversal of fortunes during the quarter, as the sector’s 7.2% decline wiped out all year-to-date outperformance versus the broad market. After trailing the S&P 500 Index by more than 50% over the prior two calendar years, Health Care was tracking ahead of the Index this year, outperforming by 750-plus basis points through the end of April. But that all changed in May and June when the sector trailed the Index by approximately 15%. Health Care performance was hampered by multiple factors, including regulatory uncertainty, particularly around drug pricing and Medicare Advantage reimbursement rates, federal investigations involving sector heavyweight UnitedHealth, disruption at the FDA and cancellations/delays of NIH grants for academic research, concerns about tariffs on the pharmaceutical industry, and renewed investor interest in AI-driven technology companies. Energy was another notable laggard, pressured by the sharp decline in oil prices during the quarter.

From a style perspective, small caps failed to lead the way in the market recovery during the quarter, trailing mid- and large-cap stocks. Small caps remain in negative territory this year, down 1.8%, while larger-cap stocks are up about 6%, having recovered all losses from early in the year. Growth stocks outperformed for a third consecutive month to finish the quarter ahead of value by between 400 and 1,400 basis points. The largest differential was in mid and large cap, where sizeable weights in Palantir/AppLovin and Magnificent Seven factored heavily into the strong showing for these growth benchmarks. Growth is now outperforming in most size segments this year, representing a meaningful turnaround from the end of March when value was ahead by a wide margin across the board.

Beyond the U.S., developed and emerging market (EM) equities were up double digits for the quarter, benefiting from the significant allocation shift away from U.S. equities early in the period. Despite modest underperformance in June, developed Europe was a standout for the quarter, bolstered by sharp gains in the Netherlands, Spain, Ireland, Germany, Italy, Finland, and Sweden. Securities in Israel, Hong Kong, Australia, and Canada also contributed to strength in developed markets. EM equities were lifted from semiconductor-related strength in Taiwan and Korea (SK hynix). Solid gains in Mexico and Brazil also contributed to EM outperformance, as investors were relieved about the relatively less punitive tariff approach announced by the U.S. administration.

CONTRIBUTORS

• Robinhood Markets, Inc., a fintech platform that offers commission-free trading and investing tools, contributed to performance during the quarter. The stock benefited from increased trading activity amid heightened market volatility and strong performance in both equity and cryptocurrency markets. The quarter began with considerable turbulence following Liberation Day in early April, when President Trump announced sweeping tariffs on most U.S. trading partners. Markets subsequently rebounded sharply in May and June, with the S&P 500 and Nasdaq both ending the quarter at record highs. Cryptocurrency prices also advanced, with Bitcoin again surpassing $100,000. In addition, Robinhood announced new crypto-related products—including tokenized trading of U.S. stocks and private assets—broadening its total addressable market and further boosting investor sentiment. We continue to own the stock due to its long-term earnings potential, driven by strong account growth, rising client assets, and a rapid pace of product innovation.
• MercadoLibre, Inc., the leading e-commerce marketplace across Latin America, contributed to performance during the quarter. The company reported better-than-expected quarterly results across gross merchandise value (GMV), total payment volume, revenue, and EBIT margin. Margin outperformance was driven largely by Argentina, where revenue grew to 34% of the total in the first quarter (up from 14% a year ago) and profitability remains structurally higher. Management cited strong business momentum in the country, supported by a more favorable macroeconomic backdrop—including falling interest rates that are boosting credit demand, lowering funding costs, and driving higher consumption. The number of items sold in Argentina also rose 50% year over year. These gains helped offset expected pressure from continued investments in new distribution centers and the expansion of MercadoLibre’s credit card portfolio. More broadly, the company continued to gain GMV share across Latin America. We remain optimistic about MercadoLibre’s long-term potential given the still-low penetration of e-commerce and financial services in the region, and the company’s category leadership in both.
• Intuit Inc. is the leading provider of accounting software for small businesses and tax preparation software for individuals and tax professionals. Shares rose after the company reported better-than-expected quarterly results and raised its annual guidance. In the most recent quarter, revenue grew 15% and earnings per share grew 18%, with TurboTax revenue exceeding Street expectations due to greater adoption of higher-priced Live assisted services. Revenue growth remained strong in the small business segment despite macroeconomic concerns, and the Credit Karma segment also delivered solid growth. We continue to own the stock due to Intuit’s strong competitive position and numerous long-term growth opportunities.

DETRACTORS

• Global payments company Fiserv, Inc. detracted from performance after reporting weaker-than-expected earnings results, primarily due to slowing payment volume growth in Clover, its small business payments platform. Clover is a leading solution that enables small businesses to accept payments and manage operations through integrated software, hardware, and capital offerings, making it more comprehensive than a standard payment acceptance product. While Clover’s revenue grew at a healthy 20% rate, investors were concerned that the deceleration in volume growth signaled rising competitive pressures. Challenging year-over-year comparisons and the timing of Easter—a seasonal factor that can influence payment volumes—likely played a role, but management did not clearly address these dynamics, which added to investor unease. Despite softer volumes, we believe Clover remains well positioned competitively, supported by channel checks that indicate strong customer satisfaction and appropriate pricing. We expect Clover to continue to gain share and Fiserv to compound earnings over time.
• Shares of leading auto insurance company The Progressive Corporation fell during the quarter. Progressive is experiencing a “Goldilocks” moment, with strong performance across key metrics, but the competitive auto insurance industry is seeing peers reach rate adequacy and reenter the market more aggressively. Investors have become increasingly concerned that Progressive’s premium growth could moderate as competitors start to regain pricing power, weighing on sentiment and contributing to the stock’s underperformance. While the earnings backdrop may become more challenging as competitive conditions normalize, we remain shareholders given Progressive’s strong fundamentals and best-in-class execution. Premium growth exceeded 15% during the quarter, policies in force continued to rise, and the company maintained a combined ratio in the mid-80s—well below its 96% target. We continue to view Progressive as a superior operator and believe it is well positioned to remain a long-term share gainer, supported by its disciplined underwriting approach.
• Clearwater Analytics Holdings, Inc. provides portfolio accounting and reporting software. While the company reported strong quarterly earnings and its business fundamentals remain solid, shares fell as investors sought evidence that management can successfully integrate its three recent acquisitions without disrupting the core business. Insider selling also weighed on sentiment, though that overhang now appears largely resolved. We retain conviction in the stock. We believe Clearwater has meaningful competitive advantages and the potential to compound revenue at a high-teens to 20% rate for several years. The company has an efficient business model that should drive 40%-plus adjusted EBITDA margins over time.

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.

Against an improving backdrop for global equities during the second quarter, Baron FinTech Fund (the Fund) appreciated 9.26% (Institutional Shares), trailing the more comparable FactSet Global FinTech Index (the Benchmark) by 456 basis points and the large-cap oriented S&P 500 Index (the Index) by 168 basis points. The shortfall versus the Index was driven by the Fund’s lack of exposure to the Magnificent Seven, as the group resumed its leadership role during the quarter, appreciating more than 20%. The group, which accounts for nearly a third of the Index, was responsible for almost 60% of the Index’s gains. The Fund was also penalized for having meaningfully higher exposure to Financials given the sector trailed the broader Index by more than 5% in the period.

The underperformance versus the Benchmark was driven by disappointing stock selection in Information Services, Payments, and Tech-Enabled Financials. Weakness in Information Services was widespread, led by poor performance from data and analytics companies Fair Isaac Corporation (FICO) and Verisk Analytics, Inc. FICO’s shares underperformed due to increased regulatory noise from the Federal Housing Finance Agency, with new director Bill Pulte publicly raising questions about the price of FICO scores in the context of the conforming mortgage market. Rising interest rates and the potential ramifications for FICO’s scores volumes (especially in mortgage) also pressured the stock. While these areas of near-term uncertainty persist, we believe FICO will be a strong long-term earnings compounder, which should drive solid returns over a multi-year period. Verisk’s shares lagged alongside other defensive stocks during the quarter. There was no materially negative company specific news in the period. Verisk reported solid Q1 2025 earnings and CEO Lee Shavel sounded upbeat about the company’s growth potential. We maintain conviction in the competitive positioning, long-term growth, margin expansion, and capital deployment prospects for the business. Financial exchanges & data providers S&P Global Inc., MSCI Inc., Moody's Corporation, and Morningstar, Inc. also weighed on performance in the category.

The principal detractor in Payments was Fiserv, Inc., a global fintech and payments company with solutions for banking, global commerce, merchant acquiring, billing and payments, and point-of-sale. Fiserv’s shares fell after reporting weaker-than-expected earnings results, primarily due to slowing payment volume growth in Clover, its small business payments platform. While Clover’s revenue grew at a healthy 20% rate, investors were concerned that the deceleration in volume growth signaled rising competitive pressures. Challenging year-over-year comparisons and the timing of Easter (a seasonal factor that can influence payment volumes) likely played a role, but management did not clearly address these dynamics, which added to investor unease. Despite softer volumes, we believe Clover remains well positioned competitively, supported by channel checks that indicate strong customer satisfaction and appropriate pricing. We expect Clover to continue to gain share and Fiserv to compound earnings over time.

Global payment networks Visa Inc. and Mastercard Incorporated also underperformed, losing out to smaller and more speculative stocks in the risk-on market environment during the quarter. Shares of Visa and Mastercard also likely suffered because of concerns about threats from stablecoin-based payments given the blowout returns of stablecoin issuer Circle Internet Group following its IPO in June.

Performance in Tech-Enabled Financials was hindered by declines from several insurers, including The Progressive Corporation and Arch Capital Group Ltd. Following an extended run of strong performance, Progressive’s stock pulled back due to investor concerns that the company’s premium growth could moderate as competitors start to regain pricing power. While the earnings backdrop may become more challenging as competitive conditions normalize, we remain shareholders given Progressive’s strong fundamentals and best-in-class execution. Arch gave back some of its gains from earlier in the year, following slower growth and broader weakness across insurance stocks during the second quarter. In the first quarter, premium growth came in below forecasts and slowed relative to the prior quarter due to rising competition and lower pricing in certain business lines. Even so, earnings beat expectations due to stronger underwriting margins and a lower tax rate. We continue to own the stock due to Arch’s strong management team and our expectation of significant growth in earnings and book value over time.

Somewhat offsetting the above was unique exposure to Capital Markets, where financial services platform Robinhood Markets, Inc. and online brokerage house Interactive Brokers Group, Inc. performed well. Robinhood was the largest overall contributor as the business benefited from increased trading activity amid heightened market volatility and strong performance in both equity and cryptocurrency markets. The company also announced new crypto-related products—including tokenized trading of U.S. stocks and private assets—broadening its total addressable market. Interactive Brokers’ performance was driven by strong quarterly results and a rebound in equity markets.

Solid stock selection in E-Commerce coupled with higher exposure to this better performing theme also added value. Strength in E-Commerce came from Latin American e-commerce platformMercadoLibre, Inc., whose share price was lifted by better-than-expected results across gross merchandise volume, total payment volume, revenue, and EBIT margin.