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    Baron FinTech Fund: Latest Insights and Commentary

    Review & Outlook

    As of 12/31/2024

    U.S. equities increased in the fourth quarter, with much of the strength following the Republican sweep of the November elections, with its promise of market-friendly economic policies, including lower taxes and government deregulation, outweighing concerns around potentially higher tariffs. The "Trump rally" faded in December, as interest rates rose following more hawkish-than-expected commentary from the Federal Reserve. The defensive tone was also attributed to stretched valuations, the uncertain U.S. legislative backdrop given the risk of a government shutdown in late December, and market breadth deterioration as the Magnificent Seven dominated returns late in the year. The Magnificent Seven ended up accounting for all the S&P 500 Index’s fourth quarter gains and more than half of the Index’s overall performance in 2024.

    Against this backdrop, Baron FinTech Fund increased in the quarter. Financials and Information Technology (IT) investments contributed to performance. Consumer Discretionary, Industrials, and Real Estate holdings detracted. With all three top contributors within the sector, Financials had a strong quarter. Appreciation within IT was led by Shopify, Inc. Shares of this cloud-based software provider for multi-channel commerce rose on strong financial results, including year-over-year revenue growth of 26% thanks to continued market share gains with gross merchandise value growth of 24%. Top detractor MercadoLibre, Inc. drove weakness within Consumer Discretionary, while consumer credit bureaus TransUnion and Equifax Inc. weighed on performance within Industrials. Real Estate detracted on weakness in sole sector holding CoStar Group, Inc. Shares of this leading provider of information and marketing services to the real estate industry dropped due to mixed net new sales performance in its residential product.

    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.

    Top Contributors/Detractors to Performance

    As of 12/31/2024

    CONTRIBUTORS

    • Alternative asset manager Apollo Global Management, Inc. contributed to performance. The company held a well-received Investor Day in October. Management highlighted the work done to build Apollo into a successful credit manager and laid out bullish five-year growth targets of $1.5 trillion, $5 billion, and $5 billion for AUM, fee-related earnings, and spread-related earnings, respectively, as well as a $15-plus increase in EPS. Apollo also participated in the broader rally of financial stocks spurred by the Republican November elections sweep, which has bolstered expectations for greater capital markets activity and reduced regulatory scrutiny. In addition, investors anticipate that a more business-friendly administration will not block growth initiatives from alternative managers, including plans to introduce private investments into a broader swathe of retirement assets. Finally, Apollo was added to the S&P 500 Index in the quarter. We remain shareholders given Apollo's strong long-term growth prospects.
    • LPL Financial Holdings Inc. is an independent broker-dealer that provides a turnkey platform for independent financial advisors. Shares more than recovered prior losses following the sharp summer pullback driven by industry-wide concerns that regulators would erode economics on cash sweep for all brokers. LPL's fundamental performance has generally been strong, with high single-digit organic growth in net new assets ahead of the industry and stabilizing cash levels that should support earnings growth. The company also participated in the broader rally of financial stocks following the Republican elections sweep. Investors expect a Republican-led SEC to be more business-friendly, which should ultimately support enhanced industry growth and lower the risk that regulators will constrain or eliminate certain products, business lines, and economic models. We remain bullish on the stock given its leading asset growth and strong long-term prospects.
    • Wise Plc is a U.K.-based provider of money transfer services for individuals and businesses worldwide. Shares advanced during the quarter on stronger-than-expected revenue growth and gross margins for the six months ended September 2024. Revenues were boosted by non-cross-border activities as Wise ramped monetization of other services, including the Wise account and cards. Gross margins improved due to lower costs of sales driven by operational efficiencies in certain markets with direct integration with local payment systems. Wise also announced the onboarding of two major global financial institutions onto its white-label Wise platform solution, which showed proof of concept and brought validation from top-tier global clients. We believe the company's platform, licenses, and global connections provide a competitive advantage that allows it to deliver a better value proposition to customers.

     

    DETRACTORS

    • MercadoLibre, Inc. is the leading e-commerce marketplace in Latin America. Shares declined on weaker-than-expected quarterly margins, which drove down near-term earnings expectations. The margin contraction was due to growth in the credit portfolio, temporary accounting changes, accruals for long-term incentive plans, and investments to expand the distribution network. We see these impacts as temporary and necessary to expand the competitive advantage relative to peers. The company is investing in the business, which sacrifices near-term profitability for long-term gain. We retain conviction in MercadoLibre as an attractive long-term growth story tied to the secular growth of e-commerce and financial penetration across Latin America.
    • Nu Holdings Ltd. is a digital bank with operations in Brazil, Mexico, and Colombia. Shares of Nu fell after the company reported a decline in net interest margin and tightened underwriting criteria for certain unsecured loans. We see these impacts as temporary and tied to the company’s growth. The margin contraction was largely driven by high growth in deposits in Mexico and Colombia, which is part of Nu's client acquisition strategy, while the tighter underwriting standards are part of the ongoing process of adjusting lending criteria to new clients. We remain excited about Nu’s growth prospects as the company is addressing the key pain points faced by retail bank clients in the region, including high fees, poor customer service, and limited access to financial products. We believe its superior product offering will allow it to take share from incumbents in this massive market.
    • Shares of specialty insurer Arch Capital Group Ltd. fell due to concerns about a cyclical slowdown following several years of favorable market conditions. The Street has forecast a decline in property catastrophe reinsurance pricing during the January 1 renewal period, defying earlier hopes for stable pricing. Despite solid third quarter earnings, underwriting margins worsened due to a recent acquisition, business mix shifts, and normal quarterly volatility. Additionally, shares were pressured by an unexpected CEO transition. We continue to own the stock due to Arch’s strong management team and our expectation of significant growth in earnings and book value.

    Quarterly Attribution Analysis (Institutional Shares)

    As of 12/31/2024

    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 FinTech Fund (the Fund) benefited from broad-based strength in Financials during the quarter, with the Fund appreciating 5.29% (Institutional Shares) and outperforming the more comparable FactSet Global FinTech Index (the Benchmark) by 105 basis points. The Fund also managed to outperform the broader market during the quarter, defined as the S&P 500 Index (the Index). The Fund overcame strength from the so-called Magnificent Seven, which were up nearly 10% in the Index, partly due to strong stock selection. The Fund’s holdings were up more than 5% in the period, outperforming the non-Magnificent Seven stocks in the Index, which were down 1%. The Fund also benefited from having meaningfully higher exposure to the strong performing Financials sector, which was up more than 7% in the Index.

    The outperformance versus the Benchmark was driven by strong performance from holdings in Payments and Capital Markets. Favorable stock selection in Payments was mostly attributable to double-digit gains from global payment companies Visa Inc. and Fiserv, Inc. Visa was a top contributor after the company reported strong quarterly results and provided a positive outlook for the next fiscal year. In the recent quarter, revenue grew 12% and EPS grew 16%, both of which exceeded Street expectations. Volume growth was stable during the quarter and modestly accelerated in the first few weeks of October. Management provided initial guidance for fiscal 2025 that calls for double-digit EPS growth. Similarly, Fiserv reported robust quarterly results and raised guidance for the full year 2024. Fiserv’s consistent performance is being rewarded by investors and the company is increasingly separating itself from peers in the payments sector. Looking ahead, we are excited about the international rollout of Clover, Fiserv’s payment platform for small businesses, which continues to grow revenues in excess of 25%.

    Strength in Capital Markets was broad based, led by excellent performance from Interactive Brokers Group, Inc., a leading online brokerage house that serves customers in over 200 countries. Positive returns during the quarter reflected strong fundamental performance, including year-over-year growth of 30% in accounts, 33% in client assets, and 45% in margin loans. These increases were driven largely by Interactive Brokers' strength in international markets, as non-U.S. investors looked to access U.S. markets and equities, which largely outperformed their global peers in 2024. The company also participated in the broader rally of financial stocks following the Republican elections sweep. Expectations of heightened capital markets activity, a more pro-business regulator, and the potential for increasing market volatility all bode well for the company's volumes, account growth, and earnings. We continue to believe Interactive Brokers has a compelling long-term growth path.

    Higher exposure to the better performing Tech-Enabled Financials theme coupled with solid stock selection in and lower exposure to the lagging Enterprise Software theme also bolstered relative results. Recent addition ServiceTitan, Inc. was mostly responsible for stock-specific strength in Enterprise Software after the company’s IPO was well received by investors. ServiceTitan is a leading business management software platform for the trades. We retain conviction in the durability of ServiceTitan’s growth opportunity, believe that their competitive positioning remains strong, and see meaningful opportunity for future margin expansion.

    Somewhat offsetting the above was disappointing stock selection in E-Commerce along with higher exposure to Information Services, which was the only theme to decline in the Benchmark during the quarter. Weakness in E-Commerce came from MercadoLibre, Inc., the leading e-commerce marketplace in Latin America. MercadoLibre was the largest detractor after reporting weaker-than-expected quarterly margins that drove down near-term earnings expectations. The margin contraction was due to growth in the credit portfolio, temporary accounting changes, accruals for long-term incentive plans, and investments to expand the distribution network. We see these impacts as temporary and necessary to expand the competitive advantage relative to peers. The company is investing in the business, which sacrifices near-term profitability for long-term gain. We retain conviction in MercadoLibre as an attractive long-term growth story tied to the secular growth of e-commerce and financial penetration across Latin America.

    Yearly Attribution Analysis (for year ended 12/31/2024)

    Baron FinTech Fund (the Fund) appreciated 23.14% (Institutional Shares) for the year, outperforming the more comparable FactSet Global FinTech Index (the Benchmark) by 897 basis points. However, the Fund didn’t fare as well against the broader market given its smaller market cap profile as performance in the S&P 500 Index (the Index) was dominated by NVIDIA Corporation, Meta Platforms, Inc., and other members of the mega-cap Magnificent Seven for a second straight year. The group was up 48% in the period, accounting for 53% of the Index’s overall gain. For comparison, the non-Magnificent Seven stocks in the Index were up only 16%, well below the Fund’s 23% gain in the period.

    The outperformance versus the Benchmark was driven by strong stock selection, with investments in Information Services, Tech-Enabled Financials, Payments, and Capital Markets accounting for most of the relative gains. Higher exposure to the outperforming Tech-Enabled Financials theme and significantly lower exposure to the lagging Payments category also bolstered relative results. Data and analytics company Fair Isaac Corporation (FICO) led the way in Information Services after reporting solid earnings results throughout 2024 and offering an optimistic outlook for fiscal 2025 across both the scores and software businesses. FICO is also a perceived beneficiary around the potential for deregulation under the incoming Republican administration. While there are some near-term areas of uncertainty, we believe FICO will be a strong earnings compounder, which should drive solid returns for the stock over a multi-year period.

    Strength in Tech-Enabled Financials was widespread, led by ​alternative asset manager Apollo Global Management, Inc. and personal auto insurer The Progressive Corporation. Apollo was a top contributor in response to above-consensus asset inflows and strong earnings growth. Investor appreciation of Apollo's focus on investment-grade private debt, a multi-trillion dollar market, increased as well. We remain shareholders given Apollo's strong long-term growth prospects. Progressive’s stock benefited from outstanding financial performance throughout the year. The company has had industry-leading growth in policies, with personal auto policies in force up 20.7% for November year-to-date, for a total of 23.6 million. Underwriting margins have been well in excess of Progressive's stated target of 4%, leading to better-than-expected earnings growth and a significant build in capital. Progressive achieved this growth by reacting faster than peers to market changes, in particular by adjusting its rates to actuarially appropriate levels, which allowed it to dial up advertising spend and drive customer growth at the expense of peers. As insurance is a cyclical industry, peers will eventually catch up, and we do not expect Progressive to sustain this level of growth indefinitely. However, we believe Progressive has consistently demonstrated its industry leadership and remain investors given its prospects for above-average growth.

    Favorable stock selection in Payments was driven by leading payment processing company Fiserv, Inc., whose shares rose more than 50% in the period. Fiserv’s strong gains were mainly driven by solid performance in the company’s Merchant segment. Clover, Fiserv's product for small businesses, grew revenue more than 25%, and organic growth for the segment as a whole was more than 20% in the first nine months of 2024. The company beat expectations on margins and expects to increase margins by more than 1.5%, up from a 1% forecast at the start of 2024. It also used free cash flow to repurchase shares. The company delivered mid-teens earnings growth for the year, one of the few payment stocks to do so, as this category has been challenged since the pandemic. As a standout in the industry, the stock experienced considerable multiple expansion, bringing it back to pre-pandemic levels. We think Fiserv has a unique combination of payment assets and expect the company to continue delivering strong earnings growth. Solid performance from global payment networks Mastercard Incorporated and Visa Inc. was responsible for most of the remaining relative gains in the theme.

    Performance in Capital Markets was aided by online brokerage house Interactive Brokers Group, Inc., electronic fixed income marketplace Tradeweb Markets Inc., and global investment bank Houlihan Lokey, Inc. Interactive Brokers’ positive returns during the year reflected strong fundamental performance, including year-over-year growth of 30% in accounts, 33% in client assets, and 45% in margin loans. Tradeweb’s stock rose in response to strong volume trends driven by favorable market conditions and share gains in key products. Houlihan’s shares performed well due to strong growth and a positive outlook. In the first nine months of 2024, revenue grew 21% and EPS grew 27%. Capital markets activity is improving, driven by stabilizing interest rates, firming corporate valuations, and renewed interest in M&A after a lengthy pause. Restructuring activity should persist as leverage remains high and interest rates remain elevated. All three companies also participated in the broader rally of financial stocks following the Republican elections sweep in early November.

    Somewhat offsetting the above was weakness in Digital IT Services attributable to poor performance from IT services provider Endava plc, whose share price was hurt by earnings pressure from soft demand trends. Organic revenue fell due to declines at a few large customers and delayed decision-making from new customers as they evaluated recent advancements in generative AI. Margins dropped due to lower utilization, growth investments, and integration costs related to a recent acquisition. We exited our position late in the year. The other material drag on performance came from the Fund’s significantly lower exposure to the better performing Enterprise Software theme, which was up more than 21% in the Index, detracting 140-plus basis points from relative results.

    Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectuses contain this and other information about the Funds. You may obtain them from the Funds’ distributor, Baron Capital, Inc., by calling 1-800-99BARON or visiting www.BaronFunds.com. Please read them carefully before investing.

    The performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor's shares, when redeemed, may be worth more or less than their original cost. The Fund’s transfer agency expenses may be reduced by expense offsets from an unaffiliated transfer agent, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted.

    Risks: All investments are subject to risk and may lose value.

    The discussion of market trends is not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed on this page reflect those of the respective writer. Some of our comments are based on management expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from our expectations. Our views are a reflection of our best judgment at the time and are subject to change at any time based on market and other conditions and Baron has no obligation to update them

    Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.

    The index performance is not fund performance; one cannot invest directly into an index.