Baron Fifth Avenue 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.
• Semiconductor giant Taiwan Semiconductor Manufacturing Company Limited (TSMC) contributed to performance as revenue growth exceeded expectations due to surging demand for AI chips. TSMC dominates the advanced semiconductor foundry market, controlling over 90% share of cutting-edge sub-7 nanometer (nm) nodes that power AI servers, flagship smartphones, and autonomous vehicles. The company benefits from a virtuous cycle in which its massive scale and profitability generate the capital necessary to fund industry-leading R&D and capex, in turn widening its technological moat and reinforcing its pricing power. As the ultimate "picks and shovels" provider of the AI era, TSMC remains insulated from the competitive dynamics of the AI chip design ecosystem. Whether hyperscalers develop custom accelerators or deploy merchant graphics processing units from companies like NVIDIA and AMD, nearly all advanced AI accelerators are manufactured exclusively at TSMC’s 3nm and 5nm nodes. We believe TSMC will deliver 20% earnings growth over the next several years, supported by secular AI-driven demand for leading-edge manufacturing capacity.
• Dutch semiconductor equipment company ASML Holding N.V. contributed to performance due to robust demand for its lithography systems amid a strong AI-driven semiconductor capex cycle. ASML holds a complete monopoly on extreme ultraviolet (EUV) lithography, the indispensable technology required to manufacture the world's most advanced chips at 7 nanometers and below. Without EUV, chipmakers cannot achieve the transistor densities needed to power AI accelerators, flagship smartphones, and autonomous vehicles. As leading chipmakers including TSMC, Samsung, and Micron race to expand advanced manufacturing capacity to meet surging AI demand, ASML sits at the center of the global semiconductor ecosystem as an indispensable enabler. Moreover, we expect a strong product cycle over the next five years as High-NA EUV—the next-generation platform delivering superior resolution and continued transistor scaling—enters high-volume manufacturing. We also project significant gross margin expansion, driven by ASML's pricing power and increasing scale, supporting strong double-digit earnings growth.

DETRACTORS

• Shopify Inc., a leading global commerce operating system, detracted from performance as a broader software selloff compressed high-multiple growth stocks. The business delivered an exceptional year: gross merchandise volume (GMV) grew 30% (adding $86 billion of incremental volume), revenue grew 30%, and free cash flow increased 26% to over $2 billion. Management guided to low-thirties revenue growth to open 2026, above the roughly 25% most analysts had modeled, and to first-quarter free cash flow margins in the low-to-mid teens, reflecting deliberate investment. Enterprise penetration remains in the early innings: merchants generating over $25 million in GMV are growing faster than the broader business, while Shopify maintains low-single-digit share of the $2.4 trillion enterprise e-commerce market. Shop Pay GMV of $121 billion grew 62% and now exceeds 50% of U.S. payments volume, serving as a strong consumer trust signal with advertising optionality via the Shopify Product Network. We view the drawdown as an opportunity to own an exceptional business at a more attractive entry point. We added to the position and see a path for attractive multi-year compounding from current levels.
• Meta Platforms, Inc., the world’s largest social network, detracted from performance. While Meta reported strong quarterly results and forward revenue guidance, management guided to 2026 operating expenses above Street expectations, raising concerns that it may be overspending on AI for less clear returns relative to competitors. Near the end of the quarter, Meta also lost a jury verdict finding that its design choices led to user harm. Additionally, broader ad budgets became more uncertain due to the conflict in Iran. While we continue to monitor the regulatory landscape, we believe the company can drive premium revenue and profit growth in the foreseeable future. Meta benefits from AI investments across its core business, driving improvements in content recommendations (with rising time spent) and in ad targeting and ranking (leading to higher conversions and better return on ad spend). Longer term, Meta’s leadership in mobile advertising, massive user base, innovative culture, leading generative AI capabilities, and technological scale position it well for continued strong performance, with additional monetization opportunities ahead in areas such as smart glasses and commerce.
• Snowflake Inc. is a cloud data platform primarily used for data analytics. Shares declined as the market reacted negatively to softer software sector sentiment and heightened fears that AI-native competitors could disrupt traditional software vendors. Even so, the company posted solid results, with product revenue growth of approximately 30%, best-in-class 125% net revenue retention, record new customer wins, and robust cash generation. Backlog continued to build momentum, with accelerating growth as the company inked its largest contract ever, valued at over $400 million. Snowflake’s product innovation also remains strong, as it rapidly embeds AI capabilities across its platform to better address customer needs. The company's AI product suite has become the fastest-growing offering in its history, already generating over $100 million in annualized revenue, while newer tools like Snowflake Intelligence and Cortex Code are now used by thousands of accounts. These developments support our long-term conviction in Snowflake’s ability to sustain durable growth and maintain its position as a foundational data platform, even as near-term valuation pressures persist.

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