Baron Fifth Avenue Growth Fund: Latest Insights and Commentary

After selling off in March due to the U.S.-Iran conflict and disruptions in the Strait of Hormuz, U.S. equities rallied to new record highs during the second quarter, with most of the gains coming in April and May. Given narrow market breadth and concentrated position sizes in recent years, the gap in performance between the market cap-weighted S&P 500 Index and the equal-weighted version has reached extremes not seen since the dotcom bubble era (based on rolling three-year results). 

U.S. stocks saw a comeback after ending the prior quarter slightly down. The AI secular growth narrative was the principal driver of market returns, overshadowing uncertainty about a potential resolution to the U.S.-Iran conflict, shifting Federal Reserve rate expectations, and depressed consumer sentiment from high living costs, persistent inflation, and elevated borrowing rates. 

The S&P 500 posted one of its strongest quarterly profit prints in five years, thanks largely to the Magnificent Seven cohort, which reported blended earnings growth in excess of 60% (versus low double digits for other constituents in the Index). The other contributors were primarily Information Technology (IT) stocks—specifically companies that are perceived to be direct beneficiaries of AI capital spending and electrification and what the market has come to call “AI winners." 

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) develops and launches advanced rockets, satellites, and spacecraft, with the long-term goal of making humanity multi-planetary. Shares rose as the company successfully completed the largest initial public offering in history, raising more than $85 billion. The proceeds are expected to accelerate growth across massive addressable markets, such as connectivity, launch, terrestrial and space infrastructure, and AI. Fundamental momentum was further reinforced by landmark compute hosting deals totaling tens of billions of dollars annually, including agreements with market leaders Anthropic and Google. SpaceX also announced its acquisition of Cursor, a premier enterprise AI-powered coding platform. Integrating Cursor’s technology, talent, and customer base provides another strategic stepping stone into the vast opportunities within AI applications and agentic systems. Lastly, the company conducted a successful test flight of the latest version of Starship, demonstrating meaningful advancements in rapid and full reusability. We believe these developments support sustained long-term revenue and profit growth well beyond current levels.
• Taiwan Semiconductor Manufacturing Company Limited (TSMC) is the world's largest contract chipmaker and the leading manufacturer of advanced logic semiconductors used in modern AI accelerators. Shares rose during the quarter as investors increasingly recognized that TSMC, rather than any individual chip designer, sits at the center of the AI supply chain. High-performance computing now represents the majority of TSMC's business. AI demand is consuming so much leading-edge capacity that smartphone and PC production is increasingly shifting to older technology nodes, reversing a dynamic that defined the foundry industry for much of the past decade. Management also raised its full-year outlook and increased capital spending to support demand that remains well above available supply. We retain long-term conviction in TSMC and view its leading-edge manufacturing monopoly, pricing power, and 2-nanometer technology roadmap as durable advantages that support multi-year earnings power.
• Observability and cloud monitoring platform Datadog, Inc. contributed to performance during the quarter after reporting its strongest results in years. Revenue accelerated to 32% year-over-year growth, marking the fourth consecutive quarter of acceleration and meaningfully exceeding consensus estimates. Operating margins and free cash flow also surpassed expectations. Management raised full-year revenue guidance by roughly $240 million against a $50 million beat, with next-quarter guidance implying continued strength. Critically, the strength was broad-based: non-AI core customer revenue growth accelerated into the mid-20% range at scale, while Datadog's AI-native customer cohort diversified and expanded to 22 customers spending more than $1 million annually. Net revenue retention reaccelerated into the low-120% range, and unit economics remained best-in-class with 80% gross margins and high-20% free cash flow margins. We view observability as a structural beneficiary of the AI buildout through cloud migration, faster application deployment, and an increasingly complex technology stack. These broadening growth drivers reinforce our conviction in the long-term thesis.

DETRACTORS

• Intuitive Surgical, Inc. sells robotic-assisted surgical systems. Shares declined after the company's first-quarter U.S. system placements came in below investor expectations. Medical device stocks also broadly underperformed the market amid concerns that health care utilization trends could decelerate following the expiration of Affordable Care Act subsidies. Concerns were further compounded by the potential impact of Medicaid work requirements expected to take effect in 2027. Despite these headwinds, we believe Intuitive can continue to grow revenue at a mid-teens rate for many years and remain positive on the company's long-term growth outlook.
• Shopify Inc., a leading global commerce platform serving merchants across online and offline channels, detracted from performance in the second quarter. The decline was driven by multiple compression rather than any deterioration in the underlying business or fundamental outlook. Shopify continued to post healthy growth in gross merchandise volume and revenue. Instead, the pressure reflected investor concerns about the company's long-term positioning in a future state of e-commerce that may rely more heavily on AI-driven applications than traditional websites. We view those concerns as misplaced and increasingly see Shopify as an AI winner. Two decades of proprietary data across millions of merchants provide Shopify with a strong foundation for AI tools that improve merchant outcomes. Recent product releases also embed the platform more deeply within the emerging agentic commerce ecosystem while creating new monetization opportunities. We continue to believe that Shopify is the category-defining platform for modern commerce, benefiting from durable secular growth in digital retail, an expanding suite of merchant solutions, improving free cash flow, and a widening competitive moat.
• Coupang, Inc., Korea's largest e-commerce platform, detracted from performance. The stock came under pressure following first-quarter results, where in-line revenue was overshadowed by softer second-quarter guidance as capacity and supply chain investments made ahead of Coupang’s 2025 data breach weighed on margins while customer volumes recovered. Sentiment was further weighed down by a record KRW 624.7 billion (about US$430 million) privacy fine stemming from an investigation into the breach, while a rotation of fast money into AI and semiconductor names added to the weakness. Despite these headwinds, our conviction remains intact. We view the margin pressure as temporary, and the fine, a monetary penalty rather than an operational restriction, removes a key overhang and reinforces our belief that the breach does not reflect a structural loss of share. By the end of April, Coupang recovered roughly 80% of the post-breach decline in WOW Membership (its paid subscription program), with returning members resuming prior spending levels. We continue to view Coupang as a competitively advantaged e-commerce business gaining share in its core market while scaling Taiwan operations.

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 Fifth Avenue Growth Fund (the Fund) rose 24.64% (Institutional Shares), outpacing the Russell 1000 Growth Index’s (the Index) return of 16.74% by 790 basis points, primarily due to tailwinds from style factors and strong stock selection. According to MSCI’s Barra factor attribution, the largest contributor from a style perspective was Beta, as the Fund benefited from being overexposed to the factor in a period when markets swiftly rebounded from late March lows. The Beta factor posted its best three-month performance on record during the period, with the factor’s performance rivaling prior sharp market rallies that followed bear markets, such as “Black Monday”, the dotcom collapse, the Great Recession, and the COVID pandemic.

From a sector standpoint, strong stock selection in Communication Services and Information Technology (IT) was responsible for the vast majority of the outperformance in the period. Strength in Communication Services stemmed from the Fund’s notable position in rocket, satellite, and spacecraft manufacturer Space Exploration Technologies Corp. (SpaceX), whose shares rose sharply after the company successfully completed the largest initial public offering in history, raising more than $85 billion. The proceeds are expected to accelerate growth across massive addressable markets, such as connectivity, launch, terrestrial and space infrastructure, and AI. Fundamental momentum was further reinforced by landmark compute hosting deals totaling tens of billions of dollars annually, including agreements with market leaders Anthropic and Google. SpaceX also announced its acquisition of Cursor, a premier enterprise AI-powered coding platform. Integrating Cursor’s technology, talent, and customer base provides another strategic stepping stone into the vast opportunities within AI applications and agentic systems. Lastly, the company conducted a successful test flight of the latest version of Starship, demonstrating meaningful advancements in rapid and full reusability. We believe these developments support sustained long-term revenue and profit growth well beyond current levels.

Within IT, gains were led by notable appreciation in cloud computing-related companies in the systems software sub-industry (Datadog, Inc., CrowdStrike Holdings, Inc., and Snowflake Inc.). While shares in Datadog, CrowdStrike, and Snowflake were down in the first quarter due to fears that AI would make traditional software companies obsolete, this reversed sharply in the second quarter as all three companies posted strong earnings results that also showcased how they would be structural beneficiaries from AI adoption and the AI buildout, which the market recognized. We retain our conviction in the long-term growth of these companies and their competitive positioning. 

Semiconductor-related names Taiwan Semiconductor Manufacturing Company Limited (TSMC) and ASML Holding N.V. also served as notable contributors in the IT sector. TSMC, which is the world's largest contract chipmaker and the leading manufacturer of advanced logic semiconductors used in modern AI accelerators, performed well during the quarter as investors increasingly recognized that TSMC, rather than any individual chip designer, sits at the center of the AI supply chain. High-performance computing now represents the majority of TSMC's business. AI demand is consuming so much leading-edge capacity that smartphone and PC production is increasingly shifting to older technology nodes, reversing a dynamic that defined the foundry industry for much of the past decade. Management also raised its full-year outlook and increased capital spending to support demand that remains well above available supply. We retain long-term conviction in TSMC and view its leading-edge manufacturing monopoly, pricing power, and 2-nanometer technology roadmap as durable advantages that support multi-year earnings power.

Similarly, ASML, which builds lithography machines used to print circuit patterns onto semiconductor chips, saw its shares rise during the quarter as accelerating AI infrastructure spending reinforced ASML's critical role in the semiconductor supply chain. Sitting at the center of advanced chip production, lithography is in high demand: leading-edge logic capacity remains sold out at ASML's largest customers, while the high-bandwidth memory buildout is driving a parallel wave of lithography equipment investment. Management raised its full-year outlook in response to these favorable demand trends, reinforcing our conviction in ASML as a core long-term holding. Despite periodic volatility from order lumpiness and export-control headwinds, we view ASML as an indispensable enabler of the leading-edge semiconductor roadmap and one of the primary beneficiaries of the ongoing equipment upcycle.

Somewhat offsetting the above was weakness in the Consumer Discretionary sector and lack of exposure to the Industrials sector, which saw strong gains. Weakness in Consumer Discretionary stemmed from declines in e-commerce businesses MercadoLibre, Inc. and Coupang, Inc. and the overexposure to this lagging sector. MercadoLibre’s stock underperformed as investor expectations reset following management’s lower margin outlook and commitment to elevated investment levels. With near-term profitability pressures increasingly reflected in the share price, attention shifted back to the company’s compelling long-term growth opportunity and durable competitive advantages. We believe MercadoLibre’s integrated ecosystem, leading market position, and disciplined capital allocation strategy uniquely position it to benefit from the continued penetration of e-commerce and financial services across Latin America. We remain confident that the current investment cycle will further strengthen the company’s competitive moat and support attractive long-term value creation for shareholders.

Coupang’s stock came under pressure following first-quarter results, where in-line revenue was overshadowed by softer second-quarter guidance as capacity and supply chain investments made ahead of the company’s 2025 data breach weighed on margins while customer volumes recovered. Sentiment was further weighed down by a record privacy fine stemming from an investigation into the breach, while a rotation of fast money into AI and semiconductor names added to the weakness. Despite these headwinds, our conviction remains intact. We view the margin pressure as temporary, and the fine, a monetary penalty rather than an operational restriction, removes a key overhang and reinforces our belief that the breach does not reflect a structural loss of share. By the end of April, Coupang recovered roughly 80% of the post-breach decline in WOW Membership (its paid subscription program), with returning members resuming prior spending levels. We continue to view Coupang as a competitively advantaged e-commerce business gaining share in its core market while scaling Taiwan operations.