Baron Fifth Avenue Growth Fund: Latest Insights and Commentary

U.S. equities delivered a steady finish to an otherwise turbulent year in the fourth quarter of 2025, with moderate gains across most indexes amid easing economic pressures and holiday-season stability. Large caps outperformed, while mid caps lagged and small caps delivered more modest advances. Market participation broadened beyond technology, with value stocks faring better than growth across all size segments. Multiple record highs were reached during the quarter, with the S&P 500 Index and Dow Jones Industrial Average peaking on December 24, the NASDAQ Composite reaching several all-time highs earlier in the quarter, and the Russell 2000 hitting a fresh peak on December 11. Volatility spikes in mid-October and mid-November proved short-lived, and the CBOE Volatility Index reached a 2025 low by late December, supported by resilient economic data.

Fourth-quarter gains were underpinned by moderating tariff impacts, robust corporate earnings, and continued monetary easing. Following a 25-basis-point rate cut in September, the Federal Reserve lowered rates twice more during the quarter, with additional 25-basis-point cuts in October and December. Investor sentiment reflected optimism, as Bank of America’s mid-December Global Fund Manager Survey showed the most bullish outlook in three-and-a-half years, with record-low cash levels and elevated allocations to equities and commodities, though concerns persisted around AI bubbles, private credit events, and elevated hyperscaler capital spending. While a prolonged government shutdown introduced some uncertainty, resilient labor market conditions and the absence of major inflation spikes helped support the rally.

The Magnificent Seven complex posted another positive quarter, rising 3.6%, though gains moderated meaningfully from prior quarters. The group outperformed the broader S&P 500 Index and accounted for nearly half of the Index’s gains. Performance within the group was mixed, led by Alphabet, which surged 28.8%, followed by Apple and Amazon. Tesla edged higher but trailed the broader market, while Meta, Microsoft, and NVIDIA declined during the period.

Looking ahead, we remain focused on well-managed companies with durable competitive advantages and attractive growth prospects. While macroeconomic and policy uncertainty persists, we believe maintaining a disciplined, long-term perspective and emphasizing company fundamentals will be essential to navigating the evolving landscape.

CONTRIBUTORS

• Alphabet Inc. is the parent company of Google, the world’s largest search and online advertising company. Shares rose on strength in the company’s core businesses, as well as in Google Cloud and Other Bets. Despite rising usage of AI competitors such as ChatGPT, both Search and YouTube delivered double-digit revenue growth year over year. Additionally, Google Search paid clicks increased compared to the prior year. Google also released the latest version of its AI assistant Gemini, which currently sits at the top of most AI leaderboards, suggesting the company’s frontier AI research capabilities have improved significantly since the launch of ChatGPT. Meanwhile, Cloud revenue growth also accelerated 34% year over year, driven by demand for AI cloud services. We believe there is further runway for cloud acceleration given a significant increase in backlog and a large deal announced with leading AI startup Anthropic. Long term, we believe AI innovation could lead to strength in adjacent fields (e.g., travel) and a continued healthy cloud infrastructure business in Google Cloud Platform (GCP), though we continue to monitor competitive pressures in search and monetization.

• 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.

• X.AI Holdings Corp. was formed in early 2025 through the merger of X (formerly Twitter) and xAI, an AI company founded by Elon Musk in March 2023 with the mission to "understand the true nature of the universe." This strategic union paired xAI's large language models with X's real-time data and worldwide distribution, speeding Grok's development while providing X with transformative AI tools for search, personalization, and user engagement. Shortly after its founding, xAI released its AI model, Grok, which swiftly emerged as a top-tier contender. Fueling Grok’s performance was the rapid deployment of xAI's data centers: Colossus 1 became operational in just 122 days with 100,000 GPUs, while Colossus 2's first 100,000 GPUs deployed even faster, positioning xAI to pioneer a 1-gigawatt training facility. The upcoming 5th version of Grok will use Colossus 2’s expanded resources and is expected to mark further improvement in the model's capabilities. Such early results demonstrate xAI’s innovation prowess and its prospects for enduring leadership in the highly competitive AI field. We value the stock based on material transaction in shares, leading to stock appreciation.

DETRACTORS

• 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 capital and operating expenditures above Street expectations, raising concerns that it may be overspending in AI for less certain returns relative to competitors. Still, we believe Meta continues to benefit from its AI investments across the 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). Our industry checks also validate strong advertiser adoption and satisfaction, including in newer areas such as easy-to-use AI creative tools and business messaging. We believe Meta will begin to realize returns from its AI investment or rationalize spending over time. Longer term, Meta’s leadership in mobile advertising, massive user base, innovative culture, leading generative AI research and distribution, and technological scale position it well for continued performance, with additional monetization opportunities ahead in areas such as smart glasses and commerce.

• Shares of Coupang, Inc., Korea's largest e-commerce platform, declined during the quarter. The weakness was initially driven by elevated upfront investment in the company’s new market, Taiwan, where aggressive customer acquisition, supplier onboarding, product procurement, and logistics infrastructure buildout weighed on near-term profitability. Investor sentiment was further pressured by a recent customer data breach, raising short-term concerns around compliance costs, reputational risk, and potential regulatory scrutiny. A softer domestic consumption backdrop in Korea toward year-end also contributed to more cautious positioning. Despite these headwinds, our conviction in Coupang remains intact. We view the data security issue as operational rather than structural, with no evidence of lasting customer attrition or erosion in competitive positioning. Over the longer term, Coupang continues to gain market share in its core business while leveraging its differentiated fulfillment infrastructure and technology to scale new services and expand into new markets. We remain invested.
• MercadoLibre, Inc., the leading e-commerce marketplace across Latin America, detracted from performance on concerns over near-term margin pressure and longer-term structural risks. Competitive intensity in Brazil rose during the second half of 2025, as Amazon and Shopee ramped promotional activity and prioritized growth. These actions compelled MercadoLibre to respond with discounts, expanded free shipping, and increased marketing spend, driving fears of margin compression. At the same time, investors began to discount emerging risks from agentic AI-driven commerce, which could pressure gross merchandise volume growth and take rates by reducing marketplace product discovery and high-margin advertising revenue growth. Continued volatility in Argentina, one of MercadoLibre’s fastest-growing markets, also raised concerns that weaker economic conditions could result in less reliable profit contribution. We maintain conviction in the company’s long-term opportunity. In our view, MercadoLibre is uniquely positioned to capture a significant share of Latin America’s underpenetrated e-commerce and fintech markets, supported by its scale, brand trust, and powerful ecosystem.