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.

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) declined 10.36% (Institutional Shares) in the first quarter, modestly trailing the Russell 1000 Growth Index (the Index) by 58 basis points. Despite strong selection, headwinds from industry and style factors contributed to the Fund’s slight underperformance in the period. According to MSCI’s Barra factor attribution, industry factors weighed heavily on relative results during the quarter, led by a notable overweight in Internet Software and IT Services, which faced significant selling pressure due to investor fears that AI will disrupt software and services businesses. The Fund’s underexposure to AI beneficiaries in the Computers Electronics, Semiconductor Equipment, Electrical Equipment, and Communications Equipment industries also hampered relative performance. These segments posted strong gains, up around 29% on average, during a period of general market weakness due to investor appetite for first-order AI beneficiaries, the "picks and shovels" technology, memory chips, and foundry services providers that have profited directly from the surge in AI development and capital expenditure.

Style-related headwinds also dampened relative performance in the period, driven by overexposure to the weak performing Beta factor and underexposure to the top performing Momentum factor. In addition, underexposure to certain value-oriented factors (Dividend Yield and Earnings Yield) and overexposure to the Growth factor proved costly given the meaningful rotation out of growth stocks during the quarter.

From a sector standpoint, active sector weights were entirely responsible for the relative shortfall in the period, overshadowing favorable stock selection. Lack of exposure to the outperforming Consumer Staples sector was a 50-plus basis point drag on relative performance. Disappointing stock selection in Financials, Health Care, Consumer Discretionary, and Communication Services also hampered relative results.

Weakness in Financials was driven by alternative asset manager KKR & Co Inc., whose stock was pressured by broad concerns sweeping the private markets space, particularly around private credit. Fears over credit quality and future fundraising led to a sell-off across alternative asset managers, while volatility related to AI and the Iran conflict added worries that capital markets activity could be softer than expected in 2026. We retain conviction. KKR is a large, diversified manager with $744 billion in assets under management (AUM), including $135 billion in private credit and $40 billion in direct lending. The market’s focus has centered on direct lending to private-equity-owned companies, a relatively small contributor to KKR’s overall business, and importantly, the firm has limited semi-liquid AUM exposed to redemption risk. As a result, we do not expect a material impact on fundraising or fee growth this year, though a less active capital markets backdrop may weigh on carried interest earnings. We continue to view KKR as a top-tier manager with multiple long-term growth avenues and a compelling valuation.

Within Health Care, robotic surgery system manufacturer Intuitive Surgical, Inc. contributed most of the losses. While the company reported solid quarterly results, shares fell amid broader pressure across the medical device subsector. Investors have become increasingly worried about slowing hospital utilization as some patients lose health insurance—both Affordable Care Act exchange coverage (following the expiration of subsidies) and Medicaid coverage (due to new federal work requirements, tighter eligibility checks, and administrative changes). These concerns were compounded by indications of weak first-quarter procedure volumes, driven by bad weather and a severe flu season, as well as renewed inflation worries stemming from the war in Iran. Investors were also focused on rising competition in robotic surgery. We retain conviction in Intuitive given its durable competitive advantages, including a large installed base, advanced technology, a broad network of trained surgeons, and a strong balance sheet. We think the company has a long growth runway ahead, as robotic surgery remains significantly underpenetrated relative to the long-term opportunity.

Performance in Consumer Discretionary was hindered by double-digit losses from e-commerce platforms Coupang, Inc. and MercadoLibre, Inc. Shares of Coupang, Korea's largest e-commerce platform, remained under pressure as fallout from a late-2025 customer data breach persisted into the new year, with fourth-quarter results confirming the incident had materially impacted revenue growth and profitability in December. Sentiment was further weighed down by an escalating geopolitical dimension: a coalition of major U.S. investors filed arbitration claims against the Korean government under the U.S.-Korea Free Trade Agreement, alleging discriminatory regulatory enforcement. The dispute drew engagement at the highest levels of the U.S. government and added a layer of uncertainty that markets struggled to price. Despite these headwinds, our conviction in Coupang remains intact. The company noted that active customer trends and gross merchandise value growth rates stabilized and began recovering early in 2026, supporting our view that the breach is operational rather than structural. The core business continues to gain share in Korea, while expansion in Taiwan is progressing. We remain invested.

MercadoLibre, which operates the leading e-commerce marketplace in Latin America, detracted from performance due to rising competitive pressures and the company’s decision to accelerate investments in logistics, marketing, and credit card origination, weighing on near-term margin expectations. While underlying volume and revenue trends remain robust, profitability is likely to be temporarily depressed as these initiatives are rolled out. The stock reacted negatively as investors began to price in this shift in the earnings trajectory. We remain confident in management’s investment and capital allocation decisions, which have consistently widened the company’s competitive moat while increasing user engagement and purchase frequency. We are also excited about the company’s long-term prospects. 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.

The Fund’s sizable position in social network Meta Platforms, Inc. accounted for most of the losses in the Communication Services sector. 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.

Partially offsetting the above was strong stock selection in Information Technology (IT), where semiconductor-related holdings Taiwan Semiconductor Manufacturing Company Limited (TSMC), ASML Holding N.V., and Monolithic Power Systems, Inc. (MPS) were standouts. TSMC shares rose as revenue growth exceeded expectations due to surging demand for AI chips. The company 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. TSMC 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 Advanced Micro Devices, 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 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 nm 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.

MPS designs chips that deliver precise, safe, and efficient power to processors, memory, and sensors in electronic systems. With deep system-level expertise and highly integrated solutions, MPS has established a strong leadership position in power management. Shares rose during the quarter following raised full-year guidance and expectations for further upward revisions. The company is poised to benefit from two major secular trends: AI-driven data center redesigns and automotive electrification. AI is fueling exponential growth in data center power needs, forcing a fundamental rethink in how power is distributed. While server shipments are experiencing unprecedented growth, power content per system is also rising, creating a durable multi-year tailwind. At the same time, vehicles are shifting to centralized computing and higher-voltage architectures, significantly increasing the need for advanced power management content per vehicle. MPS’ leadership positions it to directly benefit from both the AI infrastructure buildout and long-term automotive electrification.

Stock selection in IT was further enhanced by not owning Index heavyweight Microsoft Corporation, whose stock price declined 23.3% for the quarter, adding nearly 140 basis points of relative gains. 

Stock selection in Industrials contributed to relative performance as well, driven by strong performance from Space Exploration Technologies Corp. (SpaceX). 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.