Baron Global Advantage Fund: Latest Insights and Commentary

U.S. equity markets managed gains in a period of heightened volatility, with the CBOE Volatility Index (VIX) briefly spiking above 50 for the first time in over five years before settling back below its long-term average of 20 by quarter end as tariff policy uncertainty and war in the Middle East failed to unnerve investors. Risk-off sentiment early in the quarter centered around President Trump’s “Liberation Day” tariff announcement, which Wall Street strategists viewed as more severe than expected and likely to slow economic growth, boost inflation, and increase the odds of a recession this year. On April 2, President Trump unveiled an unprecedented global tariff regime, placing a 10% baseline tax on imports from all countries, a 34% tariff on Chinese goods, a 25% tariff on all car imports, and a 20% tariff on EU goods. In retaliation, China imposed 34% tariffs on U.S. goods and the EU announced its own countermeasures. The S&P 500 Index fell more than 12% over the next four days, nearly entering bear market territory from its all-time high on February 19, 2025 (down almost 19%). Other prominent benchmarks, such as the NASDAQ Composite Index and Russell 2000 Index, officially entered a bear market in early April, declining more than 20% from their respective all-time highs reached late last year.

After bottoming on April 8, U.S. equities rebounded due to positive trade developments. On April 9, Trump announced a 90-day pause on most reciprocal tariffs to allow for negotiations. China was the only country excluded from the pause, with Trump instead raising tariffs on China to 145%, prompting Chinese officials to increase tariffs on U.S. goods to 125%. However, U.S. and Chinese officials eventually agreed to a de-escalation of tariffs on May 12, alleviating investor concerns and contributing to additional market gains. Other market catalysts were resilient corporate earnings amid tariff-driven pressures, dovish Federal Reserve commentary following muted May inflation, AI tailwinds from NVIDIA’s strong earnings results and Middle East deals, improving consumer sentiment, and a recent ramp in M&A and IPO activity. The sudden Israel-Iran war and subsequent involvement of the U.S. via the bombing of various Iranian nuclear sites threatened to upend market momentum, but a fragile ceasefire was quickly brokered, and the market resumed its advance to close the quarter at a record high.

The Magnificent Seven complex resumed its leadership role during the quarter, accounting for nearly 60% of the S&P 500 Index’s gains. The group appreciated more than 20% in the period, outpacing the Index, which was up 10.9%. NVIDIA (+45.8%), Microsoft (+32.7%), Meta (+28.2%), and Tesla (+22.6%) posted the largest gains. Apple (-7.5%) was the only member of the group to decline and trail the broader Index.

Sector performance mirrored the influence of the Magnificent Seven, as Information Technology, Communication Services, and Consumer Discretionary were among the top performing sectors. Industrials was the only other sector to outperform the Index, helped by strong gains from aerospace & defense companies. Health Care experienced a severe reversal of fortunes during the quarter, as the sector’s 7.2% decline wiped out all year-to-date outperformance versus the broad market. After trailing the S&P 500 Index by more than 50% over the prior two calendar years, Health Care was tracking ahead of the Index this year, outperforming by 750-plus basis points through the end of April. But that all changed in May and June when the sector trailed the Index by approximately 15%. Health Care performance was hampered by multiple factors, including regulatory uncertainty, particularly around drug pricing and Medicare Advantage reimbursement rates, federal investigations involving sector heavyweight UnitedHealth, disruption at the FDA and cancellations/delays of NIH grants for academic research, concerns about tariffs on the pharmaceutical industry, and renewed investor interest in AI-driven technology companies. Energy was another notable laggard, pressured by the sharp decline in oil prices during the quarter.

From a style perspective, small caps failed to lead the way in the market recovery during the quarter, trailing mid- and large-cap stocks. Small caps remain in negative territory this year, down 1.8%, while larger-cap stocks are up about 6%, having recovered all losses from early in the year. Growth stocks outperformed for a third consecutive month to finish the quarter ahead of value by between 400 and 1,400 basis points. The largest differential was in mid and large cap, where sizeable weights in Palantir/AppLovin and Magnificent Seven factored heavily into the strong showing for these growth benchmarks. Growth is now outperforming in most size segments this year, representing a meaningful turnaround from the end of March when value was ahead by a wide margin across the board.

Beyond the U.S., developed and emerging market (EM) equities were up double digits for the quarter, benefiting from the significant allocation shift away from U.S. equities early in the period. Despite modest underperformance in June, developed Europe was a standout for the quarter, bolstered by sharp gains in the Netherlands, Spain, Ireland, Germany, Italy, Finland, and Sweden. Securities in Israel, Hong Kong, Australia, and Canada also contributed to strength in developed markets. EM equities were lifted from semiconductor-related strength in Taiwan and Korea (SK hynix). Solid gains in Mexico and Brazil also contributed to EM outperformance, as investors were relieved about the relatively less punitive tariff approach announced by the U.S. administration.

CONTRIBUTORS

• Cloudflare, Inc. is a leading cloud software infrastructure vendor. Shares contributed to performance after the company reported solid quarterly results, with revenue rising 27% year over year and slightly exceeding expectations. Results were boosted by a $135 million deal—the largest in the company’s history—driven by demand for its Workers platform, which allows developers to build and deploy applications at the edge for faster performance. The deal represented a competitive win, with the customer choosing Cloudflare over a major hyperscaler due to faster development time and better total cost of ownership. Cloudflare also continued to improve its go-to-market execution, including stronger sales productivity, improved pipeline attainment, and solid customer growth. Management noted record additions of customers spending over $1 million and $5 million annually, while churn remained stable and dollar-based net retention held steady at 111%. We continue to have high conviction in Cloudflare, given its differentiated platform, capable management team, and significant long-term growth opportunity.
• MercadoLibre, Inc., the leading e-commerce marketplace across Latin America, contributed to performance during the quarter. The company reported better-than-expected quarterly results across gross merchandise value (GMV), total payment volume, revenue, and EBIT margin. Margin outperformance was driven largely by Argentina, where revenue grew to 34% of the total in the first quarter (up from 14% a year ago) and profitability remains structurally higher. Management cited strong business momentum in the country, supported by a more favorable macroeconomic backdrop—including falling interest rates that are boosting credit demand, lowering funding costs, and driving higher consumption. The number of items sold in Argentina also rose 50% year over year. These gains helped offset expected pressure from continued investments in new distribution centers and the expansion of MercadoLibre’s credit card portfolio. More broadly, the company continued to gain GMV share across Latin America. We remain optimistic about MercadoLibre’s long-term potential given the still-low penetration of e-commerce and financial services in the region, and the company’s category leadership in both.
• NVIDIA Corporation is a fabless semiconductor company specializing in compute and networking platforms for accelerated computing. The company's dominant position in AI infrastructure—with a comprehensive portfolio spanning GPUs, systems, software, and high-performance networking solutions—continues to drive strong performance. Shares rose during the quarter as signs emerged that the AI cluster buildout is likely to extend into 2026, with NVIDIA maintaining its leadership. The company also removed all AI-related revenue contributions from China, effectively de-risking that part of the business. We maintain a long-term constructive view, as leading AI labs show growing confidence in their ability to achieve human-level intelligence and deploy AI products in enterprise settings. Many top labs are significantly expanding their compute budgets, particularly to advance reinforcement learning for AI agents operating in real-world environments. We believe these labs will begin capturing meaningful value as large-scale use cases are identified and monetized. This, in turn, should further support investment in AI infrastructure as confidence in long-term returns grows.

DETRACTORS

• Shares of IT services provider Endava plc detracted from performance due to continued soft demand trends. The company also reported a modest decline in organic revenue, driven by a slowdown in new projects, and lowered its revenue outlook to reflect slower pipeline conversion and incremental currency headwinds. We remain investors. We expect these near-term pressures to ease over time, leading to improved growth as clients increasingly prioritize digital transformation.
• Argenx SE is a biotechnology company best known for developing Vyvgart, the leading FcRn inhibitor for the treatment of autoimmune conditions. Shares declined after Q1 Vyvgart sales came in below elevated investor expectations due to a combination of seasonal factors (such as insurance reverification) and higher Medicare Part D utilization and associated discounts. Our conversations with management and neurologists continue to reinforce Vyvgart’s value as an important treatment option with strong long-term growth potential. The drug continues to launch well in both generalized myasthenia gravis and chronic inflammatory demyelinating polyneuropathy. Over time, we expect Vyvgart to demonstrate efficacy across an expanding range of autoantibody-driven autoimmune conditions, supported by encouraging Phase 2 myositis data recently presented by argenx at a major medical conference.
• Shares of IT services provider Globant S.A. fell after the company reported weaker-than-expected financial results and lowered its guidance for the year. While revenue grew 7% in the first quarter, full-year revenue growth is projected to decelerate sharply to just 2%. Management attributed the softer outlook to macroeconomic uncertainty, tariffs, and weakness in certain geographies. Globant had previously demonstrated resilience despite broader softness in IT services spending, making this slowdown particularly disappointing. We continue to own the stock, as we believe Globant has a long runway for growth in the large and expanding global IT services market.

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 Global Advantage Fund (the Fund) rose 22.68% (Institutional Shares) in the second quarter, significantly outpacing the MSCI ACWI Index (the Index) by more than 11% due to strong stock selection and, to a lesser extent, positive impacts from active country/sector weights. Style biases also contributed to the Fund’s meaningful outperformance in the period, with the largest impact coming from significant overexposure to higher beta stocks. The Beta factor experienced one of its best three-month periods of performance in the last 25 years, serving as a material tailwind to performance.

From a geographic perspective, stock selection in developed markets accounted for about 80% of the outperformance in the period. Most of the gains came from investments in the U.S., though Shopify Inc. in Canada was another material contributor. The remaining outperformance was attributable to solid stock selection in emerging markets (EM) and significantly higher exposure to MercadoLibre, Inc. (Argentina) in other markets. Strength in EM was driven by sharp gains from select holdings in Korea (Coupang, Inc.), India (Eternal Limited), Taiwan (Taiwan Semiconductor Manufacturing Company Limited), and China (GDS Holdings Limited).

On a sector level, Information Technology investments were responsible for nearly two-thirds of the outperformance in the period, owing to a combination of favorable stock selection and significantly higher exposure to this leading sector. Strength in the sector was broad based, led by substantial gains from the Fund’s holdings in systems software and semiconductors, where cloud software infrastructure vendor Cloudflare, Inc. and fabless semiconductor giant NVIDIA Corporation were the top contributors. Cloudflare’s stock rose sharply after reporting solid quarterly results, with revenue rising 27% year over year and slightly exceeding expectations. Results were boosted by a $135 million deal—the largest in the company’s history—driven by demand for its Workers platform, which allows developers to build and deploy applications at the edge for faster performance. NVIDIA’s share price increased during the quarter as signs emerged that the AI cluster buildout is likely to extend into 2026, with the company maintaining its leadership. NVIDIA also removed all AI-related revenue contributions from China, effectively de-risking that part of the business.

Outside of systems software and semiconductors, multi-channel commerce platform Shopify Inc. was a material contributor, bolstered by strong financial results and a pause in tariff escalation. Shopify reported 27% year-over-year revenue growth, with gross merchandise volume up 23%, driven by continued expansion into offline retail, international markets, and business-to-business—each of which grew 23%, 31%, and 109%, respectively. Shopify also continued to gain share in its core domestic e-commerce market. While tariffs have increased uncertainty, Shopify’s diverse merchant base and resilient business model position it well to navigate ongoing challenges. The company remains focused on reinvesting in the business, continuously improving its product and expanding its addressable market opportunity.

Stock selection in Consumer Discretionary accounted for most of the remaining relative gains in the period. Latin American e-commerce marketplace MercadoLibre, Inc., Korean e-commerce company Coupang, Inc., and Indian food delivery and quick commerce platform Eternal Limited were the standouts in the sector. MercadoLibre was a top contributor after reporting better-than-expected quarterly results across gross merchandise value, total payment volume, revenue, and EBIT margin. Coupang similarly delivered solid quarterly results, marked by continued retail market share gains and improved macroeconomic sentiment following the recent Korean elections. Coupang’s food delivery business also maintained strong growth, supported by improving unit economics. Eternal’s share price was lifted by investor enthusiasm about the company’s continued leadership in the race toward profitability in quick commerce, as well as its strong balance sheet in an increasingly competitive industry.

Lastly, the Fund benefited from its underexposure to the lagging Health Care, Energy, Consumer Staples, Materials, and Real Estate sectors, which added 230-plus basis points of relative gains.

Somewhat offsetting the above was adverse stock selection in Industrials, where the Fund’s sizeable position in private rocket and spacecraft manufacturer Space Exploration Technologies Corp. (SpaceX) weighed heavily on performance. SpaceX shares were unchanged for the quarter, hampering performance in a rising market. We value SpaceX using prices of recent financing transactions. The other material headwind came from minimal exposure to Communication Services, one of the better performing sectors in the Index during the period.