Baron Global Opportunity Fund: Latest Insights and Commentary

Global equity markets saw gains overall during the second quarter, though performance across regions was uneven. U.S. equities rallied to new record highs, with most of the gains coming in April and May. Emerging market (EM) equities continued to generate lead performance. Developed Markets (ex-U.S.) equities failed to keep pace with their EM and U.S. counterparts principally due to relative weakness in Europe, where performance was stifled by the region’s limited direct exposure to the AI secular growth theme. 

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. 

Beyond the U.S., EM equities continued their strong run of performance, beating U.S. equities for a sixth straight quarter. EM performance was once again bolstered by sharp gains in Korea and Taiwan, where ongoing investor demand for AI "picks and shovels" technology, memory chips, and foundry services contributed to market strength. 

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.
• 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.
• Leading cloud-native cybersecurity platform CrowdStrike Holdings, Inc. contributed to performance during the quarter as the market increasingly recognized the company as one of the primary beneficiaries of enterprise AI adoption. As organizations deploy AI-native systems, security has moved to the forefront of C-suite concerns, and CrowdStrike is well positioned to benefit as one of the most trusted brands in the category. That standing was reinforced when CrowdStrike was named a launch partner in major AI-industry security collaborations, including Anthropic's Project Glasswing and OpenAI's Trusted Access for Cyber program, underscoring its role in addressing new security challenges created by AI. This is already translating into demand. CrowdStrike’s AI detection and response product is experiencing one of the fastest growth trajectories in the company’s history. Management also raised full-year guidance meaningfully, reflecting the strength of its AI-driven pipeline. Because CrowdStrike's sensors already sit where AI agents operate, extending protection is a natural motion for existing customers. These advantages reinforce our conviction in the company's long-term opportunity.

DETRACTORS

• GDS Holdings Limited is a leading developer and operator of high-performance data centers, operating in key cities across China and expanding rapidly across Asia. Despite solid operating results and strong performance earlier in the year, the stock declined in the second quarter. Several factors weighed on performance, including management's commentary around the components of full-year guidance, a material step-up in expected capital expenditures over the next few years, a slight delay in the expected timing of an inflection in underlying growth. We trimmed our position and reallocated capital to ideas where we have greater visibility and lower exogenous risk, particularly given the current geopolitical environment. However, we continue to see evidence of the growing AI wave in China through significant bookings growth and believe the market underappreciates the value of GDS's stake in its spun-out international subsidiary, DayOne.
• Wix.com Ltd., a cloud-based platform for building and managing websites, detracted from performance in the second quarter. The stock came under pressure as growth in Wix's core Self Creators business decelerated, with bookings and new-user cohorts softening relative to prior quarters. While the Partners segment and newer AI-driven products continued to grow, their strength was insufficient to offset slowing momentum in the larger core franchise, raising questions about the durability of the company's overall growth profile. We had valued Wix for its combination of durable subscription revenue, expanding free cash flow, and disciplined capital returns, but the deceleration in the core business undermined a key pillar of our investment thesis. We exited our position and redeployed capital toward opportunities with clearer growth trajectories.
• Nu Holdings Ltd., a leading digital bank in Latin America, detracted from performance following weaker-than-expected first-quarter results. Loan loss provisions materially exceeded expectations, resulting in an earnings miss and raising investor concerns about the near-term outlook for credit costs, loan growth, and profitability. The unexpected departure of the chief financial officer also weighed on sentiment, as limited visibility into the reasons behind the transition added to uncertainty. Concerns were further compounded by management's U.S. ambitions, where the competitive landscape is materially more mature and the long-term returns on incremental investment are less certain. That said, the chief executive officer subsequently outlined a more measured approach to U.S. expansion and capital deployment, reinforcing our confidence in the company's execution and capital allocation. We remain confident in Nu's ability to continue gaining share across financial services in Latin America and beyond, supported by its enduring advantages in technology, data, cost efficiency, and customer experience.

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.

In a period of notable market strength, Baron Global Opportunity Fund (the Fund) rose 26.68% (Institutional Shares), significantly outpacing the MSCI ACWI Index (the Index) by 11.75%. Strong stock selection mainly contributed to the Fund’s meaningful outperformance in the period, though tailwinds from style factors also played a role. 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’s three-month performance ranked in the top decile relative to history dating back to the mid-1990s.

From a geographic perspective, favorable stock selection in developed markets accounted for most of the outperformance in the period, largely driven by gains in excess of 40% from holdings in the U.S., Netherlands, and U.K. The only areas of weakness in developed markets were Israel (Wix.com Ltd.) and Canada (Shopify Inc.).Stock selection in emerging markets (EM) was a material headwind, offsetting a portion of the gains in developed markets. Select holdings in Korea (Coupang, Inc.), China (GDS Holdings Limited), and Brazil (Nu Holdings Ltd.) contributed to losses in EM. Stock-specific weakness in Korea was exacerbated by not owning semiconductor stocks, which were up 225% in the Index. Lastly, the Fund’s overexposure to Argentina via a position in MercadoLibre, Inc. hampered relative results. 

On a sector level, strong stock selection in Communication Services and Health Care was responsible for much of the outperformance in the period. Strength in Communication Services stemmed from the Fund’s material 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.

A portion of the gains in Health Care came from biotechnology company argenx SE and not owning lagging pharmaceutical and health care equipment stocks. Argenx is best known for developing Vyvgart, the leading FcRn inhibitor for the treatment of autoimmune conditions. Shares rose after a period of prior weakness, which may have been partly driven by the retirement of longtime CEO Tim Van Hauwermeiren in early 2026. We view the transition to Karen Massey, who previously led the company's operations, as largely non-disruptive and believe she is well positioned to continue executing the company's strategy. Shares also benefited from optimism ahead of several clinical readouts, including data from studies of Vyvgart in immune-mediated necrotizing myopathy and dermatomyositis, expected in the third quarter of 2026, as well as empasibrupart in multifocal motor neuropathy, expected in the fourth quarter of 2026. Vyvgart continues to launch well in generalized myasthenia gravis and chronic inflammatory demyelinating polyneuropathy, where we believe it has established itself as an important treatment option. We expect Vyvgart to demonstrate efficacy across an expanding range of autoantibody-driven autoimmune conditions over time and remain encouraged by argenx's pipeline progress.

Life sciences tools & services businesses Illumina, Inc. and BillionToOne, Inc. also performed well in the sector. Shares of Illumina, the dominant provider of next-generation sequencing instruments and consumables, surged following a strong first-quarter earnings beat, with revenue and earnings per share both exceeding consensus expectations. The company reported continued strength in placements of its flagship NovaSeq X sequencing system, with robust clinical demand driving results well above prior guidance, and raised its full-year revenue and operating margin outlook. Conversion of the installed base to the NovaSeq X platform is nearing completion and should mitigate ongoing average selling price headwinds as the firm transitions into a volume-driven clinical growth story. We retain conviction as clinical sequencing volumes, growing well above 30% annually, are poised to accelerate further through oncology applications such as minimal residual disease testing and early cancer detection. We believe Illumina remains well positioned as the industry’s proven DNA sequencing workhorse, with a lower all-in cost relative to emerging competitors.

BillionToOne is disrupting the market with more accurate prenatal and oncology genetic tests and generates the vast majority of its revenue by UNITY, a unique prenatal test that can screen for recessive single-gene disorders from a maternal blood draw and identify fetal antigen status across both red blood cell and platelet antigens. Shares rose in the second quarter after the company reported robust first-quarter results (revenue up 84% year over year with 22% operating margins) and announced a meaningful expansion of commercial insurance coverage for its UNITY test and new UNITY Confirm product, which can replace amniocentesis or chorionic villus sampling to confirm a genetic diagnosis following a high-risk UNITY screening result. We continue to believe that BillionToOne's differentiated "quantitative counting template" technology enables more sensitive genetic testing. The company is making early headway in oncology with its SELECT therapy selection and RESPONSE therapy monitoring tests, which we think will be important future growth drivers.

The Fund’s lack of exposure to certain lagging sectors, including Energy, Consumer Staples, Materials, Utilities, and Real Estate, accounted for most of the remaining relative gains in the period. 

Somewhat offsetting the above was weakness in Consumer Discretionary, owing to overexposure to this lagging sector and declines from e-commerce businesses Coupang and MercadoLibre. 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.

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.