Baron Health Care 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. Large caps declined while small and mid caps generated positive returns at a level of relative outperformance not seen since the COVID period in 2020–2021. 

Against this backdrop, health care trailed the broader market due to sharp declines in managed care companies following lower-than-expected Medicare Advantage rate proposals as well as margin compression from rising medical utilization costs. Weakness in pharmaceuticals also weighed on sector performance, as several large-cap drug manufacturers declined amid pricing and policy uncertainty, moderating revenue expectations, and continued investor scrutiny of drug pipelines and patent cycles. Additional pressure came from double-digit declines in health care technology, life sciences tools & services, and health care equipment stocks. 

Looking ahead, we remain focused on well-managed companies with durable competitive advantages and attractive growth prospects. We continue to view health care as a sector with compelling long-term fundamentals, and we prioritize businesses that address critical challenges by reducing costs, improving efficiency, and enhancing patient outcomes. 

CONTRIBUTORS

• Arcellx, Inc. is a biotechnology company focused on cellular therapies. In partnership with Gilead, Arcellx is developing anito-cel, a BCMA-targeted CAR-T therapy similar to Legend Biotech and Johnson & Johnson’s Carvykti. Compared to Carvykti, anito-cel appears to demonstrate similar efficacy with a more benign neurological side-effect profile. Shares rose during the quarter as Gilead announced plans to acquire Arcellx for $115 per share, plus a $5 per share contingent value right tied to cumulative revenues through year-end 2029. 
• Roivant Sciences Ltd. is a biotechnology company that develops novel drugs across a range of therapeutic areas. Often, Roivant will in-license or acquire deprioritized pipeline drug assets from larger pharmaceutical companies. Each program is housed in its own standalone entity, which fosters an entrepreneurial culture while centralizing capital allocation and key resources at the parent level. We are most excited about Priovant (in partnership with Pfizer), where brepocitinib has meaningful potential across a range of rare immunological conditions, and we also see promise in Immunovant, which is developing a next-generation FcRn inhibitor for other immunological conditions. Shares rose during the quarter after Phase 2 results for brepocitinib in cutaneous sarcoidosis showed impressive efficacy, positioning the drug as the new standard of care in this setting. We believe the value of the brepocitinib franchise remains underappreciated.
• AstraZeneca PLC is a large, diversified multinational pharmaceutical company with a portfolio of innovative products and a broad pipeline that is driving, and should continue to drive, above-industry growth. Shares increased during the quarter as AstraZeneca's fourth-quarter results and 2026 revenue guidance exceeded consensus expectations, suggesting continued strength from its recently launched products. In March, the company also announced positive Phase 3 data for tozorakimab in chronic obstructive pulmonary disease, showing clinically meaningful reductions in exacerbations and supporting peak sales potential of $3 to $5 billion. We remain positive on AstraZeneca ahead of a number of additional clinical data readouts in the coming years, which should support sustained above-industry growth into the 2030s.

DETRACTORS

• This Fund does not have detractors to performance for period ending March 31, 2026

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 Health Care Fund (the Fund) declined 6.97% (Institutional Shares) in the first quarter, trailing the Russell 3000 Health Care Index by 209 basis points due to disappointing stock selection. Stock selection in certain sub-industries, namely pharmaceuticals and biotechnology, was exacerbated by having limited exposure to a handful of larger-cap companies that managed solid gains in a period of general market uncertainty.

Weakness in pharmaceuticals was responsible for most of the underperformance, with the principal headwind being limited exposure to certain large-cap stocks that were up double digits in the period. In particular, having lower exposure to Johnson & Johnson and Merck & Co., Inc. and not owning Pfizer Inc. and Bristol-Myers Squibb Company detracted approximately 275 basis points from relative performance, representing the vast majority of relative losses in the period. We generally have limited exposure to large-cap pharmaceutical companies because we think they are unlikely to meet our growth hurdle of achieving at least double-digit earnings growth over the long term.

Higher exposure to lagging life sciences tools & services stocks and weak stock selection in biotechnology and health care services also contributed to the relative shortfall. Within biotechnology, a handful of holdings weighed on performance, with the principal detractor being argenx SE, a company best known for developing Vyvgart, the leading FcRn inhibitor for the treatment of autoimmune conditions. The stock sold off due to operating expense guidance being above investor expectations and sales guidance for a seasonally weak Q1, neither of which impact our positive long-term investment thesis. Another reason for share price weakness was the unexpected retirement of beloved CEO Tim Van Hauwermeiren, who will become the non-executive Chairman. We think that the new CEO Karen Massey (formerly COO) is highly capable and represents a continuation of the company's strategy. Poor stock selection in biotechnology was exacerbated by not owning Amgen Inc., whose share price increased 8% for the quarter. We think Amgen is fairly valued based on its long-term growth potential and do not believe the company meets our investment return hurdle.

The Fund’s only position in health care services, RadNet, Inc., was down 22% for the quarter, detracting approximately 52 basis points from relative results. RadNet is the largest U.S. operator of freestanding imaging centers and a leading radiology software provider through its Deep Health subsidiary. Despite a fourth-quarter beat and above-consensus 2026 guidance, shares fell amid widespread investor concerns about the potentially disruptive impact of AI on software companies. This was likely exacerbated by RadNet’s recently announced $270 million acquisition of Gleamer, a Paris-based X-ray-focused software company. The stock was also weighed down by severe weather in the first quarter, which negatively impacted volumes. We think AI will enhance, rather than replace, RadNet’s software solutions and contribute to internal efficiencies that support margin expansion. As a result, we remain positive on RadNet and believe radiology volumes will continue to increase based on favorable demographics, a shift toward lower-cost outpatient settings, and expanded clinical applications driven by newer, more sophisticated modalities such as PET-CT.

Somewhat offsetting the above was favorable impact from having minimal exposure to UnitedHealth Group Incorporated and other managed health care companies, which were pressured by lower-than-expected federal Medicare Advantage rate proposals and margin compression from rising medical utilization costs. We sold our two stub positions in managed health care because of lack of earnings visibility given less favorable rate increases and elevated medical cost trends.

Cash exposure in a down market and solid stock selection in the health care equipment and other health care related sub-industries also added value. Strength in health care equipment came from Penumbra Inc., a manufacturer of mechanical thrombectomy devices, which remove blood clots that can cause severe conditions around the body. Penumbra’s shares performed well after the company agreed to be acquired by Boston Scientific Corporation for $374 per share, representing a premium of 19% to the prior closing price. We sold our position.

The Fund’s unique position in Welltower Inc., which is classified as a health care REIT by GICS, was a source of strength in the other health care related sub-industry. Welltower operates senior housing, life science, and medical office real estate properties. Shares rose on robust cash flow growth in the company’s senior housing portfolio, driven by continued strong occupancy and rent trends supporting bottom-line growth, along with a strong initial full-year 2026 outlook and continued execution on accretive external growth opportunities. The company also announced additional initiatives to drive asset-light earnings growth. We are optimistic about the prospects for both cyclical and secular growth in senior housing demand against a backdrop of muted supply, which we believe will support several years of favorable growth. Welltower is a “best-in-class” operator with a luxury portfolio, well positioned to capture outsized organic and inorganic growth opportunities. We retain conviction in the company given its high-quality real estate portfolio, conservative balance sheet, prudent capital allocation, and compelling multi-year earnings growth story.