Baron India 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

• Bharti Airtel Limited is a leading telecommunications company, with operations in 18 countries across Asia and Africa. The company’s offerings include wireless services, mobile commerce, and fixed-line broadband. Shares rose on steady earnings and visibility into strong future free cash flow generation, as the company has moved past its period of peak capital intensity. As India’s dominant mobile operator, Bharti Airtel is benefiting from ongoing industry consolidation. In particular, competitor Vodafone Idea appears on the verge of bankruptcy amid severe pricing pressure and an unsustainable balance sheet. We retain conviction in Bharti Airtel as it continues to transform into a digital services provider and capitalize on rising mobile tariffs.
• Max Healthcare Institute Limited is a leading hospital chain in India led by CEO Abhay Soi, a restructuring specialist with expertise in cutting costs and improving return metrics at poorly managed hospitals. These efforts have helped Max Healthcare stand out among its peers with best-in-class EBITDA margins, average revenue per occupied bed, and return on invested capital. Shares rose during the quarter, driven by sustained revenue and profitability growth, as well as strong visibility into network expansion. We are excited about the multi-year growth opportunity for hospital services in India, and we view Max Healthcare as a key beneficiary of ongoing industry consolidation. We expect the company to more than double EBITDA while sustaining mid-teens revenue growth over the next three to five years.
• Reliance Industries Limited is India’s leading conglomerate, with businesses spanning petrochemicals, refining, and oil- and gas-related operations as well as retail, telecommunications, and media. Shares rose during the quarter due to a strong recovery in retail growth following a period of store rationalization. We believe Reliance is well positioned to leverage its telecommunications network to evolve into a digital services company, with offerings such as video streaming, broadband, and e-commerce services. Reliance is also laying the foundation to create an online marketplace that will connect roughly 13 million mom-and-pop retailers to over 480 million mobile and internet subscribers. We believe earnings will sustain mid-teens growth over the next three to five years.

DETRACTORS

• Tata Consultancy Services Limited (TCS) is India’s largest IT services company. Shares were down due to investor concerns that a slowdown in the global economy could lead to lower discretionary IT spending and a prolonged revenue conversion cycle for TCS. We retain conviction in TCS, as it is uniquely positioned to benefit from structural growth opportunities arising from a multi-year cloud migration journey by global enterprises. Given its large scale and R&D capabilities, we believe TCS will continue to capture share from smaller players as customers increasingly consolidate their IT services vendor base. Backed by the renowned Tata Group, TCS enjoys best-in-class corporate governance and a strong leadership bench. In our view, TCS also stands out from the competition due to its best-in-class employee retention, which is one of the key drivers of its industry-leading profitability and return profile. We expect TCS to sustain low double-digit earnings growth over the next three to five years and to consistently return at least 80% of profit to shareholders through dividends and share buybacks.
• Shaily Engineering Plastics Limited is a leading Indian manufacturer of precision injection-molded plastic components, with diverse product offerings spanning categories such as furniture, pharmaceuticals, and toys. Shares fell during the quarter, likely due to profit-taking, despite the company reporting strong quarterly results and outlining plans for a significant ramp-up in its GLP-1 pen business over the coming year. We remain invested in Shaily, as we believe the company is well positioned to benefit from global supply chain diversification away from China, as well as opportunities in GLP-1 pen manufacturing.
• Siemens Energy India Limited (SEIL) is India’s leading power equipment manufacturer, offering solutions for power generation and transmission. The company's product portfolio includes power transformers, generators, and gas and steam turbines. SEIL was a modest detractor during the quarter after we received shares as part of a spin-off from Siemens Limited. We retain conviction in SEIL as a key beneficiary of India’s ongoing power sector reforms, which are expected to drive a multi-year investment cycle in inter-state transmission infrastructure to meet rising electricity demand and integrate renewable energy sources into the national grid. In our view, SEIL is well positioned to capitalize on this opportunity given its broad capabilities across equipment, services, and engineering, procurement, and construction. We expect the company to deliver over 20% compounded earnings growth over the next three to five years.