Baron International Growth Fund: Latest Insights and Commentary

International and emerging market (EM) equities delivered another quarter of relative outperformance, extending strong momentum from 2025. The first two months of 2026 saw international markets post solid double-digit gains, driven largely by AI-related technology companies and broad-based strength in industrials. Performance was particularly strong in Korea and Taiwan, where sustained investor demand for AI “picks and shovels” technology, memory chips, and foundry services contributed to market strength.

Late in the quarter, the U.S. and Israel attacked Iran, triggering a sharp rise in oil prices and an inflection point in global equity markets. However, this led to increased volatility and a rotation toward energy and U.S. assets. This shift weighed on international equity performance into quarter end; however, international and EM equities still comfortably outperformed the S&P 500 Index for the period, -0.6% and –0.1% versus -4.3%, respectively, underscoring the resilience of the asset class despite geopolitical disruption.

Looking ahead, the principal near-term risk remains the potential for an extended disruption to oil flows and a sustained spike in energy prices, as many Asian economies—including Taiwan, Korea, China, and India—are heavily reliant on Middle East imports. Nevertheless, current market dynamics suggest elevated energy prices are more likely to be temporary than structural.

Overall, we maintain our optimism regarding the outlook for both relative forward earnings and performance for the asset class. Company fundamentals remain intact, which supports our confidence in the asset class despite an evolving geopolitical backdrop.

CONTRIBUTORS

• 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.

DETRACTORS

• ODDITY Tech Ltd. is a consumer tech platform transforming the beauty and wellness market. Shares fell after a recent Meta algorithm update proved incompatible with the company’s “Try Before You Buy” model, steering ads toward low-intent audiences. Because the model’s higher return rates skewed the algorithm, customer acquisition costs rose from $60 to $75 to over $100 to $150. Management spent several weeks diagnosing the problem before concluding it stemmed from the auction layer rather than the creative content fed into the algorithm. By the time the cause was identified in late January, ODDITY had already entered its peak first-quarter acquisition window with unit economics that made new customer acquisition unprofitable. As a result, the company pulled back on growth marketing. With no firm timeline for resolving the algorithm issue, we significantly reduced our position, though ODDITY remains inexpensive on normalized earnings and METHODIQ (its new teledermatology platform) continues to track well. We continue to own the company given its long-term growth opportunity in a large, underpenetrated e-commerce category.

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 International Growth Fund (the Fund) declined 1.03% (Institutional Shares) in the first quarter, while its primary benchmark, the MSCI ACWI ex USA Index (the Index), retreated 0.71%. The MSCI ACWI ex USA IMI Growth Index (the Proxy Index) declined by a more significant 3.24% for the quarter. The Fund modestly trailed the Index while handily outperforming the Proxy Index during a quarter marked by substantial volatility. We were comfortable with the result, particularly in light of the ongoing challenging period for particular growth sub-sectors such as software, e-commerce, and other digital/online and data-driven businesses.

From a geographic perspective, adverse stock selection in developed markets was responsible for essentially all of the underperformance in the period, as weakness in the Netherlands, Israel, Italy, and Spain overshadowed solid stock selection in Japan, France, and Australia. Emerging markets (EM) was a source of strength, owing mostly to sharp gains from holdings in Taiwan (Taiwan Semiconductor Manufacturing Company Limited (TSMC) and eMemory Technology, Inc.) and Poland (InPost S.A.). EM performance was dented somewhat by overexposure to India, where equity markets faced headwinds from ongoing Foreign Institutional Investor outflows, disappointing corporate earnings, and rising energy prices related to the Iran war (the country imports most of its crude oil). 

From a sector or theme perspective, disappointing stock selection in Communication Services, Health Care, and Consumer Discretionary weighed heavily on relative performance. Weakness in Communication Services was driven by material declines from a few holdings in the digitization theme (Universal Music Group N.V., Bharti Airtel Limited, and Tencent Music Entertainment Group). Health Care performance was hindered by biotechnology company argenx SE, whose 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 Health Care was exacerbated by higher exposure to life sciences tools & services via positions in Agilent Technologies, Inc., Stevanato Group S.p.A., and Eurofins Scientific SE, as the sub-industry faced headwinds from soft earnings reports and guidance due to cautious spending from end markets. Several holdings contributed to losses in the Consumer Discretionary sector, with the largest relative detractors being eDreams ODIGEO SA (digitization), On Holding AG (best-in-class/high-quality growth), and Brunello Cucinelli S.p.A. (luxury). 

Lower exposure to Energy was another notable headwind given the sector was up sharply alongside the price of oil following the start of the Iran war in late February. 

Mostly offsetting the above was strong stock selection in Materials, Information Technology (IT), and Financials, attributable to various holdings in the global security, sustainability/ESG, semiconductors/AI, and Japan interest rate normalization themes. Strength in Materials came from a handful of positions across multiple themes (Lynas Rare Earths Limited, Lundin Mining Corporation, Linde plc, AMG Critical Materials N.V., and Agnico Eagle Mines Limited). Multiple names in the semiconductors/AI theme (ISC Co., Ltd., TSMC, eMemory, and Tokyo Electron Limited) led the way in the IT sector, while Financials performance was bolstered by Credicorp Ltd. (best-in-class/high-quality growth) and the Japan interest rate normalization theme (Japan Exchange Group, Inc., Mitsubishi UFJ Financial Group, Inc., and Sumitomo Mitsui Financial Group, Inc.).