Baron International Growth Fund: Latest Insights and Commentary

International and emerging market (EM) equities delivered another quarter of strong absolute performance, extending the momentum that began in 2025. The MSCI ACWI ex USA Index gained 14.5% in the second quarter, compared with 15.2% for the S&P 500 Index, while the MSCI Emerging Markets Index rose 24.1%. Performance was again led by AI-related technology companies in Korea and Taiwan, where sustained demand for memory chips, semiconductor equipment, and foundry services drove market strength. Financials also contributed to international returns, while Europe lagged, given its more limited exposure to the AI investment cycle.  

Geopolitical developments also influenced markets. A cease-fire and memorandum of understanding between the U.S. and Iran, along with the reopening of the Strait of Hormuz, eased concerns that had weighed on markets in March. Oil prices declined as shipping flows resumed, which benefited energy-importing economies but weighed on the Energy sector. However, negotiations remain unsettled, and the possibility of renewed disruption could keep oil prices and volatility elevated.  

Looking ahead, market leadership remains narrow, with Information Technology contributing roughly two-thirds of the international market’s second-quarter return. The rapid adoption of agentic AI has reinforced demand for compute and memory, but investors are increasingly focused on the returns generated by elevated AI capital spending. This could create near-term volatility, particularly for more speculative or less competitive companies across the AI ecosystem.  

Overall, we remain encouraged by the outlook for international and EM equities. Company fundamentals remain intact, and we believe a broadening of market participation would provide a healthier foundation for future gains. Outside the current AI leaders, attractive opportunities remain across areas such as e-commerce, fintech, software, health care, and industrials, where valuations in many cases do not reflect durable growth prospects. 

CONTRIBUTORS

• Taiwan Semiconductor Manufacturing Company Limited (TSMC) is the world's largest contract chipmaker and the leading manufacturer of advanced logic semiconductors used in modern AI accelerators. Shares rose during the quarter as investors increasingly recognized that TSMC, rather than any individual chip designer, sits at the center of the AI supply chain. High-performance computing now represents the majority of TSMC's business. AI demand is consuming so much leading-edge capacity that smartphone and PC production is increasingly shifting to older technology nodes, reversing a dynamic that defined the foundry industry for much of the past decade. Management also raised its full-year outlook and increased capital spending to support demand that remains well above available supply. We retain long-term conviction in TSMC and view its leading-edge manufacturing monopoly, pricing power, and 2-nanometer technology roadmap as durable advantages that support multi-year earnings power.
• Tokyo Electron Limited is a Japanese semiconductor equipment manufacturer with leading positions in deposition, etch, and cleaning tools. Shares rose during the quarter as the company emerged as one of the most direct picks-and-shovels beneficiaries of the memory supercycle. High-bandwidth memory (HBM) manufacturing involves many more process steps per wafer than standard memory, so the AI-driven boom in HBM is directly increasing demand for the tools Tokyo Electron makes. Management expects the wafer-fab equipment market to reach a record this year and noted that memory demand may mark the beginning of a multi-year supercycle, with the company’s own shipments outpacing the broader market. We retain conviction in Tokyo Electron as a core long-term holding, viewing its exposure to HBM and advanced logic process intensity, together with its elevated research investment, as durable advantages that support a long-term growth trajectory.
• South Korean semiconductor company SK hynix Inc. is the current leader in high-bandwidth memory (HBM), the specialized memory used alongside AI processors, and a leading producer of dynamic random-access memory (DRAM) and NAND flash memory. Shares rose during the quarter as the company provided perhaps the clearest evidence yet of the supply-constrained nature of the AI memory market. Customers have pre-booked more than three years of HBM supply, exceeding what SK hynix can currently produce, and are increasingly focused on securing supply rather than negotiating price. That pricing power drove record profitability in what is typically a seasonally weaker quarter, and management characterized the current cycle as structurally different from the boom-bust patterns of the memory industry's past. We retain conviction in SK hynix as a core long-term holding, viewing its leadership in the HBM market, its position as a key supplier to the leading AI chip maker, and favorable industry supply-demand dynamics as durable advantages that support multi-year earnings power.

DETRACTORS

• TotalEnergies SE is an integrated oil company with operations spanning exploration and production, liquefied natural gas (LNG), refining and chemicals, power, and marketing. Shares fell during the quarter as prices for the company’s primary commodities rolled over. After spiking earlier in the year amid conflict in the Middle East and disruption to the Strait of Hormuz, crude reversed in the second quarter as a ceasefire took hold and shipping flows resumed, bringing additional supply back to the market. We remain constructive on TotalEnergies’ outlook, underpinned by strong production growth and peer-leading reserve lives. We find this combination particularly attractive against a backdrop of plateauing U.S. shale production and a supply-risk premium re-emerging in energy commodities.
• ISC Co., Ltd. is a South Korean manufacturer of semiconductor testing equipment and the dominant global supplier of elastomer test sockets. These sockets continue to gain share from traditional pogo-pin solutions, which are approaching their electromechanical limits as semiconductor complexity increases. The stock detracted from performance during the second quarter even as earnings comfortably exceeded expectations. We believe the shares are consolidating gains following ISC's strong first-quarter performance. More recently, trading activity may reflect a broader market rotation away from leading-edge semiconductor technologies and key AI enablers toward more legacy and commodity-oriented segments of the semiconductor supply chain in the wake of the rapid adoption of agentic AI. We see no deterioration in the company's fundamentals and retain long-term conviction.
• Alibaba Group Holding Limited is China's largest e-commerce and cloud computing company. Shares fell after Alibaba reported quarterly results that showed lower group profitability and negative free cash flow as the company ramped investment in AI infrastructure and the buildout of its Qwen model ecosystem. Total spending is now expected to exceed Alibaba's prior three-year capital budget. Persistent weakness in Chinese consumption and intensifying e-commerce competition weighed on the core retail franchise, while losses in its instant-commerce initiative and other new ventures widened. Despite this near-term earnings reset, our conviction in Alibaba remains intact. Cloud revenue growth accelerated, and management for the first time disclosed the scale of its AI business, with model-as-a-service run-rate revenue expected to exceed RMB 30 billion by fiscal year end. We believe this validates the company's differentiated full-stack positioning across proprietary chips, cloud infrastructure, and leading models. We view Alibaba as one of the best-positioned proxies for China's AI supply chain and remain invested.

The Quarterly Attribution Analysis for period ending June 30, 2026, is not yet available.