Baron International Growth Fund: Latest Insights and Commentary

U.S. equities were broadly higher in the third quarter, building on gains from the prior quarter. The S&P 500 Index and NASDAQ Composite set new record highs, most recently on September 22, and the Dow Jones Industrial Average ended the quarter at an all-time high. Small caps led the market recovery, with the Russell 2000 Index finally surpassing its previous record high achieved almost four years ago on November 8, 2021. Market volatility remained muted during the quarter as the CBOE Volatility Index (VIX) continued to trade in the mid-teens, well below its long-term average of around 20. 

The preeminent driver of market strength was the increased likelihood of Federal Reserve (Fed) rate cuts, prompted by signs of weakness in the labor market and the subsequent emergence of more dovish Fed commentary. Rate cut expectations rose in early August following a much weaker-than-expected July nonfarm payrolls report and significant downward revisions to prior numbers. Dovish Fedspeak intensified as the month wore on, with Chair Powell hinting a possible interest rate cut while delivering remarks at the Fed’s annual Jackson Hole conference. Similarly, Governor Waller continued to advocate for cuts while speaking at the Economic Club of Miami. The Fed eventually resumed its rate-cutting cycle at the September meeting, lowering its policy rate by 25 basis points to a range of 4% to 4.25%, after being on hold since its previous cut last December. Robust corporate earnings, narrowing trade uncertainties, a resilient consumer, increased M&A and IPO activity, and sustained AI optimism also contributed to market gains during the quarter. 

The Magnificent Seven complex dominated market returns for a second consecutive quarter, accounting for nearly two-thirds of the S&P 500 Index’s third-quarter gains. The group appreciated 15.5% in the period, outperforming all other securities in the Index, which were up 4.6%, by a double-digit margin. Tesla (+40.0%), Alphabet (+38.1%), Apple (+24.2%), and NVIDIA (+18.1%) posted the largest gains. Meta and Amazon were essentially flat in the period, trailing the broader Index. 

Most sectors closed higher in the period, with Information Technology, Communication Services, and Consumer Discretionary being the only sectors to outperform the broader market thanks to the heavy influence of the Magnificent Seven. Consumer Staples was the only sector to decline in the period, driven by broad-based weakness across a range of sub-industries, including distillers & vintners, personal care products, food retail, tobacco, and household products. Other laggards were Real Estate, Financials, Health Care, Industrials, Energy, and Materials. From a style perspective, small caps outperformed in the third quarter, rising more than 12% and narrowing the gap with mid- and large-cap stocks this year. Performance was mixed between growth and value, with growth stocks dominating in July, losing out to value in August, and rebounding in September. Despite recent volatility, growth generally remains ahead of value year to date, with the largest differential in the mid- and large-cap segments thanks to the heavy influence of Palantir and the broader Magnificent Seven. 

Beyond the U.S., emerging market (EM) equities meaningfully outperformed in September to finish ahead of their developed market counterparts for the quarter. The rally in Chinese equities was largely responsible for EM outperformance, with gains being driven by investor optimism about AI innovation, which bolstered Chinese technology and internet companies. Targeted government initiatives, easing trade tensions with the U.S., and significant domestic capital inflows also contributed to strength in China. Taiwanese and Korean equities also performed well in the period, overshadowing weakness in India, where equity markets were pressured by underwhelming corporate earnings and concerns about recently enacted U.S. tariffs. Foreign investor flows in Indian markets turned negative in the third quarter after being meaningfully positive in May and June. Performance in developed markets was held back by weakness in continental Europe (Denmark, Germany, Norway, Switzerland, France, and Sweden). European equities were hurt by weak corporate earnings, Trump tariff headwinds, and political instability, particularly in France, where the country’s prime minister resigned after losing a crushing confidence vote in parliament.

CONTRIBUTORS

• Lynas Rare Earths Limited is an Australia-based mining and exploration company focused on rare earth minerals. Shares nearly doubled during the quarter as geopolitical and trade tensions underscored the strategic importance of supply sources outside China, which controls more than two-thirds of global rare earth production and roughly 80% of processing and refining capacity. Prices for rare earth minerals and related equities surged after the U.S. signaled support for establishing price floors to encourage non-China mining and production. We retain long-term conviction in Lynas’ earnings potential and strategic value and remain shareholders.
• Argenx SE is a biotechnology company best known for developing Vyvgart, the leading FcRn inhibitor for the treatment of autoimmune conditions. Shares rose after second-quarter Vyvgart sales meaningfully exceeded investor expectations, rebounding from prior weakness linked to seasonal factors (such as insurance reverification) and higher Medicare Part D utilization and associated discounts. Our conversations with management and neurologists continue to reinforce Vyvgart’s value as an important treatment option with strong long-term growth potential. The drug continues to launch well in generalized myasthenia gravis, and its launch in chronic inflammatory demyelinating polyneuropathy is off to a strong start. Over time, we expect Vyvgart to demonstrate efficacy across an expanding range of autoantibody-driven autoimmune conditions, and we are encouraged by argenx’s progress with its next pipeline candidate, ARGX-119, in neuromuscular diseases.
• Lundin Mining Corporation is a high-growth, global mining operator with an emphasis on copper and gold. Shares rose markedly during the quarter, initially following solid operating and financial results. The stock advanced further after competitor Freeport-McMoRan Inc. suspended production at the world’s second-largest copper mine due to a tragic mudslide, tightening global supply and triggering a market imbalance expected to persist for some time. Lundin Mining’s earnings have also benefited from the strong rise in gold prices over the past year. We retain conviction in the company's capital allocation, production growth, and earnings potential.

DETRACTORS

• Constellation Software Inc., a holding company that owns and operates a large portfolio of vertical-market software businesses, detracted from performance. The company reported solid quarterly financial results, but shares declined due to broader uncertainty around the impact of AI on software and the unexpected announcement that President Mark Leonard would step down for health reasons, though he will remain on the board. We retain conviction that Constellation can continue compounding free cash flow per share at a solid rate. While the company is not immune to macroeconomic headwinds, it benefits from a strong balance sheet, robust profitability and free cash flow generation, and a diversified end-market mix.
• InPost S.A., Poland’s leading logistics operator with a rapidly expanding pan-European presence, detracted from performance during the quarter. Allegro, Poland’s top e-commerce platform and InPost’s largest customer—contributing around 15% of group revenue—has begun exploring alternative logistics solutions and partnering with multiple providers. This has raised concerns about potential volume pressure in Poland and further market share erosion once the current Allegro–InPost contract expires in 2027. Despite worst-case fears, we believe a full exit by Allegro is unlikely. InPost controls roughly 70% of parcel lockers and 90% of out-of-home delivery volumes in Poland, making a complete transition away from its network highly disruptive to service quality. We remain positive on InPost’s market leadership, expanding international footprint, and growing client diversification.
• ODDITY Tech Ltd. intends to transform the beauty and wellness market by using proprietary technologies to sell exclusively online and launch innovative new products. The company is uniquely positioned at the intersection of beauty, wellness, and technology, and is poised to capitalize on the consumer shift toward e-commerce in categories that have historically relied on wholesale and high-touch retail models. While ODDITY’s second-quarter results exceeded management and Street expectations, the magnitude of the beat was smaller than investors anticipated, prompting shares to fall. Management also provided additional detail on costs related to the launch of its third brand and the anticipated pressure on first-half 2026 EBITDA margins. We remain shareholders. ODDITY continues to invest heavily in growth while outperforming its long-term targets of 20% top-line growth and a 20% EBITDA margin. We maintain conviction in the company’s value creation potential across its IL MAKIAGE and SpoiledChild lines, as well as its new METHODIQ brand.

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) was up 6.04% (Institutional Shares) in the third quarter, modestly trailing the MSCI ACWI ex USA Index by 85 basis points due to headwinds from stock selection and active country exposures.

On a country level, stock selection in emerging markets (EM) was entirely responsible for the relative shortfall in the period, with most of the weakness coming from investments in Poland, Korea, and Brazil. Disappointing stock selection in EM was exacerbated by having higher exposure to India, which was one of the worst performing countries in the Index. Indian equities were pressured by underwhelming corporate earnings and concerns about the impact of new U.S. trade and visa policy announcements. Somewhat offsetting the above was solid stock selection in developed markets, where the Fund’s holdings in Australia, the Netherlands, Ireland, and Germany were the standouts, overshadowing weakness in Japan, Spain, Israel, and Canada.

From a sector or theme perspective, stock selection was negative across most sectors, with the main culprits being investments in Information Technology (IT), Communication Services, Consumer Staples, and Energy. Weakness in IT was driven by a material correction in the share price of Constellation Software Inc., owing to both the unexpected retirement (health reasons) of its legendary founder and President, Mark Leonard, as well as general market concerns over AI-related uncertainties for application software companies. The Fund’s exposure to WiseTech Global Limited (digitization) and Park Systems Corporation (semiconductors/AI) also weighed on relative results as both stocks suffered corrections in an up market. Adverse stock selection in Communication Services was attributable to double-digit declines from a few holdings in the digitization theme (Universal Music Group N.V., Bharti Airtel Limited, and LY Corporation). Performance in Consumer Staples was hindered by declines from select holdings in the digitization (ODDITY Tech Ltd.) and EM consumer (Dino Polska S.A.) themes, while Waga Energy SA (sustainability/ESG) and Reliance Industries Limited (digitization) stood out as material detractors in the Energy sector. 

Largely offsetting the above was favorable stock selection in Materials, Health Care, and Financials, where various holdings in the global security, sustainability/ESG, EU mutualization, Japan interest rate normalization, and biotechnology/diagnostics themes performed well. Strength in Materials came from several positions in the global security (Lynas Rare Earths Limited and Agnico Eagle Mines Limited) and sustainability/ESG (Lundin Mining Corporation and AMG Critical Materials N.V.) themes. A handful of holdings in the EU mutualization (Deutsche Bank AG, Bank of Ireland Group plc, and Piraeus Financial Holdings S.A.) and Japan interest rate normalization (Mitsubishi UFJ Financial Group, Inc. and Sumitomo Mitsui Financial Group, Inc.) themes led the way in Financials, while strong performance from biotechnology company argenx SE aided performance in Health Care.