Baron Opportunity Fund: Latest Insights and Commentary

U.S. equities delivered a steady finish to an otherwise turbulent year in the fourth quarter of 2025, with moderate gains across most indexes amid easing economic pressures and holiday-season stability. Large caps outperformed, while mid caps lagged and small caps delivered more modest advances. Market participation broadened beyond technology, with value stocks faring better than growth across all size segments. Multiple record highs were reached during the quarter, with the S&P 500 Index and Dow Jones Industrial Average peaking on December 24, the NASDAQ Composite reaching several all-time highs earlier in the quarter, and the Russell 2000 hitting a fresh peak on December 11. Volatility spikes in mid-October and mid-November proved short-lived, and the CBOE Volatility Index reached a 2025 low by late December, supported by resilient economic data.

Fourth-quarter gains were underpinned by moderating tariff impacts, robust corporate earnings, and continued monetary easing. Following a 25-basis-point rate cut in September, the Federal Reserve lowered rates twice more during the quarter, with additional 25-basis-point cuts in October and December. Investor sentiment reflected optimism, as Bank of America’s mid-December Global Fund Manager Survey showed the most bullish outlook in three-and-a-half years, with record-low cash levels and elevated allocations to equities and commodities, though concerns persisted around AI bubbles, private credit events, and elevated hyperscaler capital spending. While a prolonged government shutdown introduced some uncertainty, resilient labor market conditions and the absence of major inflation spikes helped support the rally.

The Magnificent Seven complex posted another positive quarter, rising 3.6%, though gains moderated meaningfully from prior quarters. The group outperformed the broader S&P 500 Index and accounted for nearly half of the Index’s gains. Performance within the group was mixed, led by Alphabet, which surged 28.8%, followed by Apple and Amazon. Tesla edged higher but trailed the broader market, while Meta, Microsoft, and NVIDIA declined during the period.

Looking ahead, we remain confident in and committed to our strategy: durable growth based on powerful, long-term, innovation-driven secular growth trends. We continue to believe non-cyclical, durable, and resilient growth should be a core component of investors’ portfolios, and that our strategy is well positioned to deliver solid long-term returns for our shareholders.

CONTRIBUTORS

• Space Exploration Technologies Corp. (SpaceX) is a high-profile private company founded by Elon Musk. The company's primary focus is on developing and launching advanced rockets, satellites, and spacecrafts, with the ambitious long-term goal of making life multi-planetary. SpaceX is generating significant value with the rapid expansion of its Starlink broadband service. The company is successfully deploying a vast constellation of Starlink satellites in Earth's orbit, reporting substantial growth in active users, and regularly deploying new and more efficient hardware technology. Furthermore, SpaceX has established itself as a leading launch provider by offering highly reliable and cost-effective launches, leveraging the company's reusable launch technology. SpaceX capabilities extend to strategic services such as human spaceflight missions. Moreover, SpaceX is making tremendous progress on its newest rocket, Starship, which is the largest, most powerful rocket ever flown. This next-generation vehicle represents a significant leap forward in reusability and space exploration capabilities. We value SpaceX using prices of recent financing transactions.

• X.AI Holdings Corp. was formed in early 2025 through the merger of X (formerly Twitter) and xAI, an AI company founded by Elon Musk in March 2023 with the mission to "understand the true nature of the universe." This strategic union paired xAI's large language models with X's real-time data and worldwide distribution, speeding Grok's development while providing X with transformative AI tools for search, personalization, and user engagement. Shortly after its founding, xAI released its AI model, Grok, which swiftly emerged as a top-tier contender. Fueling Grok’s performance was the rapid deployment of xAI's data centers: Colossus 1 became operational in just 122 days with 100,000 GPUs, while Colossus 2's first 100,000 GPUs deployed even faster, positioning xAI to pioneer a 1-gigawatt training facility. The upcoming 5th version of Grok will use Colossus 2’s expanded resources and is expected to mark further improvement in the model's capabilities. Such early results demonstrate xAI’s innovation prowess and its prospects for enduring leadership in the highly competitive AI field. We value the stock based on material transaction in shares, leading to stock appreciation.

• Eli Lilly and Company is a global pharmaceutical company currently best known for its GLP-1 treatments for diabetes and obesity. Shares rose during the quarter as Zepbound’s obesity launch continued to gain strong traction. In addition, investors welcomed the announcement of an agreement with the Trump administration that expands Medicare and Medicaid coverage for Lilly’s obesity drugs, offers lower pricing through Medicaid, and supports continued U.S. drug manufacturing investment. In exchange, Lilly was excluded from any near-term “Most Favored Nations” drug pricing programs or pharmaceutical sector tariffs, improving regulatory certainty. Long term, we view Lilly’s Mounjaro and Zepbound GLP-1/GIP therapies, along with orforglipron, its oral GLP-1, as transformational for diabetic and non-diabetic obese patients, and we expect this drug class to become the standard of care for both diabetes and obesity, ultimately representing a $150 billion-plus market opportunity. In our view, GLP-1 adoption is still in its early innings, and we believe continued uptake will drive a doubling of Lilly’s total revenues by 2030.

DETRACTORS

• Spotify Technology S.A. is a leading global digital music service, offering on-demand audio streaming through paid premium subscriptions and an ad-supported model. Shares of Spotify fell as richly valued stocks across a similar peer basket broadly underperformed. In our view, the company’s fundamentals remain intact. Despite recent price hikes, user growth has continued at a double-digit year-over-year pace, with engagement remaining high. Spotify has proven to be a sticky subscription product with relative resilience in times of consumer uncertainty. The company has been on a path to structurally increase gross margins on an annual basis, aided by its high-margin artist promotions marketplace, growing contribution from podcasts, and ongoing investments in advertising. Spotify also continues to innovate across its platform, improving advertising, expanding into video, developing a Super Premium tier, and taking more market share. We still view Spotify as a long-term winner in music streaming with potential to reach 1 billion-plus monthly active users.

• Shares of software leader Microsoft Corporation fell during the quarter. Management highlighted accelerating demand signals across bookings, remaining performance obligations, and product usage, but pointed to supply constraints extending at least through fiscal 2026. We retain conviction in the stock. Microsoft reported slightly accelerating year-over-year constant currency revenue growth in fiscal Q1, alongside stable gross margins and expanding operating margins. The company ended the quarter with current remaining performance obligations (cRPO) of $157 billion, up 35% year over year, and expects cRPO to rise to roughly $167 billion in the second quarter. Assuming Microsoft’s recently announced $250 billion OpenAI agreement spans five years, it would add about $50 billion to cRPO, implying a potential balance of roughly $217 billion early next year. cRPO is a key forward-looking indicator of commercial revenue growth and now represents approximately 80% of total revenue. We are confident in the durability of Microsoft’s revenue growth profile, while the company’s strong operating expense discipline suggests there is additional room for margin expansion.

• Shares of enterprise software and cloud infrastructure provider Oracle Corporation fell after fiscal Q2 2026 cloud growth came in at the low end of guidance and pressure on gross and operating margins weighed on investor confidence in the company’s ability to execute against its growing GPU-as-a-Service (GPUaaS) opportunity. While Oracle added $67.7 billion to its remaining performance obligations (RPO), exiting the period at $523 billion in aggregate and implying bookings of $83.8 billion, investors have grown increasingly skeptical of its ability to convert this expanding backlog into profitable revenue over time. This skepticism has been amplified by uncertainty around the collectability of material commitments from OpenAI, which represents more than 50% of Oracle’s total RPO, particularly as OpenAI’s monthly active user growth slowed following the release of Gemini 3, feeding fears that ChatGPT may be falling behind. Ultimately, greater visibility is needed around whether Oracle’s emerging GPUaaS business can become accretive to earnings and free cash flow, and whether the counterparties underpinning its sizable backlog will remain durable over time. We exited our position.

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 Opportunity Fund (the Fund) increased 4.63% (Institutional Shares) in the fourth quarter, outperforming the Russell 3000 Growth Index (the Index) by 349 basis points due to stock selection. 

Favorable stock selection in Industrials accounted for more than the entirety of the outperformance during the period due to gains from private rocket, satellite, and spacecraft manufacturer Space Exploration Technologies Corp. (SpaceX), whose shares were revalued sharply higher in the period.  SpaceX is generating significant value with the rapid expansion of its Starlink broadband service. The company is successfully deploying a vast constellation of Starlink satellites in Earth's orbit, reporting substantial growth in active users, and regularly deploying new and more efficient hardware technology. Furthermore, SpaceX has established itself as a leading launch provider by offering highly reliable and cost-effective launches, leveraging the company's reusable launch technology. SpaceX capabilities extend to strategic services such as human spaceflight missions. Moreover, SpaceX is making tremendous progress on its newest rocket, Starship, which is the largest, most powerful rocket ever flown. This next-generation vehicle represents a significant leap forward in reusability and space exploration capabilities. We value SpaceX using prices of recent financing transactions.

Positive stock selection in Health Care and Consumer Discretionary also added value in the period. Health Care was bolstered by gains in molecular diagnostics company Exact Sciences Corporation. Shares contributed to performance after Abbott Laboratories announced an agreement to acquire Exact Sciences for approximately $23 billion in November, representing a premium of more than 50% to the prior closing price. We exited our position realizing a successful investment.

Strength in Consumer Discretionary came from premium footwear and apparel brand On Holding AG which rose after the company reported strong quarterly results. Revenue in the most recent quarter grew 34.5% in constant currency, with broad-based momentum across geographies, product categories, and distribution channels. This top-line strength translated into higher profitability, with EBITDA margins expanding 370 basis points to 22.6%. Management also raised fiscal 2025 guidance and issued preliminary 2026 targets, both ahead of expectations. For fiscal 2025, On now guides to approximately 34% revenue growth (up from 31%) and EBITDA margins above 18% (previously 17% to 17.5%). Looking ahead to fiscal 2026, management expects revenue growth of more than 23%. More broadly, the company forecasts roughly 30% annualized revenue growth from fiscal 2024 to 2026, up from the 26% outlook shared at its Investor Day. We maintain conviction in On’s ability to gain market share in the attractive global sportswear market through its unique product positioning and innovative offerings.

Partially offsetting the above was stock-specific weakness in Information Technology (IT), Real Estate, and Communication Services. Weakness in IT was mainly due to the Fund’s lack of exposure to Index heavyweight Apple Inc. Remaining weakness in the sector came from declines from a handful of the Fund’s software holdings most notably Zscaler, Inc., Guidewire Software, Inc., and Via Transportation, Inc. 

Weakness in Real Estate came from declines in CoStar Group, Inc. Shares fell as the company’s net new sales came in below expectations. The stock has been weighed down by significant growth investment in CoStar’s residential product, where sales performance has remained modest. That said, we are encouraged by improving momentum as the company builds out its dedicated residential sales force, enhances its customer targeting, and potentially benefits from changes in Multiple Listing Service practices. We also expect growth in CoStar’s non-residential business to accelerate as sales productivity ramps and the sales team refocuses on core offerings, a trend likely to be amplified by 20% sales force growth in 2025 alone. We believe the value of CoStar’s core non-residential business exceeds the current share price of the stock, suggesting that investors are ascribing little value to the long-term residential opportunity.

Disappointing stock selection in Communication Services was due to declines from global digital music service Spotify Technology S.A. Shares of Spotify fell as richly valued stocks across a similar peer basket broadly underperformed. In our view, the company’s fundamentals remain intact. Despite recent price hikes, user growth has continued at a double-digit year-over-year pace, with engagement remaining high. Spotify has proven to be a sticky subscription product with relative resilience in times of consumer uncertainty. The company has been on a path to structurally increase gross margins on an annual basis, aided by its high-margin artist promotions marketplace, growing contribution from podcasts, and ongoing investments in advertising. Spotify also continues to innovate across its platform, improving advertising, expanding into video, developing a Super Premium tier, and taking more market share. We still view Spotify as a long-term winner in music streaming with potential to reach 1 billion-plus monthly active users. Lack of exposure to mega-cap company Alphabet Inc. also proved costly in Communication Services, detracting 130-plus basis points from relative results.

Yearly Attribution Analysis (for year ended 12/31/2025)

Baron Opportunity Fund (the Fund) appreciated 19.73% (Institutional Shares) for the year, outperforming the Russell 3000 Growth Index (the Index), which increased 18.15%,  by 158 basis points as positive stock selection and style-related tailwinds overshadowed adverse effects from active industry exposures. From a style standpoint, underexposure to the worst performing Earnings Quality factor and overexposure to the strong performing Beta factor added the most value for the year.

From a sector perspective, stock selection in Industrials accounted for more than three times the total outperformance in the period entirely due to gains from private rocket and spacecraft manufacturer Space Exploration Technologies Corp. (SpaceX), whose shares were revalued sharply higher in the period.  SpaceX is generating significant value with the rapid expansion of its Starlink broadband service. The company is successfully deploying a vast constellation of Starlink satellites in Earth's orbit, reporting substantial growth in active users, and regularly deploying new and more efficient hardware technology. Furthermore, SpaceX has established itself as a leading launch provider by offering highly reliable and cost-effective launches, leveraging the company's reusable launch technology. SpaceX capabilities extend to strategic services such as human spaceflight missions. Moreover, SpaceX is making tremendous progress on its newest rocket, Starship, which is the largest, most powerful rocket ever flown. This next-generation vehicle represents a significant leap forward in reusability and space exploration capabilities. We value SpaceX using prices of recent financing transactions.

Investments in Health Care and Consumer Discretionary, along with underexposure to the lagging Consumer Staples sector, were also sources of relative strength in the period. Health Care was bolstered by gains in molecular diagnostics company Exact Sciences Corporation. Shares contributed to performance after Abbott Laboratories announced an agreement to acquire Exact Sciences for approximately $23 billion in November, representing a premium of more than 50% to the prior closing price. We exited our position realizing a successful investment.

Strength in Consumer Discretionary came from recently initiated position premium footwear and apparel brand On Holding AG which rose sharply in the fourth quarter after the company reported strong quarterly results. Revenue in the most recent quarter grew 34.5% in constant currency, with broad-based momentum across geographies, product categories, and distribution channels. This top-line strength translated into higher profitability, with EBITDA margins expanding 370 basis points to 22.6%. Management also raised fiscal 2025 guidance and issued preliminary 2026 targets, both ahead of expectations. For fiscal 2025, On now guides to approximately 34% revenue growth (up from 31%) and EBITDA margins above 18% (previously 17% to 17.5%). Looking ahead to fiscal 2026, management expects revenue growth of more than 23%. More broadly, the company forecasts roughly 30% annualized revenue growth from fiscal 2024 to 2026, up from the 26% outlook shared at its Investor Day. We maintain conviction in On’s ability to gain market share in the attractive global sportswear market through its unique product positioning and innovative offerings. Additional strength in the sector came from lack of ownership of Home Depot, Inc which accounted for approximately half of the outperformance in the sector.

Partially offsetting the above was stock-specific weakness in Information Technology (IT) and Communication Services. Broad weakness in IT was led by declines from syndicated research provider Gartner, Inc., who detracted from performance as its shareholder base continued to turn over following decelerating contract value growth. We attribute most of the slowdown to ongoing cost cutting in the U.S. public sector, which represents around 5% of revenue, as well as more challenging business conditions in industries dependent on public-sector funding. While the market also expressed concern about the impact of AI on Gartner’s insights business, we see no evidence that this is negatively impacting its value proposition. We believe the company has a vast and growing set of proprietary data, generated by hundreds of thousands of interactions with buyers, sellers, and consumers of technology. Gartner’s proprietary insights extend to corporate technology roadmaps, enabling the company to assess future trends, and its contract review program delivers tangible returns on investment for customers. We expect growth trends to improve as U.S. public sector headwinds abate and the company’s sales force productivity strengthens. We also think Gartner is being extremely aggressive in repurchasing stock to take advantage of what we view as a discounted valuation.

Within Communication Services, declines from internet advertising demand-side platform (DSP) The Trade Desk and lack of exposure to mega-cap company Alphabet Inc. overshadowed gains from AI model development private company X.AI Holdings Corp. Trade Desk shares declined in 2025 following softer results and increased uncertainty around forward revenue growth. Slower growth and reduced visibility also led to multiple compression. The Trade Desk’s total addressable market remains large and underpenetrated, but advertisers may take longer to shift towards biddable programmatic CTV advertising and could be drawn to lower fees offered by competitors. We have continued to monitor the competitive landscape, particularly as Amazon enters the market more meaningfully with its rapidly improving DSP offering, and ultimately decided to exit our position and reallocate capital to other investment opportunities.