Baron Opportunity 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

• NVIDIA Corporation is a fabless semiconductor company specializing in compute and networking platforms for accelerated computing. The company's dominant position in AI infrastructure—with a comprehensive portfolio spanning GPUs, systems, software, and high-performance networking solutions—continues to drive strong performance. Shares rose during the quarter as signs emerged that the AI cluster buildout is likely to extend into 2026, with NVIDIA maintaining its leadership. The company also removed all AI-related revenue contributions from China, effectively de-risking that part of the business. We maintain a long-term constructive view, as leading AI labs show growing confidence in their ability to achieve human-level intelligence and deploy AI products in enterprise settings. Many top labs are significantly expanding their compute budgets, particularly to advance reinforcement learning for AI agents operating in real-world environments. We believe these labs will begin capturing meaningful value as large-scale use cases are identified and monetized. This, in turn, should further support investment in AI infrastructure as confidence in long-term returns grows.
• Broadcom Inc. is a leading fabless semiconductor and enterprise software company, generating approximately 60% of revenue from semiconductors and 40% from software. The company is strategically positioned at the intersection of high-performance AI compute and networking infrastructure, while also demonstrating disciplined execution in software. Shares rose during the quarter on continued momentum in Broadcom’s AI-related revenue and growing investor confidence in its capabilities in AI application-specific integrated circuits and networking. Improved visibility into 2026 revenue further supports our view. VMware, Broadcom’s recently acquired cloud infrastructure software business, is performing in line with expectations, while the non-AI semiconductor segment appears to have bottomed and is poised for a recovery over the next 12 months. We retain strong conviction in Broadcom's long-term outlook, as the company is well positioned to capture a majority share of the $60 to $90 billion serviceable addressable market by 2027, driven by demand from key customers such as Google, Meta, and ByteDance.
• Microsoft Corporation is a software leader best known for its Windows and Office products. Shares rose on strong fiscal Q3 results, with Azure revenue growing 35% year over year in constant currency and accelerating significantly from the prior quarter. Growth was driven by strong execution in non-AI Azure, particularly in serving enterprise customers, along with improvements in scaling initiatives. Microsoft guided for fiscal Q4 Azure growth of 34% to 35% year over year in constant currency, above expectations of 31% to 32%, and noted that demand for AI infrastructure is outpacing supply, which the company now expects to remain constrained in the near term. Capital expenditures totaled $21.4 billion, slightly below expectations due to lease timing, and marked the first sequential decline in over two years. However, this was not due to a reduction in investment. The company reiterated its commitment to growth, projecting higher spending in fiscal Q4 with additional increases expected in fiscal 2026. We continue to view Microsoft as one of the most competitively advantaged businesses in software.

DETRACTORS

• Apple Inc. is a leading manufacturer of consumer electronics, computer software, and online services. Shares declined amid mounting headwinds, including new U.S. tariffs on Apple’s China-centric supply chain, which are pressuring gross margins, and increased regulatory scrutiny of the App Store model in both the U.S. and Europe. These developments have introduced greater uncertainty around the growth and profitability of Apple’s high-margin Services business. While we continue to admire Apple’s brand, ecosystem, and long-term innovation capabilities, the ongoing regulatory overhang and heightened risk to margins and growth prospects led us to exit the position and reallocate capital to holdings with more compelling return potential relative to risk.
• Vertiv Holdings Co, a leading provider of critical digital infrastructure solutions for data centers, detracted from performance during the quarter. Shares declined on concerns about the pace of AI-related spending following developments involving DeepSeek and later fell further during the tariff-driven sell-off. We ultimately chose to exit the position at a loss to capture the tax benefit and allocate capital toward other holdings exposed to similar long-term trends. Vertiv subsequently rebounded sharply as investor confidence grew around continued data center capital expenditures and the durability of AI-related demand. While we did not participate in the recovery through Vertiv, we benefited through other investments in the portfolio.
• Argenx SE is a biotechnology company best known for developing Vyvgart, the leading FcRn inhibitor for the treatment of autoimmune conditions. Shares declined after Q1 Vyvgart sales came in below elevated investor expectations due to a combination of 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 both generalized myasthenia gravis and chronic inflammatory demyelinating polyneuropathy. Over time, we expect Vyvgart to demonstrate efficacy across an expanding range of autoantibody-driven autoimmune conditions, supported by encouraging Phase 2 myositis data recently presented by argenx at a major medical conference.

Baron Opportunity Fund (the Fund) rebounded sharply in the second quarter, recovering all absolute and relative losses from the prior quarter. The Fund appreciated 23.27% (Institutional Shares) for the three months ended June 30, 2025, beating the Russell 3000 Growth Index (the Index) by 572 basis points due to solid stock selection and, to a lesser extent, active sector weights. The Fund also benefited from style-related tailwinds, specifically overexposure to Beta, which was the best performing factor in the period. 

Strong stock selection in Information Technology (IT) was responsible for about two-thirds of the outperformance in the period. Strength in the sector was widespread, led by sharp gains from many of the Fund’s semiconductor and systems software holdings. Fabless semiconductor and enterprise software company Broadcom Inc. and cloud software infrastructure vendor Cloudflare, Inc. were the top contributors in these segments after their share prices appreciated 65.3% and 74.1%, respectively, in the period. Broadcom was top contributor due to continued momentum in the company’s AI-related revenue and growing investor confidence in its capabilities in AI application-specific integrated circuits and networking. Cloudflare’s shares were up sharply in response to solid quarterly results, with revenue rising 27% year over year and slightly exceeding expectations. Results were boosted by a $135 million deal—the largest in the company’s history—driven by demand for its Workers platform, which allows developers to build and deploy applications at the edge for faster performance. The deal represented a competitive win, with the customer choosing Cloudflare over a major hyperscaler due to faster development time and better total cost of ownership. Cloudflare also continued to improve its go-to-market execution, including stronger sales productivity, improved pipeline attainment, and solid customer growth. 

Stock-specific strength in IT was enhanced by the Fund’s meaningfully lower exposure to Index heavyweight Apple Inc., whose share price declined 7.5% when the broader market was up double digits.

Minimal exposure to the lagging Consumer Staples sector and solid stock selection in Consumer Discretionary, Communication Services, and Health Care accounted for most of the remaining relative gains. Performance in Consumer Discretionary and Communication Services was bolstered by substantial gains from language-learning application Duolingo, Inc. and global digital music service Spotify Technology S.A., respectively. Duolingo’s shares rose on solid quarterly results and the company’s relative resilience in an uncertain macroeconomic environment, supported by its low-priced subscription model. The company has maintained strong 40%-plus year-over-year user growth, driven in part by the continued expansion of its Advanced English courses, which target the more than 1 billion people currently learning English globally. Duolingo’s new, higher-priced AI-powered tier, Duolingo Max, which enables users to practice conversational speaking, has shown early traction, with 7% of subscribers now adopting the tier. Margins remain strong, as Duolingo continues to use AI effectively to accelerate course content development. 

Similarly, Spotify’s stock price was lifted by solid underlying results and the company's durability amid an unpredictable macroeconomic environment. Spotify has been on a path to structurally increase gross margins, aided by its high-margin artist promotions marketplace, growing contribution from podcasts, and structural investments in advertising. Users continued to grow at a double-digit pace despite recent price hikes. Spotify remains a sticky subscription product with relative resilience in times of consumer uncertainty. The company also continued to innovate on the product side, calling 2025 the "year of accelerated execution," with priorities in improving advertising, expanding into video, developing a Super Premium tier, and taking more market share. 

Within Health Care, lower exposure to lagging pharmaceutical stocks and strong performance from recent addition Hinge Health, Inc. added the most value. Hinge Health’s shares were up sharply after the company’s May IPO was well received by investors. Hinge Health is a digital healthcare provider delivering virtual physical therapy, leveraging AI empowered software and hardware designed to deliver a broad spectrum of musculoskeletal (MSK) care. Four times larger than its next competitor, Hinge Health’s highly scalable platform facilitates personalized and largely automated MSK care through AI powered motion tracking (TrueMotion) and an FDA approved proprietary nerve simulation wearable device (Enso) supported by a care team of licensed physical therapists, doctors, and board-certified coaches. We remain excited about our investment in Hinge Health, a demonstrated leader in its space, given the company’s compelling value proposition for its key constituents and strong financial characteristics.   

Partially offsetting the above was stock-specific weakness in Industrials along with higher exposure to the lagging Real Estate sector. Performance in Industrials was hindered by private rocket and spacecraft manufacturer Space Exploration Technologies Corp., whose shares were unchanged in the period, trailing the broader market.