Baron Partners 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 focused on well-managed companies with durable competitive advantages and attractive growth prospects. While macroeconomic and policy uncertainty persists, we believe maintaining a disciplined, long-term perspective and emphasizing company fundamentals will be essential to navigating the evolving landscape.

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.

• Shares of global hotelier Hyatt Hotels Corporation increased during the quarter as the company delivered strong revenue per available room and unit growth despite concerns around a weakening macroeconomic environment. Hyatt also reached an agreement with Chase to extend its credit card partnership on improved economic terms, reflecting continued growth in World of Hyatt membership. The company continues to sell owned assets at accretive rates and is redeploying the proceeds through share repurchases. Hyatt maintains an investment-grade balance sheet, with approximately 90% of earnings generated from fees, yet the stock trades at a discount to peers despite a comparable growth profile and business mix. We believe this valuation gap should narrow over time as investors gain greater confidence in the durability and resilience of Hyatt’s business model.

DETRACTORS

• CoStar Group, Inc. is the leading provider of information and marketing services to the commercial and residential real estate industries. 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.

• 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 property and casualty (P&C) insurance software vendor Guidewire Software, Inc. declined during the quarter following strong gains earlier in the year, as the broader software sector came under pressure. After a multi-year transition period, we think Guidewire’s cloud migration is largely complete. We believe cloud will be the sole path forward, with annual recurring revenue benefiting from new customer wins and migrations of the existing customer base to InsuranceSuite Cloud. This progress is best exemplified by Guidewire’s landmark 10-year agreement with Liberty Mutual, the fifth-largest U.S. insurer with $45 billion in direct written premiums, to migrate its entire on-premise deployment of ClaimCenter and adopt PolicyCenter in the cloud. The deal should also help drive adoption among other Tier 1 carriers—now that Liberty Mutual has fully embraced the cloud, others are likely to follow. We believe that Guidewire will be the critical software vendor for the $2.5 trillion global P&C insurance industry, capturing 30% to 50% of its $15 billion to $30 billion total addressable market and generating margins above 40%.

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 Partners Fund (the Fund) increased 19.07% (Institutional Shares) in the fourth quarter outperforming the Russell Midcap Growth Index (the Index), which declined 3.70%, by 22.77% largely due to stock selection. 

The Fund uses leverage to enhance returns, although this does increase the volatility of returns. As of December 31, 2025, the Fund had 112.3% of its net assets invested in securities, and the use of leverage in a period when the Index declined detracted nearly 40 basis points from relative performance. 

Strength in Industrials was responsible for more than 80% of the Fund’s outperformance in the quarter, driven by Space Exploration Technologies Corp. (SpaceX), 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.

The Fund’s Communication Services, Consumer Discretionary, and Financials investments also added value in the period. Strength in Communication Services came from a combination of lower exposure to this poor performing sector and gains from AI model development private company X.AI Holdings Corp. The company was formed in early 2025 through the merger of X Holdings Corp. (“X”) (formerly Twitter) and X.AI Corp. (“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.

Within Consumer Discretionary, meaningfully higher exposure to this better performing sector along with gains from electric vehicle manufacturer Tesla, Inc. and global hotelier Hyatt Hotels Corporation added value. Tesla shares rose during the quarter due to three key catalysts. First, Tesla’s AI initiatives continued to advance rapidly. During the quarter, the company released Full Self-Driving (FSD) version 14.2 and initiated fully driverless testing in Austin, operating vehicles without safety operators for the first time. Second, investor confidence in the company's long-term vision and in Elon Musk’s leadership was reinforced by a newly proposed CEO compensation package and nearly $1 billion in personal share purchases by Musk. To fully benefit from the package, Tesla would need to achieve roughly a six- to eight-fold increase in market capitalization and more than a 25-fold increase in adjusted EBITDA. Alongside these financial goals, the company must also deliver on its revolutionary AI initiatives. Finally, Tesla’s industrial businesses, including energy storage and vehicle sales, continue to generate billions of dollars in free cash flow and are expected to remain healthy despite complex macroeconomic and geopolitical dynamics.

Hyatt’s stock price increased during the quarter as the company delivered strong revenue per available room and unit growth despite concerns around a weakening macroeconomic environment. Hyatt also reached an agreement with Chase to extend its credit card partnership on improved economic terms, reflecting continued growth in World of Hyatt membership. The company continues to sell owned assets at accretive rates and is redeploying the proceeds through share repurchases. Hyatt maintains an investment-grade balance sheet, with approximately 90% of earnings generated from fees, yet the stock trades at a discount to peers despite a comparable growth profile and business mix. We believe this valuation gap should narrow over time as investors gain greater confidence in the durability and resilience of Hyatt’s business model.

Stock-specific strength in Financials was due to share price increases from specialty insurer Arch Capital Group Ltd. and brokerage firm The Charles Schwab Corporation, whose share prices rose 5.7% and 4.9%, respectively, in the period. 

Apart from leverage, adverse stock selection in Real Estate was the only material detractor in the quarter, driven by real estate data and marketing platform CoStar Group, Inc. Shares of CoStar 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.

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

Baron Partners Fund (the Fund) increased 24.86% (Institutional Shares) for the year, and outperformed the Russell Midcap Growth Index (the Index), which increased 8.66%, by 16.20%. Stock selection was the primary reason for the outperformance but style biases also added value. Specifically, overexposure to the strong performing Size (large caps) and Beta factors. 

The Fund uses leverage to enhance returns, although this does increase the volatility of returns. As of December 31, 2025, the Fund had 112.3% of its net assets invested in securities, and the use of leverage in an up market contributed 115 basis points to relative results.

Apart from leverage, stock selection in Industrials and Communication Services added value. Strength in Industrials was due to private rocket, satellite, and spacecraft manufacturer Space Exploration Technologies Corp. (SpaceX), whose shares were revalued higher during the period based on prices of recent stock transactions. The company is generating significant value with the rapid expansion of its Starlink broadband service.

Performance in Communication Services was driven by AI model development private company X.AI Holdings Corp. (xAI) and global digital music service provider Spotify Technology S.A. With rising demand for AI-enabled solutions and products, we believe xAI's focused strategy and innovative approach position it to become a key player in the AI space. Spotify’s shares were up due to solid underlying results and the company’s durability in an unpredictable macroeconomic environment. The company continued on its path to structurally increase gross margins, aided by their high-margin artist promotions marketplace, podcasts beginning to contribute more, and structural investments in advertising. Users continue to grow at a double-digit year-over-year pace, with price hikes leading to minimal churn. Spotify remains a sticky subscription product with relative resilience in times of consumer uncertainty.

Somewhat offsetting the gains above was meaningfully higher exposure to the lagging Consumer Discretionary sector along with adverse stock selection in Information Technology (IT) and Real Estate. Weakness in IT came from syndicated research provider Gartner, Inc. Shares of Gartner declined in response to disappointing quarterly earnings. Contract value growth, a leading indicator of future revenue, decelerated by approximately 2%. We attribute most of the slowdown to ongoing cost cutting in the U.S. public sector, which represents about 5% of revenue, as well as more challenging business conditions in industries dependent on public-sector funding. In addition, companies with meaningful exposure to tariffs appear to be reducing costs, resulting in longer sales cycles and slightly higher client attrition. While the market expressed concern about the impact of AI on Gartner’s insights business, we see no evidence that this is negatively impacting its value proposition. The company continues to benefit from a vast and expanding set of proprietary data generated through hundreds of thousands of interactions with buyers, sellers, and technology consumers. Gartner bought back approximately $800 million worth of stock in July and August and authorized an additional $1 billion in September, and we expect the company to continue repurchasing shares aggressively to capitalize on the discounted valuation.

Adverse stock selection in Real Estate was due to underperformance from real estate data and marketing platform CoStar Group, Inc. and triple net REIT Gaming and Leisure Properties, Inc. Shares of CoStar 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. Gaming and Leisure’s stock declined amid investor concerns that interest rates would remain higher for longer, making the company’s 6% dividend yield relatively less attractive. In our view, the current yield remains compelling and, when combined with earnings growth, should drive attractive returns over time.