Baron Partners 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

• Tesla, Inc. designs, manufactures, and sells electric vehicles (EVs), solar products, and energy storage solutions, while also developing advanced real-world AI technologies. Despite ongoing macroeconomic challenges and regulatory complexities, shares climbed after Tesla completed a limited commercial rollout of its highly anticipated robotaxi business in Austin—following more than a decade of development and billions of dollars in investment. This milestone signals a potentially transformative shift in the automotive industry and opens up a sizable new market beyond the company’s core operations. Investor sentiment also improved after Elon Musk stepped back from government-related engagements, boosting confidence in Tesla’s near-term execution. Tesla introduced a refreshed Model Y globally, featuring design and performance upgrades, and outlined plans to unveil new mass-market models starting next quarter. Meanwhile, the company is progressing toward scaling production of its humanoid robot, adding another dimension to its long-term growth story.
• Shares of veterinary diagnostics leader IDEXX Laboratories, Inc. contributed to performance for the quarter after reporting better-than-expected financial results. Foot traffic to veterinary clinics in the U.S. remains under pressure, which has continued to hamper aggregate revenue growth. Despite macroeconomic challenges, IDEXX’s excellent execution has enabled the company to maintain strong performance. We believe competitive trends are outstanding, and we expect new proprietary innovations and field sales force expansion to be meaningful contributors to growth in 2025. We see increasing evidence that long-term secular trends around pet ownership and pet care spending have structurally accelerated, which should help support IDEXX’s long-term growth rate.
• Discount brokerage house The Charles Schwab Corporation contributed to performance during the quarter, supported by solid execution and improving fundamentals. The company continued to pay down short-term funding, which contributed to stronger net interest margin and earnings growth. Net new asset growth also improved to 5.5%, in line with Schwab’s long-term target range of 5% to 7%, as attrition tied to the Ameritrade acquisition continued to decline. After retaining capital in recent years to meet regulatory requirements, Schwab is now in a position to resume returning capital to shareholders. Overall, the quarter marked a meaningful step forward in both balance sheet strength and earnings momentum, which we believe is being recognized by the market. We remain shareholders given Schwab’s dominant position in retail brokerage and its ability to drive earnings growth through both organic expansion in assets under management and improved funding efficiency as it continues to pay down high-cost borrowings.

DETRACTORS

• Specialty insurer Arch Capital Group Ltd. gave back some of its gains from earlier in the year, following slower growth and broader weakness across insurance stocks during the second quarter. In the first quarter, premium growth came in below forecasts and slowed relative to the prior quarter due to rising competition and lower pricing in certain business lines. Even so, earnings beat expectations due to stronger underwriting margins and lower tax rates. We continue to own the stock due to Arch’s strong management team and our expectation of significant growth in earnings and book value over time.
• Global ski resort company Vail Resorts, Inc. detracted from performance on investor concerns about slowing visitation levels and the potential impact on early season pass sales for the upcoming ski season. The return of former CEO Rob Katz added uncertainty about the company’s future strategic direction, further pressuring shares. We remain investors. Vail continues to deliver consistent revenue and earnings, with roughly a third of revenue already secured in advance of the season, providing strong financial visibility and enabling more effective operational and strategic planning. We view Katz’s return positively and expect his emphasis on guest experience, pricing, and targeted acquisitions to reignite growth. Combined with a well-covered mid-single-digit dividend yield and a strong balance sheet that supports strategic growth through M&A, reinvestment in the portfolio, and share repurchases, we see an attractive long-term opportunity and the potential for multiple expansion from multi-year lows.

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 12.14% (Institutional Shares) in the second quarter, trailing the Russell Midcap Growth Index (the Index) by 606 basis points due to stock selection. 

The Fund uses leverage to enhance returns, although this does increase the volatility of returns. As of June 30, 2025, the Fund had 108.7% of its net assets invested in securities, and the use of leverage in an up market contributed nearly 270 basis points to relative performance. 

Adverse stock selection in Industrials and Financials detracted approximately 700 basis points from relative results. Weakness in Industrials came from the Fund’s sizable position in private rocket and spacecraft manufacturer Space Exploration Technologies Corp. (SpaceX), whose shares were unchanged for the quarter, hampering performance in a rising market. We value SpaceX using prices of recent financing transactions. Stock selection in Financials was hindered by specialty insurer Arch Capital Group Ltd., whose shares declined 5.3% in the period. The company reported premium growth below expectations and slowed from the prior quarter due to lower pricing in certain business segments. We maintain conviction as we believe the company is well managed and has significant growth potential.

Financial data providers FactSet Research Systems Inc. and MSCI Inc. also contributed to the relative shortfall in the sector. FactSet’s stock experienced some volatility following the announcement that longtime CEO Phil Snow will retire later this year. Remarks on a recent earnings call emphasized that this was a personal decision unrelated to company performance. The company reported better-than-expected fiscal Q3 earnings, and management remained upbeat about prospects for the remainder of fiscal 2025. We continue to own the stock given its large addressable market, strong execution across both new product development and financial results, and robust free cash flow generation. MSCI’s shares failed to keep pace with the broader sector despite reporting solid quarterly earnings and reiterating 2025 guidance. We retain long-term conviction as MSCI owns strong, “all weather” franchises and remains well positioned to benefit from numerous secular tailwinds in the investment community.

Investments in Information Technology (IT) and Real Estate also weighed on relative performance. Within IT, lower exposure to strong performing software stocks coupled with poor performance from syndicated research provider Gartner, Inc. hampered relative results. Gartner’s shares declined as reductions in government spending negatively impacted the company’s public sector business. We estimate U.S. federal exposure accounts for about 5% of Gartner’s total research contract value, with about half from the Department of Defense and intelligence organizations, and half from civilian agencies. While federal budget scrutiny remains high, we believe Gartner’s services deliver significant value to users, including the potential for hard dollar savings. The private sector business appears well positioned for sustained growth, and management is adept at exercising cost controls to support margins and free cash flow generation. The company’s balance sheet is in excellent shape, and we expect management to take advantage of this drawdown through aggressive share repurchases.

The Fund’s sizable investment in real estate information and marketing services platform CoStar Group, Inc. was responsible for most of the relative losses in Real Estate after the company’s shares failed to keep pace with the Index and peers during the quarter. The company’s recent performance has been tempered by significant investment in its residential product, Homes.com, and mixed net new sales. We remain encouraged by growth in both traffic and brand awareness for the new product and are optimistic that momentum will build as the company expands its dedicated residential sales force, enhances its customer targeting, and potentially benefits from changes in Multiple Listing Service practices. Growth in CoStar’s non-residential business also appears poised to accelerate as the sales team refocuses on core offerings—a trend we expect to continue as headcount increases by 20% or more this year. We believe the value of CoStar’s core non-residential business alone exceeds the current share price of the stock, suggesting that investors are ascribing little value to the long-term residential opportunity. 

Apart from leverage, favorable stock selection in Consumer Discretionary and lack of exposure to the worst performing Energy sector somewhat offset the relative losses listed above. Performance in Consumer Discretionary was bolstered by electric vehicle manufacturer Tesla, Inc. Despite ongoing macroeconomic challenges and regulatory complexities, Tesla’s shares climbed after the company completed a limited commercial rollout of its highly anticipated robotaxi business in Austin—following more than a decade of development and billions of dollars in investment. This milestone signals a potentially transformative shift in the automotive industry and opens up a sizable new market beyond the company’s core operations. Investor sentiment also improved after Elon Musk stepped back from government-related engagements, boosting confidence in Tesla’s near-term execution. Tesla introduced a refreshed Model Y globally, featuring design and performance upgrades, and outlined plans to unveil new mass-market models starting next quarter. Meanwhile, the company is progressing toward scaling production of its humanoid robot, adding another dimension to its long-term growth story.