Baron Real Estate 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

• Wynn Resorts, Limited is a global luxury resort operator with properties in Las Vegas and Macau and a new integrated resort under development in the UAE. Shares rose during the quarter following a strong earnings release that showed better-than-expected performance in Las Vegas and signs of accelerating growth in Macau. After years of stagnation, Macau is experiencing renewed visitation from higher-end VIP players, positioning Wynn as a key beneficiary given its premium offering and potential for EBITDA expansion in the region. The company is demonstrating strong momentum across all markets and operates the most differentiated property on the Las Vegas Strip, where we believe the outlook is set to improve in 2026. We also expect the Wynn Al Marjan development to be a major success and to gain increasing attention from the investment community as it progresses toward completion in 2026.
• Jones Lang LaSalle Incorporated (JLL) is a leading global provider of commercial real estate services, including leasing, capital markets, property management, and real estate investment management. Shares rose during the quarter after the company reported robust second-quarter financial results, with broad-based strength across business lines, and raised its full-year guidance. JLL continues to benefit from strong secular tailwinds and an emerging cyclical rebound across several areas of the business, which we expect will support outsized growth over the next several years.
• CRH public limited company is the largest supplier of building materials in North America and Europe. Unlike many peers focused solely on higher-margin upstream materials, CRH also sells downstream products, provides paving services, and produces water infrastructure and outdoor living products. This vertically integrated approach enables the company to capture value across the supply chain. Shares rose during the quarter following solid financial results that underscored the consistency of CRH’s business model. In particular, the company benefited from ongoing business improvement initiatives that drove further margin expansion—marking 11 consecutive years of improvement—and strong contributions from prior M&A activity. CRH also highlighted positive underlying demand trends and healthy backlogs, supporting a favorable organic growth outlook. We retain conviction given management’s credible framework for double-digit annual earnings growth, CRH’s multiple growth avenues, and a valuation that we view as not fully reflecting the company’s quality, consistency, and long-term potential.

DETRACTORS

• American Tower Corporation is a leading global REIT owning more than 150,000 wireless communication tower sites, with a heavy emphasis on developed markets. The stock declined during the quarter following strong gains in the first half of the year. Shares lagged the broader REIT sector, driven by a slight delay in U.S. billings from 2025 into 2026 and investor concerns regarding contractual commitments from a small customer, DISH, after EchoStar’s divestiture of its U.S. spectrum. While we acknowledge these near-term headwinds and expect shares may remain range-bound for a period of time, we believe American Tower is attractively valued on both an absolute and relative basis. The company’s business is supported by continued secular growth in mobile data, improving bookings activity, and strong visibility into mid- to high-single-digit organic earnings growth per share. We also see additional upside potential from capital allocation opportunities, including share repurchases, alongside a growing 3.5% dividend yield.
• Airbnb, Inc. operates the world’s largest technology-enabled hospitality platform, with 8 million listings and 5 million hosts across 220 countries and 100,000 cities. Despite reporting robust quarterly results, the company detracted from performance as investors focused on a sequential deceleration in third-quarter growth due to tougher comparisons, softening leisure travel trends amid an uncertain macroeconomic environment, and the potential impact of planned incremental investments on 2026 margins. We initiated a position in Airbnb in the second quarter at an attractive cost basis—taking advantage of the indiscriminate April selloff to add a high-quality company at a discount—and remain optimistic about its multi-year prospects given its leading position in alternative accommodations and scale advantages, which are driving strong brand awareness and repeat bookings.
• Floor & Decor Holdings, Inc. is a leading hard-surface flooring retailer. Shares declined during the quarter on investor concerns about elevated mortgage rates and ongoing weakness in existing home sales. Floor & Decor was also affected by volatility around tariffs and their potential impact on the company’s sourcing and margin structure. Despite these short-term headwinds, we believe Floor & Decor is well positioned to gain share in the hard-surface flooring market given its competitively advantaged business model, which emphasizes a broad product selection and everyday low prices. The company’s market position should further strengthen as smaller, less-capitalized competitors come under pressure amid shifting market conditions.

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 Real Estate Fund (the Fund) appreciated 10.25% (Institutional Shares), outperforming the MSCI US REIT Index by 576 basis points. The Fund benefited from its unique exposure to non-REIT real estate-related companies, which were up 13.9% in the period owing mostly to strength in the casinos & gaming operators, homebuilders & land developers, and building products/services categories. The Fund also outperformed the more comparable MSCI USA IMI Extended Real Estate Index (the Index) by 460 basis points due to strong stock selection and, to a lesser extent, active real estate category exposures. 

Stock selection was positive across most real estate categories, with the Fund’s casinos & gaming operators, real estate operating companies, building products/services companies, and REITs contributing the vast majority of stock-specific gains (+446 basis points). Performance in casinos & gaming was bolstered by global luxury resort operator Wynn Resorts, Limited and Las Vegas Locals-focused casino operator Red Rock Resorts, Inc. Wynn’s shares rose sharply following a strong earnings release that showed better-than-expected performance in Las Vegas and signs of accelerating growth in Macau. After years of stagnation, Macau is experiencing renewed visitation from higher-end VIP players, positioning Wynn as a key beneficiary given its premium offering and potential for EBITDA expansion in the region. The company is demonstrating strong momentum across all markets and operates the most differentiated property on the Las Vegas Strip, where we believe the outlook is set to improve in 2026. We also expect the Wynn Al Marjan development to be a major success and to gain increasing attention from the investment community as it progresses toward completion in 2026.

Similarly, Red Rock’s stock rose in response to solid operating results, with investors reacting positively to incremental visitation from new customers and accelerating spend-per-visit trends, despite concerns about a market slowdown. The company continues to report strong visitation and robust slot and table game play, along with improving activity from uncarded and non-rewards customers. Red Rock is regaining business at its flagship resort following some initial cannibalization from the opening of its Durango property, with management expecting a full recovery next year and trends already improving faster than anticipated. The new property is generating robust returns, and performance across the company’s six core casinos has strengthened as the Las Vegas Locals market absorbs Durango and returns to its historical low-single-digit growth rate. Given the strength of the market, management continues to ramp up capital investment, which we believe should support ongoing revenue and EBITDA growth over the next several years.

Real estate-focused alternative asset managers Brookfield Corporation and Blackstone Inc. led the way in the real estate operating category after their shares appreciated double digits. Brookfield was a contributor for the quarter amid strong capital deployment, momentum in fundraising, and improving values for real estate investments held on its balance sheet, which was further demonstrated by asset monetization’s at or above carrying values. Blackstone’s stock was lifted by strong quarterly results that highlighted robust fundraising, realization, and deployment activity. Furthermore, growing IPO activity, robust equity and debt capital markets, and compressing credit spreads sowed further optimism that significantly more performance fee realizations could be upcoming after being depressed for a period.

Strength in building products/services was broad based, led by sharp gains from building material supplier CRH public limited company and durable pipe and innovative stormwater management solutions provider Advanced Drainage Systems, Inc. (ADS). CRH’s stock price appreciated following solid financial results that underscored the consistency of the company’s business model. In particular, CRH benefited from ongoing business improvement initiatives that drove further margin expansion—marking 11 consecutive years of improvement—and strong contributions from prior M&A activity. The company also highlighted positive underlying demand trends and healthy backlogs, supporting a favorable organic growth outlook. We retain conviction given management’s credible framework for double-digit annual earnings growth, CRH’s multiple growth avenues, and a valuation that we view as not fully reflecting the company’s quality, consistency, and long-term potential. 

ADS shares rose during the quarter as solid business results in a challenging market environment reinforced investor confidence in management’s ability to navigate softer demand while maintaining margins and holding firm on pricing. Share price performance also reflected a normalization in valuation after a period when the stock traded at a significant discount amid concerns that weaker end markets and rising competition could pressure profitability. Looking ahead, we remain optimistic about ADS’ long-term growth prospects, as the company is well positioned to benefit from an eventual recovery in residential and non-residential construction activity.

Health care REIT Welltower Inc. was responsible for most of the relative gains in the REIT category after the company’s financial results featured above-industry rent and occupancy growth. We continue to believe that Welltower offers both offensive and defensive investment attributes in the current uncertain macroeconomic environment. Both senior housing cash flow and per share earnings growth exceeded 20% and surpassed expectations. We view management as highly disciplined capital allocators who continue to execute on a robust and expanding acquisition pipeline, while also realizing value through selective asset sales. Over the past decade, Welltower has completed $16 billion in dispositions, and should the company choose to divest its lower-growth medical office portfolio and further emphasize higher-growth senior housing, we believe it would create an even more valuable and faster-growing platform.

Apart from stock selection, the Fund benefited from being overexposed to real estate service companies and homebuilders & land developers, as both categories were up over 15% in the period. Lower exposure to the lagging hotels & leisure category and unique exposure to data centers, where GDS Holdings Limited was up sharply, added another 100-plus basis points of relative gains.

Partially offsetting the above was limited exposure to infrastructure related companies, whose strong performance was a 70 basis point drag on relative results.