Letter from Ron | Q4 2024

Letter from Ron

February 27, 2025 | Download PDF

Baron’s 2024 Investment Conference theme was “Building Legacy.” More than 5,000 Baron Capital clients and shareholders of Baron Funds attended that meeting. This was the second time I interviewed Gwynne at a Baron Conference on stage at The Met. Our first interview was five years ago on October 25, 2019. The conference theme that fall, a few months before COVID-19 changed all our lives, was shockingly, “What’s Next?” Fleetwood Mac performed at day’s end under an iconic otherworldly Andy Warhol style banner, “First Person on Mars!” Last year, in November 2024, Michael Bublé, Carrie Underwood, “Wicked” star Cynthia Erivo, the Broadway cast of “Suffs the Musical,” Broadway star Kelli O’Hara, and Israeli pop superstar Noa Kirel entertained us during lunch and at the end of the day.

All expenses of the Annual Baron Investment Conferences, including venue, entertainers, three Tesla Model Y “door prizes,” Baron “Building Legacy” t-shirts, chocolate chip cookies, miscellaneous swag… like viewing of Optimus robots up close and personal, and six Scream Ice Cream trucks serving incredibly delicious ice cream cones at 4 PM...(I personally own 5% of Internet based Scream ice cream trucks returning to my “roots” one college summer as an ice cream man)...are expenses of Baron Capital. Not of our clients or of Baron mutual fund shareholders. It’s our way of saying “Thanks” for believing in and trusting us all these years. One of our investors remarked that it seems “the only thing Ron is willing to sell is ice cream!” That individual obviously saw through the glitz.

A Baron shareholder in the 5,000-person audience at The Met in 2019 raised his hand after Gwynne spoke. “Gwynne. Fabulous presentation. No wonder Ron thinks you are amazing! But, SpaceX is a private company. How can I invest in SpaceX?” “Call Ron,” Gwynne answered. I suppose if she were asked today, she’d give the same answer.

On November 15, 2024, I began our interview with Gwynne remarking, “I love you, Gwynne.” Her response, “I love you, too, Ron.”

“Very grateful to work with you. Been a blast. And we are just getting started.” Email to me. Senior Director, Finance, SpaceX. January 27, 2025.

SpaceX’s competitive advantage is that it can refly rockets over and over like an airplane. Which enables access to space ultimately for the cost of fuel, not of an entire $150+ million rocket that can be used only once and then disintegrates in the atmosphere. Further, SpaceX’s unique launch and reuse capabilities have enabled it to create Starlink, a low earth orbital, broadband satellite network. Starlink provides communications through its thousands of low latency satellites just like you were standing on our planet and talking to someone next door! Starlink has the ability to provide communications to virtually every square inch of Planet Earth as well as in the air above our planet, a feat we think will be extremely difficult for others to duplicate. It won’t exactly be easy for others to duplicate SpaceX’s long-term goal to reach Mars, either.

Baron Capital has been purchasing shares of privately owned, actively traded... SpaceX for our mutual funds...separately managed accounts... institutional clients...foundations... endowments... executives of businesses in which we have invested...and proprietary investment accounts since 2017. In that year, Baron Partners Fund became the first open end mutual fund in the U.S. to invest in SpaceX. SpaceX shares have since been and remain the subject of sustained extraordinary demand. The cost of those purchases over the past eight years is approximately $1.1 billion. The current value of those investments is approximately $4.4 billion. The valuation of SpaceX shares has been increasing significantly since well before our initial purchases.

SpaceX is now Baron Capital’s second largest holding. It represents 9.3% of our Firm’s AUM. SpaceX represents 15.0% of Baron Partners Fund’s total investments, and 11.4% of Baron Focused Growth Fund’s net assets.

We expect to continue to increase our investment in SpaceX for clients opportunistically as far as the eye can see. Since demand is so far in excess of supply, that’s clearly not going to be easy.

The Senior Director, Finance wrote me recently that when Baron began to invest in SpaceX in 2017, SpaceX growth rate was linear. “It’s now exponential.” On January 25, 2025, on the ride to downtown LA from LAX, I “stopped by” SpaceX to chat for 45 minutes with SpaceX’s CFO. What’s new?

Starlink subscribers more than doubled to 4.6 million in 2024. They could double again in 2025. Planet Earth has more than 8 billion inhabitants. About one third have no broadband internet.

United Airlines, Qatar, Hawaiian Air, Air France, and SAS have all recently installed or are in the process of installing Starlink on their planes. A lot more to come.

Telco direct to cell texts from Starlink satellites will be available in 2025...initially through TMobile and multiple other mobile network operators around the world from Canada and Chile to Australia and Japan. We think this is a game changer. For example...more than 50% of truckers are “blind” to their drivers...and more than 30% of trains do not know the location of their cars.

Starshield has a massive opportunity to protect the American homeland.

In March, SpaceX will launch four more astronauts to the International Space Station and return home two that have been on the orbiting lab for eight months since the Boeing flight test last year.

Finally, just like JFK promised in 1961 to land a man on the moon before the end of that decade...SpaceX is preparing for an unmanned Mars mission as soon as 2026 with human footprints to follow in the years after! We’ll see. President Trump is supportive.

Since SpaceX is privately owned... for most of us, even though its shares are actively traded, it is very difficult to purchase without unusual costs. Purchases of Baron Partners Fund and Baron Focused Growth Fund, two open end, no-load mutual funds with significant holdings of SpaceX, are one way to participate at what we believe are attractive annual management fees and no “carry.” Those two top performing Baron Funds can be purchased through hundreds of the largest brokerage firms’ and banks’ mutual fund “platforms.” Or, directly through Baron. Baron Partners Fund is one of only two equity mutual funds in the United States...of over 2,600 such funds... to outperform the QQQ ETF for the past 15 years. In fact, Baron Partners Fund was the number one performing fund in that group for this period. According to Morningstar, Baron Partners Fund is the number one performing U.S. equity mutual fund since it converted from a partnership founded in 1992 to a mutual fund in 2003!*

Also speaking at our 2024 annual meeting for the second time was Henry Fernandez. Henry is the Founder and Chairman of MSCI, Inc.

Baron has been an important investor in MSCI since that company’s initial public offering in November 2007 at $18 per share. That was immediately preceding the GFC, the Great Financial Crisis. In fact, Henry told me that without Baron’s interest in 2007, MSCI’s public offering could not have taken place. Henry, who is now a very good friend, also told me he often wondered why Baron was interested when so many others were not. “Easy,” I responded. “We thought the MSCI business unique...it likely could become important to the financial structure of world economies and markets...and we believed Henry was an incredibly driven talented person. and there could be no question he is ‘a survivor.’ "

Henry and his family 50 years ago were immigrants forced to flee from Nicaragua following a Communist led military coup in that nation. Although Henry still speaks with a heavy Latin accent, Henry calls it a “southern” accent, that sometimes makes it challenging for me to understand what he is saying, his grasp of math and markets and economies is second to none. As is his dedication to MSCI shareholders.

Henry’s first presentation at a Baron Annual Investment Conference was on October 24, 2008, our 17th such meeting. On that day panic and pandemonium reigned! Markets had recently fallen dramatically and were “limit down” that morning. MSCI’s share price had fallen from $30 to $18 over the past several months when we were about to appear live on CNBC Squawk Box before his presentation at The Met. “This is an incredible country in which we live,” I told Henry. “We need to be bullish!” We were. MSCI shares now trade at ~$600 per share...and, after increasing about 26.9 times in the past 17 years, now represent 2.7% of our Firm’s AUM, with a lot more to come, we believe. MSCI is our 6th largest holding.

MSCI is a provider of financial indexes, rules, and analytics critical to the functioning of capital markets worldwide. MSCI provides definitions of what stocks and markets are investable and what are not. These rules underpin global investment portfolios. More than $15 trillion of assets are currently benchmarked to MSCI indexes! In a recent visit to the Middle East, an MSCI client, one of the largest sovereign wealth funds in the world, told Henry he thought MSCI was “the most important investment infrastructure company in the world.”

Dinos Iordanu, after great success as a property and casualty insurance executive for Warren Buffett’s Berkshire Hathaway and Hank Greenberg’s AIG, was a founder of property and casualty insurer Arch Capital Group Ltd. After we met this immigrant entrepreneur in 2002, and studying his long-term business model that paid salesmen relative to profits earned on policies written over their terms not on gross commissions earned in a year, we were intrigued. Even more so when he described the less competitive markets his new business intended to address. Finally, when we learned that property and casualty industry reserves had declined sharply over the past several years and rates hadn’t yet increased, we determined the timing for fresh capital in this industry was propitious. We began to purchase Arch shares soon after 9/11! We have since become one of Arch’s largest shareholders. Arch shares have increased approximately 34 times since our initial purchase in 2002, or 16.8% per year, annualized. Arch is now Baron’s 4th largest investment and represents 3.9% of our Firm’s AUM. More to come here, too.

So, when Dinos recommended in 2009 that we study Verisk Analytics, Inc., a business in which Arch and Dinos personally had both invested, we paid attention. Verisk is a unique and leading data and analytics provider to the U.S. insurance industry. Verisk was created almost 50 years ago as a co-op for insurance providers. A contributory database, in other words. Property and casualty providers give Verisk their anonymized data for no compensation and pay Verisk to use that data and Verisk analytics. Verisk analytics are based upon algorithms developed by hundreds of scientists, hundreds of mathematicians, and hundreds of technologists. Sharing anonymized proprietary data sets by individual providers allows insurers to better assess and price risk...and identify likely fraud for example. Verisk’s set of data assets are irreplaceable and are used by every property and casualty insurer in the U.S. Verisk data and language are embedded in all insurance policies. AI will further improve the use of this data. Property and casualty insurance is critical to the functioning of a global economy. Buffett sure proved that. When Lee Shavel, Verisk’s CEO, addressed our conference that morning he explained that he had previously been CFO for Verisk and before that of NASDAQ. When he was promoted to CEO, he called Henry Fernandez, whom he described as having built an “extraordinarily successful business” for advice. Henry told him that “if you create value for your clients and employees you will create value for your shareholders.” Lee’s interest had previously been centered principally on investors! He thought Henry’s advice to focus on a broader constituency of stakeholders was clearly helpful. He then called me, also asking for advice. He told the Baron Investment Conference audience that I then spent 45 minutes asking about his ideas for the business before giving him advice consistent with Henry’s. “Make every decision as if you owned the entire business.” In other words, think long term. Baron invested in Verisk in 2009 and since then, the stock price has increased about 10.5 times, or a 16.7% annualized return over the past 15 years. Verisk now represents 0.7% of our Firm’s AUM and is our Firm’s 23rd largest investment.

Red Rock Resorts, Inc. is a “family business.” Red Rock was founded by Frank and Lorenzo Fertitta’s dad 40 years ago, after he had worked at several Las Vegas casinos in various positions from bellman to blackjack dealer to general manager of a downtown casino. That is when he had the idea to start a casino that catered to “locals” who worked in Strip casinos not to the tourists who vacationed annually or less frequently at Strip properties. The Fertittas’ vision of “locals” casinos has enabled Red Rock to create the second largest gaming business in America...after the Las Vegas Strip...bigger than Atlantic City...Chicagoland...and the Mississippi Coast...with virtually no competition!

Why? What is Red Rock’s competitive advantage? In 1997, Las Vegas enacted legislation that restricted development of casinos in communities near schools, shopping centers, and hospitals away from the tourist corridor on the Las Vegas Strip. Exceptions to these restrictions were given to properties that had already been zoned for casinos before residential development. The Fertittas then acquired land, had it zoned for casinos before communities were developed, and “land banked” almost all the properties in the Las Vegas Valley not on the Strip that can now be developed for casinos.

When Frank and Lorenzo spoke about their family’s Las Vegas “locals casinos” at the 2024 Baron “Building Legacy” conference, the brothers first mentioned they have “known Ron for more than 31 years!” It took us awhile to leave the glitz of the expensive and not as profitable Las Vegas strip casinos...but we finally began to invest in the Fertitta’s unique and competitively advantaged “locals” casinos in 2016. The stock has increased about 3.1 times since our initial investment, a 14.0% annualized rate of return. Red Rock is now our 16th largest investment and represents 1.1% of our Firm’s AUM.

Extravagant and glamorous, spare no expense, Las Vegas Strip casinos typically cost several billion dollars each to build. Those properties typically earn high single-digit unlevered returns on capital. Red Rock casinos, built in communities generally a half hour or more from the Strip, where the Strip employees live, are the “Cheers” bars of the casino industry. They cater not only to individuals who work in Strip casinos but increasingly, to the wealthy who have moved to Las Vegas from nearby high tax states. Red Rock’s patrons are served by dealers and hostesses who not only know their names but those of their children and grandchildren...and their favorite menu items and drinks. Red Rock’s customers visit on average four times a month, not once a year or every other year as is common for “The Strip” casinos’ guests. Red Rock’s casinos in general cost hundreds of millions to build, not billions, and earn nearly 20% returns on unlevered investment!

One more thing. When COVID-19 hit, and casinos and other hotels and resorts cut expenses and laid off employees, Frank and Lorenzo did the opposite. All their employees were notified that although Red Rock casinos would be closed during COVID, its employees would continue to be paid their salaries in full until Red Rock reopened their casinos! That’s the sort of thing “family businesses” do. The Fertittas regard their employees as family and along with their physical properties consider them their most important assets. Red Rock is now the preferred place of employment in that city...which means that its customers will likely be treated better by loyal Red Rock’s employees than anywhere else.

It is quite unusual for “active” mutual funds...or any investor for that matter...to consistently outperform the passive S&P 500 Index. That is why I recommend to most who ask that they invest in a low-cost passive index fund, unless they invest with Baron, of course, which has consistently outperformed passive indexes over the long term. Although certainly not every year. In fact, just like Berkshire Hathaway, Baron has underperformed markets roughly a third of the calendar years...but substantially outperformed markets by hundreds of basis points annually over the long term. That’s because our portfolios of competitively advantaged, unique, faster growing than economy businesses are a lot different than market indexes, just like Buffett’s value oriented competitively advantaged larger companies are a lot different than indexes. But, over the long term, both strategies have outperformed indices- by a lot.

Since the U.S. stock market and our economy double about every 10 or 11 years, we think investing in passive index funds is a good way to protect your hard-earned savings from the ravages of 4% to 5% annual inflation, based on my long-term experience and practical observations. The Table “Inflation According to Ron” illustrates that the value of your money, i.e., its buying power has fallen in half approximately every 14-15 years during my 81-year lifetime. Since our government spends more than it receives in taxes over the long term, it consistently devalues our currency to pay for wars, pandemics, social services, defense of the homeland...among other priorities that allow our government representatives to remain in power. We obviously don’t believe 2% annual inflation is a likely outcome for the United States over the long term.

Since their respective inceptions, 16 of 19 Baron mutual funds, representing 96.4% of Baron Funds’ AUM, have outperformed their primary benchmarks and 14 Funds representing 95.9% of Baron Funds’ AUM, rank in the top 20% of their respective Morningstar categories. Eight Funds, representing 57.7% of Baron Funds’ AUM, rank in the top 5% of their categories. When we founded Baron Capital on March 15, 1982, the Ides of March, short term interest rates on U.S. Treasuries were 12% to 13% and America was mired in a lengthy recession. This was as U.S. Federal Reserve Chairman Volker tried to reduce the persistent inflation of the 1970s with the blunt instrument of extraordinarily high interest rates. Baron was then managing $10 million...and the Dow Jones Industrial Average was 795! It is now approaching 45,000! David, one of my two sons and co-President of Baron with Michael, recently asked me, “Dad, when Michael and I were one and two years old and economic conditions were so uncertain, how did you ever have the courage to start a business?” “The best time to start a business is when times are uncertain. Like now," I answered. Baron has been relatively successful. Our Firm’s AUM has grown from $100 million in 1992 to $45.3 billion at year end 2024. We have earned approximately $49.7 billion in realized and unrealized profits for our clients, shareholders, employees, and proprietary accounts since attempting to achieve our Mission of “Changing Lives.” So far so good. But, still a long way to go. Like the Senior Director, Finance of SpaceX believes, “We, too, are just getting started!”

Respectfully,

Additional Must-See Resources

• Baron Capital's Top 25 Holdings (As of 12/31/2024)

• Inflation According to Ron (As of 12/31/2024)

• Baron Funds (Institutional Shares) and Benchmark Performance (As of 12/31/2024)

* This is a hypothetical ranking created by Baron Capital using Morningstar extended performance data and is as of 12/31/2024. There were 2,009 share classes in these nine Morningstar Categories for the period from 4/30/2003 to 12/31/2024.

As of 12/31/2024, the annualized returns of the Invesco QQQ Trust were 25.61%, 19.93%, and 18.29% for the 1-, 5-, and 10-year periods, respectively. 

Note, the peer group used for this analysis includes all U.S. equity share classes in Morningstar Direct domiciled in the U.S., including obsolete funds, index funds, and ETFs. The individual Morningstar Categories used for this analysis are the Morningstar Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Growth, Mid-Cap Value, Small Blend, Small Growth, and Small Value Categories.

Morningstar calculates the Morningstar Large Growth Category Average performance and rankings using its Fractional Weighting methodology. Morningstar rankings are based on total returns and do not include sales charges. Total returns do account for management, administrative, and 12b-1 fees and other costs automatically deducted from fund assets.

As of 12/31/2024, the Morningstar Large Growth Category consisted of 1,088, 952, and 748, share classes for the 1-, 5-, and 10-year periods. Morningstar ranked Baron Partners Fund in the 30th, 1st, 1st, and 1st percentiles for the 1-, 5-, 10-year, and since inception periods, respectively. The Fund converted into a mutual fund 4/30/2003, and the category consisted of 678 share classes. On an absolute basis, Morningstar ranked Baron Partners Fund Institutional Share Class as the 321st, 1st, 1st, and 1st best performing share class in its Category, for the 1-, 5-, 10-year, and since conversion periods, respectively.