Baron WealthBuilder Fund | Q4 2024

Baron WealthBuilder Fund® (the Fund) performed well in the final quarter of 2024, gaining 5.53% (Institutional Shares). This result was ahead of returns for its mega-cap dominated benchmark, the S&P 500 Index (the Index), and the globally-oriented MSCI ACWI Index (the Global Index), which returned 2.41% and -0.99%, respectively.

In 2024, the Fund gained 18.73%. While this return is respectable in any market environment, it trailed the Index’s results although it exceeded the Global Index’s performance. Those two indexes returned 25.02% and 17.49%, respectively.

While the Fund modestly trailed the Index since its inception, the Fund’s since inception annualized return of 13.62% is ranked in the top percentile of its Morningstar category over that period. While disappointed in the relative returns compared to the Index, we are proud of this long-term ranking achievement in the peer category and absolute results.

As of 12/31/2024, the Morningstar Aggressive Allocation Category consisted of 185, 181, 169, and 176 share classes for the 1-, 3-, 5-year, and since inception (12/29/2017) time periods. Morningstar ranked Baron WealthBuilder Fund Institutional Share Class in the 9th, 93rd, 1st, and 1st percentiles, respectively.

Morningstar calculates the Morningstar Aggressive Allocation 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.

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We believe that after a period of macro driven pressures, investor confidence is improving. Companies are slowly returning to being valued based on their fundamentals and opportunities dictate the stock price. Inflation has remained manageable. Interest rate cuts should persist. The soft landing the government is attempting to orchestrate is occurring. And the incoming administration appears more accommodating towards growth business objectives.

In the fourth quarter, our more concentrated portfolios performed the best due to substantial gains for their two largest holdings. This strong performance was led by Baron Partners and Focused Growth Funds. Additionally, higher growth and larger-cap portfolios also contributed to returns. This group includes Baron Opportunity and Fifth Avenue Growth Funds. Only a handful of portfolios materially detracted from performance, with the largest being Baron Health Care and Emerging Markets Funds as health care and emerging market equities remained out of favor in the period.

During the fourth quarter, the Fund’s two largest underlying holdings, Tesla, Inc. and Space Exploration Technologies Corp., each appreciated more than 50%. Upcoming product launches and improvements in software propelled Tesla shares higher. The latest version of its autonomous driving software showed massive improvements and investors are optimistic that the new presidential administration will more broadly approve its use. This extended deployment would open new and large revenue opportunities for the company. Additionally, upcoming product launches should spur renewed vehicle sales growth in 2025. The Energy business continued to grow, which not only improved top-line revenue but also carried significantly higher margins. The gross profit of the company has improved significantly. More cost reductions should enable a more profitable business in the future.

While these 2 companies were the largest contributors, we had many other underlying holdings across different segments that performed well in the period. While higher growth technology-oriented companies continue to contribute to performance, the next 10 largest contributors included financial services, real estate related, and core growth companies such as Vail Resorts, Inc., The Charles Schwab Corporation, and Chart Industries, Inc. Many of these companies have proven that prior negative sentiment surrounding their businesses was unfounded. Vail had a resurgence in pass sales and continued to exhibit an ability to increase prices at its resorts. An improvement in sales coupled with a focus on cost management, we believe, should lead to margin expansion in the coming years. Schwab has used strong client inflows to pay down expensive short- term borrowings that should lead to improving net interest margins. And Chart, a leading provider of engineered equipment and solutions to the industrial gas and clean energy industry, demonstrated that demand for its products remains strong. The company showed substantial growth and even greater free cash flow conversion. The company hosted an investor meeting where it described how it can gain market share within the growing industry and expand gross margins over the coming five years.

The largest underlying detractors declined because of near-term, company- specific issues. The CEO at specialty insurer Arch Capital Group Ltd. unexpectedly resigned. He had anticipated stepping down from his position at the end of 2025 but accelerated the timing for a smoother transition and less complexity around decision making. Investors are awaiting IDEXX Laboratories, Inc.’s new test introductions and smoother clinical visit data. We believe upcoming product introductions will help improve the consistency of its growth rate.

The Fund is a compilation of our Baron Funds and provides broad equity exposure. All underlying Baron Funds follow a consistent investment philosophy and process. We do not try to mimic the indexes, and we do not alter our strategy to coincide with short-term macro events that we regard as unpredictable. We remain focused on underlying business fundamentals.

We believe small- and mid-cap growth stocks offer attractive return potential relative to their risk over the long term. Small- and mid-cap businesses represent 61.7% of the Fund (compared to only 19.0% for the Index). While our small- and mid-cap growth investments have been successful over our Firm’s 42-year history, these styles are occasionally out of favor. The past few years have been one of these environments. Large-cap growth companies outperformed small-cap growth companies during the year and in many instances over the last decade. Since the Fund’s inception 7 years ago the 1-year rolling monthly returns of the Russell 1000 Growth Index have outperformed the Russell 2000 Growth Index 78% of the time including 6 out of the past 7 calendar years.

* Not annualized. 
† Performance is calculated from the time the Fund was added to Baron WealthBuilder Fund: Baron Durable Advantage Fund – 3/13/2018; Baron Global Advantage Fund - 1/9/2018; Baron FinTech Fund – 2/27/2020; Baron Health Care Fund – 10/18/2018; and Baron Real Estate Income Fund – 5/17/2021.

Performance data quoted represents past performance. Past performance is no guarantee of future results. The indexes are unmanaged. The index performance is not Fund performance; one cannot invest directly into an index.

Performance data quoted represents past performance. Past performance is no guarantee of future results. The indexes are unmanaged. The index performance is not Fund performance. Investors cannot invest directly in an index.

Rather than only examining the Fund’s performance over a quarter or a year, we believe it is equally important to understand how the Fund has performed over the course of an economic cycle. The COVID pandemic and subsequent Macro-Induced Market Rotation has been very difficult for small- and mid-sized growth companies. Investors have favored large-cap, value-oriented businesses that are deemed safer during a time of uncertainty. We believe this offers a great opportunity for long-term investors to invest in small- and mid-cap growth businesses at attractive prices. Markets first peaked in late February 2020 before rapidly dropping as the economy braced for the COVID pandemic. It recovered quickly before experiencing another sizable drop based on macroeconomic factors. Over the three years of the COVID pandemic ended 12/31/2022, the Russell 2000 Growth Index, a small-cap growth index, gained only 1.96% on a cumulative basis. The Russell Midcap Growth Index fared better with a cumulative 3-year return of 12.00%. With that backdrop, the Fund performed better and appreciated 28.11%. We believe protecting and growing clients’ assets during this challenging period positions long-term investors well for meaningful appreciation once the macro landscape changes. Table III provides a more complete look at how the Fund and various indexes performed during the pandemic and its aftermath.

We do not yet know if the challenges caused by the COVID pandemic will persist. Volatility has remained high, but we are hopeful that interest rate increases, policy factors, and COVID hangovers are ending. Global conflict has increased and geopolitics remains uncertain. But growth companies have recently begun to outperform value. So far, we are optimistic that companies will again be valued on their fundamentals rather than on macroeconomic concerns. We have started to see the performance of some individual securities diverge. This divergence of returns, we believe, should favor growth investors. Given our weightings, the Fund’s performance has trailed the large-cap Index since the start of this cycle. However, the Fund’s return has continued to meaningfully exceed small-cap growth indexes.

While we present the Fund’s absolute and relative returns over the SEC mandated periods, we believe it is also important to discuss how the Fund performs over the course of different market environments. The three-year period ended 12/31/2022 was a difficult time for growth investors. It was a period punctuated by a global pandemic, geopolitical instability, and macroeconomic headwinds. The VIX was trading at above-average levels, while Barra factor returns for Beta and Growth were low. Despite these challenges, the Fund’s high-quality growth portfolio weathered the period well, marginally exceeding the Index. The Fund returned 8.61% annualized compared to the Index’s return of 7.66%.

However, the economy and markets have transitioned, in our opinion, over the prior two years. This market transition to a more constructive environment has been (temporarily) challenging. This started at the end of 2022 and extended into 2024. The Fund’s underlying holdings are a balanced group of distinct types of quality-growth businesses. Customers at many service businesses had retreated causing revenue growth to moderate. Suppliers had increased prices causing margins to be pressured. Higher interest rates increased financing costs and raised the discount on future earnings. Investors gravitated towards more speculative, lower-quality businesses, and mega-cap companies with AI opportunities. These businesses do not have material representation in the underlying portfolios, which has resulted in an annualized return of 22.18% for the Fund since 12/31/2022. While substantial on an absolute basis, this return trailed the Index’s annualized gain of 25.65%

This transitional period appears to be ending. Over the prior two quarters, the Fund had a cumulative return of 16.26% compared to 8.44% for the Index. We are optimistic that a sustained constructive market will result in both good absolute and relative returns for the Funds, similar to how most Baron Funds have performed since their inceptions.

Source: FactSet SPAR. Except for Standard Deviation and Sharpe Ratio, the performance based characteristics above were calculated relative to the S&P 500 Index.

* Represents less than 0.1%

Thank you for joining us as fellow shareholders in Baron WealthBuilder Fund. We continue to work hard to justify your confidence and trust in our stewardship of your hard-earned savings. We remain dedicated to giving you the information we would want if our roles were reversed. We hope this letter enables you to make an informed decision about whether this Fund remains an appropriate investment.
 

Respectfully,

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

¹Performance reflects the actual fees and expenses that were charged when the Fund was a partnership. The predecessor partnership charged a 15% performance fee through 2003 after reaching a certain performance benchmark. If the annual returns for the Fund did not reflect the performance fee for the years the predecessor partnership charged a performance fee, returns would be higher. The Fund’s shareholders will not be charged a performance fee. The predecessor partnership’s performance is only for periods before the Fund’s registration statement was effective, which was June 30, 2008. During those periods, the predecessor partnership was not registered under the Investment Company Act of 1940 and was not subject to its requirements or the requirements of the Internal Revenue Code relating to registered investment companies, which, if it were, might have adversely impacted its performance.
²The since inception date for Russell Midcap Growth Index is 6/30/1987.
³Performance reflects the actual fees and expenses that were charged when the Fund was a partnership. The predecessor partnership charged a 20% performance after reaching a certain performance benchmark. If the annual returns for the Fund did not reflect the performance fee for the years the predecessor partnership charged a performance fee, returns would be higher. The Fund’s shareholders will not be charged a performance fee. The predecessor partnership’s performance is only for periods before the Fund’s registration statement was effective, which was April 30, 2003. During those periods, the predecessor partnership was not registered under the Investment Company Act of 1940 and was not subject to its requirements or the requirements of the Internal Revenue Code relating to registered investment companies, which, if it were, might have adversely impacted its performance.
⁴While the Fund may invest in securities of any market capitalization, 42.1% of the Fund’s long holdings were invested in SMID, Mid and Mid/Large-Cap securities (as defined by Russell, Inc.) as of 12/31/2024 (SMID represents 12.6% of the portfolio and has market market capitalizations between $5.2 – $15.8 billion; Mid represents 24.8% and has market capitalizations between $15.8 – $52.6 billion; Mid /Large represents 4.7% and has market capitalizations between $52.6 – $180.5 billion).
⁵The Broad-Based Benchmark for Baron Discovery Fund, Baron Growth Fund, Baron Small Cap Fund, Baron Focused Growth Fund, Baron Asset Fund, Baron Partners Fund, and Baron Health Care Fund is Russell 3000 Index. The Broad-Based Benchmark for Baron Durable Advantage Fund, Baron Fifth Avenue Growth Fund, Baron Opportunity Fund, Baron FinTech Fund, Baron Real Estate Fund, Baron Real Estate Income Fund, Baron Technology Fund, and Baron WealthBuilder Fund is S&P 500 Index. The Broad- Based Benchmark for Baron Emerging Markets Fund is MSCI Emerging Markets Index. The Broad-Based Benchmark for Baron International Growth Fund is MSCI ACWI ex USA Index. The Broad-Based Benchmark for Baron Global Advantage Fund, Baron FinTech Fund, Baron Technology Fund, and Baron WealthBuilder Fund is MSCI ACWI Index.
⁶As of 9/30/2023.
⁷Comprised of operating expenses of 1.04% and interest expense of 0.01%.
⁸As of 12/31/2023.
⁹Comprised of operating expenses of 1.04% and interest expense of 0.95%.
¹⁰Gross annual expense ratio was 1.00%, but the net annual expense ratio was 0.70% (net of Adviser’s fee waivers).
¹¹Gross annual expense ratio was 0.78%, but the net annual expense ratio was 0.76% (net of Adviser’s fee waivers, including interest expense of 0.01%).
¹²Gross annual expense ratio was 0.95%, but the net annual expense ratio was 0.91% (net of Adviser’s fee waivers, including interest expense of 0.01%).
¹³Gross annual expense ratio was 0.98%, but the net annual expense ratio was 0.95% (net of Adviser’s fee waivers).
¹⁴Based on estimated amounts for the current fiscal year.
¹⁵Gross annual expense ratio was 6.79%, but the net annual expense ratio was 1.20% (net of Adviser’s fee waivers and expense reimbursements).
¹⁶Gross annual expense ratio was 1.21%, but the net annual expense ratio was 0.95% (net of Adviser’s fee waivers).
¹⁷Gross annual expense ratio was 0.88%, but the net annual expense ratio was 0.85% (net of Adviser’s fee waivers).
¹⁸Gross annual expense ratio was 0.96%, but the net annual expense ratio was 0.80% (net of Adviser’s fee waivers).
¹⁹Gross annual expense ratio was 5.04%, but the net annual expense ratio was 0.95% (net of Adviser’s fee waivers and expense reimbursements).
²⁰Gross annual expense ratio was 1.22%, but the net annual expense ratio was 1.19% (includes acquired fund fees and expenses, net of the expense reimbursements).
†The Fund’s historical performance was impacted by gains from IPOs. There is no guarantee that these results can be repeated or that the Fund’s level of participation in IPOs will be the same in the future.