Baron Durable Advantage Fund: Latest Insights and Commentary

U.S. stocks struggled during the first quarter of 2025 as the shock of Trump’s tariff war erased any optimism that the U.S. stock market or economy would continue to flourish under the new administration, replaced by heightened concerns of a possible recession. The mass layoffs of federal workers added to the confusion. The Magnificent Seven, which had led the market on AI-driven enthusiasm, were even harder hit by tariff uncertainties, as their relatively high valuations made them more exposed to a slowdown. In addition, the January launch of Chinese AI app DeepSeek as a less expensive alternative to U.S.-based AI models had investors questioning whether the massive investments in AI would ultimately produce the expected outsized returns. The S&P 500 Index declined 4.3%, its worst quarter since 2022.

GDP growth is widely predicted to slow during 2025, reflecting weakening consumer demand and more cautious corporate spending. Consumer confidence has plummeted. The March 2025 inflation figure came in above the U.S. Federal Reserve’s target of 2%, as measured by the Consumer Price Index. The Fed has taken a wait-and-see approach as the effects of heightened U.S. policy uncertainty on growth, inflation, and employment play out. It left interest rates unchanged in its first meeting of the year.

Against this challenging backdrop, Baron Durable Advantage Fund declined in the first quarter. Investments within Real Estate, Industrials, and Consumer Staples contributed. Information Technology (IT), Communication Services, and Consumer Discretionary holdings detracted the most. Gains within Real Estate were attributable to third largest contributor Welltower Inc. and CoStar Group, Inc., a provider of marketing and analytics to the real estate industry. Second largest contributor HEICO Corporation led advances within Industrials. Consumer Staples was a slight contributor on a share price increase in sole sector holding Costco Wholesale Corporation. Weakness within IT was led by top detractor Broadcom Inc. and third largest detractor NVIDIA Corporation. The Fund’s two Communications Services holdings, Alphabet Inc. and Meta Platforms Inc., drove declines within the sector. Second largest detractor Amazon.com, Inc. drove depreciation within Consumer Discretionary.

The second quarter may bring with it as much doubt and volatility as the first quarter, given continued elevated uncertainty around tariffs. After reaching a record high of more than $3.3 trillion in corporate profits in the fourth quarter of 2024, U.S. companies are scrambling to estimate the potential impact of the tariff war. As first quarter earnings season approaches, many observers expect businesses to offer weaker earnings guidance for the rest of the year or withdraw guidance completely.

We are closely monitoring current market conditions while staying focused on company fundamentals -- well-managed businesses with durable competitive advantages and compelling growth prospects at attractive prices -- as we believe this is the best way to generate alpha over the long term, although there are no guarantees.

CONTRIBUTORS

• Shares of global payment network Visa Inc. contributed after the company reported strong quarterly results with accelerating payment volumes. In the recent quarter, revenue grew 10% and earnings grew 14%, both of which exceeded Street expectations. Payment volume growth improved to 9% on a constant currency basis with a more meaningful acceleration in cross-border volume. Management reaffirmed annual guidance despite incremental currency headwinds. In addition, shares likely benefited from the defensiveness of Visa’s business model in a risk-off market. We continue to own the stock due to Visa’s long runway for growth and significant competitive advantages.
• HEICO Corporation, a technology-driven aerospace, industrial, defense, and electronics company, contributed to performance on the back of strong quarterly earnings driven by broad-based strength across the portfolio. In addition, the Electronic Technologies Segment, which had previously been affected by inventory-related headwinds, reported robust organic growth, signaling that the business was turning a corner. HEICO is expected to benefit from an anticipated increase in defense spending, especially by European countries, to combat threats. The company could also benefit from DOGE-related initiatives to promote cost efficiencies, as they align well with HEICO's value proposition to customers. We continue to be a shareholder, as we believe the company will meet its goal to compound earnings by 15% to 20% per year over time.
• Welltower Inc. operates senior housing, life science, and medical office real estate properties. Shares increased on robust cash flow growth in its senior housing portfolio, driven by strong occupancy and rent growth, a strong 2025 growth outlook, and execution on highly accretive proprietarily sourced capital deployment opportunities. We remain investors. We are optimistic about the prospects for both cyclical and secular growth in senior housing demand against a backdrop of muted supply. We view Welltower as a “best-in-class” operator with a high-quality curated portfolio and a management team of astute capital allocators who have demonstrated the ability to capitalize on both organic and inorganic growth opportunities.

 

DETRACTORS

• Broadcom Inc. is a leading fabless semiconductor and enterprise software company, with approximately 60% of revenue generated from semiconductors and 40% from software. The company is strategically positioned at the intersection of high-performance AI compute and networking infrastructure while also demonstrating disciplined execution in software, particularly following its VMware acquisition. Shares declined largely due to investor concerns around the durability of AI cluster build outs by hyperscalers and AI labs, reflecting broader skepticism about the pace and sustainability of capex in AI infrastructure. We maintain conviction in the long-term thesis. Broadcom’s three mega-cap customers remain on track, with robust roadmaps in place, including hardware design, compiler development, and the broader software stack necessary for scalable AI cluster architecture. We expect Broadcom to capture a majority share of the estimated $60 to $90 billion market across these engagements by fiscal 2027.
• Amazon.com, Inc. is the world’s largest retailer and cloud services provider. Shares were down this quarter following higher-than-expected 2025 capital expenditure guidance of $105 billion driven by AI. Shares also declined due to a broader technology selloff due to uncertainty about the timing and return on investment in AI as well as general macroeconomic concerns. We remain investors. Profitability across core North American retail, Amazon Web Services (AWS), and international retail continued to grow, with improved prioritization in cost discipline and optimization. It was also another solid quarter of AWS results and improving checks around generative AI use cases. While we are monitoring progress across the cloud hyperscalers, we believe AWS will ultimately be competitive in generative AI, given its scale and technical infrastructure advantages. Longer term, Amazon has more room to grow in e-commerce, where it has less than 15% penetration. Amazon also remains the clear leader in the vast and growing cloud infrastructure market, with large opportunities in application software.
• NVIDIA Corporation is a fabless semiconductor leader specializing in compute and networking platforms for accelerated computing. Its dominant position in AI infrastructure, with a comprehensive portfolio that spans GPUs, systems, software, and high-performance networking, has driven significant stock appreciation in an era of exponential AI demand. Despite strong quarterly financial results, shares fell on investor concerns around the durability of compute infrastructure spending by hyperscalers and the leading AI labs, particularly in light of uncertain return on invested capital for frontier model development. We remain positive on NVIDIA's long-term trajectory. We believe scaling laws in AI will hold, enabling linear improvements in compute to drive super-linear gains in model performance and utility. As value creation increasingly accrues to model developers, their incentive to invest in advanced infrastructure should persist, anchoring NVIDIA’s central role in the AI value chain.