Baron Global Advantage Fund: Latest Insights and Commentary

U.S. equities experienced broad declines on rising fears over Trump’s trade policy, slumping consumer confidence, and concerns regarding AI-related capital expenditures. The Magnificent Seven, a group of U.S.-based mega-tech companies that had led the global markets on AI-driven enthusiasm, were hard 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.

Meanwhile, fiscal shifts in Europe and developments in China led to a more positive outlook for both regions. An abrupt end to U.S. support for Ukraine’s defense suggesting a new era of U.S. isolationism spurred the EU to propose a historic initiative to commit to defense and infrastructure spending, elevating European growth expectations and launching related European equities higher. The technology sector led advances in China following the DeepSeek launch.

Against this challenging backdrop, Baron Global Advantage Fund declined during the quarter. No sector contributed. Information Technology (IT), Industrials, and Health Care investments detracted the most. Widespread declines within IT included NVIDIA Corporation and Datadog, Inc., the top and second largest detractors from performance, respectively. Stock weakness in Industrials was driven by InPost S.A., Poland’s leading logistics network operator, and Fiverr International Ltd., an online marketplace for freelancers. Losses within Health Care were led by next-generation DNA sequencing platform Illumina, Inc.

The second quarter may bring with it as much doubt and volatility as the first quarter, given continued elevated uncertainty around Trump’s tariff war. 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

• Bajaj Finance Limited is a leading non-bank financial company in India. Shares increased on strong quarterly earnings and signs of easing concerns about asset quality. The recently announced transition of long-time Managing Director Rajeev Jain to an Executive Vice Chairman role was also welcomed by investors, as the move ensures continuity. We retain conviction in Bajaj due to its best-in-class management team, robust long-term growth outlook, and conservative risk management frameworks. We think the company is well positioned to benefit from growing demand for consumer financial services such as mortgages and personal and credit card loans, among other related products.
• MercadoLibre, Inc., the leading e-commerce marketplace across Latin America, contributed to performance. The company reported solid quarterly results, with better-than-expected revenues and a significant beat in earnings before interest and taxes, as margins rebounded sharply, reversing the decline seen in the previous quarter and alleviating concerns around investment-driven impacts to near-term profitability. MercadoLibre continues to post strong growth in volume indicators, which gives us confidence in its ability to capture a leading share of the structural growth opportunity for e-commerce and fintech in Latin America. We remain shareholders.
• Cloudflare, Inc. offers enhanced security and performance for websites, applications, and software-as-a-service (SaaS), and is increasingly well positioned to help power AI-enabled applications at the edge (via mobile device or local server). Its network spans over 100 countries and connects with over 10,000 enterprises and providers of internet services, cloud, and SaaS. Its edge network operates within 100 milliseconds of 99% of the developed world. Shares increased after Cloudflare reported solid quarterly results, with improved revenue, operating margins, and cash flow, and reiterated expectations of accelerated growth as new sales representatives ramp productivity in 2025 and beyond. We retain conviction as we see a bright future ahead for Cloudflare, characterized by durable top-line growth of 25% year-over-year underpinned by a growing number of applications that leverage the core network, expanding margins and free cash flow.

DETRACTORS

• 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.
• Datadog, Inc. provides an observability platform for cloud applications. The company delivered strong quarterly results, ending the year with over $3 billion in annual recurring revenue, sales growth of 26%, and free cash flow margins of 29%, driven by large enterprises consolidating observability stacks onto Datadog and AI-native start-ups using Datadog to monitor rapidly growing AI applications. However, shares fell due to a miss in 2025 sales growth guidance, as the AI-native customers optimized contracts for better pricing after a period of exponential spend growth. In addition, Datadog plans to accelerate investments in engineering and sales, which will result in lower incremental margins over the next few quarters. We view the contract optimization issue as short term, and believe the larger volume commitments AI-natives are signing will fuel growth beyond 2025 as they scale. We also support the decision to invest in product development and sales capacity as it should position Datadog to take more share in a $50 billion market longer term.
• Shopify Inc. is a cloud-based software provider for multi-channel commerce. Shares declined in the first quarter as investors took profits after two strong years and as growth stocks sold off in the last six weeks of the quarter due to increased uncertainty and declining consumer confidence. We remain shareholders. Shopify reported strong quarterly results, with year-over-year gross merchandise volume, revenue, and free-cash-flow growth of 26%, 31%, and 37%, respectively. Operating margins also ran ahead of expectations, reaching 16.5% for the fourth quarter and 12.1% for 2024. While the company continues gaining share in its core domestic e-commerce market (we estimate that Shopify reached a 12% market share), we are increasingly seeing data pointing to a successful expansion to new opportunities including international, business-to-business, and offline. While Shopify will not be immune to a cyclical downturn if it occurs, we like its longer-term prospects given its strong competitive positioning, innovative culture, and long runway for growth, as it still holds less than a 2% share of the global commerce market.

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 Global Advantage Fund (the Fund) fell 9.39% (Institutional Shares) in the first quarter, trailing the MSCI ACWI Index (the Index) by 807 basis points due to adverse impacts from active sector weights and, to a lesser extent, disappointing stock selection. Style biases also proved costly, with the Fund’s significant overexposure to the weak performing Beta and Residual Volatility factors weighing heavily on performance.

From a geographic perspective, stock selection in developed markets accounted for most of the underperformance in the period, as double-digit declines from investments in the U.S., U.K., Israel, and Canada overshadowed solid performance from Spanish online sports betting and casino operator Codere Online Luxembourg, S.A. Poor stock selection in emerging markets was another material drag on performance, owing mostly to underperformance from select holdings in Poland (InPost S.A.), Korea (Coupang, Inc.), and China (GDS Holdings Limited).

On a sector level, Information Technology (IT) investments were responsible for about half of the underperformance in the period, owing to a combination of adverse stock selection and significantly higher exposure to this lagging sector, which was down double digits in the Index. Weakness in the sector was widespread, led by sharp declines from IT services providers Globant S.A. and Endava plc. Globant’s shares fell after the company provided financial guidance below Street expectations. While management expects market share gains to continue in 2025 with 9% to 12% revenue growth and expanding margins, this guidance missed more optimistic expectations and carried some uncertainty given an anticipated sequential revenue decline in the first quarter. We remain investors. Despite a broad-based slowdown in IT spending, Globant has shown resilience with 11% revenue growth and 13% operating income growth in the most recent quarter. Revenue growth is well above peer levels due to Globant’s diversified customer base, favorable geographic mix, and acquisition strategy. We believe Globant has a long runway for growth in a large global market for IT services.

Endava’s stock underperformed because of ongoing soft demand trends. Organic revenue fell in the most recent quarter due to declines at a few large customers and delayed decision-making from new customers as they evaluated recent advancements in generative AI. Management trimmed their revenue outlook due to weaker spending from U.K. and international clients. We remain invested because we expect these near-term headwinds to abate over time, leading to better growth as clients need to embrace digital transformation.

Stock selection in Health Care and Industrials detracted another 200-plus basis points from relative results, with DNA sequencing leader Illumina, Inc. and freelance services marketplace Fiverr International Ltd. accounting for most of the relative losses. Illumina’s shares underperformed after the company was added to China’s unreliable entity list as part of Beijing’s retaliation against U.S. tariffs, putting the company’s China business at risk. In addition, the National Institutes of Health slashed funding support for academic research, further hampering Illumina’s stock price. Finally, Roche highlighted its new sequencer at the AGBT conference, adding to competitive pressures. We still believe in the future of sequencing in clinical diagnostics, especially in oncology applications like early cancer screening, and think Illumina should continue to have a strong presence due to its established track record in existing clinical workflows. In addition, Illumina is focused more on the end-to-end workflow rather than just the sequencing component. This includes their Constellation technology, designed to offer more structural variant insights while eliminating sample prep, which can significantly enhance workflow efficiencies.

Fiverr’s stock declined despite reporting better-than-expected fourth quarter earnings and offering preliminary fiscal year 2025 revenue guidance that beat expectations. The company’s shares sold off in large part due to ongoing macroeconomic uncertainty as small and medium-sized businesses (Fiverr’s core customer base) are considered the most macro-sensitive segment. While near-term uncertainty remains, we retain long-term conviction and believe that management continues to execute well with strong underlying business fundamentals and ramping profitability.

Lastly, weak stock selection in Financials coupled with lower exposure to this better performing sector hampered performance. Payment company Block, Inc. was the principal detractor after reporting quarterly results and near-term guidance that were softer than expected. In the fourth quarter, gross profit growth of 14% and EPS growth of 51% were strong overall but missed Street expectations. Also, investors appeared skeptical of 15% gross profit growth guidance for 2025 given that it implies acceleration throughout the year in an uncertain macroeconomic environment. Nevertheless, management reiterated their expectation of achieving the “Rule of 40” investment framework in 2026 with mid-teens gross profit growth and a mid-20% operating margin. We continue to own the stock due to Block’s long runway for growth, sustainable competitive advantages, and innovative product offering.

Somewhat offsetting the above was favorable stock selection in Consumer Discretionary attributable to strong performance from Latin American e-commerce leader MercadoLibre, Inc. The company reported solid quarterly results, with better-than-expected revenues and a significant beat in earnings before interest and taxes, as margins rebounded sharply, reversing the decline seen in the previous quarter and alleviating concerns around investment-driven impacts to near-term profitability. MercadoLibre continues to post strong growth in volume indicators, which gives us confidence in its ability to capture a leading share of the structural growth opportunity for e-commerce and fintech in Latin America.