Baron Growth Fund: Latest Insights and Commentary

U.S. equity markets were volatile during the quarter, as positive sentiment and strong performance in January were undermined by AI-related disruption fears and geopolitical tensions. Small and mid caps generated positive returns in the first quarter while large caps declined, a margin of outperformance for small and mid caps not seen since the COVID rally in late 2020 and early 2021. 

The year began with positive momentum for U.S. stocks, supported by easing inflation, resilient economic trends, strong corporate earnings, and investor optimism about the Trump administration’s stimulative economic strategy. Market sentiment began to shift in February, with the early catalyst being widespread losses across a range of industries due to fears about AI-driven disruption. Technology and software companies experienced notable pressure as investors worried AI agents could directly replace human-led business workflows. The sell-off worsened after the U.S. and Israel attacked Iran on February 28. Investors became concerned about the potential for sustained inflation and reduced economic growth from surging oil prices and supply chain disruptions. 

Against this backdrop, the dominant market trend was the continued rotation out of the Magnificent Seven, software, and other growth-oriented stocks. The Magnificent Seven complex declined 11.3%, accounting for about 90% of the cap-weighted S&P 500 Index’s losses. Microsoft (-23.3%), Tesla (-17.3%), Meta (-13.3%), Amazon (-9.8%), and Alphabet (-8.1%) suffered the largest losses. The non-Magnificent Seven stocks in the Index were down only 0.6% for the month. 

Looking ahead, we remain focused on well-managed companies with durable competitive advantages and attractive growth prospects. While macroeconomic and policy uncertainty persist, we believe maintaining a disciplined, long-term perspective and emphasizing company fundamentals will be essential to navigating the evolving landscape. 

CONTRIBUTORS

• FIGS, Inc. designs and sells scrubwear for health care professionals through a digitally native, direct-to-consumer strategy. Shares rose following robust fourth-quarter results and upbeat 2026 guidance. Revenue expanded 33% to $201.9 million, reflecting broad-based momentum across categories and geographies and exceeding expectations. Holiday demand was strong throughout the season and remained elevated through quarter-end. U.S. revenue rose 28.7% to $164.2 million, while international revenue accelerated 55% to $37.7 million, with scrubs and non-scrubwear contributing gains of 35% and 26%, respectively. This topline strength translated to profitability, with EBITDA rising 29.8% to $26.7 million. Building on this momentum, revenue is expected to grow in the low-20% range in the first quarter and 10% to 12% for the full year. Additional drivers include accelerating international expansion, new store openings (both the ramping 2025 cohort and four locations planned for 2026), and continued traction in TEAMS (FIGS’ enterprise and group ordering business). The company maintains a strong balance sheet, with no debt and roughly $300 million in cash and marketable securities.
• Global hotel franchisor Choice Hotels International, Inc. contributed to performance during the quarter as the company saw a slight acceleration in revenue per available room across its portfolio. Choice continues to grow units at a low-single-digit rate and is benefiting from higher royalty rates on new franchise contracts, driving mid-single-digit growth in earnings and free cash flow. The company is using this cashflow to return capital through share repurchases. We continue to believe the stock offers compelling value, trading at a roughly five multiple-point discount to its historical average. Choice maintains a strong balance sheet, providing flexibility for additional share buybacks, particularly when the stock trades below the company’s view of intrinsic value. Choice’s steady growth profile, both domestically and internationally, should further support attractive shareholder returns over time.
• Specialty insurer Arch Capital Group Ltd. contributed to performance as property and casualty (P&C) insurance stocks broadly outpaced the market amid heightened volatility. P&C insurance stocks tend to be resilient during turbulent markets and are less exposed to the AI-related concerns weighing on other sectors. In addition, Arch reported better-than-expected quarterly earnings, and management expects a continuation of double-digit growth in book value per share. We continue to own the stock due to Arch’s strong management team and our expectation of continued growth in earnings and book value over time.

DETRACTORS

• CoStar Group, Inc. is the leading provider of information and marketing services to the commercial and residential real estate industries. Shares fell due to multiple compression driven by rising AI fears. The market has come to view AI as an existential risk for a growing number of industries—including software, business services, information services, and video games—despite no evidence of any fundamental impact to these sectors. This “shoot first and ask questions later” dynamic has resulted in meaningful share price declines. We continue to own CoStar given its differentiated data assets and significant growth opportunities in providing enhanced real estate information, analytics, and marketplace offerings. CoStar boasts an enviable business model with high levels of recurring revenue and meaningful cash flow generation potential. While near-term cash flow is obscured by elevated investment in Homes.com, we expect spending to moderate and cash flow to improve over the next several years. The company also maintains a substantial cash balance, which we are hopeful will be used to aggressively repurchase shares at current depressed valuation levels.
• Syndicated research provider Gartner, Inc. detracted from performance as valuation multiples compressed amid rising concerns around AI. Investors have increasingly viewed AI as a potential existential risk across a widening range of industries—including software, business services, information services, and video games—despite no evidence of any fundamental impact to these sectors. This “shoot first and ask questions later” dynamic has driven meaningful share price declines across the group. Against this backdrop, shares of Gartner came under pressure after the company reported contract value growth that was just 0.5% below expectations, underscoring the dramatic valuation compression at play. We continue to own Gartner given its large addressable market, significant competitive advantages, and robust free cash flow generation, which we expect management to deploy toward share repurchases at depressed valuation levels. We also view Gartner as an AI beneficiary, as it can leverage emerging tools to extract deeper insights from its vast trove of proprietary data and deliver it to customers in chatbot-type formats that meaningfully enhance its value proposition.
• Shares of specialty insurer Kinsale Capital Group, Inc. fell due to concerns about moderating growth amid a cyclical slowdown in the property and casualty insurance industry. In the most recent quarter, gross premium growth slowed because of a drop in large property business, where competition and pricing pressure are most acute. Nevertheless, Kinsale reported quarterly earnings that exceeded Street expectations, driven by higher earned premiums, very low catastrophe losses, and favorable reserve development. We continue to own the stock because we believe Kinsale is well managed and has a long runway for growth in an attractive segment of the insurance 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 Growth Fund (the Fund) fell 12.06% (Institutional Shares) and underperformed the Russell 2000 Growth Index (the Index), which fell 2.81%, by 925 basis points. Stock selection added 400-plus basis points in the period but was overshadowed by weakness associated with active industry exposures and style biases, demonstrating what a challenging period it was for the Fund’s investment approach. Most of the underperformance was due to the negative impact of active industry weights, led by notable overexposure to the weak performing Insurance Brokers and Reinsurance, Diversified Financials, and Life Health and Multi-line Insurance industries. Potential disruption from AI weighed on multiple segments within Financials, including financial data providers, insurance brokers, and wealth managers. Additionally, insurance stocks were hurt by ongoing soft industry pricing trends. The Fund’s lack of exposure to AI beneficiaries in the Computers Electronics, Electrical Equipment, Semiconductors, Communications Equipment, and Semiconductor Equipment industries also weighed heavily on performance, as these segments were up nearly 25% on average during a period of general market weakness. Most of the remaining underperformance came from style-related headwinds, namely underexposure to the Momentum factor, which continued its strong run of performance to begin 2026.

From a sector perspective, investments in Real Estate, Information Technology (IT), and Financials weighed the most on relative performance. Weakness in Real Estate and IT was attributable to the Fund’s meaningful positions in real estate information and marketing services platform CoStar Group, Inc. and syndicated research provider Gartner, Inc., which were the largest absolute and relative detractors to performance in the period. Both companies were down sharply due to multiple compression driven by rising AI fears. The market has come to view AI as an existential risk for a growing number of industries—including software, business services, information services, and video games—despite no evidence of any fundamental impact to these sectors. This “shoot first and ask questions later” dynamic resulted in meaningful share price declines for these companies.

We continue to own CoStar given its differentiated data assets and significant growth opportunities in providing enhanced real estate information, analytics, and marketplace offerings. CoStar boasts an enviable business model with high levels of recurring revenue and meaningful cash flow generation potential. While near-term cash flow is obscured by elevated investment in Homes.com, we expect spending to moderate and cash flow to improve over the next several years. The company also maintains a substantial cash balance, which we are hopeful will be used to aggressively repurchase shares at current depressed valuation levels. We also remain positive about Gartner given its large addressable market, significant competitive advantages, and robust free cash flow generation, which we expect management to deploy toward share repurchases at depressed valuation levels. We also view Gartner as an AI beneficiary, as it can leverage emerging tools to extract deeper insights from its vast trove of proprietary data and deliver it to customers in chatbot-type formats that meaningfully enhance its value proposition.

Within Financials, most of the weakness was centered in the financial exchanges & data sub-industry, where FactSet Research Systems Inc., Morningstar, Inc., and MSCI Inc. were hurt by industry-wide AI fears around the potential for enhanced functionality from AI companies to negatively impact these businesses. We remain constructive about these long-held businesses. All three companies have been actively buying back stock, signaling confidence that shares are undervalued. We retain long-term conviction in FactSet due to the large addressable market, consistent execution on both new product development and financial results, and robust free cash flow generation. We believe several of Morningstar’s segments (particularly Wealth, Retirement, and Credit) are relatively well protected from AI-related pressures, as these are largely asset-based and transactional-based businesses. While Morningstar Direct and PitchBook are more software- and data-driven, both leverage proprietary datasets (with PitchBook drawing on a combination of proprietary and non-proprietary data), which we believe would be difficult for AI to fully replicate in terms of depth and quality. Similarly, MSCI owns strong, "all weather" franchises underpinned by proprietary data assets and remains well positioned to benefit from numerous secular tailwinds in the investment community.

Specialty insurer Kinsale Capital Group, Inc. was another material detractor in Financials owing to concerns about moderating growth amid a cyclical slowdown in the property and casualty insurance industry. In the most recent quarter, gross premium growth slowed because of a drop in large property business, where competition and pricing pressure are most acute. Nevertheless, Kinsale reported quarterly earnings that exceeded Street expectations, driven by higher earned premiums, very low catastrophe losses, and favorable reserve development. We continue to own the stock because we believe Kinsale is well managed and has a long runway for growth in an attractive segment of the insurance market.

Partially offsetting the losses above was strong stock selection in the Consumer Discretionary sector, where health care apparel company FIGS, Inc. and hotel franchisor Choice Hotels International, Inc. were the top contributors. FIGS shares rose following robust fourth-quarter results and upbeat 2026 guidance. Revenue expanded 33% to $201.9 million, reflecting broad-based momentum across categories and geographies and exceeding expectations. Holiday demand was strong throughout the season and remained elevated through quarter-end. U.S. revenue rose 28.7% to $164.2 million, while international revenue accelerated 55% to $37.7 million, with scrubs and non-scrubwear contributing gains of 35% and 26%, respectively. This topline strength translated to profitability, with EBITDA rising 29.8% to $26.7 million. Building on this momentum, revenue is expected to grow in the low-20% range in the first quarter and 10% to 12% for the full year. Additional drivers include accelerating international expansion, new store openings (both the ramping 2025 cohort and four locations planned for 2026), and continued traction in TEAMS (FIGS’ enterprise and group ordering business). The company maintains a strong balance sheet, with no debt and roughly $300 million in cash and marketable securities.

Choice contributed to performance for the quarter as the business saw a slight acceleration in revenue per available room across its portfolio. The company continues to grow units at a low-single-digit rate and is benefiting from higher royalty rates on new franchise contracts, driving mid-single-digit growth in earnings and free cash flow. Choice is using this cashflow to return capital through share repurchases. We continue to believe the stock offers compelling value, trading at a roughly five multiple-point discount to its historical average. Choice maintains a strong balance sheet, providing flexibility for additional share buybacks, particularly when the stock trades below the company’s view of intrinsic value. Choice’s steady growth profile, both domestically and internationally, should further support attractive shareholder returns over time.

Meaningfully lower exposure to the lagging Health Care sector added another 75-plus basis points of relative gains in the period.