Baron Growth Fund: Latest Insights and Commentary

CONTRIBUTORS

• FIGS, Inc. designs and sells scrubwear for health care professionals through a digitally native, direct-to-consumer strategy. Shares rose after the company reported quarterly results that beat expectations and raised its outlook for revenue and profits for the remainder of the year. FIGS’ revenue grew 8% due to robust customer demand for its health care apparel, supported by improving execution and normalizing industry trends. Demand for health care apparel remains largely non-discretionary and replenishment driven. The company also delivered stronger-than-expected profitability, benefiting from meaningful operating leverage while continuing to invest in the business. In addition, FIGS continues to expand its three key growth initiatives: international markets, TEAMS (its enterprise and group ordering business), and retail. Internationally, the company refined its growth strategy and is targeting 60 planned markets by year-end, up from 33. Within TEAMS, FIGS continues to add talent and develop new technology solutions to support growth. In retail, the company plans to open three stores (New York, Houston, and Chicago) with further expansion anticipated into 2026.

• Shares of specialty insurer Arch Capital Group Ltd. rose on strong earnings results and active capital management. Third-quarter earnings per share beat Street expectations due to improved underwriting margins and very low catastrophe losses, as there were no landfall hurricanes in the U.S. this season for the first time since 2015. Return on equity of 18% exceeded management’s long-term target, driving 9% growth in book value per share, or 18% growth when adjusted for a special dividend. In addition, a faster pace of share repurchases reduced the share count by 4% year to date, signaling management’s confidence in the company’s valuation. We continue to own the stock due to Arch’s strong management team and our expectation for continued growth in earnings and book value over time.

• Veterinary diagnostics leader IDEXX Laboratories, Inc. contributed to performance after again reporting better-than-expected financial results. Foot traffic to veterinary clinics in the U.S. remains modestly negative but is poised to recover over the next several years. Even so, IDEXX’s excellent execution has enabled the company to continue delivering robust performance. We believe IDEXX’s competitive trends are outstanding, and we expect new proprietary innovations—such as InVue, MultiCue, and CancerDX—to be meaningful contributors to growth in the years ahead. We also see increasing evidence that long-term secular trends around pet ownership and pet care spending have structurally accelerated, which should help support IDEXX’s long-term growth rate.

DETRACTORS

• CoStar Group, Inc. is the leading provider of information and marketing services to the commercial and residential real estate industries. Shares fell as the company’s net new sales came in below expectations. The stock has been weighed down by significant growth investment in CoStar’s residential product, where sales performance has remained modest. That said, we are encouraged by improving momentum as the company builds out its dedicated residential sales force, enhances its customer targeting, and potentially benefits from changes in Multiple Listing Service practices. We also expect growth in CoStar’s non-residential business to accelerate as sales productivity ramps and the sales team refocuses on core offerings, a trend likely to be amplified by 20% sales force growth in 2025 alone. We believe the value of CoStar’s core non-residential business exceeds the current share price of the stock, suggesting that investors are ascribing little value to the long-term residential opportunity.

• Shares of specialty insurer Kinsale Capital Group, Inc. fell during the quarter due to concerns about moderating growth amid a cyclical slowdown for the property and casualty insurance industry. While third-quarter revenue growth improved sequentially, the pace of improvement was more modest than suggested by monthly data from state insurance commissioners. 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.

• Choice Hotels International, Inc. is a global franchisor of economy and midscale hotels across a portfolio of well-known brands. Shares declined amid investor concerns over continued revenue per available room (RevPAR) weakness at the company’s lower-end brands. However, Choice continues to grow through unit expansion, albeit at a slightly slower pace, by adding larger and more upscale hotels that generate higher RevPAR and carry higher royalty rates, helping offset near-term pressure. Developers are also accelerating new franchise signings with Choice, indicating that the company’s brands continue to resonate. In addition, Choice is managing costs effectively and generating strong cash flow, which it is using to support increased dividend payments, share repurchases, and potential tuck-in acquisitions. The company also maintains a strong balance sheet, with financial leverage below its targeted levels, providing additional flexibility to accelerate share repurchases at current valuation levels.

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 2.69% (Institutional Shares) in the fourth quarter and underperformed the Russell 2000 Growth Index (the Index), which rose 1.22%, by 391 basis points. The relative losses were due to relative sector weights and stock selection. Style biases also hampered relative results, driven by lower exposure to the better performing Momentum factor and overexposure to the poor performing Earnings Quality factor.

On a sector level, lower exposure to the better performing Health Care sector, unfavorable stock selection in Real Estate, and higher exposure to the underperforming Financials sector weighed the most on relative results. 

Lack of exposure to biotechnology and pharmaceuticals stocks within Health Care, which rose 26.1% and 24.1%, respectively in the Index, detracted nearly 300 basis points from relative results. Adverse stock selection in Real Estate was another drag on relative performance, driven by real estate data and marketing platform CoStar Group, Inc. Shares of CoStar fell as the company’s net new sales came in below expectations. The stock has been weighed down by significant growth investment in CoStar’s residential product, where sales performance has remained modest. That said, we are encouraged by improving momentum as the company builds out its dedicated residential sales force, enhances its customer targeting, and potentially benefits from changes in Multiple Listing Service practices. We also expect growth in CoStar’s non-residential business to accelerate as sales productivity ramps and the sales team refocuses on core offerings, a trend likely to be amplified by 20% sales force growth in 2025 alone. We believe the value of CoStar’s core non-residential business exceeds the current share price of the stock, suggesting that investors are ascribing little value to the long-term residential opportunity. Triple net REIT Gaming and Leisure Properties, Inc., whose shares declined single-digits before being sold late in the period, also hampered performance in the sector. 

Lastly, favorable stock selection in Financials, driven by specialty insurer Arch Capital Group Ltd., was more than offset by the Fund’s meaningfully higher exposure to this lagging sector. 

Somewhat offsetting the losses above was lack of exposure to the underperforming Industrials sector, lower exposure to the poor performing Information Technology sector, and favorable stock selection in Consumer Discretionary. Within Consumer Discretionary, shares of health care apparel company FIGS, Inc. rose after the company reported quarterly results that beat expectations and raised its outlook for revenue and profits for the remainder of the year. FIGS’ revenue grew 8% due to robust customer demand for its health care apparel, supported by improving execution and normalizing industry trends. Demand for health care apparel remains largely non-discretionary and replenishment driven. The company also delivered stronger-than-expected profitability, benefiting from meaningful operating leverage while continuing to invest in the business. In addition, FIGS continues to expand its three key growth initiatives: international markets, the TEAMS enterprise and group ordering business, and retail. Internationally, the company refined its growth strategy and is targeting 60 planned markets by year-end, up from 33. Within TEAMS, FIGS continues to add talent and develop new technology solutions to support growth. In retail, the company plans to open three stores (New York, Houston, and Chicago) with further expansion anticipated into 2026.

Yearly Attribution Analysis (for year ended 12/31/2025)

Baron Growth Fund (the Fund) fell 14.18% for the year, underperforming the Russell 2000 Growth Index (the Index), which increased 13.01%, by 27.19%. Approximately 40% of the underperformance was due to style-related biases as the Fund was punished for being overexposed to the Earnings Quality factor, which suffered one of its worst performing periods in the last nine months of the year. Underexposure to the strong performing Momentum, Beta, and Residual Volatility factors also contributed to the relative shortfall in the period. The remaining underperformance came from stock-specific issues and active industry exposures.

Underperformance of the Fund’s Financials investments weighed heavily on relative performance due to a combination of adverse stock selection and meaningfully higher exposure to this lagging sector. Financial exchanges & data holdings FactSet Research Systems Inc., Morningstar, Inc., and MSCI Inc. were material detractors, hurt by a combination of industry-wide AI concerns, cautious commentary from several financial data and software peers, and factor rotation as investors shifted from high-quality, defensive names to higher-growth stocks. We remain investors in these high-quality businesses that have been big winners for the Fund over the long term.

Specialty insurers Kinsale Capital Group, Inc. and Arch Capital Group Ltd. also contributed to relative weakness in the sector owing to concerns about moderating growth and a cyclical slowdown in the broader insurance industry. Nevertheless, Kinsale reported quarterly earnings that exceeded Street expectations, with 14% premium growth outside of large property policies, which face the most competition. Recent data from several state insurance commissioners also presages faster premium growth for the company in the third quarter. We remain investors because we believe Kinsale is well managed and has a long runway for growth in an attractive segment of the insurance market. Similarly, Arch reported results that exceeded Street expectations, as underwriting margins remained strong despite increasingly competitive market conditions. Return on equity of 18% was above management’s long-term target, driving 12% growth in book value per share, or 22% growth when adjusted for the recent special dividend. 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.

Adverse stock selection in IT, driven by syndicated research provider Gartner, Inc. also weighed heavily on relative results. Gartner’s shares declined in response to disappointing quarterly earnings. Contract value growth, a leading indicator of future revenue, decelerated by approximately 2%. We attribute most of the slowdown to ongoing cost cutting in the U.S. public sector, which represents about 5% of revenue, as well as more challenging business conditions in industries dependent on public-sector funding. In addition, companies with meaningful exposure to tariffs appear to be reducing costs, resulting in longer sales cycles and slightly higher client attrition. While the market expressed concern about the impact of AI on Gartner’s insights business, we see no evidence that this is negatively impacting its value proposition. The company continues to benefit from a vast and expanding set of proprietary data generated through hundreds of thousands of interactions with buyers, sellers, and technology consumers. Gartner bought back approximately $800 million worth of stock in July and August and authorized an additional $1 billion in September, and we expect the company to continue repurchasing shares aggressively to capitalize on the discounted valuation.

Investments in Consumer Discretionary and Real Estate along with lower exposure to the better performing Industrials and Health Care sectors also hampered relative results. Within Consumer Discretionary, higher exposure to this underperforming sector and weakness from hotel franchisor Choice Hotels International, Inc. and global ski resort operator Vail Resorts, Inc. hurt relative results. Choice shares fell during the year amid investor concerns over continued revenue per available room (RevPAR) weakness at the company’s lower-end economy and midscale brands. While the slowdown in RevPAR is disappointing and bears monitoring, Choice continues to grow its more revenue-intensive units at a strong pace, helping offset the softness. The company is also increasing royalty rates, particularly across its Radisson brands, further supporting revenue and margin expansion. Choice generates strong cash flow and maintains a solid balance sheet, providing flexibility to pursue acquisitions, reinvest in the business, and repurchase shares. We believe the stock’s valuation continues to reflect a significant discount to intrinsic value, and management’s disciplined capital allocation and commitment to returning capital to shareholders position the company for upside as growth reaccelerates following the recent economic slowdown.

Vail detracted from performance amid investor concerns about slowing visitation levels, driven by a lack of growth in season pass sales. In response, the company is refining its marketing strategy and investing in new media channels, including social media and influencer partnerships, to attract new skiers and accelerate pass sales. Vail also plans to narrow the pricing gap between lift tickets and season passes to encourage more non-pass holders to join its ecosystem, which should drive stronger pass growth next year. Consumer sentiment toward Vail’s pass products is improving, and management continues to enhance the value of the portfolio. The company maintains strong margins and cash flow, which support both share repurchases and a 6% dividend yield. We believe the stock’s significant discount to its historical valuation should narrow as growth reaccelerates in the coming years.

Adverse stock selection in Real Estate was due to losses from real estate data and marketing platform CoStar Group, Inc. and triple net REIT Gaming and Leisure Properties, Inc. Shares of CoStar fell as the company’s net new sales came in below expectations. The stock has been weighed down by significant growth investment in CoStar’s residential product, where sales performance has remained modest. That said, we are encouraged by improving momentum as the company builds out its dedicated residential sales force, enhances its customer targeting, and potentially benefits from changes in Multiple Listing Service practices.  Gaming and Leisure’s stock declined amid investor concerns that interest rates would remain higher for longer, making the company’s 6% dividend yield relatively less attractive. We exited our position late in the period.