Baron Generational Growth Fund: Latest Insights and Commentary

CONTRIBUTORS

• The contributors to performance for period ending September 30, 2026 is not yet available

DETRACTORS

• The detractors to performance for period ending September 30, 2026 is not yet available

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 Generational Growth Fund (the Fund) increased 2.13% (Institutional Shares) in the third quarter, outperforming the Russell 2000 Growth Index (the Index), which declined 9.39%, by 11.5%. About 80% of the relative strength was due to style-related tailwinds, notably lower exposure to the weak performing Momentum and Beta factors, as the market rotated away from semiconductors and other so-called AI winners that had dominated market performance over the first half of the year. Stock selection was responsible for the remainder of the outperformance, as the Fund's investments in high-quality businesses with durable competitive advantages and strong free cash flow generation held up well in a challenging period for small- and mid-cap stocks.

From a sector perspective, Financials accounted for about half of the relative gains, owing to a combination of strong stock selection and significantly higher exposure to this better performing sector. Stock-specific strength was led by financial exchanges & data companies FactSet Research Systems Inc., Morningstar, Inc., and MSCI Inc. Solid earnings reports across the broader software and services universe helped dismantle the market's fear that AI would erode pricing power, compress margins, and displace incumbent platforms, and share prices across all three names benefited. FactSet shares advanced following fiscal third-quarter results that showed both organic revenue and annual subscription value (ASV) growth reaccelerating, alongside the company's largest-ever quarterly share repurchase. Shares rose again on fiscal fourth-quarter results, which delivered a record organic ASV for the year and AI-related ASV additions that more than doubled, with management guiding to a return to margin expansion in fiscal 2027. MSCI reported solid second-quarter results, with double-digit revenue growth and particular strength in the Index and Private Capital Solutions businesses. Management also expressed confidence in the pipeline for the back half of the year and in the traction of a large slate of recently launched products. Similarly, Morningstar reported solid results, with revenue and earnings exceeding expectations, organic revenue growth of 6.8%, and continued share repurchases. Results were strong across several of its key segments, including Wealth, Retirement, and Credit, which are largely asset-based and transactional businesses that are relatively well protected from AI-related disruption. 

Specialty insurers Arch Capital Group Ltd. and Kinsale Capital Group, Inc. also contributed a portion of the Financials-related gains. Despite posting modest declines in the period, Arch and Kinsale were meaningful contributors to relative performance given their large weights in a period of broad market weakness. Both companies continued to deliver solid financial results despite a cyclical slowdown in the property and casualty (P&C) insurance industry. We continue to own Arch because of its strong management team and our expectation of continued growth in earnings and book value over time. We remain Kinsale shareholders because we believe the company is well managed and has a long runway for growth in an attractive segment of the insurance market.

Favorable stock selection in Information Technology (IT) was another material driver of outperformance, led by double-digit gains in syndicated research provider Gartner, Inc. and P&C insurance software vendor Guidewire Software, Inc. After multiple quarters of significant share price weakness driven by AI-related fears and decelerating contract value growth, Gartner's stock rebounded sharply as the market began to appreciate the durability of its franchise. We have long believed the characterization of Gartner as an AI disruption victim was misplaced. The company has a vast and growing set of proprietary data, generated by hundreds of thousands of interactions with buyers, sellers, and consumers of technology. Its proprietary insights extend to corporate technology roadmaps, enabling Gartner to assess future trends. Its contract review program also delivers tangible return on investment for customers. Growth trends are improving as U.S. public sector headwinds abate and sales force productivity strengthens, and the company continues to repurchase shares aggressively at what we view as an attractive valuation. Taken together, we remain confident in Gartner's long-term outlook.

Like Gartner, Guidewire had been unjustly punished by the market for perceived AI disruption risk in prior periods. Guidewire's InsuranceSuite platform serves as the core system of record for insurance carriers, functioning as the single source of truth for the policies an insurer writes, the claims it processes, the premiums it collects, and the payments it makes. Insurance policies are complex and highly regulated, and the data underlying them is stored natively within Guidewire, which makes the system of record particularly critical and therefore highly valuable. We believe AI meaningfully expands the opportunity by enabling automation and intelligence on top of the core system of record. Guidewire is already bringing new AI-enabled capabilities to market and signing customers, and we expect that adoption to accelerate.

Solid stock selection in IT was enhanced by not owning semiconductors & semiconductor equipment stocks, which were down more than 20% the Index, adding 75-plus basis points of relative gains. 

Finally, strong stock selection in Consumer Discretionary coupled with lack of exposure to the lagging Industrials sector aided relative performance. The main standout in Consumer Discretionary was healthcare apparel brand FIGS, Inc., which delivered a strong second quarter. Net revenues grew 28.8% year-over-year, driven by more orders and higher average order value. Growth was broad-based: scrubwear revenue rose 26.5%, non-scrubwear rose 40.3%, and international sales grew 67% year-over-year. Active customers increased 13% to roughly 3.1 million, and revenue per active customer reached a record. Profitability inflected as well, with adjusted EBITDA margin expanding 570 basis points year-over-year to 18.6% on full-price selling, lower returns, and expense leverage. Management raised its full-year revenue growth outlook to approximately 20% from 14%–16%. We retain our strong conviction in FIGS.

Marginally offsetting the gains noted above was underexposure to Health Care, the Index's best-performing sector, driven by significant gains in life sciences tools & services and health care technology.