Dear Baron Focused Growth Fund Shareholder:
Baron Focused Growth Fund® (the Fund) continued to generate strong absolute and relative performance in the fourth quarter, increasing 14.49% (Institutional Shares) compared to the Russell 2500 Growth Index (the Benchmark), which appreciated 2.43%. The Fund had strong performance across the board as Trump’s election win led investors to believe there could be less regulation of companies and Trump’s pro-business mantra could have a significant impact in accelerating the earnings growth rates for many of our investments. This combined with the expectation for the Federal Reserve (the Fed) to continue to lower interest rates over the next year led to gains across the portfolio. Performance was led by our Disruptive Growth investments, the valuations of which had been negatively impacted by higher interest rates and whose growth could accelerate in a lower interest rate and moderate inflationary environment. Included in this category of investments are Tesla, Inc. (TSLA), Shopify Inc. (SHOP), and Spotify Technology S.A. (SPOT).
Table I.
Performance
Annualized for periods ended December 31, 2024
| Baron Focused Growth Fund Retail Shares 1, 2, 3 | Baron Focused Growth Fund Institutional Shares 1, 2, 3, 4 | Russell 2500 Growth Index2 | Russell 3000 Index2 | |
|---|---|---|---|---|
| Three Months5 | 14.42% | 14.49% | 2.43% | 2.63% |
| One Year | 29.52% | 29.85% | 13.90% | 23.81% |
| Three Years | 5.77% | 6.04% | (0.02)% | 8.01% |
| Five Years | 25.59% | 25.91% | 8.08% | 13.86% |
| Ten Years | 18.00% | 18.30% | 9.45% | 12.55% |
| Fifteen Years | 16.30% | 16.59% | 12.00% | 13.56% |
| Since Conversion(June 30, 2008) | 13.94% | 14.21% | 10.14% | 11.58% |
| Since Inception(May 31, 1996) | 13.73% | 13.89% | 8.24% | 9.79% |
|
Performance listed in the above table is net of annual operating expenses. Annual expense ratio for the Retail Shares and Institutional Shares as of December 31, 2023, was 1.32% and 1.06%, respectively. The performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor’s shares, when redeemed, may be worth more or less than their original cost. The Adviser may waive or reimburse certain Fund expenses pursuant to a contract expiring on August 29, 2035, unless renewed for another 11-year term and the Fund’s transfer agency expenses may be reduced by expense offsets from an unaffiliated transfer agent, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted. For performance information current to the most recent month end, visit BaronCapitalGroup.com or call 1-800-99-BARON. (1)Reflects the actual fees and expenses that were charged when the Fund was a partnership. The predecessor partnership charged a 15% performance fee through 2003 after reaching a certain performance benchmark. If the annual returns for the Fund did not reflect the performance fees for the years the predecessor partnership charged a performance fee, the returns would be higher. The Fund’s shareholders will not be charged a performance fee. The performance is only for the periods before the Fund’s registration statement was effective, which was December 31, 2008. During those periods, the predecessor partnership was not registered under the Investment Company Act of 1940 and was not subject to its requirements or the requirements of the Internal Revenue Code relating to registered investment companies, which, if it were, might have adversely affected its performance. (2)The Russell 2500™ Growth Index measures the performance of small to medium-sized companies that are classified as growth. The Russell 3000® Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market, as of the most recent reconstitution. All rights in the FTSE Russell Index (the “Index”) vest in the relevant LSE Group company which owns the Index. Russell® is a trademark of the relevant LSE Group company and is used by any other LSE Group company under license. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. The Fund includes reinvestment of dividends, net of withholding taxes, while the Russell 2500™Growth and Russell 3000® Indexes include reinvestment of dividends before taxes. Reinvestment of dividends positively impacts the performance results. The indexes are unmanaged. Index performance is not Fund performance. Investors cannot invest directly in an index. (3)The performance data does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or redemption of Fund shares. (4)Performance for the Institutional Shares prior to May 29, 2009, is based on the performance of the Retail Shares, which have a distribution fee. The Institutional Shares do not have a distribution fee. If the annual returns for the Institutional Shares prior to May 29, 2009, did not reflect this fee, the returns would be higher. (5)Not annualized. |
For calendar year 2024, the Fund outperformed the Benchmark by 15.95%, increasing 29.85% while the Benchmark increased 13.90%. This strength was led by our well-financed, high-growth companies that continue to take share of large market opportunities and invest their capital at high rates of return. Examples of these companies include Tesla, Inc., Space Exploration Technologies Corp. (SpaceX), Spotify Technology S.A., and Shopify Inc. However, even subtracting the strong performance of Tesla and SpaceX, the Fund still outperformed the Benchmark by 447 bps in 2024.
Our Financials investments were also strong during the year. This is despite the expectation for lower future interest rates as our investments in this category, such as Interactive Brokers Group, Inc. (IBKR), Jefferies Financial Group Inc. (JEF), and Arch Capital Group Ltd. (ACGL), benefitted from increases in business activity and consumer confidence. Interactive Brokers benefited from a continued acceleration in new client growth and trading revenue, while Arch saw continued growth in insurance premiums written and higher pricing due to strong demand for its property and casualty insurance. Jefferies saw business activity accelerate with client engagement remaining strong.
Our Core Growth investments that have strong, recurring revenue with significant pricing power while maintaining high customer retention rates such as Guidewire Software, Inc. (GWRE) and Verisk Analytics, Inc. (VRSK), as well as our Real/Irreplaceable Assets investments such as Hyatt Hotels Corporation (H) and Choice Hotels International, Inc. (CHH) also contributed to outstanding performance for the year.
Our portfolio investments had a strong year despite continued macroeconomic concerns of a slowdown in consumer spending and capital investments due to higher interest rates and stubbornly high inflation. These businesses have yet to experience changes in their customer demographics or spending levels. While inflation has impacted company operating expenses, including labor, insurance, and utilities, most of our portfolio companies have been able to offset these cost increases with higher prices without impacting demand. This has led to stable margins and cash flow for businesses held in the Fund, which when combined with some of the strongest balance sheets in their respective industries, has created a less volatile portfolio and generated strong risk-adjusted returns for our shareholders.
The 2024 stock price gains mentioned above were slightly offset by underperformance in our more economic-sensitive stocks, including Krispy Kreme, Inc. (DNUT), Red Rock Resorts, Inc. (RRR), and Vail Resorts, Inc. (MTN). These businesses were negatively impacted by an increase in investments across their business which penalized company margins as well as concerns that their pricing power would be eroded by a decline in inflation. However, we believe as interest rates continue to decline, business activity for these companies should accelerate. This should not only increase earnings growth rates but also the stock multiples, creating significant portfolio returns. We continue to believe these businesses have strong competitive advantages with underpenetrated growth opportunities ahead of them and robust balance sheets to fund their growth. We believe valuations are attractive at current levels and continue to see an acceleration in insider buying activity, a key pillar that gives us stronger confidence in our investment theses for these companies and expected stock returns over time.
In the near term, we continue to believe that inflation will remain at or below the historic 3% to 4% annualized levels and interest rates will approximate the rate of inflation. This has been the case since World War II. We believe that is a favorable environment for businesses that are growing significantly faster than the rate of inflation and the 7% nominal annualized growth rate of our economy.
The Fund has continued to generate strong returns with less than market risk. Over the trailing 3, 5, and 10 years, the Fund has captured 90%, 128%, and 113%, respectively, of the upside when the market increased. When markets declined, the Fund lost less with 72%, 81%, and 82% downside capture, respectively. As a result, the Fund’s Sharpe ratio, a measure of risk-adjusted return, was significantly higher than the Benchmark for each of these periods.
We believe these strong returns with downside protection are due to our research-based investment process. Our research enables us to identify and understand businesses’ competitive advantages, differentiation, long-term growth prospects, and exceptional people; and it allows us to invest in these businesses for the long term. As a result, as shown in the table below, the Fund has outperformed its Benchmark for all respective periods including since its inception on May 31, 1996. Since its inception as a private partnership over 28 years ago, the Fund has increased 13.89% annually. This compares to an 8.24% annualized return for the Benchmark and a 9.79% annualized return for the Russell 3000 Index that measures the performance of the largest 3,000 U.S. companies.
The Fund’s outperformance in the fourth quarter was due to our Disruptive Growth investments. These businesses represented 42.9% of the Fund’s net assets and gained 36.0%, adding 13.29% to performance in the quarter.
Tesla increased 54.4% in the quarter, adding 508 bps to performance. Tesla designs, manufactures, and sells electric vehicles, related software and components, and solar and energy storage products. The stock increased as the core automotive segment accelerated sequentially, and management indicated they expected a further acceleration in 2025 as they release new lower-cost models. We continue to believe lower interest rates should help sell more cars and halt the company’s continuous lowering of prices. In addition, the company’s energy storage business continues to grow and increased a strong 60% on a sequential basis. In time, we believe the energy storage business should add significantly to revenue and gross margins and help offset any margin degradation from its automotive business. Tesla continues to generate sufficient gross profit to support a robust product development plan. The refreshed Models 3 and Y continue to generate strong demand with improving unit-level economics and we see further growth coming from newer models that are expected to be introduced in early 2025. Lastly, Tesla should benefit from its eight-year, $10 billion investment in data and compute, that will allow AI to “train” cars to drive with autonomous technology. Dojo, an AI “training” compute; auto bidder, an automated energy trading platform; the Optimus, a human-like robot; and energy storage, we believe also provide opportunity. We continue to believe Tesla is well positioned for further growth given its strong balance sheet with substantial cash and strong annual cash generation, which should accelerate over the coming years.
Spotify increased 21.4% in the quarter and helped performance by 136 bps. The company continues to improve its platform by adding new products and making it more beneficial for the consumer. This has resulted in an increase in subscribers along with significant pricing power. The company has started to institute more regular price increases, which is accelerating its revenue and margin growth. Further, the company has been able to increase prices without increasing its churn rate. We believe the business should be able to improve gross margins from 26% to between 30% and 35% over time while continuing to add subscribers and generate strong top- and bottom-line growth. This should result in an increase in cash flow. Given strong cash flow conversion rates, we believe the company could initiate a return of capital program in the near future. We believe Spotify’s valuation remains attractive despite its recent stock price increase. Founder & CEO Daniel Eck continues to own a 15% stake in the business.
The Fund’s Financials investments also contributed to performance.
Interactive Brokers, a global automated electronic broker, increased 26.9% in the quarter and helped performance by 139 bps. The company continues to gain market share due to its strong automation and ability to operate in international markets with little competition. This is allowing the company to continue to grow its new accounts, which have accelerated recently as they have now added more than a million customers over the past year. The company has industry-leading margins of over 70% generating robust cash flow. It has significant cash on its balance sheet and is looking to deploy it towards acquisitions and continued platform growth. We continue to believe the company’s focus on the most sophisticated investors who trade a range of assets across different global markets is a key differentiating factor. The vast array of markets it serves and strong growth from countries outside the U.S. where low-cost brokerage is not well penetrated are key competitive advantages for the company. This allows the company to offer its clients the lowest cost trading due to its high level of automation, while also offering highly competitive rates on margin and paying its customers attractive yields on their uninvested cash balances. More than 80% of Interactive Brokers’ clients are non-U.S. citizens, and more than 80% of their investments are in U.S. stocks. The company has little direct competition serving this clientele. Interactive Brokers continues to hire software and computer engineers with a focus on automating many of the processes that competitors rely on employees to perform. With its low-priced offerings and leading range of capabilities, we believe Interactive Brokers is well positioned to continue its rapid pace of account growth from just over three million clients today. The company’s focus on automation should enable it to continue to be a low-priced provider while earning best-in-class margins, which we believe should lead to double-digit revenue and earnings growth over time.
The outperformance described above was partially offset by smaller than Benchmark gains in our investments that are more susceptible to a slowdown in the macroeconomic environment and penalized by high interest rates. These stocks include FIGS, Inc. and Red Rock as described below in the “Top detractors” section. However, we believe these businesses can continue to grow and in fact accelerate from current levels in a declining interest rate environment because they both have strong retention of customers who should have an increase in disposable income as inflation and interest rates continue to decline.
Table II.
Total returns by category for the quarter ended December 31, 2024
| Percent of Net Assets (%) | Total Return (%) | Contribution to Return (%) | |
|---|---|---|---|
| Disruptive Growth | 42.9 | 36.02 | 13.29 |
| X.AI Corp. | 1.7 | 80.87 | 1.09 |
| Space Exploration Technologies Corp. | 11.4 | 65.18 | 4.62 |
| Tesla, Inc. | 11.7 | 54.36 | 5.08 |
| Shopify Inc. | 3.4 | 32.68 | 1.10 |
| Spotify Technology S.A. | 5.5 | 21.40 | 1.36 |
| On Holding AG (ONON) | 4.0 | 9.21 | 0.44 |
| ANSYS, Inc. (ANSS) | 1.6 | 5.91 | 0.14 |
| Iridium Communications Inc. (IRDM) | 1.1 | -4.33 | -0.06 |
| FIGS, Inc. (FIGS) | 2.5 | -9.64 | -0.47 |
| Financials | 15.6 | 5.34 | 1.14 |
| Jefferies Financial Group Inc. | 0.9 | 27.98 | 0.27 |
| Interactive Brokers Group, Inc. | 4.5 | 26.94 | 1.39 |
| FactSet Research Systems Inc. (FDS) | 2.8 | 4.67 | 0.19 |
| MSCI Inc. (MSCI) | 3.3 | 3.22 | 0.11 |
| Arch Capital Group Ltd. (ACGL) | 3.9 | –13.19 | –0.83 |
| Real/Irreplaceable Assets | 18.3 | 2.46 | 0.66 |
| Vail Resorts, Inc. | 4.6 | 10.22 | 0.50 |
| Choice Hotels International, Inc. | 2.7 | 9.20 | 0.37 |
| Douglas Emmett, Inc. (DEI) | 1.3 | 6.73 | 0.13 |
| Airbnb, Inc. (ABNB) | 0.8 | 3.63 | 0.06 |
| Hyatt Hotels Corporation | 4.1 | 3.21 | 0.14 |
| Las Vegas Sands Corporation (LVS) | 1.0 | 2.42 | 0.04 |
| American Homes 4 Rent (AMH) | 0.4 | -1.85 | -0.01 |
| Red Rock Resorts, Inc. | 3.5 | -14.83 | -0.57 |
| Russell 2500 Growth Index | 2.43 | ||
| Core Growth | 20.9 | -1.48 | -0.34 |
| Birkenstock Holding plc (BIRK) | 2.5 | 15.09 | 0.31 |
| Verisk Analytics, Inc. | 2.1 | 2.93 | 0.12 |
| Illumina, Inc. (ILMN) | 1.7 | 2.47 | 0.14 |
| CoStar Group, Inc. (CSGP) | 3.5 | -5.03 | -0.20 |
| Live Nation Entertainment, Inc. (LYV) | 1.2 | -6.45 | -0.06 |
| Krispy Kreme, Inc. | 2.2 | -7.24 | -0.11 |
| Guidewire Software, Inc. | 4.2 | -7.85 | -0.27 |
| IDEXX Laboratories, Inc. (IDXX) | 3.5 | -18.72 | -0.27 |
| Cash and Cash Equivalents | 2.3 | –– | 0.02 |
| Fees | –– | –0.29 | –0.29 |
| Total | 100.0* | 14.48** | 14.48** |
* Individual weights may not sum to displayed total due to rounding.** Represents the blended return of all share classes of the Fund.
Top Contributors to Performance
Table III.
Top contributors to performance for the quarter ended December 31, 2024
| Year Acquired | Market Cap When Acquired ($ billions) | Quarter End Market Cap ($ billions) | Total Return (%) | Contribution To Return (%) | |
|---|---|---|---|---|---|
| Tesla, Inc. | 2014 | 31.2 | 1,296.4 | 54.36 | 5.08 |
| Space Exploration Technologies Corp. | 2017 | 21.6 | 349.1 | 65.18 | 4.62 |
| Interactive Brokers Group, Inc. | 2023 | 33.8 | 75.2 | 26.94 | 1.39 |
| Spotify Technology S.A. | 2020 | 45.4 | 89.8 | 21.40 | 1.36 |
| Shopify Inc. | 2022 | 43.9 | 137.6 | 32.68 | 1.10 |
Tesla, Inc. designs, manufactures, and sells electric vehicles, related software and components, and solar and energy storage products. Shares rose on growth in the energy segment, the promise of new model launches in 2025, and increasing investor confidence in Tesla’s AI initiatives. Despite macroeconomic challenges, delivery data in major markets like China have shown considerable improvement. The energy and automotive segments demonstrated stronger-than-expected profitability. Tesla also expanded its advanced computing center in Texas, released an improved version of its software-enhanced driving solution, and is set to launch new mass market vehicles years after the initial rollouts of Models 3 and Y. Expectations of deregulation under the incoming administration point to the potential acceleration of new technology rollouts, which could enhance Tesla’s leadership position in real world AI and bolster investor confidence that Tesla will benefit from these large and attractive growth opportunities.
Space Exploration Technologies Corp. (SpaceX) is a high-profile private company founded by Elon Musk. Its primary focus is on developing and launching advanced rockets, satellites, and spacecrafts, with the ambitious long-term goal of enabling human colonization of Mars. SpaceX is generating significant value with the rapid expansion of its Starlink broadband service. The company is successfully deploying a vast constellation of Starlink satellites in Earth’s orbit, reporting substantial growth in active users, and regularly deploying new and more efficient hardware technology. Furthermore, SpaceX has established itself as a leading launch provider by offering highly reliable and cost-effective launches, leveraging the company’s reusable launch technology. SpaceX capabilities extend to strategic services such as crewed space flights. Moreover, SpaceX is making tremendous progress on its newest rocket, Starship, which is the largest, most powerful rocket ever flown. This next-generation vehicle represents a significant leap forward in reusability and space exploration capabilities. We value SpaceX using prices of recent financing transactions.
Interactive Brokers Group, Inc. is a leading online brokerage house that serves customers in over 200 countries. Positive returns during the quarter reflected strong fundamental performance, including year-over-year growth of 30% in accounts, 33% in client assets, and 45% in margin loans. These increases were driven largely by Interactive Brokers’ strength in international markets, as non-U.S. investors looked to access U.S. markets and equities, which largely outperformed their global peers in 2024. The company also participated in the broader rally of financial stocks following the Republican elections sweep. Expectations of heightened capital markets activity, a more pro-business regulator, and the potential for increasing market volatility all bode well for the company’s volumes, account growth, and earnings. We believe Interactive Brokers has a compelling long-term growth path and remain investors.
Top Detractors from Performance
Table IV.
Top detractors from performance for the quarter ended December 31, 2024
| Year Acquired | Market Cap When Acquired ($ billions) | Quarter End Market Cap ($ billions) | Total Return (%) | Contribution to Return (%) | |
|---|---|---|---|---|---|
| Arch Capital Group Ltd. | 2003 | 0.9 | 34.7 | -13.19 | -0.83 |
| Red Rock Resorts, Inc. | 2017 | 2.6 | 4.9 | -14.83 | -0.57 |
| FIGS, Inc. | 2022 | 1.5 | 1.1 | -9.64 | -0.47 |
| IDEXX Laboratories, Inc. | 2022 | 36.5 | 33.9 | -18.72 | -0.27 |
| Guidewire Software, Inc. | 2013 | 2.7 | 14.1 | -7.85 | -0.27 |
Shares of specialty insurer Arch Capital Group Ltd. fell due to concerns about a cyclical slowdown following several years of favorable market conditions. The Street has forecast a decline in property catastrophe reinsurance pricing during the January 1 renewal period, defying earlier hopes for stable pricing. Despite solid third quarter earnings, underwriting margins worsened due to a recent acquisition, business mix shifts, and normal quarterly volatility. Additionally, shares were pressured by an unexpected CEO transition. We continue to own the stock due to Arch’s strong management team and our expectation of significant growth in earnings and book value.
Red Rock Resorts, Inc. is a casino owner focused on the Las Vegas Locals market. Shares fell on a slowdown in the market and cannibalization by its new Durango casino, which has had a larger-than-expected impact on its other casinos. We remain shareholders. The Durango casino continued to attract more visitors and is already generating 20% returns on invested capital. Red Rock is using the cash flow to add parking, hotel rooms, and an expansion of the casino and is also looking to renovate some older casinos with an eye toward an expected market rebound over the next few years. The Las Vegas population is growing at a low single-digit rate, which, when combined with inflationary pricing and recent renovations, should lead to high single-digit growth in EBITDA. Management has been buying stock at current levels, suggesting the stock is attractively valued.
FIGS, Inc. designs and sells scrub wear to health care professionals using a digitally native direct-to-consumer (DTC) strategy. Shares declined following disappointing quarterly results, including a drop in revenue of 1.5% versus Street expectations of slight growth. Management attributed the soft revenue results to specific delays, out of stocks in popular footwear styles, and changes in the marketing calendar. Margins also missed expectations due, in part, to expenses associated with the transition to a new distribution facility. We retain long-term conviction that the company will consolidate the health care apparel industry through its DTC offering and superior product quality. We also believe margins will improve as FIGS laps one-time expenses from an earlier Olympics marketing campaign and the new distribution center.
Investment Strategy & Portfolio Structure
We remain steadfast in our commitment to long-term investing in competitively advantaged growth businesses. We believe these investments are an effective way to protect and increase the purchasing power of your savings. Wars, pandemics, financial panics, higher-than-normal inflation, and interest rate increases can cause significant market declines, but when these negative influences abate, interest rates stabilize and decline, stock prices in the past have increased substantially. We believe this will happen again, although the timing remains uncertain.
As of December 31, 2024, the Fund owned 30 investments. The Fund’s average portfolio turnover for the past three years was 11.35%. This means the Fund has an average holding period for its investments of nearly nine years. This compares to the average mid-cap growth mutual fund that typically turns over its entire portfolio every 16 months. From a quality standpoint, the Fund’s investments have stronger sales growth; higher EBITDA, operating, and free-cash-flow margins; and stronger returns on invested capital than the Benchmark. We believe these metrics help limit risk in this focused portfolio and are why the portfolio has generated strong risk-adjusted returns over time.
While focused, the Fund is diversified by sector. The Fund’s weightings are significantly different than those of the Benchmark. For example, the Fund is heavily weighted to Consumer Discretionary businesses with 39.5% of net assets in this sector versus 14.1% for the Benchmark. The Fund has no exposure to Energy, Materials, Consumer Staples, or Utilities. We believe companies in these sectors can be cyclical, linked to commodity prices, and/ or have little if any competitive advantage. This compares to the Benchmark that had 10.7% total exposure to these sectors. The Fund also has lower exposure to Health Care stocks at 5.1% for the Fund versus 20.6% for the Benchmark. The performance of many stocks in the Health Care sector can change quickly due to exogenous events or binary outcomes (e.g., biotechnology and pharmaceuticals). As a result, we do not invest a large amount in these stocks in this focused portfolio. In Health Care, we invest in competitively advantaged companies that are leaders in their industries such as IDEXX Laboratories, Inc., the leading provider of diagnostics to the veterinary industry, and Illumina, Inc., the leader in DNA sequencing instruments and consumables. The Fund is further diversified by investments in businesses at different stages of growth and development.
Table V.
Disruptive Growth Companies as of December 31, 2024
| Percent of Net Assets (%) | Year Acquired | Cumulative Return Since Date Acquired (%) | |
|---|---|---|---|
| Tesla, Inc. | 11.7 | 2014 | 2,319.1 |
| Space Exploration Technologies Corp. | 11.4 | 2017 | 1,237.8 |
| Spotify Technology S.A. | 5.5 | 2020 | 87.0 |
| On Holding AG | 4.0 | 2023 | 71.7 |
| Shopify Inc. | 3.4 | 2022 | 205.5 |
| FIGS, Inc. | 2.5 | 2022 | -32.4 |
| X.AI Corp. | 1.7 | 2024 | 80.9 |
| ANSYS, Inc. | 1.6 | 2022 | 38.5 |
| Iridium Communications Inc. | 1.1 | 2014 | 339.1 |
Disruptive Growth firms accounted for 42.9% of the Fund’s net assets. On current metrics, these businesses may appear expensive; however, we think they will continue to grow significantly and, if we are correct, they have the potential to generate exceptional returns over time. Examples of these companies include electric vehicle leader Tesla, Inc., commercial satellite and launch company Space Exploration Technologies Corp., and audio streaming service provider Spotify Technology S.A. These companies all have large underpenetrated addressable markets, are well-financed with significant equity stakes by these founder-led companies, giving us further conviction in our investment.
Table VI.
Core Growth Investments as of December 31, 2024
| Percent of Net Assets (%) | Year Acquired | Cumulative Return Since Date Acquired (%) | |
|---|---|---|---|
| Guidewire Software, Inc. | 4.2 | 2013 | 264.7 |
| CoStar Group, Inc. | 3.5 | 2014 | 234.5 |
| IDEXX Laboratories, Inc. | 3.5 | 2022 | -6.3 |
| Birkenstock Holding plc | 2.5 | 2023 | 40.9 |
| Krispy Kreme, Inc. | 2.2 | 2021 | -27.6 |
| Verisk Analytics, Inc. | 2.1 | 2022 | 61.4 |
| Illumina, Inc. | 1.7 | 2023 | 17.6 |
| Live Nation Entertainment, Inc. | 1.2 | 2024 | -7.7 |
Core Growth investments, steady growers that continually invest in their businesses for growth and return excess free cash flow to shareholders, represented 20.9% of net assets. An example is CoStar Group, Inc., a marketing and data analytics provider to the real estate industry. The company continues to add new services in commercial and residential real estate, which have grown its addressable market and enhanced services for its clients. This has improved client retention and cash flow. CoStar continues to invest its cash flow in its business to accelerate growth, which we believe should generate strong returns over time.
Table VII.
Investments with Real/Irreplaceable Assets as of December 31, 2024
| Percent of Net Assets (%) | Year Acquired | Cumulative Return Since Date Acquired (%) | |
|---|---|---|---|
| Vail Resorts, Inc. | 4.6 | 2013 | 293.7 |
| Hyatt Hotels Corporation | 4.1 | 2009 | 476.8 |
| Red Rock Resorts, Inc. | 3.5 | 2017 | 159.2 |
| Choice Hotels International, Inc. | 2.7 | 2010 | 612.8 |
| Douglas Emmett, Inc. | 1.3 | 2022 | 30.6 |
| Las Vegas Sands Corporation | 1.0 | 2023 | 15.3 |
| Airbnb, Inc. | 0.8 | 2024 | 14.6 |
| American Homes 4 Rent | 0.4 | 2018 | 99.3 |
Companies that own what we believe are Real/Irreplaceable Assets represented 18.3% of net assets. Vail Resorts, Inc., owner of the premier ski resort portfolio in the world, Hyatt Hotels Corporation, upscale lodging brand, and Red Rock Resorts, Inc., the largest player in the Las Vegas Locals casino gaming market, are examples of companies we believe possess meaningful brand equity and barriers to entry that equate to significant pricing power over time.
Table VIII.
Financials Investments as of December 31, 2024
| Percent of Net Assets (%) | Year Acquired | Cumulative Return Since Date Acquired (%) | |
|---|---|---|---|
| Interactive Brokers Group, Inc. | 4.5 | 2023 | 123.1 |
| Arch Capital Group Ltd. | 3.9 | 2003 | 2,567.1 |
| MSCI Inc. | 3.3 | 2021 | -5.2 |
| FactSet Research Systems Inc. | 2.8 | 2008 | 1,017.0 |
| Jefferies Financial Group Inc. | 0.9 | 2023 | 168.5 |
Financials investments accounted for 15.6% of the Fund’s net assets. These businesses generate strong recurring earnings through subscriptions and premiums that generate highly predictable earnings and cash flow. These businesses use cash flows to continue to invest in new products and services, while returning capital to shareholders through share buybacks and dividends. These companies include Arch Capital Group Ltd., FactSet Research Systems Inc., and MSCI Inc.
Portfolio Holdings
As of December 31, 2024, the Fund’s top 10 holdings represented 57.4% of net assets. Many of these investments have been successful and were purchased when they were much smaller businesses. We believe they continue to offer significant appreciation potential, although we cannot guarantee that will be the case.
The top five positions in the portfolio, Tesla, Inc., Space Exploration Technologies Corp., Spotify Technology S.A., Vail Resorts, Inc., and Interactive Brokers Group, Inc. all have, in our view, significant competitive advantages due to irreplaceable assets, strong brand awareness, technologically superior industry expertise, or exclusive data that is integral to their operations. We think these businesses cannot be easily duplicated and have large market opportunities to penetrate further, which enhances their potential for superior earnings growth and returns over time.
Table IX.
Top 10 holdings as of December 31, 2024
| Year Acquired | Market Cap When Acquired ($ billions) | Quarter End Market Cap ($ billions) | Quarter End Investment Value ($ millions) | Percent of Net Assets (%) | |
|---|---|---|---|---|---|
| Tesla, Inc. | 2014 | 31.2 | 1,296.4 | 248.4 | 11.7 |
| Space Exploration Technologies Corp. | 2017 | 21.6 | 349.1 | 240.5 | 11.4 |
| Spotify Technology S.A. | 2020 | 45.4 | 89.8 | 117.2 | 5.5 |
| Vail Resorts, Inc. | 2013 | 2.3 | 7.0 | 96.3 | 4.6 |
| Interactive Brokers Group, Inc. | 2023 | 33.8 | 75.2 | 95.4 | 4.5 |
| Guidewire Software, Inc. | 2013 | 2.7 | 14.1 | 88.7 | 4.2 |
| Hyatt Hotels Corporation | 2009 | 4.2 | 14.8 | 85.8 | 4.1 |
| On Holding AG | 2023 | 10.1 | 17.7 | 84.1 | 4.0 |
| Arch Capital Group Ltd. | 2003 | 0.9 | 34.7 | 83.1 | 3.9 |
| CoStar Group, Inc. | 2014 | 6.2 | 29.3 | 74.2 | 3.5 |
Recent Activity
In the fourth quarter, we initiated a new position in Live Nation Entertainment, Inc., the leader in the management and operation of live concerts at their owned and third-party venues. They are a leader in concert venue operations, tour promotions, event ticketing through Ticketmaster, and the selling of sponsorships and advertising on their website and owned venues. Live Nation’s dominant share in ticketing and unmatched scale in concert promotions are key competitive advantages for them and give them the ability to monetize tours through ticketing, sponsorships, and high- margin food and beverage at their owned and operated venues. Concerts and live events are a secular growing business that we believe should grow at a high single-digit rate for the company as the industry grows and they take share. We believe the company has an opportunity to significantly increase pricing or add new supply given the continued consumer preference for experiences over goods and the scarce nature of these events. The company has an incredible brand, and benefits in both upcycles with strong demand, and downcycles through an increase in supply as touring is a significant part of artists’ incomes. Despite concerns about slower consumer spending growth from peak levels, the company continues to grow at a double-digit rate in revenue despite consumer worries and is now leaning in with increased marketing to grow internationally where it remains underpenetrated. The company is still generating strong cash flow with a robust balance sheet to fund venue renovations where it expects to generate 20% returns on capital. John Malone of Liberty Media still owns 30% of the business with the CEO owning a significant portion of his net worth in the stock. We believe valuation remains attractive at current levels given the double-digit growth we expect in both revenue and earnings over the coming years.
In the fourth quarter, we also increased our position in IDEXX Laboratories, Inc., as we believed the stock was trading at an attractive valuation and should see accelerated growth in the years ahead. We increased our position in IDEXX as the stock declined in the quarter due to continued slow foot traffic at its veterinary clinics. However, we believe the pandemic pet boom will create an age wave of pets that will require significantly more diagnostic testing. We believe this combined with an inevitable improvement in foot traffic over time driven by the introduction of new tools and tests should drive double-digit sales growth and mid-teens to 20% EPS growth over the coming years. We still believe the company has significant pricing power given its industry position, which should enable the company to generate strong free cash flow. The company has recently accelerated its share repurchase activity, a sign that gives us further confidence in our investment thesis.
Outlook
We believe the shares of many of our portfolio investments continue to be attractively priced and believe earnings growth could accelerate this year for many of our companies. This should lead to not only earnings growth but also multiple expansion which we believe will provide attractive stock returns for our investors. So far, most of our portfolio holdings have not experienced a slowdown in sales or earnings growth, and their outlooks remain strong. In addition, we believe that even if a downturn were to occur, our portfolio companies would still be operating above pre-pandemic levels. These businesses’ balance sheets have been strengthened since COVID-19, and we believe they remain well positioned to weather a downturn should one occur. We find the current risk/reward inherent in our portfolio holdings attractive at current levels.
Thank you for investing in Baron Focused Growth Fund. We continue to work hard to justify your confidence and trust in our stewardship of your family’s hard-earned savings. We also continue to try to provide you with information we would like to have if our roles were reversed. This is so you can make an informed judgment about whether the Fund remains an appropriate investment for your family.
Respectfully,
Ronald Baron, CEO and Portfolio Manager
David Baron, Co-President and Portfolio Manager
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The performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor’s shares, when redeemed, may be worth more or less than their original cost. The Adviser waives and/or reimburses or may waive or reimburse certain Funds expenses pursuant to a contract expiring on August 29, 2035, unless renewed for another 11-year term and the Funds’ transfer agency expenses may be reduced by expense offsets from an unaffiliated transfer agent, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted. For performance information current to the most recent month end, visit BaronCapitalGroup.com or call 1-800-99-BARON. Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectuses contain this and other information about the Funds. You may obtain them from the Funds’ distributor, Baron Capital, Inc., by calling 1-800-99-BARON or visiting BaronCapitalGroup.com. Please read them carefully before investing. Risks: All investments are subject to risk and may lose value. Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectus contain this and other information about the Funds. You may obtain them from the Funds’ distributor, Baron Capital, Inc., by calling 1-800-99-BARON or visiting BaronCapitalGroup.com. Please read them carefully before investing. Risks: The Fund is non-diversified which means, in addition to increased volatility of the Fund’s returns, it will likely have a greater percentage of its assets in a single issuer or a small number of issuers, including in a particular industry than a diversified fund. Single issuer risk is the possibility that factors specific to an issuer to which the Fund is exposed will affect the market prices of the issuer’s securities and therefore the net asset value of the Fund. Specific risks associated with investing in small and medium-sized companies include that the securities may be thinly traded and more difficult to sell during market downturns. The Fund may not achieve its objectives. Portfolio holdings are subject to change. Current and future holdings are subject to risk. The discussions of the companies herein are not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed in this report reflect those of the respective portfolio managers only through the end of the period stated in this report. The portfolio manager’s views are not intended as recommendations or investment advice to any person reading this report and are subject to change at any time based on market and other conditions and Baron has no obligation to update them. This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Focused Growth Fund by anyone in any jurisdiction where it would be unlawful under the laws of that jurisdiction to make such offer or solicitation. Upside Capture explains how well a fund performs in time periods where the benchmark’s returns are greater than zero. Downside Capture measures how well a fund performs in time periods where the benchmark’s returns are less than zero. Free cash flow (FCF) represents the cash that a company generates after accounting for cash outflows to support operations and maintain its capital assets. EPS Growth Rate (3-5-year forecast) indicates the long term forecasted EPS growth of the companies in the portfolio, calculated using the weighted average of the available 3-to-5 year forecasted growth rates for each of the stocks in the portfolio provided by FactSet Estimates. The EPS Growth rate does not forecast the Fund’s performance. BAMCO, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Baron Capital, Inc. is a broker-dealer registered with the SEC and member of the Financial Industry Regulatory Authority, Inc. (FINRA). |
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