Baron Funds - Baron Capital Management

Transcription

Baron
Asset
December
31,Fund
2010
Baron Growth Fund
Baron Small Cap Fund
Baron Opportunity Fund
Baron Partners Fund
Baron Fifth Avenue Growth Fund
Baron Focused Growth Fund
Baron International Growth Fund
Baron Real Estate Fund
Baron Emerging Markets Fund
Baron Energy and Resources Fund
Baron Global Advantage Fund
Baron Discovery Fund
Baron Funds
September 30, 2015
Quarterly Report
Letter from Ron
®
600,000 workers worldwide, more than 300,000
in Germany alone. Volkswagen is the largest
employer in Germany and one of that nation’s
most important businesses.
“With more than 300,000 Berkshire
employees, Buffett can almost guarantee
that someone is doing something wrong
somewhere in our business.” Charles Munger.
Vice Chairman. Berkshire Hathaway.
Berkshire Hathaway’s 50th Annual Meeting.
May 2015.
Volkswagen apparently was unable to
simultaneously meet increasingly stringent auto
emissions and greater fuel economy standards
required by regulators without adding
materially to the cost of its diesel cars and
negatively impacting its performance.
Volkswagen’s diesel engines achieved fuel
economy, an important feature to consumers,
only by cheating with “emissions test defeating”
software. The emissions tests were administered
by testing companies hired and paid by
Volkswagen. The tests took place in laboratories,
not on roads, and used different car models than
were sold to the public!
Berkshire Hathaway’s culture encourages its
employees to “do the right thing.” In a 1991
letter to employees of a business in which
Berkshire was an investor, Buffett wrote,
“Whenever an employee of our business is
contemplating an act, that individual should ask
himself whether he would be willing to see it
described by an informed and critical reporter
on the front page of a local newspaper that is
read by his spouse, children, and friends.”
Efforts to deceive its regulators, customers or
employees will not be tolerated by Berkshire
and its two senior executives. This principle is
ingrained in the firm’s culture. It is because
those two individuals want to “do the right
thing.” It is also because Buffett’s and Munger’s
perspective developed over their lengthy careers
has reinforced their belief that Berkshire’s
reputation will make a greater contribution to
its sustainable profitability than any attempt to
improperly maximize its short-term profits.
Munger has commented “that is why Berkshire
has an 800-number for our people to contact us
if they are worried something isn’t right.”
Volkswagen’s culture seems to be much different.
On September 23, 2015, following discussions
that lasted months between U.S. regulators and
Volkswagen about the car company’s diesel
emission test results, the automobile
manufacturer recanted its assertion that it had
done nothing wrong. Volkswagen then admitted
it had purposely installed “emission test
defeating” software in more than 11 million
diesel powered cars it had manufactured and
The big question, in our minds, is that since
many individuals may likely have known that
Volkswagen’s software illegally permitted
RONALD BARON
CEO AND CHIEF INVESTMENT OFFICER
sold between 2009 and 2015. Without this
software, nitrous oxide emissions by
Volkswagen’s diesel powered automobiles
would have tested 35-40 times higher than
permitted by law! Nitrous oxide is a pollutant
that poses significant health dangers. Probably
dozens, perhaps hundreds, of Volkswagen’s
engineers and executives developed and
installed this software. Many more probably
knew about it.
“Where were the whistleblowers?”
Volkswagen is the largest automobile
manufacturer in Europe. It produces 10 million
cars annually. The company employs more than
TABLE OF CONTENTS
Letter from Ron
Letter from Linda
Baron Funds Performance
Baron Asset Fund
Baron Growth Fund
Baron Partners Fund
Portfolio Holdings
1
4
8
13
17
21
25
29
33
37
41
45
53
57
62
66
70
Letter from Ron
violation of emissions and fuel economy
standards, why didn’t anyone say anything?
Where were the whistleblowers? Did
Volkswagen’s culture, like that of General
Motors’ regarding its faulty ignition switches
and Toyota’s regarding its faulty braking
systems, condition them to obey authority
despite understanding they were aiding and
abetting business executives to intentionally
violate the law?
“It comes from the top.” Steve Cutler. General
Counsel. J.P. Morgan. Former Director of
Enforcement. U.S. Securities and Exchange
Commission. 1993.
In 1993, the former SEC’s Director of
Enforcement tried to explain that the culture of
a business is created by its senior executives.
That is why those executives and their general
counsels take such care to outline “roadmaps”
for employees’ behavior rather than provide
them with explicit “directions.” It is also the job
of senior executives to hire individuals having
good character. “Character is what you do when
you think no one is watching,” according to Roy
Furman, the Vice Chairman of Jefferies, the
institutional investment banking firm. Roy has
been my friend since I met him in 1969 when I
applied for my first job as a Wall Street
securities analyst…which I didn’t get at his firm.
Anyway, every year Roy now welcomes Jefferies’
new employees with a brief talk. “Reputation is
what you earn from everything you do,” he tells
his recruits. “Most individuals feel their
interview ends when they get a job. That is not
true. Your interview continues throughout your
career. Everyone is watching everything you do
every single day. Those actions create your
reputation. That is also an ‘interview.’ ” It is
shocking to me that at large firms like
Volkswagen, General Motors, Toyota, and many
others…when many had to know their firm was
doing something wrong, no one spoke up!
A friend of mine is a senior partner at one of
New York’s top law firms. He recently visited me
for lunch. He told me he had significant liquidity
and wanted to consider investing some of it
with us. As our lunch meeting was ending and
he was preparing to leave, he told me that he
invests based on his assessment of an
individual’s character and a firm’s culture. I was
proud when he told me he was going to invest
with us. He chose to invest with us for the same
reason we choose to invest in businesses…our
assessment of executives’ characters and firms’
cultures. We believe this approach provides us
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with a competitive advantage over passive
investors who do not do this.
to conclusions about with whom we should
invest.
“It’s all about investing in people.” Jay Pritzker.
Founder. Hyatt Corporation. 1975.
“When the map differs from the terrain,
suggest you go with the terrain.” Admiral
Eric T. Olson, U.S. Navy (Ret’d), Former
Commander, U.S. Special Operations
Command. Director. Under Armour. 2015.
One benefit of investing with Baron Funds is
that before, during, and after we invest in
businesses, we “Question Everything.” In fact,
questioning everything is so integral to our
investment process that we have made
“Question Everything” the theme of our annual
conference this year that will take place on
November 6, 2015. Questioning everything is
what gives us confidence to “invest in people,”
another tenet of our investment process. For
example, we have made a significant effort to
understand Tesla’s culture by tirelessly
questioning its executives. As a result, it is
unimaginable to me that if a car part or an
assembly process wasn’t exactly “right” and
potentially compromised the safety of Tesla
passengers, that Elon Musk would lie about it.
This is regardless of whether it cost his business
millions to correct a problem or he had to miss
projected car deliveries in a quarter and Tesla’s
stock price would be negatively impacted for a
period. Under Armour’s Kevin Plank wants to
make the best products to help athletes perform
better. That’s what his brand stands for. He
wants kids who wear his gear to feel like
Superman. He believes that it is necessary to
make the highest quality products to protect his
brand. If he doesn’t get it right, he fixes it.
Regardless of the cost. All that you need to do to
come to that conclusion is talk to Kevin. Another
40-something-year-old entrepreneur who is
building a business by “doing the right things” is
Inovalon’s Dr. Keith Dunleavy. Keith provides
unique health care data and analytics to insurers
and health care providers. He spends significant
amounts every year so that better and more
effective care at lower cost can be provided to
all of us. He tolerates no shortcuts. It would be
unimaginable for Hyatt Chairman Tom Pritzker
and his tireless 52-year-old CEO Mark
Hoplamazian to alter software to avoid paying
room taxes or to do anything else improper.
Further, Tom and Mark have empowered their
employees to do whatever is necessary to “fulfill
the needs and desires of their guests.” This is to
enhance the value of the Hyatt Hotels’ brands.
They give their employees “a roadmap, not
directions how to get there.” I am certain
knowing Tom and Mark for many years it would
never cross their minds to do anything
improper. By questioning everything we come
Admiral Eric T. Olson is an Under Armour Board
member. During a recent conversation between
Kevin Plank, Under Armour’s CEO, Michael
Baron and me, we asked Kevin how he makes
difficult tactical decisions. He answered by
relaying the above advice he had received from
Admiral Olson which I thought was so
interesting, I have since been looking for a place
to write about it.
Former Secretary of State Hillary Clinton, the
current frontrunner for the 2016 Democratic
Presidential nomination, recently countered
criticisms that she was “constantly changing
positions to satisfy political needs rather than in
response to her core beliefs.” You “cannot be
impervious to evidence of changed
circumstances” was how she put it. Sort of
another way to make Admiral Olson’s point.
At the start of the 2016 election campaign for
President, several Republican candidates
proposed that Congress repeal Dodd-Frank. The
Dodd-Frank Act is the financial reform
legislation that became law in 2010. After
watching a recent interview with former Federal
Reserve Chairman Bernanke, I thought Admiral
Olson’s advice and Secretary Clinton’s answer
were appropriate retorts to suggestions that
Dodd-Frank be repealed.
Among other things, Dodd-Frank increases
regulation of the financial derivatives that
played such an important role in bringing our
nation’s banking system to its knees during the
2008-09 financial crisis. According to former Fed
Chairman Bernanke, Dodd-Frank, coupled with
more stringent bank capital requirements and
rules designed to curb risk taking by banks,
limited systemic risk during volatile markets this
fall. Since America’s banks have been
recapitalized with equity and their activities as
principals have been significantly constrained,
banks and our financial system were little
impacted by recent volatile markets. The
dramatic decline in the price of oil and other
commodities in 2015 preceded the 200 basis
point repricing of high-yield debt markets last
month. The financial distress of commodity
trading firm Glencore and the “emission
September 30, 2015
Letter from Ron
cheating” software scandal at Volkswagen would
likely have wreaked havoc on the more
leveraged banking system infused with
counterparty risk as it was constituted in 2008.
It seems to us that the “Invisible Hand” theory
introduced by Adam Smith in 1759 is not
applicable in all circumstances in today’s highly
complex financial system. Regardless, Republican
Presidential candidates, in the midst of an
election campaign, continue to propose to
eliminate banking regulation implemented since
The Great Recession of 2008-09. Their politicized
proposals ignore the fact that the actions of the
Fed during the credit crisis and the regulation
that followed are precisely what saved and
strengthened our economy. Increased regulation
has also provided safeguards to withstand future
shocks. Since being recapitalized, banks have
virtually eliminated their risk businesses, and, in
many ways, have become more like utilities.
We think the proposals of Presidential
candidates to repeal Dodd-Frank are the result
of their looking at another “map,” without
realizing the “terrain” now differs from that map.
We believe our economy at present is on more
secure footing. At Baron, we go with the terrain.
Baron Investment Conference 2015.
November 6, 2015. Metropolitan Opera
House. New York City.
We hope you will be able to attend our 24th
annual investment conference on November 6th.
For those of you who can’t attend, you will be
able to watch the live webcast on the Baron
Funds website (except for entertainment, which
we are contractually prevented from streaming).
You can get a sense of our meeting by
watching CNBC’s Squawk Box that morning
from 6 a.m. to 8:30 a.m. EST. CNBC’s Andrew
Ross Sorkin and I will be interviewing several
executives with whom Baron Funds has
invested and with whom we expect to make a
lot more money...although, we obviously can’t
promise that. Andrew will also interview me
on Squawk Box live from the conference that
morning.
We like to say, “We invest in people.” We hope
when you attend our annual conferences or
watch us on CNBC or visit our website, you will
gain a better understanding of the businesses in
which we invest, and the character and talent of
the executives who run them as well as the
people who work at our Firm.
Thank you for joining us as fellow shareholders
in Baron Funds. We will continue to work hard
to justify your confidence in us. See you in
November.
Respectfully,
Ronald Baron
CEO and Chief Investment Officer
October 23, 2015
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
1-800-99BARON or visiting www.BaronFunds.com. Please read them carefully before investing.
Portfolio Holdings
As a Percentage of Net Assets
As of September 30, 2015
Hyatt Hotels Corp.
Inovalon Holdings, Inc.
Tesla Motors, Inc.
Under Armour, Inc.
Baron
Asset Fund
1.6
1.3
Baron
Growth Fund
0.7
5.2
Baron
Opportunity
Fund
1.0
3.5
1.3
Baron
Partners
Fund
5.2*
2.3*
8.6*
0.4*
Baron
Focused
Growth
Fund
7.0
Baron Real
Estate
Fund
3.0
11.7
* % of Long Positions.
At September 30, 2015, Baron Small Cap Fund, Baron Fifth Avenue Growth Fund, Baron International Growth Fund, Baron Emerging Markets Fund, Baron Energy and Resources Fund,
Baron Global Advantage Fund and Baron Discovery Fund did not own any of the securities listed above.
Portfolio holdings may change over time.
The discussion of market trends and companies throughout this report are not intended as advice to any person regarding the advisability of investing in any particular security. Some
of our comments are based on current management expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from
our expectations. Our views are a reflection of our best judgment at the time of the publication of this report and are subject to change any time based on market and other
conditions, and we have no obligation to update them.
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Letter from Linda
This time of year there is a lot happening. College football, NFL football, the
World Series, NHL hockey, the NBA, political debates; plus we have Hillary
Clinton’s emails, Donald Trump’s hair, and the return of Homeland. Similarly,
there has been much happening in the news and the markets, both in the U.S.
and globally. In the U.S., the presidential race commands the headlines, and we
have the continuing distress of gun violence. From overseas we have news
about displaced refugees and the continuing strife in Afghanistan, Iran, and
Iraq. There is a global economic slowdown, driven mostly by weakness in the
Chinese economy and its ripple effect on other emerging markets; commodity
prices are causing whiplash; recent U.S. job market reports have been
unexpectedly weak; and the Fed continues to delay raising rates. The markets
finished down for the quarter, and the VIX has made a return to the headlines.
This has caused uncertainty, and thus anxiety, which can lead to bad decision
making by investors. People tend to sell after the market has gone down, and
buy after the market has gone up. We think this is because people tend to
panic and make rash, short-term investment decisions. As always, we think it
is important to have a long-term perspective, regardless of the markets. We
think Baron Funds is a good place to be. So here are the
top 10 reasons to invest – or invest more - in Baron Funds.
1. We Focus on People
We invest in people. We believe that people are the key drivers of a
successful business: the people who run the companies in which we invest
and the people who work at Baron. We look for people who are smart, hardworking and ethical; people we trust and admire.
When we evaluate new investments, we interview company executives
thoroughly and extensively. Strong, visionary management is one of our
four main investment criteria. We try to find honorable and inspiring leaders
who we believe can make businesses grow, even in difficult times. Since we
usually stay invested for a long time, we spend significant amounts of time
with management teams, and this gives us the opportunity to know them
well over the years.
When we hire, we carefully select employees who share both our
entrepreneurial spirit and our approach to investing and serving clients. We
believe this will help us continue to make successful investments and serve
our clients well. And we make sure that our employees learn and grow and
are recognized for their hard work.
2. We Have Seasoned Research and Business Teams
We believe that the experience of our team sets us apart. Our portfolio
managers have been in the industry between 14 and 45 years. Our analysts’
research experience is about 11 years, on average. Our senior management
team members have spent between 15 and 45 years in their fields. But to
us experience is not just a number of years spent in the industry. It is the
quality of the experience that we think makes a difference for long-term
value creation.
Many of our employees have spent a large portion of their careers at Baron.
This has enabled them to understand, master, and improve our investment and
business processes. Others had impressive track records at industry-leading
companies before joining Baron. We have multiple portfolio managers and
analysts who have been widely recognized for their skills and achievements.
Our team has navigated through multiple market and economic cycles and,
more importantly, has reflected on and learned from the challenges and
opportunities that we have faced along the way. Almost two-thirds of our
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LINDA MARTINSON
CHAIRMAN, PRESIDENT AND COO
research and portfolio management team has worked together longer than
5 years and a third has been working together for at least 10 years. 21% of
our entire staff has been at the firm longer than 10 years, notwithstanding
that so far this year we added 16 new employees, and 24 last year. This has
led to a highly collaborative, creative and well-synchronized organization.
3. We’ve Built a Smarter Team
We think one of our strongest competitive advantages is that we have a lot of
women at Baron. 48% of our employees are women. Moreover, 63% of our
employees in leadership roles are women, compared to about 10%, on
average, of senior roles in long-only institutional asset management. As Adam
Grant and Sheryl Sandberg wrote in the New York Times (12/6/14), “When
more women lead, performance improves.” The article continues, “A
comprehensive analysis of 95 studies on gender differences showed that when
it comes to leadership skills, although more men are confident, women are
more competent.” Another New York Times piece, by Anita Wooley, Thomas
Malone and Christopher Chabris (1/16/15), entitled “Why Some Teams are
Smarter Than Others,” describes the three characteristics from a study that
distinguished the smarter teams from the rest. One of the characteristics: the
teams with more women outperformed teams with more men. In this study,
it was not a question of having diversity (equal numbers of women and men)
on the team; it was having more women than men. The skills that the women,
in particular, brought to the table were communication and the ability to read
complex emotions in others. We think we have built a pretty strong team.
And, by the way, the women at Baron have not sacrificed motherhood for
their careers. Baron has been remarkable in allowing the women here to
“have it all.” About 50% of the Baron women are moms, including me
(I have three children). 57% of the women leaders in the firm are moms.
Yes, this is a great place to work (see reason # 5 below).
4. Diversity Gives Us an Edge
We have a diverse group of employees. We think our different backgrounds
and experiences add enormous value and perspective. Reflecting much of
September 30, 2015
life in New York City, we are multi-cultural. Aside from English, we speak or
read 27 different languages. About half of our employees speak more than
one language. 17% of our employees speak Spanish. French or Russian is
spoken by 6% of our employees. The next most prevalent languages spoken
are Hebrew, Cantonese, Hindi, Mandarin, Yiddish, Italian, Ukrainian, Polish and
Gujarati. We also have employees who speak or read Vietnamese, Bulgarian,
Marathi, Rajasthani, Arabic, Portuguese, Albanian, Serbo-Croatian, Tamil,
Slovak, Azerbaijani, Turkish, Czech, Macedonian, and German. 25% of our
employees were born outside the U.S. We root for 21 different NFL teams,
although not surprisingly, 40% of our staff are Giants fans (we are New Yorkbased after all). We attended some 88 different colleges, with the great
University of Pennsylvania having the highest representation (including me).
Letter from Linda
attractive to our research team too. It allows our analysts to really get to
know the businesses they cover and become experts in their areas.
We believe that long-term perspective allows us to find better investments
and manage our portfolios more efficiently. We do not evaluate our
investments based on their most recent quarterly results. Rather, we take
an integrated approach and dig deep in each business to assess its growth
potential for the next five (and more) years. This helps us mitigate risk,
differentiate between quality information and noise. It also allows us to
take advantage of overlooked opportunities by short-term oriented
investors. This is what we call Baron’s time-risk arbitrage.
We think diversity makes for a better team. No football coach wants a team
comprised entirely of wide receivers.
As a testament to our long-term commitment, we have invested in our
business for the future, including extending and expanding our office lease
until 2045 and adding more space for future growth.
5. Baron is a Great Place to Work
7. We’ve Had a Long and Consistent Track Record
Over the years, we have strived to assemble and champion a team of highly
intelligent people driven by genuine professional passion and sharing
Baron’s core values. We believe that the best way to stimulate productivity
and personal development is by providing our employees with a congenial
work environment and a good work/life balance.
We have been managing long-only equity portfolios for over 30 years.
Seven of our funds are older than 10 years, and six of our funds are older
than 15 years.
At Baron, we maintain a non-hierarchical, informal environment where
everybody is accessible. We encourage transparency and open communication
and that’s why our office space has an open layout and transparent glass walls.
Our organization thrives on collaboration, so we promote the open exchange
of thoughts and ideas. People are friendly and respectful of each other which
makes work even more pleasant and effective. We also participate in team
sports like softball and basketball, and we have our special “Thirsty Thursdays”
where we all get together to share a little food and something to drink.
Our office space is designed with our employees in mind. We have an
abundance of natural light, and the spectacular city views are shared by the
entire staff. It is a place where people look forward to coming in the
morning rather than leaving at night. Yet, we ensure that our employees
have enough time for their personal lives too, as we realize that is also
important for higher productivity and employee satisfaction.
Baron is a place of people who are proud of what they do and where they
work. No wonder we have been able to attract talented employees and
retain them for years.
6. We Have a Long-Term Perspective
At Baron, we apply our long-term perspective to everything we do, on both
the investment and operational sides of our business. We do not believe that
short-term actions will lead to sustained successes in the long run. When we
hire people to work at Baron, we look for people we believe want to stay for
a long time rather than “job hoppers.” Our long-term investment approach is
We have steadily grown our business into a solid institution that manages
growth equity portfolios for the long term. From two employees in 1982 to
145 employees as of September 30, 2015, our Firm has constantly
expanded, through both good and challenging times. We have invested in
our growth, adding staff every year and building our infrastructure to
improve our operational and research capabilities. During the Great
Recession, when many businesses laid-off employees and slowed down
capex, we added research and operational staff, launched new products, and
expanded our office space.
Most of Baron’s current senior management team has been at the Firm for
over 25 years. Baron’s consistency in leadership has been a key factor in
ensuring efficient and effective processes and a disciplined approach to
investing.
Baron’s investment philosophy is shared by all our portfolio managers, and
it is constantly reinforced through collaboration and mentoring. Our 13
mutual funds may invest in different equity classes and geographies, but
they all share the same seasoned investment process and philosophy.
The Baron Funds have consistently outperformed their respective
benchmark indices and their average peers over the long term. Our
oldest Funds have experienced several market cycles, including the dot
com bubble and the financial crisis. With the exception of Baron Fifth
Avenue Growth Fund, each Fund has been managed by the same
portfolio management teams over these long periods, which we believe
is one of the main reasons for the consistency of the results. With
respect to Baron Fifth Avenue Growth Fund, we replaced the manager in
November of 2011.
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Letter from Linda
Seasoned* Baron Funds - Performance vs. Primary Benchmarks as of 9/30/2015
based on the performance of each Fund’s institutional share class
10-Year Returns
Fund
Style
Morningstar
Category
US OE Small Growth
Baron Adjusted
Small-Cap
Morningstar Small
Growth
Growth Category
US OE Mid-Cap Growth
Smid-Cap
Growth
Mid-Cap
Growth
Large-Cap
US OE Large Growth
Growth
All-Cap
Growth
Name
Inception
Fund Primary
Date
Age (yrs) Benchmark
9/30/1997
18.0
Russell 2000 Growth Index
Average
Annualized
Periods
% Time In Excess
Excess Return
Outperforming Top Half Return Since Inception
84/97
87%
90%
3.09%
4.25%
Baron Growth Fund
12/31/1994
20.7
119/130
92%
95%
5.00%
5.71%
Baron Growth Fund
Baron Focused
Growth Fund
12/31/1994
20.7
119/130
92%
92%
5.00%
5.71%
5/31/1996
19.3
101/113
89%
98%
4.20%
3.56%
Baron Asset Fund
6/12/1987
28.3
Russell Mid Cap Growth Index 151/220
69%
80%
0.65%
1.46%
11.4
0%
0%
–1.31%
–1.21%
23.7
15.6
Russell Mid Cap Growth Index 161/165 98%
68/68 100%
98%
100%
3.29%
4.93%
3.39%
2.50%
Baron Fifth Avenue
4/30/2004
Growth Fund
Baron Partners Fund
1/31/1992
Baron Opportunity Fund 2/29/2000
0/18
Source: Morningstar Direct, Baron Capital.
% Time In Top Half measures the fraction of time a fund ranked in the 50th percentile or better in its respective Morningstar category. Statistics are based on monthly rolling returns. Average excess return figures are annualized.
*Seasoned: Ten years of consecutive track record or longer.
8. We Believe in Transparency and Communication
Transparency of our business and the way we think about investing are
reflected in our quarterly reports, our website, and other materials we
publish. Every year we have an annual conference for our investors, which
includes hearing from four or five CEOs of portfolio companies and
question and answer sessions with our research team. The conference
enables our investors to “kick the tires” of their investments (our tires).
We put a lot of effort and thought into the production of our
communications to inform our investors how we think about our portfolios
because we want our shareholders and clients to understand why we invest
in particular stocks and how we think about building our portfolios.
Collectively, our employees1 have over $240 million invested in our mutual
funds. A large portion of employee assets are through retirement plans or
deferred compensation and retention plans that have appreciated over the
many years held. The Firm has an additional $225 million invested in the
Baron Funds. Almost all of our employees are invested in our mutual funds.
Almost half of our employees have over $100,000 invested, and all
members of senior management each have greater than $2 million invested
in our Funds. Every member of our research staff invests in our Funds. Every
portfolio manager is invested in his own Fund, as well as Funds managed by
his Baron peers. Our interests are aligned with those of our clients and
shareholders; we are on the same team.
10. We Have Great T-shirts
Our weighty quarterly reports contain information about the performance of
our Funds and a discussion of particular stocks so that our investors are up-todate about our portfolios. Our portfolio managers also share their thoughts on
their portfolios and current market events, among other things. Ron’s cover
letter usually gives additional insights about companies and people who have
made an impression on him. My letters typically discuss current industry
topics, our internal processes (and a lot of references to sports).
We pay particular attention to the quality of the information provided in our
reports and other publications and go through a tight process of checks and
edits. We constantly try to improve what we produce and the timeliness of the
production. We do all of this because we want our investors to understand
what we do. We keep trying to do it better, and on a more timely basis.
9. We Have Skin in the Game
When we invest in companies for our clients, we look for high ownership
levels by management teams, so that management’s interests are aligned
with ours. Similarly, we believe in aligning our interests with those of our
clients and shareholders.
Our Code of Ethics prohibits our employees from investing in individual
securities. We do this to avoid any potential conflicts of interest, or even the
appearance of a conflict of interest. We encourage our employees to invest
in mutual funds – hopefully ours - and we impose a minimum holding
period on those investments.
1
6
Employees who have been at the Firm for longer than one year.
Our t-shirts will be available to our shareholders and investors at the
November conference and thereafter by emailing
[email protected].
Sincerely,
Linda S. Martinson
Chairman, President and COO
October 23, 2015
September 30, 2015
Letter from Linda
prospectuses contain this and other information about the Funds. You may obtain them from the Funds’ distributor, Baron Capital, Inc., by calling 1-800-99BARON
or visiting www.BaronFunds.com. Please read them carefully before investing.
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 has reimbursed certain Fund expenses for Baron Opportunity, Fifth Avenue, Focused Growth,
International Growth, Real Estate, Emerging Markets, Energy and Resources, Global Advantage and Discovery Funds (by contract as long as BAMCO, Inc. is the
adviser to the Fund) and all 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 www.BaronFunds.com or call 1-800-99BARON.
Baron Asset Fund’s annualized returns as of September 30, 2015: 1-year, 2.11%; 5-years, 13.39%; 10-years, 7.52%. Annual expense ratio for the Institutional
Shares as of September 30, 2014 was 1.04%. Baron Growth Fund’s annualized returns as of September 30, 2015: 1-year, 1.51%; 5-years, 13.46%; 10-years,
7.71%. Annual expense ratio for the Institutional Shares as of September 30, 2014 was 1.04%. Baron Small Cap Fund’s annualized returns as of September 30,
2015: 1-year, (4.08)%; 5-years, 11.29%; 10-years, 6.88%. Annual expense ratio for the Institutional Shares as of September 30, 2014 was 1.04%. Baron
Opportunity Fund’s annualized returns as of September 30, 2015: 1-year, (2.38)%; 5-years, 9.26%; 10-years, 8.09%. Annual expense ratio for the Institutional
Shares as of September 30, 2014 was 1.08%. Baron Partners Fund’s annualized returns as of September 30, 2015: 1-year, (0.03)%; 5-years, 15.07%; 10-years,
8.31%. Annual expense ratio for the Institutional Shares as of December 31, 2014 was 1.26% (comprised of operating expenses of 1.06% and interest expense
of 0.20%). Baron Fifth Avenue Growth Fund’s annualized returns as of September 30, 2015: 1-year, 0.72%; 5-years, 13.20%; 10-years, 6.09%. As of
September 30, 2014, annual operating expense ratio for the Institutional Shares was 1.08%, but the net annual expense ratio was 1.05% (net of the Adviser’s
fee waivers). Baron Focused Growth Fund’s annualized returns as of September 30, 2015: 1-year, (3.78)%; 5-years, 9.91%; 10-years, 8.35%.* As of
December 31, 2014, annual operating expense ratio for the Institutional Shares was 1.09%.
*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
predecessor partnership’s performance is only for periods before the Fund’s registration statement was effective, which was June 30, 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.
If a Fund’s historical performance was impacted by gains from IPOs and/or secondary offerings, there is no guarantee that these results can be repeated or
that a Fund’s level of participation in IPOs and secondary offerings will be the same in the future.
Definitions (provided by BAMCO, Inc.): The Russell 2000® Growth Index is an unmanaged index that measures the performance of small-sized U.S. companies that are classified as growth. The Russell
2500™ Growth Index measures the performance of small to medium-sized companies that are classified as growth. The Russell Midcap® Growth Index is an unmanaged index of those Russell Midcap
medium-sized companies that are classified as growth companies. The Russell 1000® Growth Index is an unmanaged index that measures the performance of large-sized U.S. companies classified that
are classified as growth. The Russell 3000® Growth Index measures the performance of the broad growth segment of the U.S. equity universe comprised of the largest 3000 U.S. companies representing
approximately 98% of the investable U.S. equity market.
The Morningstar US OE Mid-Cap Growth Average is not weighted and represents the straight average of annualized returns of each of the funds in the Mid-Cap Growth category. As of September 30,
2015, the category consisted of 755, 587 and 446 funds for the 1-, 5-, and 10-year periods. Morningstar ranked Baron Asset Fund Retail Share Class in the 42nd, 30th and 47th percentiles, respectively,
and ranked Baron Asset Fund Institutional Share Class in the 39th, 23rd and 41st percentiles, respectively, in the category. Morningstar ranked Baron Growth Fund Retail Share Class in the 46th, 28th and
40th percentiles, respectively, and ranked Baron Growth Fund Institutional Share Class in the 44th, 22nd and 37th percentiles, respectively, in the category. Morningstar ranked Baron Partners Fund Retail
Share Class in the 62nd, 8th and 30th percentiles, respectively, and ranked Baron Partners Fund Institutional Share Class in the 59th, 5th and 26th percentiles, respectively, in the category. Morningstar
ranked Baron Opportunity Fund Retail Share Class in the 81st, 88th and 33rd percentiles, respectively, and ranked Baron Opportunity Fund Institutional Share Class in the 80th, 86th and 31st percentiles,
respectively, in the category. Morningstar ranked Baron Focused Growth Fund Retail Share Class in the 89th and 82nd percentiles, for the 1- and 5-year periods, and ranked Baron Focused Growth Fund
Institutional Share Class in the 88th and 79th percentiles, respectively, in the category.
The Morningstar US OE Small Growth Category Average is not weighted and represents the straight average of annualized returns of each of the funds in the Small Growth category. Morningstar moved
Baron Growth Fund from the Small Growth Category effective May 31, 2011 to the Mid-Cap Growth Category. The Fund’s investment mandate has been and continues to be investing in small cap growth
stocks for the long run. We intend to continue to provide comparative performance data for the Small Growth Category because we strongly disagree with Morningstar’s reclassification of the Fund. As
of September 30, 2015, the category consisted of 722, 579, and 408 funds for the 1-, 5- and 10-year time periods. Morningstar ranked Baron Small Cap Fund Retail Share Class in the 93rd, 75th and
62nd percentiles, respectively, and ranked Baron Small Cap Fund Institutional Share Class in the 92nd, 69th and 59th percentiles, respectively, in the category.
The Morningstar US OE Large Growth Category Average is not weighted and represents the straight average of annualized returns of each of the funds in the Large Growth category. As of September 30,
2015, the category consisted of 1,689, 1,339 and 929 funds for the 1-, 5-, and 10-year periods. Morningstar ranked Baron Fifth Avenue Growth Fund Retail Share Class in the 62nd, 45th and 77th
percentiles, respectively, and ranked Baron Fifth Avenue Growth Fund Institutional Share Class in the 60th, 40th and 73rd percentiles, respectively, in the category.
© 2015 Morningstar, Inc. All Rights Reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is
not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
Morningstar rankings are based on total returns for the 1-year, 5-year, 10-year and Since Inception periods ended 9/30/2015.
About Risk: The value of investments in equity securities is subject to unpredictable declines in the value of individual securities and periods of below average performance in individual securities and the
equity market as a whole. Growth stocks are generally more sensitive to market movements than other types of stocks primarily because their stock prices are based heavily on future expectations. If our
assessment of the prospects for a company’s growth is wrong, or if our judgment of how other investors will value the company’s growth is wrong, then the price of the company’s stock may fall or not
appreciate as we expect.
7
Baron Asset Fund
Comparison of the change in value of $10,000 investment in Baron Asset Fund (Institutional Shares)†
in relation to the Russell Midcap Growth Index and the S&P 500 Index
$220,000
$210,000
$200,000
$190,000
$180,000
$170,000
$160,000
$150,000
$140,000
$130,000
$120,000
$110,000
$100,000
$90,000
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
6/12/87 9/87
$198,421
$136,050
$120,406
9/89
9/91
9/93
9/95
9/97
9/99
9/01
9/03
9/05
9/07
9/09
9/11
9/13
9/15
Baron Asset Fund1,4
Information Presented by Fiscal Year as of September 30
1
Russell Midcap Growth Index
S&P 500 Index1
Baron Asset Fund’s annualized returns as of September 30, 2015: 1-year, 2.11%; 3-year, 14.03%; 5-year, 13.39%; 10-year, 7.52%; and Since Inception, 11.14%.
Baron Growth Fund
Comparison of the change in value of $10,000 investment in Baron Growth Fund (Institutional Shares)†
in relation to the Russell 2000 Growth Index and the S&P 500 Index
$140,000
$130,000
$120,000
$110,000
$100,000
$90,000
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
12/31/94 9/95
$125,250
$62,014
$42,676
9/97
9/99
9/01
9/03
9/05
9/07
9/09
9/11
9/13
9/15
Baron Growth Fund2,4
Russell 2000 Growth Index2
S&P 500 Index
2
Baron Growth Fund’s annualized returns as of September 30, 2015: 1-year, 1.51%; 3-year, 11.94%; 5-year, 13.46%; 10-year, 7.71%; and Since Inception, 12.95%.
Comparison of the change in value of $10,000 investment in Baron Small Cap Fund (Institutional Shares)†
$60,000
$50,000
$48,629
$40,000
$30,000
$28,277
$23,791
$20,000
$10,000
$0
9/30/97
9/99
9/01
9/03
9/05
9/07
9/09
9/11
9/13
9/15
Baron Small Cap Fund3,4
3
S&P 500 Index
Baron Small Cap Fund’s annualized returns as of September 30, 2015: 1-year, (4.08)%; 3-year, 9.98%; 5-year, 11.29%; 10-year, 6.88%; and Since Inception, 9.18%.
1
2
3
4
†
8
The indexes are unmanaged. The Russell Midcap® Growth Index measures the performance of medium-sized U.S. companies that are classified as growth and the S&P 500 Index of
500 widely held large cap U.S. companies. The indexes and Baron Asset Fund are with dividends, which positively impact the performance results.
The indexes are unmanaged. The Russell 2000® Growth Index measures the performance of small-sized U.S. companies that are classified as growth and the S&P 500 Index of
500 widely held large cap U.S. companies. The indexes and Baron Growth Fund are with dividends, which positively impact the performance results.
The indexes are unmanaged. The Russell 2000® Growth Index measures the performance of small-sized U.S. companies that are classified as growth and the S&P 500 Index of 500
widely held large cap U.S. companies. The indexes and Baron Small Cap Fund are with dividends, which positively impact the performance results.
Past performance is not predictive of future performance. The performance data does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or
redemptions of Fund shares.
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.
Comparison of the change in value of $10,000 investment in Baron Opportunity Fund (Institutional Shares)† in relation
to the Russell 3000 Growth Index, the Russell Midcap Growth Index and the S&P 500 Index
$24,000
$22,000
$20,000
$18,000
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
9/01
2/29/00
9/03
9/05
$20,005
$18,955
$16,439
$13,729
9/07
9/11
9/09
9/13
9/15
Baron Opportunity Fund1,4
1
Russell Midcap Growth Index
S&P 500 Index
1
1
Baron Opportunity Fund’s annualized returns as of September 30, 2015: 1-year, (2.38)%; 3-year, 8.17%; 5-year, 9.26%; 10-year, 8.09%; and Since Inception, 4.55%.
Baron Partners Fund
Comparison of the change in value of $10,000 investment in Baron Partners Fund (Institutional Shares)†
in relation to the Russell Midcap Growth Index and the S&P 500 Index
$200,000
$180,000
$165,338
$160,000
$140,000
$120,000
$100,000
$80,192
$75,849
$80,000
$60,000
$40,000
$20,000
$0
1/31/92
12/93
12/95
12/97
12/99
12/01
12/03
12/05
12/07
12/09
12/11
12/13
9/15
2,4,5
Baron Partners Fund
Information Presented by Fiscal Year as of December 31
and for the nine months ended September 30, 2015
Russell Midcap Growth Index2
2
S&P 500 Index
Baron Partners Fund’s annualized returns as of September 30, 2015: 1-year, (0.03)%; 3-year, 16.81%; 5-year, 15.07%; 10-year, 8.31%; and Since Inception, 12.58%.
Comparison of the change in value of $10,000 investment in Baron Fifth Avenue Growth Fund (Institutional Shares)†
$30,000
$25,000
$23,740
$21,977
$20,879
$20,000
$15,000
$10,000
$5,000
$0
4/30/04
9/04
9/05
9/06
9/07
9/08
9/09
9/10
9/11
9/12
9/13
9/14
9/15
Baron Fifth Avenue Growth Fund3,4
S&P 500 Index3
Baron Fifth Avenue Growth Fund’s annualized returns as of September 30, 2015: 1-year, 0.72%; 3-year, 12.93%; 5-year, 13.20%; 10-year, 6.09% and Since Inception, 6.66%.
1
2
3
4
5
†
The indexes are unmanaged. The Russell 3000® Growth Index measures the performance of those companies classified as growth among the largest 3,000 U.S. companies, the Russell Midcap®
Growth Index measures the performance of medium-sized U.S. companies that are classified as growth, and the S&P 500 Index of 500 widely held large cap U.S. companies. The Baron Opportunity
Fund no longer considers the Russell Midcap® Growth Index an appropriate benchmark index. The Russell Midcap® Growth Index is included in the table above for comparison purposes for the
period before the Fund converted to an all-cap fund. Prior to February 20, 2015, the Fund invested in companies with market capitalizations between $1 billion and $15 billion at the time of
purchase. Since then, the Fund may invest in companies of all market capitalizations. The Adviser believes that the Russell 3000 Growth Index is more representative of the Fund’s current investable
universe. The indexes and Baron Opportunity Fund are with dividends, which positively impact the performance results.
The indexes are unmanaged. The Russell Midcap® Growth Index measures the performance of medium-sized U.S. companies that are classified as growth and the S&P 500 Index of 500 widely
held large cap U.S. companies. The indexes and Baron Partners Fund are with dividends, which positively impact the performance results.
The indexes are unmanaged. The Russell 1000® Growth Index measures the performance of large-sized U.S. companies that are classified as growth and the S&P 500 Index of 500 widely held
large cap U.S. companies. On January 1, 2015, the Fund changed its primary benchmark from the S&P 500 Index to the Russell 1000 Growth Index. The indexes and Baron Fifth Avenue Growth
Fund are with dividends, which positively impact the performance results.
Past performance is not predictive of future performance. The performance data does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or redemption of Fund shares.
Reflects the actual fees and expenses that were charged when the Fund was a partnership. The predecessor partnership charged a 20% performance fee 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, returns would be higher. The Fund’s
shareholders will not be charged a performance fee. The predecessor partnership’s performance is only for periods before the Fund’s registration statement was effective, which was April 30, 2003.
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.
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.
9
Comparison of the change in value of $10,000 investment in Baron Focused Growth Fund (Institutional Shares)†
$90,000
$80,000
$70,547
$70,000
$60,000
$50,000
$41,098
$37,431
$40,000
$30,000
$20,000
$10,000
$0
5/31/96
12/97
12/99
12/01
12/03
12/05
12/07
12/09
12/11
12/13
9/15
Baron Focused Growth Fund1,4,5
S&P 500 Index1
Baron Focused Growth Fund’s annualized returns as of September 30, 2015: 1-year, (3.78)%; 3-year, 7.98%; 5-year, 9.91%; 10-year, 8.35%; and Since Inception, 10.63%.
Comparison of the change in value of $10,000 investment in Baron International Growth Fund (Institutional Shares)†
in relation to the MSCI ACWI ex USA IMI Growth Index and the MSCI ACWI ex USA Index
$25,000
$20,699
$20,000
$17,358
$16,052
$15,000
$10,000
$5,000
$0
12/31/08
12/09
12/13
12/12
12/11
12/10
12/14
9/15
Baron International Growth Fund2,5
MSCI ACWI ex USA IMI Growth Index2
MSCI ACWI ex USA Index2
Baron International Growth Fund’s annualized returns as of September 30, 2015: 1-year, (3.45)%; 3-year, 5.33%; 5-year, 5.21%; and Since Inception, 11.38%.
Comparison of the change in value of $10,000 investment in Baron Real Estate Fund (Institutional Shares)
in relation to the MSCI USA IMI Extended Real Estate Index and the S&P 500 Index
$30,000
$25,000
$24,741
$20,000
$20,674
$19,430
$15,000
$10,000
$5,000
$0
12/31/09
6/10
12/10
6/11
12/11
6/12
12/12
6/13
12/13
6/14
12/14
6/15 9/15
Baron Real Estate Fund3,5
MSCI USA IMI Extended Real Estate Index3
S&P 500 Index3
Baron Real Estate Fund’s annualized returns as of September 30, 2015: 1-year, (0.71)%; 3-year, 13.03%; 5-year, 17.18%; and Since Inception, 17.06%.
1
2
3
4
5
†
10
The indexes are unmanaged. The Russell 2500™ Growth Index measures the performance of small to medium-sized U.S. companies that are classified as growth and the S&P 500 Index of 500 widely held
large cap U.S. companies. The indexes and Baron Focused Growth Fund are with dividends, which positively impact the performance results.
The MSCI ACWI ex USA indexes cited are unmanaged, free float-adjusted market capitalization weighted indexes reflected in US dollars. The MSCI ACWI ex USA IMI Growth Index Net USD
measures the performance of large, mid and small cap growth securities across developed and emerging markets, excluding the United States. The MSCI ACWI ex USA Index Net USD measures
the equity market performance of large and mid cap securities across developed and emerging markets, excluding the United States. The indexes and Baron International Growth Fund include
reinvestment of dividends, net of foreign withholding taxes, which positively impact the performance results.
The MSCI USA IMI Extended Real Estate Index is a custom index calculated by MSCI for, and as requested by, BAMCO, Inc. The index includes real estate and real estate-related GICS classification
securities. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further
redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, reviewed or produced by MSCI. The S&P 500 Index measures the performance
of 500 widely held large cap U.S. companies. The indexes and Baron Real Estate Fund are with dividends, which positively impact performance results.
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 predecessor partnership’s performance is only for the periods before the Fund’s registration statement was effective, which was
June 30, 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.
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.
Comparison of the change in value of $10,000 investment in Baron Emerging Markets Fund (Institutional Shares)
in relation to the MSCI EM IMI Growth Index and the MSCI EM IMI Index
$15,000
$10,508
$10,000
$8,399
$7,825
$5,000
$0
12/31/10
6/11
12/11
6/12
12/12
6/13
12/13
6/14
12/14
6/15 9/15
Baron Emerging Markets Fund1,3
MSCI EM IMI Growth Index1
MSCI EM IMI Index1
Baron Emerging Markets Fund’s annualized returns as of September 30, 2015: 1-year, (13.67)%; 3-year, 1.66%; and Since Inception, 1.05%.
Comparison of the change in value of $10,000 investment in Baron Energy and Resources Fund (Institutional Shares)
in relation to the S&P North American Natural Resources Sector Index and the S&P 500 Index
$20,000
$16,537
$15,000
$10,000
$8,285
$7,367
$5,000
$0
12/30/11
6/12
12/12
6/13
12/13
6/14
12/14
6/15
9/15
2,3
S&P North American Natural Resources
2
Sector Index
2
S&P 500 Index
Baron Energy and Resources Fund’s annualized returns as of September 30, 2015: 1-year, (43.98)%; 3-year, (7.77)%; and Since Inception, (7.83)%.
1
2
3
The MSCI EM (Emerging Markets) indexes cited are unmanaged, free float-adjusted market capitalization weighted indexes reflected in US dollars. The MSCI EM (Emerging Markets) IMI Growth
Index Net USD and the MSCI EM (Emerging Markets) IMI Index Net USD are designed to measure equity market performance of large, mid and small cap securities in the emerging markets. The
MSCI EM (Emerging Markets) IMI Growth Index Net USD screens for growth-style securities. The indexes and Baron Emerging Markets Fund include reinvestment of dividends, net of foreign
withholding taxes, which positively impact the performance results.
The S&P indexes cited are unmanaged. The S&P 500 North American Natural Resources Sector Index measures the performance of U.S.-traded natural resources-related stocks, including mining,
energy, paper and forest products, and plantation owning companies. The S&P 500 Index measures the performance of 500 widely held large cap U.S. companies. The indexes and Baron Energy
and Resources Fund are with dividends, which positively impact the performance results.
11
Comparison of the change in value of $10,000 investment in Baron Global Advantage Fund (Institutional Shares)
in relation to the MSCI ACWI Growth Index and the MSCI ACWI Index
$20,000
$15,000
$12,883
$12,485
$12,357
$10,000
$5,000
$0
4/30/12
6/12
12/12
6/13
12/13
6/14
12/14
6/15
9/15
Baron Global Advantage Fund1,3
MSCI ACWI Growth Index1
MSCI ACWI Index1
Baron Global Advantage Fund’s annualized returns as of September 30, 2015: 1-year, (12.55)%; 3-year, 7.82%; and Since Inception, 6.39%.
Comparison of the change in value of $10,000 investment in Baron Discovery Fund (Institutional Shares)
$20,000
$15,000
$11,900
$11,180
$10,799
$10,000
$5,000
$0
9/30/13
12/13
3/14
6/14
9/14
12/14
3/15
6/15
9/15
2,3
2
S&P 500 Index2
Baron Discovery Fund’s annualized returns as of September 30, 2015: 1-year, (4.53)%; and Since Inception, 5.74%.
1
2
3
12
The MSCI ACWI indexes cited are unmanaged, free float-adjusted market capitalization weighted indexes reflected in US dollars. The MSCI ACWI Growth Index Net USD measures the equity
market performance of large and mid cap growth securities across developed and emerging markets. The MSCI ACWI Index Net USD measures the equity market performance of large and mid
cap securities across developed and emerging markets. The indexes and the Baron Global Advantage Fund include reinvestment of dividends, net of foreign withholding taxes, which positively
impact the performance results.
The indexes are unmanaged. The Russell 2000® Growth Index measures the performance of small-sized U.S. companies that are classified as growth and the S&P 500 Index of 500 widely held
large cap U.S. companies. The indexes and Baron Discovery Fund are with dividends, which positively impact the performance results.
Baron Asset Fund
September 30, 2015
Dear Baron Asset Fund Shareholder:
Performance
During the three-month period ended September 30, 2015, most market
indexes dropped sharply. Stocks began their decline in late-August, before
partly recovering, and then falling sharply again in late-September. Baron
Asset Fund Retail Shares fell 8.31% and Baron Asset Fund Institutional
Shares fell 8.25%; the Russell Midcap Growth Index (the “Index”) declined
7.99%, and the S&P 500 Index declined 6.44%. The reasons for the market
decline included increased uncertainty about the health of the Chinese
economy and the potential ramifications this might have on global growth;
the continued decline in energy and commodity prices; and, the shockwaves
from a rapid decline in biotechnology shares, driven by concerns about that
industry’s pricing trends. Although we believe the Fund had limited direct
exposure to these developments, many of our investments suffered over
these concerns, nonetheless.
As discussed below, the investments that performed best against this
challenging backdrop included Health Care companies that lacked even
tangential exposure to the drug pricing concerns that impacted many
important participants in the sector. These included IDEXX Laboratories,
Inc., a veterinary diagnostic firm. Several businesses that serve Information
Technology (IT) end-markets reported good results, indicating that they
were insulated against these issues. These included VeriSign, Inc., SS&C
Technologies, Inc. and Equinix, Inc. Finally, companies with proprietary
data and analytics, characterized by highly-recurring, largely subscriptionbased revenues, also were relative outperformers. These included Verisk
Analytics, Inc., Nielsen Holdings Plc and Gartner, Inc.
Table I.
Performance†
ANDREW PECK
PORTFOLIO MANAGER
Retail Shares: BARAX
Institutional Shares: BARIX
The worst performers included the manufacturer of DNA sequencers,
Illumina, Inc., which suffered from both company-specific issues, as well as
fall-out from the sell-off in biotechnology shares. China-related concerns
impacted Mettler-Toledo, Inc., a manufacturer of weighing devices, that
has an important presence in that market. The continued drop in energy
prices hurt master limited partnerships (MLPs) that own midstream energy
infrastructure assets, Shell Midstream Partners, L.P. and Tallgrass Energy
GP, LP, as well as FleetCor Technologies, Inc., which primarily provides
credit card processing services for large oil companies.
Annualized for periods ended September 30, 2015
Three Months5
Nine Months5
One Year
Three Years
Five Years
Ten Years
Since Inception
(June 12, 1987)
Baron
Asset Fund
Retail
Shares1,2
Baron
Asset Fund
Institutional
Shares1,2,3
(8.31)%
(4.50)%
1.83%
13.72%
13.08%
7.33%
11.07%
Table II.
Russell
Midcap
Growth
Index1
S&P 500
Index1
(8.25)%
(4.29)%
2.11%
14.03%
13.39%
7.52%
(7.99)%
(4.15)%
1.45%
13.98%
13.58%
8.09%
(6.44)%
(5.29)%
(0.61)%
12.40%
13.34%
6.80%
11.14%
9.68%4
9.19%
Top contributors to performance for the quarter ended September 30, 2015
Year
Acquired
IDEXX Laboratories, Inc.
Arch Capital Group Ltd.
Verisign, Inc.
SS&C Technologies, Inc.
Equinix, Inc.
2006
2003
2013
2014
2007
Percent
Impact
0.52%
0.29
0.18
0.16
0.10
Shares of veterinary diagnostics manufacturer IDEXX Laboratories, Inc.
gained as the company reported strong quarterly results that demonstrated
Performance listed in the above table is net of annual operating expenses. Annual expense ratio for the Retail Shares and Institutional Shares as of September
30, 2014 was 1.31% and 1.04%, 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 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
www.BaronFunds.com or call 1-800-99BARON.
†
1
2
3
4
5
The Fund’s historical performance was impacted by gains from IPOs and/or secondary offerings. There is no guarantee that these results can be repeated or that the Fund’s level of participation in
IPOs and secondary offerings will be the same in the future.
The indexes are unmanaged. The Russell Midcap® Growth Index measures the performance of medium-sized U.S. companies that are classified as growth and the S&P 500
Index of 500 widely held large cap U.S. companies. The indexes and the Fund are with dividends, which positively impact the performance results. Russell Investment Group
is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell is a trademark of Russell Investment Group.
The performance data in the table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or redemption of Fund shares.
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.
For the period June 30,1987 to September 30, 2015.
Not annualized.
13
Baron Asset Fund
continuing market share gains in its in-clinic instruments business. In
particular, new placements of its flagship Catalyst instruments grew 44% in
the third quarter, driven by the launch of the improved CatalystOne device
in the U.S. and Europe; and, placements of premium hematology
instruments grew 30%, a meaningful increase from last quarter’s results.
IDEXX’s reference laboratory segment also posted good results, which
suggested ongoing market share gains. Finally, the company’s results also
assuaged many investors’ recent concerns about a potentially diminished
competitive position in IDEXX’s rapid assay segment.
Arch Capital Group Ltd. is a Bermuda-based specialty insurance and
reinsurance company. The company’s shares rose on reports of good
quarterly financial results, highlighted by the 9% growth in its book value
per share, a key metric for insurance industry investors. Despite soft pricing
trends across its industry, Arch continues to generate above-average returns
because of its profitable underwriting experience, benign catastrophe
losses, and favorable developments in its historic treatment of reserves. The
company’s recently acquired mortgage insurance business also is scaling up,
and we believe this will provide a new avenue for growth. In addition, recent
merger activity in the property and casualty insurance industry has boosted
share prices across the sector.
Table III.
Top detractors from performance for the quarter ended September 30, 2015
Illumina, Inc.
TerraForm Power, Inc.
Mettler-Toledo International, Inc.
FleetCor Technologies, Inc.
Shell Midstream Partners, L.P.
Year
Acquired
Percent
Impact
2012
2014
2008
2012
2014
–0.80%
–0.58
–0.49
–0.42
–0.42
Illumina, Inc. is the leading provider of next generation DNA sequencing
instruments and consumables. The company reported disappointing
financial results, but we do not believe they reflect a change in the
company’s market opportunity. We continue to believe the addressable
market for the company’s products and services is large (over $20 billion)
and growing as new applications for DNA sequencing emerge.
Competitively, we believe Illumina remains the dominant provider of
sequencing instruments and consumables. Illumina continues to invest
substantially in research and development, and we are optimistic that the
company will retain its large technological lead over its potential
competitors.
Verisign, Inc. oversees domain registrations for many of the most common
Internet address suffixes, including .com and .net. Its shares gained after
reporting better-than-expected financial results, which exceeded
expectations of both revenues and profit margins. In addition, the company
is poised to introduce a new series of domain names for international
markets that we believe should generate a highly-profitable revenue
stream. We believe that Verisign’s exclusive contract with the Internet
Corporation for Assigned Names and Numbers (ICANN), a key regulatory
body overseeing the operations of the Internet, creates a substantial barrier
for competitors. In uncertain markets, stocks with stable businesses and
highly-visible revenues tend to outperform, although past performance is
no guarantee of future performance.
TerraForm Power, Inc. is a ‘yieldco,’ a dividend growth-oriented company
that bundles renewable long-term contracted operating assets to generate
predictable cash flows. TerraForm is focused largely on the commercialscale development of solar and wind power projects. Its stock dropped after
the announcement that TerraForm’s parent, Sun Edison, Inc., would acquire
Vivint Solar, thereby expanding into the residential solar market. Investors
questioned both the strategic aspects of the deal, as well as its $2.2 billion
price tag. This contributed to a market-wide reassessment of the unit
economics underlying Sun Edison’s solar development plans. Although we
believe in the secular drivers behind the growth in renewable energy
demand, we chose to exit our position in the company.
Shares of financial technology vendor SS&C Technologies Holdings, Inc.
performed well, as the company closed its acquisition of Advent Software
and announced the acquisition of Citi Alternative Investor Services. We
expect both acquisitions to enhance SS&C’s competitive positioning and be
meaningfully accretive to its financial performance. We believe SS&C’s
management team has an outstanding track record of value creation
through M&A, and we believe that Advent could be its most significant
acquisition yet.
Mettler-Toledo International, Inc. is the world’s largest provider of
weighing instruments for use in laboratory, industrial, and food retailing
applications. The company reported largely positive quarterly results, but
weakness in the Chinese market, where Mettler has a large presence,
resulted in a slight lowering of its constant currency revenue growth
forecast for the year. We continue to believe Mettler is an exceptional
business with an outstanding management team, and we remain confident
in its longer-term prospects.
Equinix, Inc. operates a global network of state-of-the-art data centers. Its
shares performed well, as the company completed its long-awaited
transformation into a REIT, thereby reducing its cost of capital and
attracting an additional class of shareholders. Equinix also continued to be
involved in expanding its network through accretive acquisitions. We
continue to like the growth prospects for the data center business, and we
believe that Equinix has a clear and sensible plan to continue growing
revenues at a faster pace than its peers while improving business
efficiencies and recognizing margin improvement.
FleetCor Technologies, Inc. provides payment processing services to
vehicle fleet operators and large oil companies worldwide. Although
FleetCor reported good quarterly results and raised its full-year earnings
guidance, macroeconomic concerns, including weak fuel prices and a
stronger U.S. dollar, outweighed these results and caused the stock price to
drop. Without these macroeconomic headwinds, company management
estimated that earnings growth would have been 39% instead of the 16%
reported. As these headwinds eventually subside, we believe its earnings
will improve meaningfully.
14
Baron Asset Fund
September 30, 2015
Shell Midstream Partners, L.P. is the recent IPO of a midstream energy
MLP formed by Royal Dutch Shell in 2014. Shares fell as the broad MLP
market experienced significant selling pressure because of diminished
growth expectations, the prospect of rising interest rates, and tax-loss
selling. Shell Midstream belongs to a group of high growth, high multiple
stocks that experienced even more selling pressure than the broader MLP
market. We believe the company has substantial room to grow, while its
cash flows should be relatively less sensitive to falling commodity prices.
Portfolio Structure
At September 30, 2015, Baron Asset Fund held 60 positions. The Fund’s 10
largest holdings represented 37.4% of assets, and the 20 largest
represented 57.9% of assets. The Fund’s largest weighting was the
Information Technology sector at 22.4% of assets. This sector includes
software companies, IT consulting firms, and credit card processors. The
Fund held 22.0% of its assets in the Health Care sector, which includes
investments in life sciences companies, health care equipment and supplies
companies, and health care technology companies. The Fund held 16.5% of
its assets in the Industrials sector, which includes investments in
manufacturers, distributors and information services firms. The Fund also
had significant weightings in Financials at 14.2% of assets and Consumer
Discretionary at 14.2% of assets.
Table IV.
Top 10 holdings as of September 30, 2015
Market Quarter
Cap
End
When
Market
Percent
Year
Acquired
Cap
Amount of Net
Acquired (billions) (billions) (millions) Assets
Gartner, Inc.
Vail Resorts, Inc.
Verisk Analytics, Inc.
Illumina, Inc.
FactSet Research
Systems, Inc.
SBA Communications Corp.
The Charles Schwab Corp.
2007
2006
1997
2009
2003
2012
2012
$2.9
2.5
0.2
4.0
0.9
5.3
2.9
$7.0
6.8
3.8
12.5
9.0
25.4
12.7
$130.1
121.0
104.7
96.1
95.5
92.3
79.1
2006
2007
1992
2.5
3.8
1.0
6.6
13.4
37.6
79.1
73.3
72.8
5.2%
4.8
4.1
3.8
3.8
3.7
3.1
3.1
2.9
2.9
Recent Activity
Bio-Techne Corporation sells specialized proteins, antibodies and other
reagents, as well as instruments for protein analysis, to life sciences
researchers at academic institutions, biopharmaceutical companies and
government-funded research entities. Its products are used by scientists to
investigate potential therapies for disease. Most of the company’s products
are for research purposes only, and so they avoid the need for expensive,
time-consuming regulatory approvals. The products are also relatively
inexpensive, and they generally do not represent large cost items in most
clients’ research budgets. With a portfolio of more than 275,000 products,
Bio-Techne has by far the largest portfolio in its field, making the company
a key supplier across its customer base.
We have also owned this stock in Baron Growth Fund for many years. We
believe that Bio-Techne has attractive financial characteristics, including
consistent revenue growth potential, high profit margins potential, and low
capital requirements. We also believe the company has a reputation for
manufacturing high quality, reliable, consistent products. The company has
a staff of scientists who stay current with scientific advances and areas of
interest for researchers and help direct product development into these
growing areas.
Starting in 2010, the company’s organic growth slowed to the low single
digits because of academic funding constraints, which hurt customer
spending, and a lack of re-investments in the business by the former
management team. Chuck Kummeth, who assumed the CEO position in
April 2013, has been taking steps to reinvigorate growth, including hiring
new executives and salespeople, making acquisitions, and expanding in
China where the government is committed to investing in life sciences
research.
We bought the stock in the quarter because we believe the fundamentals
of this attractive business will continue to improve. In the most recently
reported quarter, organic growth accelerated to 7%, the highest level in
years. The funding environment for the company’s customer base is stable.
Drug development budgets are improving. There have been proposed
increases in the NIH budget, though uncertainty about the final budget
remains. The company is annualizing the acquisition of a business called
Protein Simple, which we believe has potential to drive revenue growth
acceleration through the sale of its innovative instrument platform that
automates the Western Blotting technique. Management has an
aspirational plan to grow the company’s revenues to $1 billion in the next
five years. Despite improving fundamentals, the stock price trades at what
we believe is an attractive level.
During the past quarter, the Fund established three new positions and
added to five others. The Fund also sold six positions and reduced its
holdings of 19 others.
Table VI.
Table V.
Colfax Corp.
Nielsen Holdings Plc
Phillips 66 Partners LP
Shutterstock, Inc.
Top net purchases for the quarter ended September 30, 2015
Quarter End Amount
Market Cap Purchased
(billions)
(millions)
Bio-Techne Corporation
TerraForm Global, Inc.
Blue Buffalo Pet Products, Inc.
Towers Watson & Co.
CDK Global, Inc.
$3.4
1.1
3.5
8.1
7.6
$29.0
12.5
5.1
4.4
4.0
Top net sales for the quarter ended September 30, 2015
Amount Sold
(millions)
$24.1
18.6
18.2
15.4
11.5
We exited our position in Colfax Corp., which manufactures products for
gas and fluid handling markets, as we became less optimistic that the
company could overcome the significant headwinds it faces in its energy
and industrial-related end markets. We exited our position in TerraForm
15
Baron Asset Fund
Power, Inc. as the market reassessed the unit economics underlying Sun
Edison’s solar development plans. We reduced our stake in Nielsen
Holdings Plc to focus on other data-oriented investments. We exited
Phillips 66 Partners LP over concerns about its valuation, given headwinds
in the MLP universe. Finally, we exited Shutterstock, Inc., a digital
photography vendor, over concerns about its competitive position.
Thank you for investing in Baron Asset Fund.
Our entire Firm and our research department, in particular, are committed
to justifying your ongoing confidence and support. I remain a significant
investor in the Fund alongside you.
Sincerely,
Outlook
Nothing has changed our longstanding view that high-quality, mid-sized
growth stocks represent an attractive long-term investment opportunity.
The U.S. economy is among the world’s healthiest, and, particularly after
this quarter’s stock market correction, its equity market multiples are
within the range of their long-term averages. Interest rates remain at
historic lows, and we believe that equity markets often perform well, even
after rates begin to increase. Employment and housing trends continue to
improve, and energy prices remain meaningfully below their recent levels.
We believe that our portfolio of well-managed, competitively advantaged,
fast growing companies will continue to perform well in this environment,
although it’s not a guarantee that they will.
Andrew Peck
Portfolio Manager
October 23, 2015
prospectus contains this and other information about the Funds. You may obtain them from its distributor, Baron Capital, Inc., by calling 1-800-99BARON or
visiting www.BaronFunds.com. Please read them carefully before investing.
The Adviser believes that there is more potential for capital appreciation in mid-sized companies, but there also may be more risk. Specific risks associated
with investing in mid-sized companies include that the securities may be thinly traded and they may be more difficult to sell during market downturns. Prior
to February 15, 2007, the Fund’s strategy was to invest primarily in small and mid-sized growth companies. Since then, the Fund’s investment strategy has
shifted to mid-sized companies. The Fund may not achieve its objectives. Portfolio holdings are subject to change. Current and future portfolio 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 Asset Fund by anyone in any jurisdiction where it would be unlawful under the laws of that
jurisdiction to make such offer or solicitation.
16
Baron Growth Fund
September 30, 2015
Dear Baron Growth Fund Shareholder:
Performance
U.S. stock markets were unusually volatile during the three months ended
September 30, 2015. Most indexes fell sharply, with small and mid cap
stocks performing worse than large caps. During the quarter, Baron Growth
Fund (the “Fund”) declined in value by 8.66% (Institutional Shares), which
was better than the Russell 2000 Growth Index, the small cap benchmark
against which we compare the performance of this Fund, which declined
13.06%. The S&P 500 Index, the benchmark for the broad market, declined
6.44%. Over the long term, Baron Growth Fund has outperformed its
benchmark by on average 3.14% per year since December 31, 2000 and
5.71% per year since its inception on December 31, 1994. Please see Table I.
Table I.
Performance
Three Months4
Nine Months4
One Year
Three Years
Five Years
Ten Years
Fifteen Years
Since Inception
(December 31,1994)
Baron
Growth
Fund
Retail
Shares1,2
Baron
Growth
Fund
Institutional
Shares1,2,3
Russell
2000
Growth
Index1
S&P 500
Index1
(8.71)%
(5.56)%
1.27%
11.65%
13.17%
7.54%
8.66%
(8.66)%
(5.38)%
1.51%
11.94%
13.46%
7.71%
8.78%
(13.06)%
(5.47)%
4.04%
12.85%
13.26%
7.67%
4.15%
(6.44)%
(5.29)%
(0.61)%
12.40%
13.34%
6.80%
3.96%
12.87%
12.95%
7.24%
9.19%
RONALD BARON
CEO AND PORTFOLIO MANAGER
During the quarter, the markets were pressured by several disruptive events
that more than wiped out the gains achieved in the first half of the year.
China growth slowed, which weighed on emerging markets and stoked fears
of contagion. Geopolitical turmoil arose again in the Middle East, and
Russia’s move to engage directly in the Syrian conflict further rattled
investor confidence. Oil and commodities prices continued to fall. Highyield spreads widened. The lower quality credit market was negatively
impacted by impending financial problems of leveraged energy and
industrial companies amid downgrades of Volkswagen (following an
embarrassing emissions scandal) and Glencore debt. To many investors’
surprise, interest rates, however, did not change.
The Fed chose not to raise rates in September as many had forecast. This
decision was attributed to slower-than-expected growth, market turmoil,
Retail Shares: BGRFX
Institutional Shares: BGRIX
and lower-than-desired inflation. This signal sent the markets lower. We
believe the volatility in U.S. markets in the third quarter was largely in
reaction to these macro and overseas events as opposed to business
fundamentals.
Table II.
“Tastes great…less filling.” Miller Lite. 1974. “Better alpha…less beta.” Baron
Growth Fund. 2015.
Performance Based
Characteristics as of
September 30, 2015
Time Interval
Baron Growth Fund – Institutional Shares
Since
3 Years
5 Years
10 Years
Inception
Alpha (%)
Beta
Upside Capture (%)
Downside Capture (%)
2.67
0.71
77.96
67.18
Quality Characteristics
Baron Growth Fund
Russell 2000 Growth
Index
Difference (A good thing)
3.29
0.74
79.34
64.88
1.32
0.80
80.89
75.76
7.48
0.68
82.34
60.84
Standard Deviation of
Year-over-Year Earnings Growth – 5 years
89.27
169.59
–80.32
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 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
1
2
3
4
The indexes are unmanaged. The Russell 2000® Growth Index measures the performance of small-sized U.S. companies that are classified as growth and the S&P 500 Index
of 500 widely held large cap U.S. companies. The indexes and the Fund are with dividends, which positively impact the performance results. Russell Investment Group is the
source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell is a trademark of Russell Investment Group.
Not annualized.
17
Baron Growth Fund
creation through M&A and that Advent could be its most important
acquisition to date. (Neal Rosenberg)
Table III.
“Any Time at All.”
“The Long and
Winding Road”
Bush Years
“Here Comes
“Yesterday”
2000-2008
the Sun”
Clinton Years
9/11; Iraq;
Obama Years
1992-2000
Afghanistan;
2008-2015
Internet Bubble Housing Bubble; Recovery
“Any Time
12/31/99 P/E 33x Financial Panic
P/E 15.1x
at All”
Annualized Returns
Inception
Inception
12/31/94 to
12/31/99 to 12/31/08 to 12/31/94 to
12/31/99
12/31/08
9/30/15
9/30/15
Baron Growth
Fund –
Institutional
Shares
Russell 2000
Growth Index
S&P 500 Index
29.90%
2.46%
15.98%
12.95%
18.99%
28.56%
(4.71)%
(3.60)%
16.25%
14.25%
7.24%
9.19%
Table IV.
Year
Acquired
Under Armour, Inc.
Bright Horizons Family
Solutions, Inc.
Market
Cap
Quarter
When
End Market
Acquired
Cap
Total
(billions) (billions) Return
2005
2002
2010
2005
$1.0
0.4
1.0
1.9
$20.9
9.0
7.0
6.8
2013
1.8
3.9
Percent
Impact
15.99%
9.72
12.27
15.76
0.56%
0.31
0.28
0.21
11.14
0.18
Shares of Under Armour, Inc. a manufacturer of athletic apparel, increased
in the third quarter. The company reported another period of strong
financial results due to continued revenue growth and impressive cost
management. Under Armour appears to be capitalizing on its brand
momentum and positioning the business for future growth as it continues
to execute on its goal to become the second largest global sporting goods
brand. Additionally, Under Armour expressed confidence in its ability to
accelerate its growth as it plans to double in size over the next three years.
(Michael Baron)
reinsurance company. Shares rose on reports of good quarterly financial
results with its 9% growth in book value per share. Despite soft industry
pricing conditions, Arch continues to generate above-average returns due to
profitable underwriting, benign catastrophe losses, and favorable reserve
development. The recently acquired mortgage insurance business is scaling
up. M&A activity in the property & casualty insurance industry has also
helped boost share prices. (Josh Saltman)
Shares of financial technology vendor SS&C Technologies Holdings, Inc.
performed well in the third quarter. The company closed the acquisition of
Advent Software and announced the acquisition of Citi Alternative Investor
Services. We expect both acquisitions to enhance SS&C’s competitive
positioning and be meaningfully accretive to financial performance. We
believe SS&C’s management team has an outstanding track record of value
18
Table V.
Market
Cap
When
Year
Acquired
Acquired (billions)
CaesarStone
Sdot-Yam Ltd.
Community Health
Systems, Inc.
United Natural
Foods, Inc.
Marriott Vacations
Worldwide Corp.
Financial Engines, Inc.
Quarter
End Market
Cap
Total
(billions) Return
Percent
Impact
2012
$0.4
$1.1
–55.59% –0.82%
2004
2.4
5.1
–32.09
–0.79
2011
1.8
2.4
–23.82
–0.41
2013
2010
1.5
0.7
2.1
1.5
–25.47
–30.47
–0.41
–0.38
CaesarStone Sdot-Yam Ltd. is a leading global manufacturer of quartz
surfaces for kitchens and bathrooms. Shares fell sharply in August after the
company reduced its full year revenue guidance on the second quarter
earnings call. A negative research report also weighed on the stock price. We
remain positive on our investment in CaesarStone, as earnings growth
accelerates from successful new product launches and quartz market share
gains vs. other countertop materials. (David Kirschenbaum)
Community Health Systems, Inc. is one of the country’s largest hospital
operators, with 31,000 beds in 29 states, primarily located in small and midsized markets. Shares were weak on concerns that Affordable Care Act
tailwinds are largely over and that comps will be more difficult going
forward. We maintain a positive view as we believe the spinoff of Quorum
Health will create shareholder value, synergies from the merger with HMA
will exceed initial guidance, more states will expand Medicaid, and
deleveraging will accelerate. (Susan Robbins)
Shares of United Natural Food, Inc., the leader in healthy foods
distribution to North American supermarkets, declined during the third
quarter due to a contract loss representing 5% of sales that occurred after
a change in ownership with a specific customer. We view United Natural’s
leading scale, national coverage, and high service levels as key competitive
advantages. It has a strong supply chain infrastructure in the industry and
we think it is well positioned for share gains over the next several years.
(Matthew Weiss)
Recent Purchases
Table VI.
Atara Biotherapeutics, Inc.
ConforMIS, Inc.
Hudson’s Bay Co.
Douglas Emmett, Inc.
Juno Therapeutics, Inc.
Year
Acquired
Market
Cap
When
Acquired
(billions)
Quarter
End
Market
Cap
(billions)
Amount
Purchased
(millions)
2015
2015
2015
2009
2015
$1.5
0.8
3.2
1.0
3.8
$0.9
0.7
3.1
4.2
4.1
$35.3
33.4
11.6
9.1
8.3
Baron Growth Fund
September 30, 2015
We initiated a position in Atara Biotherapeutics, Inc., a biotech company
developing therapies for muscle wasting conditions, cancer and viralassociated diseases. The company has an exclusive license from Memorial
Sloan Kettering Cancer Center for T-Cell programs targeting three different
viral or cancer specific antigens. These are off-the-shelf therapies that can
be made available within days of patients’ needs. The most advanced T-Cell
therapy has shown a dramatic increase in survival in Phase 2 studies.
Management believes the technology has broader applicability, including
additional viral targets and indications. The company is also developing a
drug for muscle wasting in dialysis patients. We believe this drug has great
potential. In our opinion, Atara has a strong, experienced management team
committed to building a big business over the long term. (Neal Kaufman)
We initiated a position in ConforMIS, Inc. a company which develops
custom implants for joint replacement procedures. The company uses
proprietary software to design knee implants that match a patient’s unique
anatomy. The company also uses 3D printing technology to manufacture
customized instruments. In our view, ConforMIS has unique technology that
is patent protected and disruptive to the $14 billion joint replacement
industry. Studies have shown that the company’s knee implants result in
better patient outcomes versus traditional off-the-shelf implants. We
believe ConforMIS is well positioned to take market share, especially
because Medicare and other payors are shifting reimbursement away from
a fee-for-service payment model and towards bundled payments. Because
patients who receive ConforMIS implants have been shown to recover
faster than patients who receive off-the-shelf implants, the total cost of
care for these patients should be lower, which, in our view, should drive
hospital adoption. (Neal Kaufman)
Hudson’s Bay Co. is a leading luxury goods retailer, operating iconic
department stores throughout North America and Europe, including: Saks Fifth
Avenue and Lord & Taylor in the U.S., The Bay in Canada and Galeria Kaufhof
in Germany. Unlike many of its retail peers, Hudson’s Bay owns several of these
premiere real estate assets, including the Saks Fifth Avenue’s and Lord &
Taylor’s flagship stores in Manhattan, which represent key strategic value.
During the quarter, we initiated a position in the company after management
partnered with two leading REITs to monetize several properties in its portfolio
and used the proceeds to acquire one of the better leading department store
chains in Germany, further diversifying the business. We believe Hudson’s Bay
can expand its top and bottom line meaningfully over the next several years
through continuous improvement of its merchandise, the rollout of additional
Saks Fifth Avenue full-line and OFF 5th discount stores, substantial renovations
of its flagship stores and significant investments in e-commerce and omnichannel capabilities. (Matthew Weiss)
Portfolio Structure and Strategy
The objective of Baron Growth Fund is to double its value per share within
five years. Of course, we may not achieve our objective. Our strategy to
accomplish this goal is to invest for the long term in a diverse portfolio of
what we believe are well-managed, growing small cap businesses at
attractive prices.
As of September 30, 2015 Baron Growth Fund held 81 investments. The top
10 holdings comprise 35.0% of the Fund and the median market
capitalization of these companies was just over $3 billion. We believe this
diversified portfolio offers investors potentially better than market returns
with less “risk” than the market. We define “risk” as volatility. The Fund’s
“beta,” i.e., a measure of the portfolio’s volatility relative to the market’s
volatility, since inception is 0.68. Compared to the companies in its
benchmark, Baron Growth Fund’s investments possess higher levels of
profitability (as defined by average gross and operating margins), greater
returns on capital and employ low levels of leverage.
The Fund’s average portfolio turnover for the past three years is 9.91%. This
means the Fund has an average holding period for its investments of over
10 years. This contrasts sharply with the average small cap mutual fund
which typically “turns over” its portfolio every 15 months. We invest in
small companies at the time of purchase that we believe have the potential
to double in size within four to five years.
We believe that a portfolio of investments diversified among several
industries all of which are dependent upon different, non-correlated
fundamentals will likely help reduce portfolio volatility. In addition,
many of the companies in which the Fund invests potentially have
significant recurring revenue, which makes earnings for companies in
which we have invested less volatile than the Russell 2000 Growth Index.
We find all these businesses through our dedicated research effort. Our
holdings’ significant barriers to competitive threats provide pricing
power. Most of our companies reinvest in their business to increase their
revenues and margins over the long term. We believe the Fund has an
opportunity to meet its objectives, although there is no guarantee that
it will do so.
While we do not try to predict short-term “macro” developments or current
events, we believe conditions remain favorable for the economy and stocks.
During the quarter, the unemployment rate fell to 5.1%, a post-recession
low. U.S. economic growth is improving. Consumer and business confidence
is rising. Housing and auto sales remain strong and prices continue to
increase. The decline in oil prices, while challenging for the energy and
manufacturing sectors in the short term, is a substantial positive for the U.S.
economy and non-energy related stocks, as money saved on energy costs
can be spent elsewhere or used to pay off debt. Finally, we believe stocks
remain attractively valued, trading around 15-16x earnings, roughly in-line
with the market’s long-term average valuation.
Table VII.
Market Quarter
Cap
End
When
Market
Percent
Year
Acquired
Cap
Amount of Net
Under Armour, Inc.
The Middleby Corp.
FactSet Research
Systems, Inc.
Gartner, Inc.
Vail Resorts, Inc.
ITC Holdings Corp.
Dick’s Sporting Goods, Inc.
MAXIMUS, Inc.
2005
2002
2011
$1.0
0.4
1.6
$20.9
9.0
6.0
$358.1
290.2
268.2
2006
2007
2010
1997
2005
2004
2011
2.5
2.3
1.0
0.2
0.8
1.4
1.2
6.6
7.0
7.0
3.8
5.2
5.9
3.9
255.7
237.1
216.3
216.1
212.5
188.5
178.7
5.2%
4.2
3.9
3.7
3.4
3.1
3.1
3.1
2.7
2.6
19
Baron Growth Fund
Thank you for investing in Baron Growth Fund.
Thank you for joining us as fellow shareholders in Baron Growth Fund. We
believe the growth prospects for the businesses in which Baron Growth
Fund has invested continue to be favorable.
We continue to work hard to justify your confidence and trust in our
stewardship of your family’s hard-earned savings. We will also continue to
provide you with information that I would like to have if our roles were
reversed. This is so you will be able to make an informed judgment about
whether Baron Growth Fund remains an appropriate and attractive
investment for your family.
Respectfully,
Ronald Baron
CEO and Portfolio Manager
October 23, 2015
The Adviser believes that there is more potential for capital appreciation in smaller companies, but there also may be more risk. Specific risks associated with
investing in smaller companies include that the securities may be thinly traded and they may be more difficult to sell during market downturns. The Fund
may not achieve its objectives. Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.
This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Growth Fund by anyone in any jurisdiction where it would be unlawful under the laws of that
Alpha: measures the difference between a fund’s actual returns and its expected performance, given its level of risk as measured by beta.
Beta: measures a fund’s sensitivity to market movements. The beta of the market (Russell 2000 Growth Index) is 1.00 by definition.
P/E: the price earnings ratio is a valuation ratio of a company’s current stock price to its actual earnings per share.
Upside Capture: explains how well a fund performs in time periods where the benchmark’s returns are greater than zero.
Downside Capture: explains how well a fund performs in time periods where the benchmark’s returns are less than zero.
Standard Deviation of YOY EPS Growth: is calculated by taking the 5-year standard deviation of year-over-year (“YOY”) LTM EPS growth. The standard deviation is used to measure the spread around
the average or mean. In other words, it indicates whether the values being considered differ greatly from each other. The smaller the standard deviation, the smaller the spread. Standard deviation is
determined by first finding the average of the data set. Each data item is then subtracted from the average, and the difference is squared. The sum of the squared values is divided by the number of
data items minus one. The function returns the square root of that value.
20
September 30, 2015
Dear Baron Small Cap Fund Shareholder:
Performance
The third quarter was a very challenging one for stocks as global equity
markets declined. Baron Small Cap Fund lost 12.52% (Institutional Shares)
in the quarter. This was in line with the Russell 2000 Growth Index which
lost 13.06% in the quarter. The S&P 500 Index has lost 6.44% in the
quarter. Year-to-date, the Fund is down 8.75%, the Russell 2000 Growth
Index is down 5.47% and the S&P 500 is down 5.29%.
Table I.
Performance
Three Months4
Nine Months4
One Year
Three Years
Five Years
Ten Years
Since Inception
(September 30, 1997)
Baron
Small
Cap
Fund
Retail
Shares1,2
Baron
Small
Cap
Fund
Institutional
Shares1,2,3
(12.56)%
(8.92)%
(4.32)%
9.71%
11.01%
6.71%
(12.52)%
(8.75)%
(4.08)%
9.98%
11.29%
6.88%
9.09%
9.18%
Russell
2000
Growth
Index1
S&P 500
Index1
(13.06)% (6.44)%
(5.47)% (5.29)%
4.04%
(0.61)%
12.85% 12.40%
13.26% 13.34%
7.67%
6.80%
CLIFF GREENBERG
PORTFOLIO MANAGER
Retail Shares: BSCFX
Institutional Shares: BSFIX
Table II.
4.93%
5.94%
The market weakened in August on macro angst. Concerns arose that growth
in China was significantly slowing, now heading for a hard landing. The Chinese
devalued their currency by 2% which fueled the fire. Emerging market equities
and currencies declined, and their economies entered recession. Fears were
stoked that developed economies and stocks would suffer in conjunction. The
U.S. market experienced its first correction in four years.
The tenor of the small cap market changed. Psychology got decidedly
negative. The down draft in prices spread from companies with big foreign
exposures and economic sensitivities to engulf many of the sectors that
had been the leaders for the previous year. Biotechnology, pharmaceuticals
and high multiple technology stocks rolled over. Health Care stocks got
spooked by comments by politicians that drug cost inflation needed to be
better controlled. Holders sold other “winners” to protect gains as high
flyers witnessed multiple contractions.
Another reason stocks sold off was concern about the effects of the Federal
Reserve raising interest rates, which was considered to be imminent. That
ended up not happening. Uncertainty about Fed policy contributed to the
weak market.
Percent
Impact
Bright Horizons Family Solutions, Inc.
The Ultimate Software Group, Inc.
Flotek Industries, Inc.
Equinix, Inc.
0.27%
0.22
0.15
0.15
0.10
Our best acting stocks in the quarter were primarily well performing
businesses and companies with established and respected business models
that felt safe, as investors hid from risk.
Bright Horizons Family Solutions, Inc., the leading provider of corporatesponsored childcare, reported another quarter of strong results. Earnings
grew 29%, which was ahead of expectations. An important driver is the
maturing of consortium centers that the company has heavily invested in
for years and now are becoming increasingly profitable. The stock is up 37%
year-to-date, as the market has appreciated its strong near-term results,
continued long term growth prospects and its premier business model.
IDEXX Laboratories, Inc., the leading manufacturer of veterinary
diagnostics and equipment, contributed to performance in the third quarter.
cost. 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
1
2
3
4
Not annualized.
21
The company reported strong results that demonstrated solid gains in
instruments and reference labs, and reversed prior negative trends in rapid
assays. Instrument sales were up 38% and consumable revenue grew 20%
on a constant currency basis. We believe the results confirm that the
company’s decision to go direct with its salesforce is paying off. Also, the
company is very optimistic about its new SDMA test, that detects liver
disease in pets, which was launched to great success in the quarter. We
believe this is a harbinger of success for many new products the company
has been spending heavily on to develop.
The Ultimate Software Group, Inc., a leading provider of cloud-based payroll
and human resources software, reported their best overall sales quarter in their
history and strong quarterly results. We got involved in the stock seven years
ago when the company was struggling but had a superior product, a great
management team and culture, and big aspirations. They have performed
exceptionally well and the stock has risen six fold. Management now targets
doing $1 billion in revenues in 2018 and $2 billion in 2022 (they were doing
$150 million when we bought in). . .isn’t compounding great. . . and we believe
they will continue to achieve their goals.
Flotek Industries, Inc. supplies chemical additives to the oil and gas industries.
They have proprietary product that is proving extremely effective at increasing
the productivity of shale wells. Though drilling has collapsed this year (the rig
count was down 41% in the quarter) with the decline in oil prices, Flotek’s
sales of Complex nano-Fluid (CNF) grew 34% year over year and were 76%
higher than the previous quarter. We believe Flotek can continue to buck the
severe industry headwinds. We increased our position in the stock earlier in the
year when it traded much lower along with most Energy stocks.
Equinix, Inc., the global data center operator, completed its transition to
REIT status in the quarter and bid to acquire a large European competitor.
The business is also performing very well as the company reported strong
and accelerating results based on strong trends around cloud and
enterprise. We expect Equinix to report over $1 billion of Adjusted Funds
from Operations (AFFO) in 2016 up ten-fold when we first bought stock in
2008. The trading multiple of the stock has expanded, and we think even
more is justified, plus we expect earnings to compound at 15% per year, so
we foresee further gains.
Percent
Impact
–0.57%
–0.53
–0.51
–0.50
–0.49
The worst performing stocks in the quarter declined because their current
earnings or guidance were below expectations. We also took some hits as
investors rotated out of certain sectors (MLPs, Health Care).
Brookdale Senior Living, Inc., the largest operator of senior living
communities, declined after the company reported challenges integrating
their acquisition of Emeritus. Occupancy declined, management turnover
increased and ancillary therapy revenues fell short. Investors lost faith that
the company will be able to pursue actions to unlock shareholder value. We
sold some stock but maintain a position some since we think the benefits
from the acquisition will eventually be realized, that strategic alternatives
22
Mattress Firm Holding Corp., the largest domestic mattress retailer, also
announced lower-than-expected earnings and the stock declined. Mattress
sales in Texas and other oil affected markets were soft, and the company
decided to abandon development of a separate discount chain and took
losses to shut it down. However, the company did report positive results
from its important Sleep Train acquisition and continued success rolling out
additional stores. We continue to believe in management and in the longterm opportunities for the company. We believe they should be able to
compound earnings at 20% per year for a while and now with the stock
trading at a discount multiple, we think the stock will perform well,
assuming that the retail environment stabilizes.
Financial Engines, Inc., the financial service company that provides advice
and money management services to 401(k) accounts, fell in the quarter in
conjunction with the market’s decline. Overall assets under contract were
below forecast (because the market fell), but we were encouraged as
enrollment rates improved, the company added a new large record keeper to
its list of partners. New senior management is spending to improve marketing
campaigns to increase sales and retention which is depressing margins, but, if
successful, should result in faster growth in revenues and profits.
Targa Resources Corp. is the general partner of a midstream energy MLP.
The Small Cap Fund owns a basket of seven energy MLPs, primarily
midstream pipeline operators, that grow by drop-down of assets owned by
their refinery parents. Our holdings have been able to grow their dividends
by 15-20% per year, and we believe, although we cannot guarantee, they
will continue to do so in the future even with the decline in the price of oil
and in a more difficult financing environment. We considered these stocks
to be safe with low volatility. That proved to be incorrect this quarter, as the
MLP group fell sharply with the decline in crude oil, outflows for MLP
dedicated funds, and fear of higher rates on the horizon (which didn’t
happen). Our MLP holdings fell about 30% in the quarter. They now trade
at compelling valuations, which we believe will lead to good stable returns
once the stocks decouple from other energy equities.
Portfolio Structure
Table III.
Brookdale Senior Living, Inc.
Mattress Firm Holding Corp.
Targa Resources Corp.
Globe Specialty Metals, Inc.
still could add value and that the shares traded down to an extremely cheap
valuation.
As of September 30, 2015, the Fund had $4.52 billion under management
and was invested in 91 common stocks. The top 10 positions represented
29.7% of the Fund at the end of the quarter.
Table IV.
Quarter End
Investment Percent
Year
Value
of Net
Acquired (millions)
Assets
TransDigm Group, Inc.
Gartner, Inc.
SBA Communications Corp.
Bright Horizons Family Solutions, Inc.
Acuity Brands, Inc.
The Ultimate Software Group, Inc.
Waste Connections, Inc.
DexCom, Inc.
2006
2007
2004
2013
2011
2008
2009
2012
2010
2008
$180.5
167.9
151.9
151.0
144.9
125.3
109.3
107.3
103.2
99.6
4.0%
3.7
3.4
3.3
3.2
2.8
2.4
2.4
2.3
2.2
September 30, 2015
With the market turmoil, we have been selling some positions, so the
number of stocks held is down somewhat. We would expect this trend to
continue.
The top 10 stocks are up as a percentage of assets because, in the
aggregate, they have performed well. In the third quarter, the top 10 stocks,
on aggregate, were roughly flat, and year-to-date they are up 11.16%.
These larger positions are mostly stocks we have owned for a long time
(anywhere from 3 to 11 years), have larger market capitalizations because
their stocks have risen over the years, and are well established, well
respected companies. These holdings usually hold up better in down
markets, as is the case this year, and help to lower the beta of the Fund.
For the quarter, the sectors with the largest average weight were Industrials,
Information Technology, Health Care and Consumer Discretionary.
Consumer stocks used to dominate the Fund, but no longer, since the retail
landscape is so competitive it’s more difficult to identify long-term winners,
and because the current environment is trying. We aren’t making a
statement through our lead weighting in Industrials, it’s just that we have
some large winning stocks in this sector (Transdigm, Waste Connections
and On Assignment, Inc.).
Compared to the Russell 2000 Growth Index, we continue to be
significantly underweight in Health Care and Information Technology. As
explained in previous letters, this has been a major factor in our relative
underperformance since last fall. These groups came back to earth at the
end of the quarter, so our positioning now is working in our favor.
Recent Activity
Table V.
Year
Acquired
Builders FirstSource, Inc.
Houghton Mifflin Harcourt Company
Summit Materials, Inc.
Party City Holdco, Inc.
Cognex Corp.
2015
2015
2015
2015
2011
Quarter End Amount
(billions) (millions)
$1.4
2.8
1.9
1.9
3.0
$22.8
18.5
17.7
13.0
12.1
We were not very active during the quarter. As we looked for new ideas, we
were more focused on special situations early in the quarter, as growth
companies traded at high valuations. As the quarter progressed, we added
to some existing positions after they had fallen, and we deemed them
attractive for purchase.
Builders FirstSource, Inc. (BFS) is a leading lumber and building materials
distributor and a manufacturer of structural and related building products,
primarily supplying residential new construction markets. The company has
been around since the late ‘90s, has been built through dozens of
acquisitions. They impressively managed through the bursting of the
housing bubble in 2008. The Baron Real Estate Fund has owned the stock
for some time and holds management in high regard. We recently bought
in when the company sold shares to fund the acquisition of a company
twice its size called ProBuild.
We believe the acquisition will be transformative. BFS is the third largest
player in the industry but has acquired the biggest, creating an ever stronger
and diversified distributor with more exposure to the higher margin
remodeling segments. ProBuild was struggling, and we believe operations
can be improved by BFS management. Over $100 million of synergies have
been outlined, which if achieved, will mean that the acquisition was done
under six times proforma EBITDA.
We believe BFS is well positioned to benefit from the ongoing housing
recovery. We forecast growth in single family starts to accelerate, back
toward 1 million starts per year. As the largest players in the fragmented
industry, we believe BFS will gain additional market share from smaller
distributors. And we expect their bigger scale will enable them to improve
product margins and drive incremental sales of value-added, higher margin
products.
If this plays as we expect, the numbers are dramatic. We estimate earnings
to grow from less than a dollar per share next year to between $3-4 per
share by 2020. That the company will generate significant amounts of free
cash flow, which would enable it to de-lever rapidly from about five times
debt to cash flow presently to under two times in four years. The risks to
our thesis have to do with the success and pace of integration and the
trajectory of the residential housing recovery. We like the risk reward.
In addition to this new purchase, we added to our positions in Houghton
Mifflin Harcourt Company, Summit Materials, Inc. and Party City
Holdco, Inc. We discussed Houghton in the last quarterly, so please refer to
that for our rationale. Summit Materials is a construction materials
company that came public in March 2015, and we participated in its
successful IPO. We think management is very seasoned, that the business is
growing organically at a double-digit clip, and that they continue to make
accretive acquisitions of complimentary assets in existing and new markets.
The stock sold off recently and traded under 10 times our estimate of 2016
and eight times 2017 EBITDA, which we find very attractive, so we added
to our position.
Party City is the leading domestic retailer and largest global supplier of
party-related goods. Like Summit Materials, Party City came public earlier
this year, and we added it to our holdings this quarter when the stock was
weak. We greatly admire Party City’s vertically integrated business model.
It maximizes profitability, which has led to enviable profit margins. We
believe Party City will grow nicely by opening new stores, which we believe
will continue to show nice comparable store growth, by continuing to
acquire manufacturers of products and capture both retail and wholesale
margin, by expanding internationally and by de-leveraging. The stock has
declined because of concerns that retail sales will be underwhelming in this
tough environment. The stock is trading at twelve times our estimates for
2016 earnings and eight times EBITDA, which we believe underestimates
the company’s worth and doesn’t reflect future growth.
Table VI.
Year
Acquired
Berry Plastics Group, Inc.
Brookdale Senior
Living, Inc.
Fossil Group, Inc.
LaSalle Hotel Properties
Market
Quarter End
Cap
Market Cap or
When
Market Cap Amount
Acquired
When Sold
Sold
(billions)
(billions)
(millions)
2012
$1.7
$3.6
$58.3
2005
2005
2013
2011
1.7
1.4
1.0
1.8
4.2
3.3
4.0
3.2
38.5
20.7
17.7
17.0
23
During the quarter, we trimmed some larger positions and sold out entirely
of many small ones. We sold some Berry Plastics Group, Inc., after they
announced an accretive acquisition and the stock rose. Though we think the
deal is attractive, and we believe management will integrate it well, the
nature of the company changed, and we decided to take some profits. We
trimmed Brookdale, as mentioned earlier. We sold out of long-term holding
Fossil Group, Inc. and Graco, Inc. to redeploy funds to other names. The
acquisitions of Rally Software Development Corp. and Advent Software,
Inc. closed in the quarter.
Outlook
After the quarter ended, the Federal Reserve refrained from raising interest
rates, seemingly concerned about the softening domestic economic
reports and uncertainties about weak growth and markets abroad. The
market initially reacted quite negatively, viewing the Fed’s lack of action to
be a show of no conviction/pessimism in the economy’s pace of growth.
Shortly thereafter, the jobs report for September was released, which was
considered “grim,” and figures for the prior two months were revised down
as well. Some corporate earnings pre-releases and reports pointed to
slowing consumption, especially in energy-impacted areas. The Fed’s
decision seemed more sound as fears arose about slowing domestic
growth.
In all this negativity, there are some positive observations. If rates were to
stay low longer, that would be good for stocks (at least for the time being).
The U.S. dollar was rising in anticipation of higher domestic interest rates,
which was hurting our economy (exports harder, imports more
competitive) and reducing reported earnings of companies with
international operations. This, too, is on hold. Investment sentiment quickly
became negative. . . this is good for stocks. And on a micro level, stock
multiples have contracted to a point where they seemed reasonable, even
cheap in many cases, against our expectations of future earnings.
We believe earnings will be the key to the market. And through all the
clutter it is what we are most focused on. It’s been a market where
struggling companies that miss earnings’ expectations have been blasted,
no questions asked, and the stocks have gone down more and stayed down
longer than in normal market environments. Many performing companies
have become market darlings, trading up to hefty valuation levels we feel
uncomfortable with. Lots of these companies aren’t yet profitable and trade
at revenue multiples or other concoctions, which don’t hold up well in
corrections.
We are hoping to invest somewhere in the middle. We seek to invest in
special businesses that are able to show significant organic revenue growth
(usually 5-20%), which can increase margins so profits are growing faster
than revenues, that can supplement this with accretive acquisitions, debt
repayment or share repurchase, so that per share earnings grow even faster;
and where trading multiples can (ideally) expand or stay around present
levels. This is our preferred formula.
Going forward, the bull case for stocks is that the economy will continue to
expand at a modest, yet self-sustaining rate. That monetary policy will be
friendly, meaning when rates do rise that it will be gradual and won’t choke
off growth. And that the stocks’ valuations are okay absolutely and cheap
relative to low levels of interest rates and inflation. The bear case is that a
recession is in the offing or the market will be gripped by contagion. The bull
case seems more likely to us and we are generally constructive about the
U.S. economy and underlying fundamentals. But we are hearing of
weakening conditions from some of our portfolio companies so we are
watching carefully.
Thank you for investing in the Small Cap Fund.
Cliff Greenberg
Portfolio Manager
October 23, 2015
respective portfolio manager 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 does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Small Cap Fund by anyone in any jurisdiction where it would be unlawful under the laws of that
24
September 30, 2015
Dear Baron Opportunity Fund Shareholder:
Performance
Baron Opportunity Fund (the “Fund”) had a disappointing third quarter in a
challenging market. The Fund declined 12.09% (Institutional Shares),
lagging both the Russell 3000 Growth Index (the Fund’s new primary
benchmark index), which declined 5.93%, and the broader market as
represented by the S&P 500 Index, which declined 6.44%.
Table I.
Performance†
Baron
Baron
Opportunity Opportunity Russell Russell
Fund
Fund
3000
Midcap
Retail
Institutional Growth Growth S&P 500
Shares1,2
Shares1,2,3 Index1
Index1
Index1
Three Months4
(12.16)%
Nine Months4
(6.04)%
(2.70)%
One Year
7.87%
Three Years
8.95%
Five Years
7.90%
Ten Years
Since Inception
(February 29, 2000) 4.43%
(12.09)% (5.93)% (7.99)% (6.44)%
(5.83)% (1.86)% (4.15)% (5.29)%
(2.38)% 3.21% 1.45% (0.61)%
8.17% 13.54% 13.98% 12.40%
9.26% 14.38% 13.58% 13.34%
8.09%
8.05% 8.09% 6.80%
4.55%
2.05%
3.24%
4.19%
Review & Outlook
The third quarter was full of unexpected challenges. Markets endured a late
summer swoon in August and September as investors expressed concerns
about global growth and reassessed the timing of the Fed’s long anticipated
rate increase. The sell-off began with the unexpected devaluation of the
Chinese RMB in mid-August. This coincided with disappointing Chinese
economic data and led to a reduction in Chinese GDP growth expectations,
which lead to a significant decline in Chinese equity markets. Many
developing economies are highly dependent on China, creating second
order concerns about the health of emerging markets and how an emerging
markets slowdown may ultimately impact developed nations. At the same
time, investors debated the likelihood of the Fed raising interest rates given
an uncertain global macroeconomic picture. That debate is continuing as of
this writing, although we believe the probability of a 2015 rate increase is
currently running close to zero. Finally, we believe that the unexpected
resignation of Speaker of the House, John Boehner, coupled with election-
MICHAEL A. LIPPERT
PORTFOLIO MANAGER
Retail Shares: BIOPX
Institutional Shares: BIOIX
season rhetoric from national political candidates added further
uncertainty to the mix, a condition that is rarely good for markets.
In our opinion, none of these have impacted the secular trends or long-term
drivers of business value for the companies in which we are invested. We
remain steadfast in our view that a portfolio of well-managed, higher
growth businesses capitalizing on innovative and longer-term secular
growth themes could potentially outperform the broader market and
passive indexes across market cycles. As we conduct our research, attending
conferences, visiting companies, questioning management teams and
listening to a wide range of earnings calls, it becomes increasingly clear to
us that the world is changing fast, that legacy business models and
technologies are being left behind and that consumers and enterprises alike
are quickly adopting new ways of doing things. Nonetheless, macro
uncertainties had a significant impact on the market this quarter and the
multiples that investors were willing to pay for the growth businesses we
own.
In addition, even more bad news was received in late August, when the
Fund’s Portfolio Manager, Michael Lippert, was seriously injured in a bicycle
Performance listed in the above table is net of annual operating expenses. Annual expense ratio for the Retail Shares and Institutional Shares as of September 30,
2014 was 1.35% and 1.08%, 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 has reimbursed certain Fund expenses (by contract as long as BAMCO, Inc. is the adviser to the Fund) 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 www.BaronFunds.com or call 1-80099BARON.
†
1
2
3
4
The indexes are unmanaged. The Russell 3000® Growth Index measures the performance of those companies classified as growth among the largest 3,000 U.S. companies, the Russell Midcap®
Growth Index measures the performance of medium-sized U.S. companies that are classified as growth and the S&P 500 Index of 500 widely held large cap U.S. companies. Baron Opportunity Fund
no longer considers the Russell Midcap® Growth Index an appropriate benchmark index. The Russell Midcap® Growth Index is included in the table above for comparison
purposes for the period before the Fund converted to an all-cap fund. Prior to February 20, 2015, the Fund invested in companies with market capitalizations between $1
billion and $15 billion at the time of purchase. Since then, the Fund may invest in companies of all market capitalizations. The Adviser believes that the Russell 3000 Growth
Index is more representative of the Fund’s current investable universe. The indexes and the Fund are with dividends, which positively impact the performance results. Russell
Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell is a trademark of Russell Investment Group.
Not annualized.
25
accident. We are pleased to report that Mike has made remarkable progress
over the last two months, and that he has impressed doctors with the speed
of his recovery. Those of us that know Mike well are thankful for his
improvement but not surprised by it. Mike has long inspired his colleagues
with his exemplary work ethic, sense of perseverance and determination to
succeed. These are attributes that have helped make him an outstanding
portfolio manager and research analyst, and give us confidence that he will
fully recover ahead of schedule.
In the interim, the portfolio is being managed by Alex Umansky, Neal
Rosenberg, and Ashim Mehra. Mike has already begun to participate in daily
portfolio discussions over the phone. He has brought his usual energy,
passion and insight to those meetings, and he is playing an active role in
managing the portfolio. We look forward to having him back in the office
on a full time basis as soon as possible.
Table II.
Amazon.com, Inc.
Acxiom Corp.
athenahealth, Inc.
Equinix, Inc.
Percent
Impact
0.29%
0.27
0.18
0.17
0.17
Flotek Industries, Inc. is primarily a supplier of chemical additives to the
global oil & gas industry with some ancillary oilfield service operations. The
company has a proprietary product dubbed “complex nano-fluid (CnF)” that
is proving to be extremely effective at increasing oil & gas shale well
productivity. The company’s shares rebounded in the third quarter following
stronger-than-expected results in the second quarter that were principally
driven by CnF sales and margins. Given the recent volatility in the energy
markets we exited the position in the quarter in order to reallocate capital
towards higher conviction ideas. We will continue to monitor developments
at the company going forward.
Shares of Amazon.com, Inc. rose after the company reported another
better-than-anticipated quarter. Having recently disclosed that Amazon
Web Services (AWS) was more profitable than many investors anticipated,
the continued growth in both the retail and AWS business provided
investors with greater confidence in the company’s future growth plans.
With e-commerce representing around 10% of global retail sales, we
believe the structural shift to online retailing represents a multi-year
growth opportunity for Amazon.
We have been invested in Equinix, Inc. for over a decade and it is truly
remarkable to see how the company has created a globally differentiated
and hard-to-replicate platform to serve their customers’ needs. Year to date,
shares are up 23% as the company has completed its REIT transformation,
reduced its cost of capital and taken advantage of those lower capital costs
to try and buy a large European competitor. We believe that, if the
acquisition goes through, the company should be able to generate greater
value to shareholders. We continue to like the growth prospects for
Equinix’s business and think that management has a clear and workable
plan to keep growing at a higher pace than its peers, while improving
business efficiencies and showing margin leverage.
Table III.
Percent
Impact
SunEdison, Inc.
CaesarStone Sdot-Yam Ltd.
Benefitfocus, Inc.
Illumina, Inc.
Shutterstock, Inc.
–1.55%
–0.87
–0.82
–0.74
–0.70
Shares of SunEdison, Inc., the world’s largest renewable energy developer,
declined in the wake of its acquisition of U.S. residential solar developer
Vivint Solar, with plans to drop down its solar portfolio to its yieldco (a
dividend growth-oriented public company that bundles renewable longterm contracted operating assets to generate predictable cash flows and
attractive income) TerraForm Power, Inc. Investors questioned aspects of
the deal, including its $2.2 billion cost. We believe in the secular renewable
energy story and that SunEdison’s large development pipeline should
benefit it and its “yieldcos”. While we think the market dislocation is
technical and temporary and that SunEdison will resume future growth, we
have decided to sell the position to reallocate capital towards higher
conviction ideas.
The stock price of CaesarStone Sdot-Yam Ltd. detracted from
performance during the third quarter. CaesarStone is a leading global
manufacturer of quartz surfaces for kitchens and bathrooms. The stock
price fell sharply in August after the company reduced its full-year revenue
guidance on the second quarter earnings call. Weighing further on the stock
price was the publishing of a negative report by a hedge fund that was short
selling the stock. We believe that the stock price has overreacted to both
events and remain positive on our investment in CaesarStone, as earnings
growth continues to accelerate from successful new product launches and
quartz market share gains versus other countertop materials, such as
granite and marble.
Acxiom Corp. is a leader in identity management and marketing data
services for small and large enterprises. The company’s technology platform
weaves an intricate web of customer data, business intelligence and deep
analysis that empowers 7,000+ global brands across many industries.
Shares of Acxiom appreciated in the quarter based on the rapid growth in
its cloud-based connectivity and identity business, which almost doubled
from a year ago. We believe that Acxiom is positioned to be the rails over
which all marketing data is moved for the marketing software and digital
advertising ecosystem.
Shares of Benefitfocus, Inc., a leading provider of cloud-based benefits
software, detracted from performance after outperforming earlier in the
year. The company conducted a secondary offering during the quarter,
which we believe weighed on the stock. The company continues to generate
robust financial results, growing its employee customer count by 36% yearover-year and demonstrating initial traction with its newly launched
modules. We believe that Benefitfocus serves an addressable market that is
a hundred times larger than its current business.
Shares of athenahealth, Inc. were up 16.4% in the quarter. The company
reported better-than-expected growth in the number of physicians added
to the company’s network as well as better-than-expected margins. We
continue to have conviction in the investment thesis because we believe
athena has a compelling software-enabled-service offering and will
continue to gain market share.
Shares of Illumina, Inc. detracted from performance in the quarter. Illumina
is the leading provider of next generation DNA sequencing instruments and
consumables. During the quarter, the company reported financial results
slightly below Wall Street expectations. Although revenue increased 25%
year-over-year and management reiterated full-year guidance, expectations
had risen too high. The short-term stock price volatility did nothing to
26
September 30, 2015
change our long-term investment thesis. We continue to believe Illumina
has a dominant position in DNA sequencing at a time when demand is
accelerating. Management has identified a total addressable market of $20
billion, excluding emerging opportunities in cancer related blood tests and
non-invasive prenatal testing.
Shutterstock, Inc. is the leading online provider of royalty-free stock
photography to consumers and enterprises. Shares of Shutterstock were
down in the quarter based on concerns around Adobe’s launch of their own
competitive offering, Adobe Stock. Adobe increased its competitive
positioning against Shutterstock by offering lower prices in certain
segments and by integrating image buying into their proprietary software
workflow. We believe that the increasing level of competition from Adobe,
combined with the departure of Shutterstock’s CFO, created too much
uncertainty for us with respect to the company going forward. We exited
the position in the quarter.
Portfolio Structure
The Fund invests in high-growth, innovative businesses across all market
capitalizations. As of the end of the third quarter, the largest market cap
holding in the Fund was $426.5 billion and the smallest was $899 million.
The median market cap of the Fund was $6.5 billion. The Fund had $323.9
million of assets under management. The Fund had investments in 44
securities. The Fund’s top 10 positions accounted for 40.0% of the portfolio.
Table IV.
Guidewire Software, Inc.
Google, Inc.
Gartner, Inc.
CoStar Group, Inc.
Illumina, Inc.
Equinix, Inc.
Facebook, Inc.
Amazon.com, Inc.
Tesla Motors, Inc.
ANSYS, Inc.
Quarter End
Market Cap
(billions)
Quarter End
Investment
Value
(millions)
$ 3.7
426.5
7.0
5.6
25.4
15.6
253.4
239.4
32.4
7.9
$18.5
14.8
13.5
12.8
12.4
12.2
11.7
11.5
11.2
10.9
Percent
of Net
Assets
5.7%
4.6
4.2
3.9
3.8
3.8
3.6
3.5
3.5
3.4
Recent Activity
Table V.
Quarter End
Market Cap
(billions)
Google, Inc.
ServiceNow, Inc.
MasterCard, Inc.
MarketAxess Holdings, Inc.
Aspen Technology, Inc.
$426.5
10.8
102.0
3.5
3.2
Amount
Purchased
(millions)
$10.7
4.3
4.2
3.8
3.4
We added to our position in Google, Inc., in the quarter. Google is the
world’s leading search provider, the world’s leading Internet video service
through YouTube, and the provider of Android, the world’s most popular
mobile operating system. We believe that Google will be more successful
with its mobile transition (like Facebook before it) than the naysayers
believe, that YouTube has significant monetization potential and that
Google possesses the assets and relationships to make it a major player in
people-based digital advertising.
During the quarter, the Fund initiated a position in ServiceNow, Inc., a
Software as a Service (SaaS) company that allows customers to manage
and automate IT operations. The company has leveraged its superior
architecture and product flexibility to rapidly increase its market share
within IT Service Management, and it already counts 25% of the Global
2000 as customers. We believe that ServiceNow’s newly introduced
products, its outstanding brand recognition and its customers’ need to
enhance productivity should allow the company to successfully increase its
share within the larger IT Operation Management market. The company’s
average contract value within its existing customers grew by 40% last year
alone. We believe the company already serves an addressable market of
$15 billion annually, which is more than 15 times larger than its current
size. We believe that opportunity will continue to expand as ServiceNow
introduces new products to service adjacent markets. ServiceNow’s growth
is supported by a secular trend of IT spend shifting from legacy on premise
solutions towards SaaS offerings as IT environments are becoming
increasingly complex. The company has high levels of recurring revenues
and generates high customer retention rates of approximately 97%.
MasterCard, Inc. is the world’s second-largest payments technology
company that connects consumers, businesses, banks and governments,
enabling them to use electronic forms of payment instead of cash and
checks. There are over two billion MasterCard- and Maestro-branded cards
outstanding with acceptance at 36 million locations in more than 210
countries and territories. Broad merchant acceptance and consumer
adoption of MasterCard-branded cards create strong network effects. 85%
of all payment transactions are made with cash or checks today, while only
15% are made with electronic forms of payment, providing substantial
room for further growth. We added to our position in MasterCard in the
quarter.
MarketAxess Holdings, Inc. operates the leading electronic platform for
trading corporate bonds and other fixed-income securities. The company
has dominant share with over 90% of electronic trading in the U.S.
corporate bond market, which is in the early innings of a transition away
from broker assisted voice-based trading to electronic. Electronic trading
platforms provide a lower-cost and more efficient way to connect buyers
and sellers. Just as the equities and futures markets shifted from trading
floors/pits to electronic trading in the ‘80s and ‘90s, we would expect the
same transition to happen in fixed-income in the coming years. With only
15% market share of the U.S. high-grade market and 6% of the U.S. highyield market, the company is still in the early innings of penetrating its
addressable market. Market share for Eurobonds is in the mid-high single
digits, having doubled from a year ago. The regulatory environment for
financial institutions has also reduced the appetite of large banks to take
positions in bonds or trade as actively as they once did, providing tailwinds
to an already attractive growth opportunity. With only 7% penetration into
the $47 billion dollar global fixed-income market, we remain optimistic
about the road ahead. MarketAxess is a new holding in the portfolio.
Aspen Technology, Inc. is the leading process tools provider for the
engineering and construction, chemicals and energy markets. Its software
improves competitiveness and profitability by increasing throughput and
productivity, reducing operating costs and enhancing capital efficiency. We
believe the company has substantial room to grow through new products,
further customer penetration, a new product upgrade cycle and continued
market share gains. The return on investment that the company’s customers
realize from efficiency gains provides us with further confidence to invest
with Aspen. We initiated a position in Aspen Technology in the quarter.
27
Table VI.
Shutterstock, Inc.
Alexion Pharmaceuticals, Inc.
Alibaba Group Holding Ltd.
DigitalGlobe, Inc.
Towers Watson & Co.
Market Cap
When Sold
(billions)
Amount
Sold
(millions)
$ 1.2
38.8
159.3
1.6
8.1
$7.0
6.3
5.6
5.5
5.0
Alexion Pharmaceuticals, Inc. is the premier orphan disease company,
whose lead product Soliris is a lifesaving medicine for both Paroxysmal
Nocturnal Hemoglobinuria (PNH) and Atypical hemolytic uremic syndrome
(aHUS). The company has expanded its efforts in orphan diseases
(particularly ones with high unmet needs) with the acquisition of Strensiq
for HPP (Hypophosphatasia) and Kanuma for LAL-D (Lysosomal Acid Lipase
Deficiency), both of which are approved or in the final stages of approval for
launch worldwide. The company recently announced the delay of Strensiq
approval by the FDA for manufacturing related issues. With greater
uncertainty surrounding the approval of Strensiq, and overall sentiment on
the biotech industry souring, we reduced our exposure to the industry and
sold our position in Alexion.
Alibaba Group Holding Ltd. is the largest e-commerce company in China
and the world. Shares have been declining based on the company lowering
its projections for growth as its consumers continue to transition to mobile
purchasing, which has inherently lower conversion. The mobile transition
combined with slower overall growth in China and an IPO lock-up overhang
created greater uncertainty for the road ahead. Accordingly, we sold out of
the position in the quarter. We will continue to monitor developments at
the company in an effort to gain further conviction on the company’s
growth prospects, should we decide to own this business again in the
future.
Thank you for your support and for trusting us with your assets. We
look forward to updating you in future letters.
Sincerely,
Alex Umansky
Ashim Mehra
Neal Rosenberg
October 23, 2015
The Adviser believes that there is more potential for capital appreciation in securities of high growth businesses benefiting from innovation through
development of pioneering, transformative or technologically advanced products or services, but there also is more risk. Companies propelled by innovation,
including technological advances and new business models, may present the risk of rapid change and product obsolescence and their successes may be
difficult to predict for the long term. Securities issued by small and medium sized companies may be thinly traded and may be more difficult to sell during
market downturns. The Fund may not achieve its objectives. Portfolio holdings are subject to change. Current and future portfolio holdings are subject to
risk.
This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Opportunity Fund by anyone in any jurisdiction where it would be unlawful under the laws of that
28
Baron Partners Fund
September 30, 2015
Dear Baron Partners Fund Shareholder:
Performance
During the three-month period ended September 30, 2015, Baron Partners
Fund (the “Fund”) declined 10.51% (Institutional Shares). The Russell
Midcap Growth Index, the benchmark against which we compare the
performance of this Fund, declined 7.99%. The S&P 500 Index, which
measures the performance of large cap companies, lost 6.44%.
Year-to-date, the Fund (Institutional Shares) has underperformed its
benchmark index, but slightly outperformed the S&P 500 Index. The Fund
has outperformed both its benchmark index and the S&P 500 Index on an
annualized basis since its conversion from a partnership to a mutual fund
on April 30, 2003, as well as over the last 3 years, 5 years, 10 years, 15 years,
20 years and since its inception on January 31, 1992. Prior to the Fund’s
conversion from a private partnership to a mutual fund on April 30, 2003, it
paid substantially higher fees to Baron Capital Management, Inc., its
manager. As a result, the Fund’s performance prior to that date would have
been significantly higher if its present fee structure had been in place.
RONALD BARON
CEO AND PORTFOLIO MANAGER
Retail Shares: BPTRX
Institutional Shares: BPTIX
The third quarter was challenging for equity markets. In August, the Chinese
government unexpectedly devalued the country’s currency to help
Table I.
Performance
Three Months5
Nine Months5
One Year
Three Years
Five Years
Ten Years
Since Conversion
(April 30, 2003)
Fifteen Years
Twenty Years
Since Inception
(January 31,1992)
Baron
Partners
Fund
Retail
Shares1,2,3
Baron
Partners
Fund
Institutional
Shares1,2,3,4
Russell
Midcap
Growth
Index2
S&P 500
Index2
(10.56)%
(5.33)%
(0.28)%
16.51%
14.77%
8.13%
(10.51)%
(5.13)%
(0.03)%
16.81%
15.07%
8.31%
(7.99)%
(4.15)%
1.45%
13.98%
13.58%
8.09%
(6.44)%
(5.29)%
(0.61)%
12.40%
13.34%
6.80%
12.97%
6.94%
10.26%
13.12%
7.06%
10.36%
10.97%
3.72%
8.60%
8.33%
3.96%
8.14%
12.51%
12.58%
9.19%
8.94%
stimulate economic growth, which led to a sudden decline in Chinese stock
markets because investors feared the Chinese economy was slowing more
than previously anticipated. Global stock markets also declined because of
concerns that the slowing Chinese economy would negatively impact other
economies, particularly other emerging market economies. In addition,
uncertainty about when the Federal Reserve would start to raise interest
rates added to stock market volatility. The Fed’s decision not to raise rates
in September was attributed to slower than expected economic growth,
market turmoil, and lower than desired inflation. John Boehner’s surprise
decision to resign as Speaker of the House also weighed on stock markets
due to heightened uncertainty about whether Congress would be able to
govern effectively under a new Speaker.
Oil prices remain depressed, and Energy stocks continued to decline in the
quarter. Baron Partners Fund owns no Energy investments. Consumer
Discretionary businesses benefit from low energy prices. The Fund has
about 33% of its gross assets invested in the Consumer Discretionary
sector. The Fund has 18% of its gross assets invested in several Financial
stocks that we believe will benefit if interest rates increase modestly. The
Performance listed in the above table is net of annual operating expenses. Annual expense ratio for the Retail Shares as of December 31, 2014 was 1.51%
(comprised of operating expenses of 1.32% and interest expense of 0.19%) and Institutional Shares was 1.26% (comprised of operating expenses of 1.06%
and interest expense of 0.20%). 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 Fund’s
transfer agency expenses may be reduced by expenses 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
1
2
3
4
5
Reflects the actual fees and expenses that were charged when the Fund was a partnership. The predecessor partnership charged a 20% performance fee after reaching a certain performance
benchmark. If the annual returns for the Fund did not reflect the performance fees the returns would be higher. The Fund’s shareholders will not be charged a performance fee. The predecessor
partnership’s performance is only for periods before the Fund’s registration statement was effective, which was April 30, 2003. 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.
The indexes are unmanaged. The Russell Midcap® Growth Index measures the performance of medium-sized U.S. companies that are classified as growth and the S&P 500
Index of 500 widely held large cap U.S. companies. The Russell Midcap Growth Index, the S&P 500 Index and the Fund are with dividends, which positively impact the
performance results. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell is a trademark
of Russell Investment Group.
Not annualized.
29
Baron Partners Fund
Fund has 22% of its gross assets invested in technology businesses that
provide services to consumers and financial businesses.
Of the Fund’s average gross assets, 3.7% produced double-digit returns,
17.4% advanced by single digits and 78.9% declined based on average
weight. On average, 52.7% of the Fund’s average gross assets outperformed
the benchmark. Notable contributors to performance included Arch Capital
Group Ltd., IDEXX Laboratories, Inc., ITC Holdings Corp., Verisk Analytics,
Inc., and Under Armour, Inc. Notable detractors from performance included
The Carlyle Group, CoStar Group, Inc., Hyatt Hotels Corp., Illumina, Inc.,
and Mobileye N.V. We regard this quarterly underperformance as anomalous
and believe all these investments will contribute positively to the Fund’s
future performance, although we cannot guarantee it.
We try to explain the reasons certain stocks outperformed or underperformed
during the period in the “Top Contributors” and “Top Detractors” sections. In
many instances, we regard gains and losses in the short term as random. We
think prospects for The Carlyle Group, CoStar Group, Inc., Hyatt Hotels Corp.,
Illumina, Inc., and Mobileye N.V. are favorable. All penalized their results in the
quarter! We continue to believe all the businesses in which we have invested
have the potential to double in size in four to five years. As a result, we believe
stocks that have recently underperformed will achieve above average returns
and contribute positively to the Fund’s performance in coming quarters,
although we cannot guarantee this.
Although economic data from other regions around the world (Europe,
China, and South America) has not been robust, U.S. economic data
continues to show signs of improvement. Consumer and business
confidence is rising, unemployment is falling, wages are increasing, housing
prices are rising, auto sales are strong, and interest rates remain at
historically low levels.
In our opinion, stocks remain attractively valued, trading at 15 times next
year’s earnings, while business activity continues to improve. Historically,
stocks have provided protection against inflation, as well as better returns
than other asset classes. We think that will continue to be the case.
Table II.
Year
Acquired
ITC Holdings Corp.
Under Armour, Inc.
2002
2013
2005
2009
2015
Market
Cap
Quarter
When End Market
Acquired
Cap
Total Percent
(billions) (billions) Return Impact
$ 0.6
4.7
0.8
4.0
16.2
$ 9.0
6.8
5.2
12.5
20.9
9.72%
15.76
4.19
1.58
15.99
0.69%
0.41
0.16
0.06
0.05
results with 9% growth in book value per share. Despite soft industry
30
Shares of veterinary diagnostics manufacturer IDEXX Laboratories, Inc.
contributed to the third quarter performance. The company reported strong
second quarter results that demonstrated share gains in instruments and
reference labs, and assuaged concerns regarding its competitive position in
rapid assays. Catalyst placements grew 44% in the quarter, driven by the
launch of CatalystOne in the U.S. and Europe. Premium hematology
placements grew 30% in the third quarter, a meaningful increase from 14%
in the second quarter. Reference lab results were also strong, growing
12.1% in the third quarter. (Neal Rosenberg)
ITC Holdings Corp. is the nation’s largest independent transmission
company. Shares rose due to the relatively strong performance of the
electric utility sub-industry as investors rotated away from risk in the
broader stock market. We believe ITC has robust prospects for growth and
will continue to execute on its growth strategy. The primary drivers for
transmission investment, reliability and connection of new generation
(including renewables), remain intact, and we believe ITC is well positioned
to benefit from these trends. (Rebecca Ellin)
Table III.
The Carlyle Group
CoStar Group, Inc.
Hyatt Hotels Corp.
Illumina, Inc.
Mobileye N.V.
Year
Acquired
Market
Cap
When
Acquired
(billions)
Quarter
End
Market
Cap
(billions)
Total
Return
Percent
Impact
2012
2005
2009
2013
2014
$0.7
0.7
4.2
6.8
7.9
$ 1.3
5.6
6.7
25.4
9.9
–38.10%
–14.01
–16.94
–19.48
–15.46
–1.58%
–1.39
–1.07
–0.98
–0.88
Shares of The Carlyle Group, an alternative asset manager, declined in the
period. The company continues to perform well in its corporate private
equity division. However, its newer divisions in Real Assets, Investment
Solutions and Global Market Strategies have faced issues. While poor
performance in these areas will likely result in lower near-term distributions,
we think Carlyle still holds long-term promise as it launches new products
and performance of existing funds may improve. (Michael Baron)
Shares of CoStar Group, Inc., the leading provider of information and
marketing services to the commercial real estate industry, detracted from
third quarter performance. Investors appeared cautious about the
magnitude of CoStar’s 2016 marketing investments to support its
multifamily initiative. We see strong early traction in the multifamily space
and believe that investments in marketing will yield meaningful returns.
Over time, we believe the multifamily business can evolve into an
incremental $1 billion business with 50% margins. (Neal Rosenberg)
Shares of global lodging company Hyatt Hotels Corp. decreased in the
third quarter. Investors appeared concerned that the upswing in the
lodging cycle was ending based on a scattering of pre-announced third
quarter earnings and trends in indicated RevPAR (revenue per available
room) that were weaker than expected. We believe these preannouncements reflected company-specific issues unrelated to Hyatt’s
asset locations and quality. Hyatt generated strong RevPAR growth in the
period, leading to higher margins and cash flow, which it is using to buy
back stock. (David Baron)
Baron Partners Fund
September 30, 2015
Recent Portfolio Additions
Investment Strategy
Table IV.
We invest for the long term in a non-diversified portfolio of what we believe
are competitively advantaged, well-managed, growing businesses at what we
think are attractive prices. Often, we have opportunities to purchase stocks of
businesses we have researched extensively, which we believe are mispriced or
have fallen in price due to what we perceive to be temporary issues. This
quarter, we bought Douglas Emmett, Inc., a long-time holding in other Baron
Funds, and added to current holdings Zillow Group, Inc., Hyatt Hotels Corp.,
Fastenal Co. and The Charles Schwab Corp., among others. Our objective is
to purchase shares of what we believe are well-established, appropriately
capitalized, growing companies, with strong positions in markets with growing
demand for their products and services. The Fund uses leverage with the goal
of enhancing its investment returns. Leverage also increases risk, of course.
Zillow Group, Inc.
Douglas Emmett, Inc.
Hyatt Hotels Corp.
Fastenal Co.
Market
Cap
When
Acquired
(billions)
Quarter
End
Market
Cap
(billions)
Amount
Purchased
(millions)
$4.3
2.4
4.2
4.2
6.8
$ 4.9
1.1
4.2
6.7
10.6
$47.0
20.0
8.2
4.9
1.8
Zillow Group, Inc. is the leading online real estate site in the U.S., offering
information on homes for sale and rent, in addition to the Zillow Mortgage
Marketplace. The company also owns and operates Street Easy, the leading real
estate site for New York City and the Hamptons. Zillow continues to invest in
its brand as the leader in the $12 billion real estate advertising market. The
company recently acquired Trulia, the number three player in online real
estate. Zillow has recently completed the integration of Trulia onto Zillow’s
advertising sales platform. The integration of the sales platform and the
introduction of new products focused on improving advertiser ROI should
benefit the company going forward. Given that the combined companies
capture less than 5 percent of the $12 billion that real estate professionals
spend on marketing each year, we believe there is ample room for future
growth and as such, added to our position in the quarter. (Ashim Mehra)
We initiated a position in Terraform Global, Inc. upon its IPO. TerraForm
Global is a globally diversified dividend growth-oriented company formed to
own and operate contracted clean power generation assets in attractive highgrowth emerging markets. The company’s parent is SunEdison, the world’s
largest renewable energy developer, and TerraForm Global’s purpose is to
acquire assets that produce high-quality long-term contracted cash flows from
SunEdison and other third parties. As a “yieldco”, TerraForm Global’s high
dividend payout ratio and long-term contracted cash flows enable a lower cost
of capital than its developer parent, and that differential allows the funding of
future growth at accretive levels. The market for renewable energy is huge and
growing rapidly, with $2.1 trillion of investment needed between 2015 and
2020, of which 35% is in TerraForm Global’s addressable market. Solar and wind
energy capacity additions are expected to have a compounded annual growth
rate of 32% and 14%, respectively, within its target markets. (Rebecca Ellin)
Douglas Emmett, Inc. is a REIT that owns and manages what we believe to
be an exceptionally high-quality portfolio that includes 15.5 million square
feet of Class A office space and 3,300 apartment units in the premier coastal
submarkets of Los Angeles and Honolulu. The long-term fundamental outlook
for Douglas Emmett’s submarkets is favorable. Demand is being driven by
continued job growth, as well as employees’ propensity to work close to where
they live (thereby avoiding heavy traffic). Supply is constrained as a result of
significant barriers to new construction that include zoning restrictions, height
limitations and outspoken homeowner groups. The company has dominant
positions, with an average 25% market share in its Los Angeles submarkets,
and 34% in Honolulu, resulting in strong tenant relationships, economies of
scale and pricing power. The company has attractive growth prospects through
leasing up vacant space and raising rents in the existing portfolio,
complemented by an active acquisition and development strategy. We are
investing alongside a management team that we respect and who together
own over 20% of the company. (David Kirshenbaum)
Another common investment theme for Baron Partners Fund is to invest in
businesses investing for growth, often at the expense of short-term profits.
These businesses are investing in order to become much larger, more
profitable businesses in the future. Virtually all the businesses in which we
have invested are making such capital commitments. Verisk Analytics, Inc.’s
startup investments in health care and real estate data services, CarMax,
Inc.’s line of new stores coupled with efforts to grow sales in existing stores,
and Hyatt Hotels Corp.’s investment in hotel renovations and improved
guest services as well as its ongoing expansion in Asia, are noteworthy in this
regard. As long-term investors who hold stocks for an average of nearly five
years, we expect to benefit from these expenditures. In contrast, most midcap mutual funds are trading oriented, turning over their entire portfolios on
average every 18 months. Since these funds, in general, will not care about
or benefit from such long-term, strategic investments by businesses, they
accord them little or no value. This allows us to invest in these companies at
prices we feel are especially attractive.
Baron Partners Fund also has significant investments in growing “C”
corporations like Vail Resorts, Inc., and ITC Holdings Corp., whose shares
we believe are undervalued when compared to similar businesses structured
as REITs or master limited partnerships. The Fund’s investments in
alternative investment money manager The Carlyle Group, and financial
intermediary The Charles Schwab Corp., are benefiting from strong
performance of equities since the Financial Crisis of 2008-09. We expect
both businesses to benefit when interest rates begin to increase.
Managing risk is a key part of our investment process. We help manage
risk from a company perspective by investing in businesses that we
believe are conservatively financed with high barriers to entry. Our
proprietary research regarding business’ long-term growth opportunities,
competitive advantages, management teams and risks determines how
much we allocate to individual securities. We invest in different industries
that are affected differently in the short term by unpredictable events.
This is to achieve a portfolio of investments with risks that are not
correlated. This is part of our effort to help reduce the volatility of this
non-diversified portfolio. Further, the underlying businesses in which the
Fund has invested historically have less volatile earnings than its
benchmark index.
Our approach is to invest for the long term. We do not try to predict shortterm “macro” developments or shift our investment approach because certain
types of stocks are in or out of favor. We think it is especially important to
make an effort to reduce portfolio volatility in a fund like Baron Partners Fund.
This is to offset risk of a non-diversified portfolio that uses leverage.
31
Baron Partners Fund
Thank you for investing in Baron Partners Fund.
Portfolio Structure
The Fund’s non-diversified portfolio is currently invested in 29 businesses,
principally mid cap companies. As of September 30 2015, the weighted
average market capitalization of the Fund’s portfolio investments was $11.1
billion, compared with $13.1 billion for the benchmark. The Fund currently has
significantly larger investments in Consumer Discretionary, Financials,
Information Technology and Utilities sectors than the Russell Midcap Growth
Index. The Fund’s investments in Health Care and Industrials are weighted less
than the index. The Fund does not have investments in Consumer Staples,
Energy, Materials, or Telecommunication Services. We are not attempting to
mirror our benchmark or any other index with the Fund’s portfolio.
We think the businesses in which the Fund has invested have the potential
to double in size within four to five years, although there is no guarantee
that will be the case. We think because of the competitive advantages of
those businesses, it would take many years or cost a lot of money, and,
therefore, not be economically feasible, for new entrants to compete
against them. We think these barriers enable our companies to generate
potential strong returns on capital and provide them with the ability to
grow consistently over the long term.
Table V.
Thank you for joining us as fellow shareholders in Baron Partners Fund. We
believe the growth prospects for the businesses in which Baron Partners
Fund has invested are favorable and improving. Since, in our opinion, the
share prices of our businesses do not reflect their prospects, we believe they
remain attractive. Of course, there can be no guarantee this will be the case.
We are continuing to work hard to justify your confidence and trust in our
stewardship of your family’s hard-earned savings. We also remain dedicated
to continuing to provide you with the information I would like to have if our
roles were reversed. This is so you will be able to make an informed decision
about whether this Fund remains an appropriate investment for you and
your family.
Respectfully,
Ronald Baron
October 23, 2015
Market Quarter
Cap
End
When
Market
Percent
Year
Acquired
Cap
Amount
of Total
Acquired (billions) (billions) (millions) Investments
Tesla Motors, Inc.
CoStar Group, Inc.
Arch Capital
Group Ltd.
ITC Holdings Corp.
FactSet Research
Systems, Inc.
Hyatt Hotels Corp.
CarMax, Inc.
The Charles
Schwab Corp.
Dick’s Sporting
Goods, Inc.
2014
2005
$21.9
0.7
$32.4
5.6
$204.9
190.4
8.6%
8.0
2002
2005
0.6
0.8
9.0
5.2
180.0
130.0
7.6
5.5
2007
2009
2011
2009
2.5
4.2
6.1
4.0
6.6
6.7
12.3
12.5
123.9
122.5
118.6
110.9
5.2
5.2
5.0
4.7
1992
1.0
37.6
109.2
4.6
2005
1.6
5.9
102.9
4.3
The Adviser believes that there is more potential for capital appreciation using non-diversification and leverage, but there also is more risk. Specific risks
associated with non-diversification and leverage include increased volatility of the Fund’s returns and exposure of the Fund to greater loss in any given period.
The Fund invests in companies of all sizes, including small and medium sized companies whose securities may be thinly traded and made difficult to sell
during market downturns. Leverage is the degree to which an investor or business is utilizing borrowed money. The Fund may not achieve its objectives.
Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.
The discussions of the companies herein is 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
This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Partners Fund by anyone in any jurisdiction where it would be unlawful under the laws of that
32
September 30, 2015
Dear Baron Fifth Avenue Growth Fund Shareholder:
Performance
The third quarter of 2015 was a challenging one for equity investors and we
did not fare well. The Baron Fifth Avenue Growth Fund declined 10.4%
(Institutional Shares) compared to the 5.3% and 6.4% declines for the
Russell 1000 Growth and S&P 500 Indexes, respectively.
It was an unusual quarter. Amazon, Google, Starbucks, Facebook,
Priceline, Equinix and Visa – seven of our top 10 holdings, were all up
during the quarter, with Amazon and Google, our two largest investments,
posting double-digit returns. Admittedly, to our surprise, it was not nearly
enough to offset the extreme share price dislocations for the companies
that have suddenly lost the market’s favor. After three years of materially
better-than-expected growth, Illumina reported a modest deceleration and
the shares declined 20%. A presidential candidate railed on Twitter against
a ridiculous 5,000% price hike on a 62-year-old drug and our biotech
investments, which we believe have always acted in a responsible manner,
suffered double-digit declines. The drug maker backed down from the price
increase and, naturally, the shares of the biotech companies declined even
further. Speaking of Twitter, getting rid of an unpopular and
underperforming CEO has proven to be a lot easier than finding a
competent one and fixing even the most obvious of problems. Though not
a large position in the portfolio, the 25%+ decline in the price of the stock
was still painful enough, and we believe it finally de-risked our investment.
Alibaba also continued its freefall, down 28%, as the growth of the Chinese
Table I.
Performance†
Three Months4
Nine Months4
One Year
Three Years
Five Years
Ten Years
Since Inception
(April 30, 2004)
Baron Fifth
Avenue
Growth
Fund
Retail
Shares1,2
(10.48)%
(2.76)%
0.48%
12.65%
12.92%
5.92%
Baron Fifth
Avenue
Growth
Fund
Institutional
Shares1,2,3
(10.42)%
(2.56)%
0.72%
12.93%
13.20%
6.09%
Russell
1000
Growth
Index1
(5.29)%
(1.54)%
3.17%
13.61%
14.47%
8.09%
S&P 500
Index1
(6.44)%
(5.29)%
(0.61)%
12.40%
13.34%
6.80%
6.51%
6.66%
7.87%
7.14%
ALEX UMANSKY
PORTFOLIO MANAGER
Retail Shares: BFTHX
Institutional Shares: BFTIX
economy came under further scrutiny and the Chinese Central Bank
unexpectedly weakened the Yuan. But the truly injurious developments
occurred in our alternative energy investments SunEdison and TerraForm
Global, where the circular feedback loop of loss of confidence leading to
loss of access to capital markets leading to loss of possible future growth
led to a terrible dislocation. The declines in these two stocks accounted for
over 60% of the Fund’s relative underperformance.
Trying to understand the psychology of investing (behavioral finance, loss
aversion, cognitive errors, etc.) has always been part of our investment
process. Emotions, biases, lack of patience are all commonly present on
the human side of investing and can sometimes be the reasons behind
the mispricing of stocks. We frequently witness outcomes strongly biasing
perceptions (a team wins the Super Bowl – it must have been the best
team, or a fund posting a strong year – must have been managed by
skilled investors). Less frequent and harder to navigate are circumstances
when perceptions bias the outcomes. By all accounts, the leverage
deployed by Lehman Brothers during the financial crisis was not
materially different from that of its peers but the perceptions and loss of
investors’ confidence ultimately led to its complete demise. Howard
Performance listed in the table above is net of annual operating expenses. Annual expense ratio for the Retail Shares and Institutional Shares as of September
30, 2014 was 1.37% and 1.08%, but the net annual expense ratio is 1.30% and 1.05% (net of the Adviser’s fee waivers), 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 has reimbursed certain Fund expenses (by
contract as long as BAMCO, Inc. is the adviser to the Fund) 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 www.BaronFunds.com or call 1-800-99BARON.
†
1
2
3
4
The indexes are unmanaged. The Russell 1000® Growth Index measures the performance of large-sized U.S. companies that are classified as growth and the S&P 500 Index
source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell is a trademark of Russell Investment Group. On January 1, 2015 the
Fund changed its primary benchmark from the S&P 500 Index to the Russell 1000 Growth Index.
Not annualized.
33
Marks, the founder and Co-Chairman of Oaktree Capital, explains this
concept beautifully in his most recent letter that can be found here:
http://www.oaktreecapital.com/MemoTree/Inspiration%20from%20the%2
0World%20of%20Sports.pdf
Although recent sharp share price declines in several of our investments were
disappointing, we remain confident in our philosophy and process of looking
for “big ideas” and investing in what we believe are unique, competitively
advantaged companies for the long term. Though time will tell, we do not
believe we have suffered permanent loss of capital during this quarter.
Table II.
Amazon.com, Inc.
Google, Inc.
Starbucks Corp.
Facebook, Inc.
The Priceline Group, Inc.
Quarter End
Market Cap
(billions)
Percent
Impact
$239.4
426.5
84.4
253.4
62.7
1.19%
0.54
0.20
0.18
0.18
Shares of Amazon.com, Inc., continued to inflect during the
September quarter, up 18%, as the sheer size, growth rate and actual
profitability of Amazon Web Services (AWS) became more apparent. We
believe the meaningful re-rating of the shares over the last nine months
was due to increased transparency and disclosures allowing investors to
better appreciate all the various ways that Amazon has continued to grow
and outperform expectations – Amazon Prime, Third Party sales and
fulfillment, AWS, Streaming and original content, better operating margins
and profitability, and so on. Our investment thesis premised on the secular
shift towards e-commerce, which still represents less than 10% of global
retail sales, benefiting the pure play e-commerce platforms, continues to be
intact, and Amazon.com remains our highest conviction long-term
investment idea.
We think a phenomenon some investors refer to as “pattern recognition” is
responsible for the strong performance of the shares of Google, Inc. (up
17%) in the third quarter. The company announced a change in the
corporate structure and the creation of a “holdco,” appropriately named
Alphabet, which would hold Google’s core search engine business and
separate out its newer, less mature endeavors such as Google Fiber, Artificial
Intelligence, Calico (Google’s foray into longevity), and others. Google
veteran Sundar Pichai will become the CEO of Google, Inc., a subsidiary of
Alphabet, allowing Google’s co-founders Larry Page and Sergey Brin to
spend more time on Alphabet’s other businesses. We continue to believe
that Google is one of the most innovative companies on Earth, with a
powerful business model that benefits from the network effect, and the
greatest collection of human talent in any one place in the world. Data is
becoming increasingly more important and they own more data than any
other company we know. We think the value of that data and its
monetization opportunities will become more apparent over time.
Shares of Starbucks Corp., the leading global specialty coffee platform
(that’s right!), rose 6% in the third quarter after delivering another quarter
of industry-leading sales and earnings growth. Same store sales growth at
company-owned cafes accelerated to 7% during the quarter, driven by
growth in emerging markets and key merchandising and marketing
initiatives. With the core in-store beverage business as strong as ever, we
believe Starbucks is just scratching the surface of its opportunities in food,
34
mobile payment and loyalty programs, Asia-Pacific expansion and
wholesale channel development. Starbucks continues to be one of our
stalwart investments.
It’s been a while since we mentioned the shares of Facebook, Inc., the
world’s largest social network, which rose 5% in the third quarter. It was a
year ago that we argued that the word “mobile” was no longer describing a
device, but rather a behavior. Facebook’s early focus on driving and
improving consumer engagement on mobile platforms is starting to bear
fruit. The company is the obvious beneficiary of a structural shift of
advertising dollars from “analog” to digital, and with one billion active
monthly mobile users, Facebook has positioned itself as one of the largest
beneficiaries of the mobile way of life by presenting global advertisers with
what we believe is the most compelling advertising platform. We believe the
company is in the middle stages of scaling and building out its monetization
structures and stands to benefit from expected improvements in the price of
advertising on its platform. We think Facebook is continually expanding the
size of its addressable market by acquiring and investing in newer synergistic
offerings such as Instagram, WhatsApp, and Oculus VR.
The Priceline Group, Inc. is a leading online travel agency with sites that
include Booking.com, Priceline.com, RentalCars.com, and Agoda.com.
Shares of Priceline rose 7% in the third quarter on the strength of strong
second quarter results, and the expectation of improving margins in the
latter half of this year. Though the cost of consumer marketing continues to
increase, we think it is more than offset by the new growth opportunities
the company is addressing in the U.S., Asia, and Latin America.
Table III.
Quarter End
Market Cap
(billions)
SunEdison, Inc.
FireEye, Inc.
Illumina, Inc.
$
2.3
5.1
148.2
1.1
25.4
Percent
Impact
–2.48%
–1.32
–1.00
–0.92
–0.87
Vivint Solar, with plans to drop down its solar portfolio to its yieldco
TerraForm Power, Inc. Investors questioned aspects of the deal, including its
$2.2 billion cost. We believe in the secular renewable energy story and that
SunEdison’s large development pipeline will benefit it and its yieldcos. We
think the market dislocation is technical and temporary and that SunEdison
will likely resume growth in the future.
FireEye, Inc. is the next generation network security company that
pioneered Advanced Persistent Threat Protection. The company has grown
its sales by more than 10x over the last four years. While FireEye reported
strong second quarter results with a significant beat on profitability
metrics, the stock gave up most of its earlier gains on the news that the
company’s CFO was unexpectedly leaving. We believe that FireEye has the
best post-breach incident response service, which minimizes remediation
time and damage and is the reason it is frequently the first call for
companies that have been victimized. This service consistently gets FireEye
into the door and gives them an opportunity to introduce and sell their
other security products, potentially allowing them to build a real
cybersecurity platform of the future.
September 30, 2015
Alibaba Group Holding Ltd. is the largest e-commerce company in China.
Alibaba describes itself as the premier online shopping destination for
consumers, brands and retailers alike, as well as a global wholesale platform
for Chinese small businesses. The shares were hit hard during the quarter
due to continued slowdown in the growth of the Chinese economy and the
2 ½% devaluation of the Chinese currency relative to the U.S. dollar. We
continue to be optimistic about Alibaba’s prospects given its market leading
position, positive network effects, high cash generation, and what we
believe to be its long runway for continued growth. Over the long term, we
see further upside from its cloud computing business, as well as its interest
in Alipay, the largest online payments provider in China.
TerraForm Global, Inc. is a dividend growth-oriented renewable energy
company (a yieldco) focused on emerging markets. The company went
public in the third quarter at a lower-than-expected valuation. Its debt
capital raise was also more expensive than anticipated, given difficult
conditions in high yield and emerging markets. We believe in the secular
renewable energy story and that parent SunEdison, Inc.’s large development
pipeline will benefit its yieldcos. We think the market dislocation is technical
and temporary and that TerraForm Global will likely resume future growth.
Shares of Illumina, Inc. suffered a significant decline during the
September quarter. Illumina is the leading provider of next generation DNA
sequencing instruments and consumables. We have owned a substantial
position in Illumina for the Fund over the last four years. During the quarter,
the company reported financial results that missed the consensus revenue
estimate. Although revenue increased 25% year-over-year and
management reiterated full-year guidance, expectations had risen too high.
We believe Illumina has a dominant position in DNA sequencing at a time
when demand is accelerating, driven by expansion of the company’s
technology into clinical markets.
Recent Activity
Table V.
Quarter End
Market Cap
(billions)
SunEdison, Inc.
Google, Inc.
The Charles Schwab Corp.
Mobileye N.V.
Naspers Ltd.
$2.6
2.5
2.3
1.5
1.4
We have used the market weakness to add to our existing investments in
SunEdison Inc., Google, Inc., Mobileye N.V. and Naspers Ltd.
We have purchased an initial position in the shares of The Charles
Schwab Corp. In business for over 40 years, Schwab has become a trusted
platform to independent registered investment advisors (RIAs) and
individual investors alike. We believe Schwab is a structural share gainer in
assets under management as advisors continue to migrate away from
bulge bracket brokerage firms and wirehouses and find Schwab’s
integrated custody, trading, portfolio management, and other investment
advisory services uniquely suitable. We think profit margins have further
room to improve as the company has been investing aggressively for
growth and should start to realize the benefits of leverage and scale over
the next few years.
Table VI.
PORTFOLIO STRUCTURE
During the quarter we have initiated one investment and eliminated
another one. The top 10 positions represented 51.0% of the Fund, the top
20 were 74.9%, and we exited the quarter with 36 holdings.
$ 2.3
426.5
37.6
9.9
52.5
Amount
Purchased
(millions)
Illumina, Inc.
Brookfield Infrastructure Partners L.P.
Concho Resources, Inc.
Quarter End
Market Cap or
Market Cap
When Sold
(billions)
Amount
Sold
(millions)
$25.4
6.0
11.8
$1.9
1.6
1.3
Table IV.
Amazon.com, Inc.
Google, Inc.
Facebook, Inc.
Apple, Inc.
Illumina, Inc.
Starbucks Corp.
MasterCard, Inc.
Visa, Inc.
The Priceline Group, Inc.
Equinix, Inc.
Quarter End
Market
Cap
(billions)
Quarter End
Investment
Value
(millions)
Percent of
Net Assets
$239.4
426.5
253.4
629.0
25.4
84.4
102.0
169.5
62.7
15.6
$14.9
10.4
9.5
6.1
5.9
5.9
5.9
5.8
5.4
4.7
10.2%
7.1
6.5
4.2
4.1
4.0
4.0
4.0
3.7
3.2
Over the last three and a half years we watched Illumina, Inc. grow
significantly faster than even our optimistic expectations. In the process,
the company’s share price increased almost six-fold making it easily the
biggest and most consistent contributor to the Fund. We thought it was
time to take some money off the table. Illumina remains one of the high
conviction investments in the portfolio.
We initiated a small position in Brookfield Infrastructure Partners L.P. last
quarter on the expectation of seeing an inflection point in the company’s
growth rate. A few months later, we have concluded that our thesis was
incorrect and we exited the investment with a small loss.
Concho Resources, Inc. has been a standout performer amidst a steep
decline in the energy sector. We reduced the size of the position to make
room for our investment in Charles Schwab.
35
Outlook
As we are finishing this letter, we have had a very good start to the third
quarter earnings season. In fact, after strong earnings reports from Google
and Amazon (yes, you read this right – Amazon and earnings actually used
in the same sentence), the Fund is up 8.4% (Institutional Shares) from
September 30 through October 23, and has recovered most of last quarter’s
losses. Ironically, due to continued softness of the economies in Europe and
further slowdown in growth in China, the Federal Reserve is no longer
expected to start raising interest rates until sometime in early 2016, a
perception that some are crediting for the renewed bid in the equity
markets.
As is typical, we do not have insights on the direction of the market.
However, we do observe that unemployment in the U.S. remains fairly low,
the economy appears to be humming along, and the decline in oil prices
should provide meaningful savings to consumers. While we expect the
market to remain volatile, we are constructive on the overall environment.
Our goal remains to maximize long-term returns without taking significant
risks of permanent loss of capital. Our focus continues to be on identifying
and investing in what we believe are unique companies with sustainable
competitive advantages that have the ability to reinvest capital at high
rates of return.
Thank you for investing in the Baron Fifth Avenue Growth Fund.
Sincerely,
Alex Umansky,
Portfolio Manager
October 23, 2015
The Fund invests primarily in large cap equity securities which are subject to price fluctuations in the stock market. The Fund may not achieve its objectives.
Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.
This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Fifth Avenue Growth Fund by anyone in any jurisdiction where it would be unlawful under the laws
of that jurisdiction to make such offer or solicitation.
36
September 30, 2015
Dear Baron Focused Growth Fund Shareholder:
Performance
Baron Focused Growth Fund trailed its benchmark in the third quarter of
2015. The Fund declined in value by 13.77% (Institutional Shares) during
this period while the Russell 2500 Growth Index, the benchmark against
which we compare the performance of the Fund, declined by 11.05%. The
S&P 500 Index, which measures the performance of large cap companies,
declined by 6.44%. The Morningstar US OE Mid-Cap Growth Category*,
measuring the performance of all United States open end, mid cap growth
funds fell by 9.49% for the three months ending September 30, 2015. For
the first nine months of the year, the Fund declined 7.95% (Institutional
Shares) while the Russell 2500 Growth Index fell 3.85%.
Table I.
Performance†
Three Months5
Nine Months5
One Year
Three Years
Five Years
Ten Years
Fifteen Years
Since Inception
(May 31,1996)
Baron
Focused
Growth
Fund
Retail
Shares1,2,3
Baron
Focused
Growth
Fund
Institutional
Shares1,2,3,4
Russell
2500
Growth
Index2
S&P 500
Index2
(13.79)%
(8.15)%
(4.01)%
7.74%
9.63%
8.19%
6.81%
(13.77)%
(7.95)%
(3.78)%
7.98%
9.91%
8.35%
6.92%
(11.05)%
(3.85)%
3.35%
13.79%
13.93%
8.38%
4.77%
(6.44)%
(5.29)%
(0.61)%
12.40%
13.34%
6.80%
3.96%
10.55%
10.63%
7.07%
7.58%
RONALD BARON
Retail shares: BFGFX
CEO
CHIEFAND
INVESTMENT
PORTFOLIO
OFFICER
MANAGER
AND PORTFOLIO MANAGER
Institutional Shares: BFGIX
A difficult market in the third quarter more than eliminated the gains
achieved in the first half of the year. Investors have been skittish as oil prices
have come under severe pressure, the Chinese stock market has
substantially declined, and turmoil increased in the Middle East with
Russia’s direct entry into the Syrian conflict. The Federal Reserve indicated
that it too was concerned about the pace of global economic growth and
chose not to increase interest rates in the period. In addition to these
macroeconomic (“macro”) concerns, company-specific problems have had
a negative impact on the markets. Volkswagen’s “emission cheating”
software will likely have an important adverse impact on the finances of the
second largest global car manufacturer. This is while Glencore, the world’s
largest commodity trader, may also be on unsound footing as commodity
prices have substantially declined.
Smaller companies’ stocks significantly underperformed those of larger
companies in the period. The eight small cap companies held in the Fund
represent 25.4% of the portfolio. This portfolio segment fell in value 26.4%,
substantially more than the larger companies’ price decline. We do not think
the broad decline of smaller cap businesses was a result of business
Performance listed in the above table is net of annual operating expenses. Annual expense ratio for the Retail Shares as of December 31, 2014 was 1.39%,
but the net annual expense ratio was 1.35% (net of the Adviser’s fee waivers) and Institutional shares was 1.09%. 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 has reimbursed certain Fund expenses (by contract as long as BAMCO,
Inc. is the adviser to the Fund) for 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 www.BaronFunds.com or call 1-800-99BARON.
†
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 June 30, 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 indexes are unmanaged. The Russell 2500™ Growth Index measures the performance of small to medium-sized U.S. companies that are classified as growth and the S&P 500 Index of 500 widely
held large cap U.S. companies. The indexes and the Fund are with dividends, which positively impact the performance results. Russell Investment Group is the source and owner of the trademarks,
service marks and copyrights related to the Russell Indexes. Russell is a trademark of Russell Investment Group.
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
5 Not annualized.
* The Morningstar US OE Mid-Cap Growth Category Average is not weighted and represents the straight average of annualized returns of each of the funds in the Mid-Cap
Growth category. As of September 30, 2015, the category consisted of 772, 755 and 587 funds for the 3-month, 1- and 5-year periods. Morningstar ranked Baron Focused
Growth Fund Retail Share Class in the 98th, 89th and 82nd percentiles, for the 3-month, 1- and 5-year periods, and ranked Baron Focused Growth Fund Institutional Share Class
in the 98th, 88th and 79th percentiles, respectively, in the category.
37
fundamentals. Accordingly, we think their share prices now represent
unusually attractive value. We think this is probably because those
companies are underfollowed by Wall Street analysts. Consumer
Discretionary businesses represent the largest segment of the Fund at
43.6% of the portfolio and should benefit from the equivalent of the
substantial “tax cut” American citizens are experiencing as a result of lower
energy prices. We think travel businesses like Vail Resorts, Inc. and Hyatt
Hotels Corp. should be assisted by lower cost of transportation, while
retailer CarMax, Inc. should be aided by customers having more disposable
income.
Table II.
“Any Time at All.”
“The Long and
Winding Road”
Bush Years
“Here Comes
“Yesterday”
2000-2008
the Sun”
Clinton Years
9/11; Iraq;
Obama Years
1992-2000
Afghanistan;
2008-2015
Internet Bubble Housing Bubble; Recovery
“Any Time
12/31/99 P/E 33x Financial Panic
P/E 15.1x
at All”
Annualized Returns
Inception
Inception
5/31/96 to
12/31/99 to 12/31/08 to 5/31/96 to
12/31/99
12/31/08
9/30/15
9/30/15
Baron Focused
Growth Fund –
Institutional
Shares
27.87%
Russell 2500
Growth Index 17.60%
S&P 500 Index
26.58%
2.72%
13.11%
10.63%
(3.99)%
(3.60)%
17.80%
14.25%
7.07%
7.58%
Table III.
Market
Cap
When
Year
Acquired
Acquired (billions)
ITC Holdings Corp.
Church & Dwight
Co., Inc.
Quarter
End
Market
Cap
(billions)
Total
Return
Percent
Impact
2003
2008
$0.9
2.2
$9.0
5.2
9.72% 0.30%
4.19
0.09
2007
2009
3.0
5.0
11.0
12.5
3.80
1.58
0.04
0.03
results with its 9% growth in book value per share. Despite soft industry
ITC Holdings Corp. is the nation’s largest independent transmission
company. Shares rose due to the relatively strong performance of the
38
electric utility sub-industry as investors rotated away from risk in the
broader stock market. We believe ITC has robust prospects for growth and
will continue to execute on its growth strategy. The primary drivers for
transmission investment, reliability and connection of new generation
(including renewables), remain intact, and we believe ITC is well positioned
to benefit from these trends. (Rebecca Ellin)
Shares of consumer products company Church & Dwight Co., Inc. rose in
the period. Despite continued category headwinds and a weak consumer
market, performance was solid. Organic sales grew by over 5%, and we
think momentum will continue, as the company has successfully addressed
supply constraints in its vitamin business. Investors appeared confident in
Church & Dwight’s ability to make growth-enhancing acquisitions. There is
also speculation of a takeover by a firm looking to enter the U.S. market.
(Michael Baron)
Table IV.
Market
Cap
Quarter
When End Market
Year
Acquired
Cap
Total
Acquired (billions) (billions) Return
CaesarStone
Sdot-Yam Ltd.
Benefitfocus, Inc.
The Carlyle Group
Hyatt Hotels Corp.
2013
2014
2012
2014
2009
$1.5
0.7
0.9
1.8
4.2
$1.1
0.9
1.3
1.5
6.7
–55.65%
–28.73
–38.10
–30.47
–16.92
Percent
Impact
–2.23%
–1.40
–1.32
–1.29
–1.19
surfaces for kitchens and bathrooms. Shares fell sharply in August after the
company reduced its full-year revenue guidance on the second quarter
earnings call. A negative report by a short seller of the stock also weighed
on the stock price. We believe investors overreacted to both events and
remain positive on our investment in CaesarStone, as earnings growth
accelerates from successful new product launches and quartz market share
gains vs. other countertop materials. (David Kirshenbaum)
Shares of Benefitfocus, Inc., a leading provider of cloud-based benefits
software, detracted from the third quarter performance after performing
well earlier in the year. The company conducted a secondary offering during
the third quarter, which we believe weighed on the stock. It continued to
generate robust financial results, growing its employee customer count by
36% and demonstrating initial traction with its newly launched modules.
We believe that Benefitfocus serves an addressable market that is more
than 100 times larger than its current business. (Neal Rosenberg)
Shares of The Carlyle Group, an alternative asset manager, declined in the
period. The company continues to perform well in its corporate private
equity division. However, its newer divisions in Real Assets and Investment
Solutions and Global Market Strategies have faced issues. While poor
performance in these areas will likely result in lower near-term distributions,
we think Carlyle still holds long-term promise as it launches new products
and performance of existing funds may improve. (Michael Baron)
September 30, 2015
Recent purchases
Table V.
Mobileye N.V.
Year
Acquired
Market
Cap
When
Acquired
(billions)
Quarter
End
Market
Cap
(billions)
Amount
Purchased
(millions)
2015
$11.5
$9.9
$1.3
Mobileye N.V. (MBLY) is an Israeli-based, software and systems design
leader for camera based ADAS (advanced driver assistance systems). MBLY’s
algorithms help avoid accidents by implementing an advanced set of
applications ranging from warnings (collision warning, lane departure
warning) to active safety (Autonomous Emergency Breaking and Auto Pilot
features). We believe MBLY has a dominant and defensible market position
in ADAS due to its technology, as evidenced by its design wins with 75% of
the most significant worldwide original equipment manufacturers (OEMs).
Our proprietary research and public announcements from existing supply
chain companies lead us to believe that MBLY has a great opportunity to
significantly grow units and prices for the foreseeable future. We think that
over the next decade almost every car on the road will have camera based
algorithms deployed in it as a basic feature (a part of a larger sensors’
system). We believe these features will help save thousands of lives and
billions of dollars. With its technology and low selling price, we believe
MBLY is well positioned to capitalize on its existing relationships with the
majority of worldwide OEMs and grow its revenues and cash flows at a very
fast rate. We believe MBLY could be the parallel of “Intel inside” in the auto
world. (Gilad Shany)
Portfolio structure
The objective of Baron Focused Growth Fund is to double its value per share
within five years. Of course, we may not achieve our objective. Our strategy
to accomplish this goal is to invest for the long term in a focused portfolio
of what we believe are appropriately capitalized, well-managed, small and
mid-cap businesses at attractive prices. We attempt to create a portfolio of
less than 30 securities diversified by GICS sectors that will be approximately
90% as volatile as the market. These businesses are identified by our Firm’s
proprietary research.
We think all the businesses in which Baron Focused Growth Fund has
invested have the potential to double in size within approximately five
years and double again over the subsequent five years. We think these
well-managed businesses have sustainable competitive advantages and
strong, long-term growth opportunities. Considering current stock price
valuations, we believe we have the opportunity to meet our performance
goals during the next decade, although there is no guarantee that we will
do so.
As of September 30, 2015, Baron Focused Growth Fund held 24
investments. The median market capitalization of those small and mid-sized
growth companies was $5.41 billion. Compared to its benchmark, the
Fund’s investments have higher profitability (as exhibited through greater
operating margin, net margin and free cash flow margin). They also exhibit
better internal returns (higher return on invested capital and return on
equity). And they are more conservatively financed (lower debt to market
capitalization ratio) and have more consistent earnings (lower standard
deviation of earnings growth and lower beta). We find these metrics
important in helping limit risk for a concentrated portfolio.
The Fund has had less exposure to the Health Care sector than its index.
Currently, the Fund does not hold any Health Care investments, while the
average weighting in its benchmark index is 22.0%. Additionally, the Fund
currently does not hold any Energy positions, although this sector
constitutes a small portion of the index. The Health Care sector, and
particularly the biotechnology category, has been an extremely strong
performer the past few years as investors speculate on increased drug
approvals and their profitability. However, this strength reversed in the third
quarter as the Health Care sector was the second worst performing
category (behind Energy) in the Russell 2500 Growth Index, declining
16.50%. We have felt that the industry did not offer the attractive
risk/reward characteristics. We have historically avoided biotechnology
stocks in this focused portfolio since the outcomes for many such
companies are binary.
Instead, the Fund has invested in businesses with, in our view, multiple
growth opportunities. Examples included businesses like financial
technology platform FactSet Research Systems, Inc., which is growing its
small customer base in a sizeable category, while also introducing new
products and services allowing it to increase price per account; and
Manchester United plc, a sports franchise that we believe can increase
sponsorships, improve global merchandising, more effectively monetize
television broadcasting and launch subscription-based digital content. We
believe these multifaceted businesses will provide steadier and more
impressive returns over the long term than companies solely reliant on a
single product’s success.
Table VI.
Market Quarter
Cap
End
When
Market
Percent
Year
Acquired
Cap
Amount of Net
Tesla Motors, Inc.
Vail Resorts, Inc.
CoStar Group, Inc.
Hyatt Hotels Corp.
FactSet Research
Systems, Inc.
Manchester United plc
Choice Hotels
International, Inc.
CarMax, Inc.
Benefitfocus, Inc.
2014
2013
2014
2009
$31.2
2.3
6.2
4.2
$32.4
3.8
5.6
6.7
$20.4
14.3
13.0
12.2
11.7%
8.2
7.5
7.0
2008
2012
2003
2.5
2.3
0.9
6.6
2.8
9.0
12.0
9.4
7.3
6.9
5.4
4.2
2010
2011
2014
1.9
5.7
0.7
2.7
12.3
0.9
7.1
7.1
7.0
4.1
4.1
4.0
39
Thank you for investing in Baron Focused Growth Fund.
We are continuing to work hard to justify your confidence and trust in our
stewardship of your family’s hard-earned savings. We are also continuing to
try to provide you with information I would like to have if our roles were
reversed. This is so you can make an informed judgment about whether
Baron Focused Growth Fund remains an appropriate investment for your
family.
Respectfully,
Ronald Baron
October 23, 2015
The Adviser believes that there is more potential for capital appreciation in small and medium-sized companies and using non-diversification, but there also
may be more risk. Specific risks associated with non-diversification include increased volatility of the Fund’s returns and exposure of the Fund to greater risk
of loss in any given period. Securities of small and medium-sized companies may be thinly traded and they may be 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.
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.
P/E: the price earnings ratio is a valuation ratio of a company’s current stock price to its actual earnings per share.
Standard Deviation of YOY EPS Growth: is calculated by taking the 5-year standard deviation of year-over-year (“YOY”) LTM EPS growth. The standard deviation is used to measure the spread around
the average or mean. In other words, it indicates whether the values being considered differ greatly from each other. The smaller the standard deviation, the smaller the spread. Standard deviation is
determined by first finding the average of the data set. Each data item is then subtracted from the average, and the difference is squared. The sum of the squared values is divided by the number of
data items minus one. The function returns the square root of that value.
40
September 30, 2015
Dear Baron International Growth Fund Shareholder:
Performance
The Baron International Growth Fund (the “Fund”) declined 9.96%
(Institutional Shares) for the third quarter of 2015, while its principal
benchmark index, the MSCI ACWI ex USA IMI Growth Index, retreated
10.59% for the quarter. Global equities declined significantly in response to
diminishing growth prospects, particularly in the emerging markets, as well
as to widening credit spreads and a broad increase in risk premium. In our
view, a key catalyst during the quarter was a volatile progression of policy
moves in China - first, a failed attempt to stabilize the local A Share equity
markets, and subsequently a modest, but in our view meaningful,
devaluation of the Chinese RMB. Such measures resulted in rising
uncertainty over economic and financial stability as well as political
leadership in China, an undisputed leading driver of global investment and
growth over the past decade. We understand the global market reaction but
will detail our perhaps out of consensus interpretation of the RMB
devaluation later in this letter. The other major catalyst of market activity
during the quarter was the shifting market anticipation over an imminent
start to the U.S. Fed rate hike cycle. As we have suspected, expectations of
such an event have been pushed out for now due to concerns over the
global economic and financial growth. We do note however that, although
the Fed currently remains on hold, during the quarter a very significant
tightening of conditions has been priced into the global credit markets,
particularly high-yield and EM sovereign bonds where credit concerns are
concentrated. As such, while we believe we are now in the late stages of the
current market correction, we note that tightening of the recent conditions
Table I.
Performance†
Baron
Baron
International International
MSCI
Growth
Growth
ACWI ex
Fund
Fund
USA IMI
Retail
Institutional Growth
1,2
1,2.3
Shares
Shares
Index1
Three Months4
Nine Months4
One Year
Three Years
Five Years
Since Inception
(December 31, 2008)
(9.99)%
(3.21)%
(3.68)%
5.07%
4.93%
(9.96)%
(3.04)%
(3.45)%
5.33%
5.21%
11.11%
11.38%
MSCI
ACWI ex
USA Index1
(10.59)% (12.17)%
(5.24)% (8.63)%
(7.58)% (12.16)%
3.87%
2.34%
2.93%
1.82%
8.51%
7.26%
MICHAEL KASS
PORTFOLIO MANAGER
Retail Shares: BIGFX
Institutional Shares: BINIX
has increased the possibility of a related credit event, which in our view
could mark the “ninth inning” and perhaps set up the stage for a sustainable
recovery. Also worth noting on the positive side during the quarter,
immediate concerns over a Greek insolvency and Euro exit faded as a
referendum resulted in a pro-Euro parliamentary majority. Though the
current investment environment remains somewhat uncertain, we remain
enthusiastic about the many companies and entrepreneurs in which we
have invested. Further, we believe such companies and entrepreneurs in
general represent the solution to the primary challenge facing many
economies, particularly those in the developing world experiencing the
greatest stress and threatening global growth; we would define this
challenge as deteriorating capital efficiency and economic productivity
coincident with sustained credit growth. We remain confident that we are
well positioned to deliver on the long-term potential inherent in the
international and emerging equity markets.
While down in absolute terms, our third quarter return modestly
outperformed our key international benchmark indexes. During the
quarter, the largest drivers of positive relative performance were stock
selection effect in the Industrials and Consumer Discretionary sectors.
Within Industrials, our performance was driven by Aena SA, the leading
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, 2014 was 1.63% and 1.34%, but the net annual expense ratio was 1.50% and 1.25% (net of the Adviser’s fee waivers), 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 has reimbursed certain Fund
expenses (by contract as long as BAMCO, Inc. is the adviser to the Fund) 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 www.BaronFunds.com or call 1-800-99BARON.
†
1
2
3
4
The MSCI ACWI ex USA indexes cited are unmanaged, free float-adjusted market capitalization weighted indexes. The MSCI ACWI ex USA IMI Growth Index Net USD
measures the equity market performance of large, mid and small cap growth securities across developed and emerging markets, excluding the United States. The MSCI ACWI
ex USA Index Net USD measures the equity market performance of large and mid cap securities across developed and emerging markets, excluding the United States. The
indexes and Baron International Growth Fund include reinvestment of dividends, net of foreign withholding taxes, which positively impact the performance results.
The performance data does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or redemption of Fund shares.
Not annualized.
41
airport operator in Spain, which we profiled in our March 2015 letter,
Ryanair Holdings plc and EasyJet plc, both leaders in low-cost European
air travel, and MonotaRO Co., Ltd., a fast growing Japan-based B-to-B
eCommerce distributor of maintenance, repair and operations
consumables. Within Consumer Discretionary, the drivers of
outperformance were Domino’s Pizza Group plc and Domino’s Pizza
Enterprises Ltd., the highly efficient operators of Domino’s franchise
rights in the U.K. and Australia, ProSiebenSat.1 Media SE, a leading
German broadcast and digital media operator, and AO World plc, the
leading online vendor of appliances and televisions in the U.K. and
Germany. The largest negative impact to relative returns was a significant
underweight position in Consumer Staples, as well as adverse stock
selection within the Utilities sector, where our recently established
investment in the IPO of TerraForm Global, Inc. was a victim of poor
timing in the context of the rapid decline in energy prices and a significant
increase in emerging market credit spreads.
recovered in the third quarter as the company reiterated its longer-term
growth forecast. The company expects growth to reaccelerate in the latter
half of the year, along with a continued ramp in German operations, a
market that is twice as large as the U.K. market. (Ashim Mehra)
Domino’s Pizza Group plc is the master franchisee of the Domino’s Pizza
brand in the U.K., Ireland, and other European countries. The company
entered continental Europe with the goal of replicating its success in the
U.K. When its share price corrected substantially due to lack of progress in
Germany, we built a position on the belief that the market had overpenalized it for the weakness in Germany, and that its business there would
make progress. During the third quarter, the company reported earnings
that demonstrated a solid turnaround in Germany. (Kyuhey August)
Table III.
Percent
Impact
Table II.
Percent
Impact
Ryanair Holdings plc
easyJet plc
AO World plc
Domino’s Pizza Group plc
0.18%
0.18
0.18
0.17
0.17
Shares of Ryanair Holdings plc rose in the third quarter after reporting
stronger-than-expected full-year guidance. Ryanair is a European budget
airline. While we think low oil prices will buoy all airlines in the short term,
we expect Ryanair to attract passengers with the lowest fares in the
industry, leading to profitability in any oil price environment. We believe
that Ryanair’s cost advantage is sustainable, and that it will continue to gain
significant market share in the European short haul passenger market.
(Aaron Wasserman)
results with 9% growth in book value per share. Despite soft industry
Shares of easyJet plc rose in the third quarter after reporting a strongerthan-expected summer result and expectation for the fall period. EasyJet is
a low-cost European airline. While average fares can fluctuate over a short
period of time due to incremental capacity shifts from competitors over
specific routes, we believe the long-term consolidation underway will be
difficult to reverse, and we expect easyJet to continue gaining market share
from larger, loss-making incumbent airlines. (Aaron Wasserman)
AO World plc is the leading online seller of major domestic appliances in
the U.K. AO sets itself apart through its optimization of proprietary
software and logistics and focus on customer service. Shares of AO
42
Nomad Foods Limited
Kingdee International Software Group Co. Ltd.
Mellanox Technologies Ltd.
Haitong Securities Co., Ltd.
–0.91%
–0.58
–0.56
–0.53
–0.50
TerraForm Global, Inc. is a divided growth-oriented renewable energy
pipeline will benefit its yieldcos. We think the market dislocation is
technical and temporary and that TerraForm Global will resume future
growth. (Rebecca Ellin)
Nomad Foods Limited owns Iglo Foods, Europe’s leading frozen-food
company. Nomad gave back some of its second quarter gains as its business
remained challenging as a result of discounting and more private label
competition. To grow, Nomad continues to acquire, recently purchasing
Findus, a European seafood and frozen food business. We think Findus
overlaps nicely with Iglo’s products and geography, presenting the potential
for significant synergies for Nomad, and we retain conviction in the
company. (David Goldsmith)
Shares of Kingdee International Software Group Co. Ltd. declined during
the third quarter amid significant volatility in the Chinese market. Kingdee
is a software vendor to small and medium-sized businesses in China.
Following an investment from leading Chinese e-commerce operator
JD.com, Kingdee is undergoing a strategic transformation from a direct to
an indirect sales model. We think the indirect sales model will allow Kingdee
to reach more potential customers more profitably and earn higher returns
on its capital over the long run. (Aaron Wasserman)
Shares of semiconductor company Mellanox Technologies Ltd. fell in the
third quarter in the wake of its late quarter announcement that it had
acquired EZChip, creating concerns around the current level of organic
growth. Initial results for the third quarter released after quarter end
September 30, 2015
alleviated these concerns and sent the stock back to its pre M&A levels. We
believe the organic growth path for Mellanox remains intact and this
acquisition will be meaningfully accretive to earnings and provide
substantial cost and revenue synergies that will accrue to shareholder value
over time. (Gilad Shany)
Haitong Securities Co., Ltd. declined materially during the quarter in
sympathy with the broad decline in China equities, particularly given the
company’s sensitivity to margin balances and equity market trading
volumes. We remain comfortable with Haitong’s long-term prospects given
the anticipated shift in China credit provision from the traditional bank
sector in favor of the securities industry which we believe is currently in the
very early stage. (Michael Kass)
PORTFOLIO STRUCTURE
Table IV.
Top 10 holdings as of September 30, 2015 - Developed Countries
Percent of
Net Assets
Constellation Software, Inc.
Aena SA
Check Point Software Technologies Ltd.
Ingenico Group SA
ProSiebenSat.1 Media SE
Eurofins Scientific SE
Domino’s Pizza Enterprises Ltd.
Ryanair Holdings plc
Symrise AG
4.0%
3.3
3.0
2.7
2.6
2.4
2.3
2.2
2.2
2.0
Table V.
Top five holdings as of September 30, 2015 - Developing Countries
Percent of
Net Assets
Steinhoff International Holdings Ltd.
Tencent Holdings Ltd.
TAL Education Group
Dish TV India Ltd.
1.5%
1.3
1.3
1.2
1.1
Exposure by Country: At the end of the third quarter of 2015, the Fund
was invested 80.8% in developed countries and 16.9% in developing
countries, with the remaining 2.3% in cash. The Fund seeks to maintain
broad diversification by country at all times. A detailed review of the
Fund’s holdings by country is available at the back of this Baron Funds
Quarterly Report.
Table VI.
Percentage of securities in developed markets as of September 30, 2015
Percent of
Net Assets
United Kingdom
Japan
Germany
Israel
Spain
Canada
France
United States
Australia
Ireland
Switzerland
Italy
Norway
Hong Kong
19.2%
14.0
10.2
6.1
5.6
5.6
5.1
4.8
3.2
2.2
1.9
1.7
0.7
0.5
Table VII.
Percentage of securities in developing markets as of September 30, 2015
Percent of
Net Assets
China
India
Indonesia
South Africa
Brazil
7.4%
4.7
2.2
1.5
1.1
The Fund may invest in companies of any market capitalization, and we
strive to maintain broad diversification by market cap. As of September 30,
2015, the Fund’s median market cap was $6.97 billion, and we were
invested approximately 53.9% in large/giant cap companies, 37.6% in mid
cap companies, and 6.2% in small/micro cap companies, as defined by
Morningstar, with the remainder in cash and unassigned securities.
Recent Activity
Amid rising volatility and rapidly shifting macroeconomic conditions, the third
quarter was relatively quiet in terms of new positions. While no major new
themes emerged, we did initiate investments in lululemon athletica, inc., the
world’s leading designer and retailer of “athleisure” wear, as well as Intesa
Sanpaolo S.p.A., a leading and high-quality financial services provider based in
Italy that we believe is positioned to benefit from the county’s economic
reform agenda as well as the revival in European credit growth. During the
quarter, we exited modest positions in China Unicom (Hong Kong) Ltd. and
Syngenta AG, subsequent to a takeover bid from Monsanto Corporation.
43
Outlook
In our previous letter, we questioned whether global monetary authorities
had successfully engineered escape velocity and asset reflation; indeed, the
third quarter confirmed our skepticism over an imminent start to a Fed rate
hike cycle as a downgrade in growth and inflation expectations triggered a
widespread retreat in financial markets and a return to “risk-off’ sentiment.
While we are not at all surprised by this turn of events, we suspect that we
have now entered the late stages of the current market correction as well
as the absolute and relative bear market in emerging market equities,
currencies and sovereign bonds. While such asset prices now appear
arguably cheap, the key question in our view is what will be the catalyst for
a recovery? Or, alternatively, what is the way forward from here?
To answer, we must first analyze the root cause of the dislocation while
recognizing that the emerging markets and commodity sector represent the
epicenter of current instability and concern. We believe the strong
headwinds emerging market economies and equities face today stem in
large measure from aggressive quantitative easing by developed world
central banks in recent years. Subsequent to the financial crisis of 2008, U.S.
quantitative easing led to both a significant decline in global interest rates
and expectations for sustained dollar weakness, driving a historic increase
in U.S. dollar bond issuance by emerging market sovereigns and corporates.
As leverage rose in the emerging markets, the U.S. economy slowly healed,
and eventually Fed easing gave way to tapering. As the Fed passed the
monetary baton to Japan and subsequently the ECB, conditions in the
emerging markets markedly changed. While an easing in Japan or Europe
may sooth local conditions, in a very low growth environment, and in the
context of Fed tapering, such policy represents a tightening for most EM
countries – particularly China whose currency until recently was pegged to
the dollar. This is largely because many EM countries have commodity
sensitive revenue streams and currencies and/or had previously aggressively
borrowed in dollars. We have consistently suggested that if dollar strength
against EM currencies persists, eventually we should expect China to
engineer a depreciation of the RMB; we see no reason to expect China to
unilaterally absorb the deflationary pressure resulting from a rising dollar as
their Asian neighbors devalue. In fact, we believe maintaining the peg is one
reason why China appears the epicenter of global weakness and risk. Indeed,
in August, China shocked the markets with a modest currency depreciation,
deflecting a portion of the deflationary impulse back at the developed and
neighboring emerging countries. In our view, this action represents a
warning by China, a precursor of what may come if the Fed engages in a
rate hike cycle as currently envisioned, though that we now discount as
unlikely. However, given a clear decoupling of economic conditions, we
suspect that China would likely seek a market driven RMB exchange rate in
such a scenario, which could drive the RMB at least 10% lower. We believe
this would likely exacerbate global deflationary pressures while exposing
how complex the global economic balance has become in recent years.
This brings us back to our previous question: what is the way forward from
here? In the relative near term, we see three possibilities. First, the global
economic indicators could sustainably improve of their own accord in
response to months of accumulated easing in the pipeline. We believe this
is a possible but unlikely outcome. Second, China could engage in
aggressive stimulus and/or devalue materially – also possible, but, in our
view, not likely given recent official statements. Third, the Fed could shift its
own rhetoric, indefinitely deferring rate hikes and perhaps even signaling a
bias towards further easing, an outcome which we would tend to expect if
the market based tightening referenced above were to result in an
international credit event. While we certainly cannot predict the future, we
do believe any of the above could create an important bottom in global
markets and would likely trigger in particular a reversal in the relative
performance of hard hit asset classes such as energy, commodities, cyclicals
and the emerging markets. Of course, in the long term, we see the principal
source of value creation in the international and emerging markets being a
shift in capital allocation, resources and subsidies towards private sector
entrepreneurs, as well as to the beneficiaries of productivity enhancing
economic, financial and labor reforms. As our themes and investments are
based on identifying and capturing such long-term value creation, we
remain quite confident that we are well positioned to execute on the
promise inherent in our markets.
Thank you for investing in the Baron International Growth Fund.
Sincerely,
Michael Kass
Portfolio Manager
October 23, 2015
Non-U.S. investments may involve additional risks to those inherent in U.S. investments, including exchange-rate fluctuations, political or economic instability, the
imposition of exchange controls, expropriation, limited disclosure and illiquid markets. This may result in greater share price volatility. Specific risks associated with
investing in small and medium-sized companies include that the securities may be thinly traded and they may be more difficult to sell during market downturns.
The Fund may not achieve its objectives. Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.
This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron International Growth Fund by anyone in any jurisdiction where it would be unlawful under the
laws of that jurisdiction to make such offer or solicitation.
44
September 30, 2015
DEAR BARON REAL ESTATE FUND SHAREHOLDER:
The generally unimpeded six-year broad-based appreciation in the stock
market, most real estate securities, and the Baron Real Estate Fund (the “Fund”)
hit a speed bump in the third quarter. The onslaught of negative news items
contributed to disappointing performance for most stocks. Concerns included
uncertainty over China’s economic growth prospects and its effect on
emerging markets, the surprise devaluation of the yuan, persistently weak oil
and commodity prices, uncertainty over the timing of the first Federal Reserve
rate hike, and stretched valuations for certain segments of the market.
The S&P 500 Index declined 6.44% from June 30, 2015 through September 30,
2015, its worst quarterly performance in four years, since the third quarter of
2011 when the S&P 500 declined 13.87%. The Baron Real Estate Fund was not
immune to the overall market correction, and we are disappointed in the third
quarter performance (see performance table below). As we finalize this third
quarter letter, the Fund is off to a strong start in the fourth quarter, and has
increased by 7.68% (Institutional Shares) from September 30, 2015 through
October 23, 2015.
In our shareholder letters, we strive to bring you under the tent so that you
are fully informed of our current views. We have devoted considerable time
reflecting on the first nine months of 2015, our observations regarding the
stock market, and the various segments of the real estate market.
Performance
Table I.
Performance
Baron Real
Estate
Fund
Retail
Shares1,2
Three Months3
(9.97)%
Nine Months3
(9.41)%
One Year
(0.95)%
Three Years
12.76%
Five Years
16.89%
Since Inception
(December 31, 2009)
(Annualized)
16.78%
Since Inception
(December 31, 2009)
(Cumulative)3
143.97%
Baron Real
Estate
Fund
Institutional
Shares1,2
MSCI
USA IMI
Extended
Real Estate
Index1
S&P 500
Index1
(9.91)%
(9.26)%
(0.71)%
13.03%
17.18%
(2.87)%
(3.67)%
6.13%
11.67%
12.96%
(6.44)%
(5.29)%
(0.61)%
12.40%
13.34%
17.06%
13.46%
12.25%
147.41%
106.74%
94.30%
JEFFREY KOLITCH
PORTFOLIO MANAGER
Retail Shares: BREFX
Institutional Shares: BREIX
In this letter, we will address various items that may be “top of mind,”
including our perspective on the outlook for the stock market, the Fund,
commercial real estate, the housing market, interest rates, and
valuations. We will also opine on a number of real estate categories and
companies that comprise the Fund, including REITs, hotels and cruise
lines, homebuilders and land developers, building product/services
companies, real estate services companies, senior housing operators,
tower operators, casinos and gaming operators, and real estate operating
companies.
Q. What is your outlook for the overall market, real estate, and the
Fund?
A. Although we recognize that in the months ahead, there may be periods
of market weakness, we continue to maintain our view that the prospects
for the stock market, real estate, and the Fund are promising. We believe
various factors should contribute to attractive returns in the future. We
encourage you to read the “Portfolio Structure” section presented later in
this letter. We also urge you to review our perspective on the outlook for
the broader market, real estate, and several other “top of mind” topics that
can be found in the “Outlook” section at the end of this letter.
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
cost. The Adviser has reimbursed certain Fund expenses (by contract as long as BAMCO, Inc. is the adviser to the Fund) 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 www.BaronFunds.com
or call 1-800-99BARON.
1
2
3
The indexes are unmanaged. The MSCI USA IMI Extended Real Estate Index is a custom index calculated by MSCI for, and as requested by, BAMCO, Inc. The index includes
real estate and real estate-related GICS classification securities. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with
respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This
report is not approved, reviewed or produced by MSCI. The S&P 500 Index measures the performance of 500 widely held large cap U.S. companies. The indexes and the Fund
include reinvestment of interest, capital gains and dividends, which positively impact the performance results.
Not annualized.
45
Table II.
Quarter End
Market Cap
(billions)
Equinix, Inc.
Strategic Hotels & Resorts, Inc.
AvalonBay Communities, Inc.
Home Depot, Inc.
Simon Property Group, Inc.
$15.6
3.8
23.2
148.3
56.8
Percent
Impact
0.25%
0.24
0.13
0.11
0.10
During the most recent quarter, the following holdings were the top
contributors to performance:
Equinix, Inc., an owner and operator of data centers, remains a top holding
of the Fund. The company continues to report strong business results amid
diminishing competition, and improving demand for its hard-to-replicate
data center assets. It recently announced an agreement to acquire Telecity,
a European data center company, for $3.6 billion. We are optimistic about
this transaction because we think it should result in increased revenue
opportunities, cost savings, tax advantages, geographic diversification, and
new data capacity. In our opinion, the company should continue to
generate strong cash flow growth and the shares remain attractively valued.
Strategic Hotels & Resorts, Inc., a hotel REIT, owns one of the highest
quality luxury hotel portfolios in the U.S. In the most recent quarter,
Strategic Hotels announced that it has entered into a definitive agreement
to be acquired by Blackstone Real Estate.
A few of what we consider to be the Fund’s “best-in-class” REITs continued
to report strong business results and held up well despite the recent market
turmoil. They include AvalonBay Communities, Inc., that owns and
operates what we believe is one of the newest and highest quality
apartment portfolios in the U.S., and Simon Property Group, Inc., the
world’s largest and best managed retail mall and outlets operator.
Home Depot, Inc. also held up well in the most recent quarter as the
company continued to report strong business results and encouraging
business prospects.
Table III.
Quarter End
Market Cap
(billions)
Diamond Resorts International, Inc.
Hilton Worldwide Holdings, Inc.
Jones Lang LaSalle, Inc.
$1.1
4.2
1.7
22.7
6.5
Percent
Impact
–1.28%
–1.08
–0.75
–0.64
–0.57
In the most recent quarter, the shares of CaesarStone Sdot-Yam Ltd., the
leading global manufacturer of high quality engineered quartz surfaces used
primarily as countertops in residential kitchens, declined significantly from
a peak of approximately $70 per share to $30. During this period, the Fund
sold a portion of its holdings at an average price of $57 per share and
subsequently reacquired shares at $33 per share, a price that we believe
46
represents considerable value. We remain bullish about the prospects for
the shares and the company.
In our opinion, the shares of CaesarStone were impacted by three key
factors:
First, its second quarter U.S. sales growth of 20%, while strong, did fall short
of expectations of 30%. This occurred following the company’s recent
increase of its manufacturing capacity to meet the surging demand for its
quartz products. This lower growth quarter was likely due to factors that
included customer budgeting shortfalls, delays in distributor orders,
customer bottlenecks, and some moderation in single-family home
construction. Importantly, we believe that despite its more moderate 20%
growth, demand for quartz and CaesarStone products specifically will
remain strong. Furthermore, management believes that growth in the U.S.
in the second half of 2015 may be greater than 20%.
Second, a small hedge fund issued a negative report on the company. In our
opinion, the allegations cited in the report (that include claims of cost
inflation, misrepresentations regarding quartz content, market share losses,
and financial reporting inaccuracies) are irresponsible, inaccurate, and
misleading. The management of CaesarStone published a response that
refutes all claims in the hedge fund report and is considering legal action
against the hedge fund.
Third, in the most recent quarter, two Board members resigned. We have
discussed this with management and are comfortable that the reasons for
the two resignations did not include concerns about corporate governance,
the management team, or strategy. Further, the company also issued a
press release that states that the two resignations did not reflect
differences of opinion as it relates to the company’s business, accounting or
public disclosures, or any concerns about alleged wrongdoing.
What is our current view of CaesarStone? We remain optimistic about the
company’s long-term prospects. CaesarStone’s quartz products continue to
take market share from other materials such as granite, marble, and
laminate because it offers superior scratch, stain, and heat resistance as well
as a wider array of design options. Quartz penetration in the U.S. is
estimated at only 8% versus a much deeper penetration rate in the
company’s other geographic markets (Israel 86%, Australia nearly 40%,
Canada 18%). Our sense is that quartz penetration will continue to
accelerate, and its modest 8% U.S. penetration underscores the potential
opportunity for CaesarStone to grow sales over time. The company has zero
debt. We believe CaesarStone continues to be a high-growth way to
participate in the residential construction, repair and remodeling market.
We believe CaesarStone’s shares are attractively valued at only 12.2 times
our 2016 estimate of $2.78 earnings per share. At only 14 times our 2017
earnings per share estimate of $3.36 (20% earnings growth), the shares
would reach $47 per share in the next 12 to 18 months versus a current
price of $34 per share or 40% upside.
Following a 35% increase in 2014, the shares of Brookdale Senior Living,
Inc., the largest and most comprehensive owner-operator of senior housing
in the U.S., declined significantly due to lowered earnings guidance (for two
straight quarters), its slower-than-expected merger integration with
Emeritus Corp., management leadership changes, and a pickup in senior
housing construction activity. Following the second quarter, the Fund has
been steadily decreasing its investment in Brookdale and currently
September 30, 2015
maintains only a modest position in the company. We do, however, view the
recent price decline as overdone and believe the shares have now become
attractively valued. We remain optimistic about Brookdale’s long-term
prospects, and we will continue to monitor its business and performance.
In the third quarter, the shares of Diamond Resorts International, Inc., a
global leader in the hospitality and vacation ownership industry, declined
due to some concerns regarding the potential for increased competition
from Airbnb and regulatory changes that could negatively impact the
timeshare industry’s consumer lending practices. However, we recently met
with management and believe these issues are overstated and should not
result in a material financial impact.
We remain optimistic about the prospects for Diamond Resorts due to its
strong growth potential, solid balance sheet (its low net debt level
approximates estimated cash flow), extremely favorable valuation (less
than 4.5 times 2016 estimated cash flow!), and its strong estimated free
cash flow generation of approximately $250 million (15% free cash flow
yield) that could be used for acquisitions, dividends, stock buybacks, or debt
repayment. Finally, in our opinion, management’s interests are aligned with
ours due to their significant ownership stake in the company.
The shares of Hilton Worldwide Holdings, Inc., the largest hotel company
in the world, declined in the third quarter alongside most hotel stocks.
Factors that weighed on hotel shares include concerns about a global
economic slowdown, fears about competition and pricing pressure from
Airbnb, and weaker-than-expected financial results and forecasts from
several other companies (although not from Hilton). We recently met with
Hilton management, and we continue to believe the company’s long-term
prospects remain attractive.
Table IV.
Fund investments in real estate categories as of September 30, 2015
Percent of Net Assets
Hotels & Leisure
Hotels & Timeshare/Leisure1
Cruise Lines
REITs2
Building Products/Services
Real Estate Service Companies
Real Estate Operating Companies
Homebuilders & Land Developers
Casinos & Gaming Operators
Tower Operators3
Senior Housing Operators
Other4
Cash and Cash Equivalents
1
2
3
4
22.7%
16.1%
6.6
20.7
17.2
10.5
7.9
4.6
3.7
3.6
3.4
2.7
97.0
3.0
100.0%
Total would be 19.0% if included hotel REIT Strategic Hotels & Resorts, Inc.
Total includes 4.2% from Equinix, Inc., which has been operating as a REIT since
January 1, 2015.
Total would be 5.7% if included tower REIT American Tower Corp.
Other includes Data Centers and Infrastructure-Related & MLPs real estaterelated categories. Currently, the Fund holds no MLPs.
At September 30, the Fund maintained 43 positions. Our 10 largest
holdings comprised 35.2% of the Fund, with an average position size of
3.5%, and our 20 largest holdings accounted for 60.2% of the Fund, with an
average position size of 3.0%.
Hilton has been generating industry leading growth and gains in market
share. In addition to its solid business results, we believe there are several
catalysts that could propel the shares higher, including a possible REIT
conversion of its company-owned real estate, the spin-out of its timeshare
business, the initiation of a dividend policy and stock buyback plan, Hilton’s
inclusion in the S&P 500 Index, and an upgrade of its debt rating to
investment grade. We are confident that management is focused on
methods and initiatives to unlock shareholder value.
Following the third quarter decline in the broad market and most real
estate-related companies, we generally believe that real estate valuations
have now become more attractive and business prospects remain solid.
Our thoughts on The Baron Real Estate Fund’s 10 real estate category
allocations are as follows:
At its current share price of $23, Hilton is priced at what we believe is a
compelling value of less than 10 times 2016 estimated cash flow. It has
been our experience that buying high-quality hotel companies such as
Hilton at less than 10 times cash flow has been prudent, and it usually
results in strong returns, although there is no guarantee that this will be the
case. We have continued to buy stock at recent prices and remain
optimistic about the company’s long-term prospects.
Hotels (9.0%): In the first nine months of 2015, shares of most hotel
companies declined due to concerns over the possibility of increased
inventory and pricing pressure from new competitors such as Airbnb, fears
of a global economic slowdown, difficult year-over-year growth
comparisons, concerns that the lodging cycle might be nearing an end, and
weaker than expected financial results and business forecasts by several
companies.
Portfolio Structure
Q: What are your current thoughts regarding the various real estate
categories that comprise the Fund?
A: In addition to our investments in REITs, we differentiate the Fund by
investing in nine additional non-REIT real estate categories, as listed below.
We believe that our broader approach to investing in real estate should
produce better results over the long term.
Hotels & Leisure (22.7%) (Includes Hotels (9.0%), Timeshare/Leisure
(7.1%) and Cruise Lines (6.6%)):
While we continue to closely monitor industry conditions, we maintain that
the prospects for our investments in hotels are attractive amid expectations
of solid demand, generally low supply forecasts, company-specific
initiatives that may unlock shareholder value, the growing likelihood of
mergers & acquisition activity (Strategic Hotels & Resorts, Inc., one of the
Fund’s top holdings, recently agreed to be sold to Blackstone Real Estate),
and attractive valuations that, in our opinion, reflect low investor
expectations and more than anticipate many of the aforementioned
possible challenges.
47
Timeshare/Leisure (7.1%): We also remain optimistic about our timeshare
investments, Wyndham Worldwide Corp. and Diamond Resorts
International, Inc. Following strong share price performance the last few
years, the stocks of both companies have declined in 2015 due to concerns
regarding the potential for increased competition (Airbnb) and regulatory
changes that could negatively impact the timeshare industry’s consumer
lending practices. We recently discussed these issues with both
management teams and believe the worries are overstated and should not
result in any material financial impact for the foreseeable future. We remain
optimistic about the prospects for both companies due to solid growth
potential, quality balance sheets, extremely favorable valuations, and strong
estimated free cash flow generation that could be used for acquisitions,
dividends, stock buybacks, or debt repayment. Finally, we believe the
interests of both management teams are aligned with ours due to their
significant ownership stake in their companies.
Cruise Lines (6.6%): We are optimistic about the prospects for the Fund’s
investments in our cruise line companies (“hotels on water”), Norwegian
Cruise Line Holdings, Ltd. and Royal Caribbean Cruises Ltd. We believe
cruise line prospects are strong due to (i) a favorable industry structure
whereby the three largest companies comprise 80% of the industry, and are
rationally addressing new ship additions and customer pricing (fewer last
minute discounts), (ii) high barriers to entry and limited competition due to
the high cost to build a new passenger ship (approximately $800 million to
$1 billion), (iii) lower oil prices (a key cost component) are providing a
tailwind for earnings, (iv) excess Caribbean ship capacity is being
redeployed to China, a new source of future demand, (v) strong growth
prospects, and (vi) favorable valuations (approximately 15 times earnings
amidst 25% earnings growth).
REITs (20.7%):
Business conditions are generally strong for our REIT companies, and they
may continue to benefit from low interest rates, occupancy growth and
increased rents at a time of limited new construction activity, improved
balanced sheets that can support corporate growth, continued access to
unprecedented low cost capital, and accretive investment opportunities. We
are mindful, however, that although some REIT valuations are “fair” in our
opinion, many of the Fund’s non-REIT real estate-related companies’
valuations are generally more compelling. Also, REITs may be more
vulnerable to an eventual rise in interest rates than non-REITs.
Building Products/Services Companies (17.2%):
We have continued to invest in several residential-related real estate
companies that we believe will benefit from a multi-year recovery in
housing. Within the residential real estate-related category, we favor
building products/services companies such as Home Depot, Inc., Lowe’s
Companies, Inc., Mohawk Industries, Inc., Masonite International Corp.,
Builders FirstSource, Inc., and CaesarStone Sdot-Yam Ltd. because they
typically benefit from an increase in new and existing home sales and the
acceleration in spending for home repair and remodeling.
Real Estate Service Companies (10.5%):
We are optimistic about the prospects for our commercial real estate
service companies, such as CBRE Group, Inc., Jones Lang LaSalle, Inc. and
Kennedy-Wilson Holdings, Inc. We believe each company’s business
48
prospects, balance sheets, and growth prospects are strong and valuations
are attractive.
Real Estate Operating Companies (7.9%):
We recently attended an annual investor meeting with the management of
Brookfield Asset Management, Inc. We are big fans of CEO, Bruce Flatt,
and his management team, and continue to believe the company has
several opportunities to drive growth in the years ahead. We are also
optimistic about the prospects for Forest City Enterprises, Inc., a
diversified real estate operating company that is planning to convert to a
REIT in the months ahead and should continue to execute on its plan to
increase cash flow, repay debt, sell non-core assets, and improve
shareholder value.
Homebuilders & Land Developers (4.6%):
We remain optimistic about the multi-year outlook for housing as we
believe the pieces are falling in place for a moderately growing housing
market. Although we favor specific homebuilders, such as Toll Brothers,
Inc., and land developers like Howard Hughes Corp., we generally prefer to
gain exposure to the housing market by investing in the residential building
products/services category because these companies benefit not only from
an improvement in home sales but also from consumer spending on home
repair and remodeling.
Casinos & Gaming Operators (3.7%):
We remain bullish on the prospects for MGM Resorts International
because Las Vegas business trends are encouraging, the company is focused
on improving profitability (its “$300 million profit plan”), of possible
strategic initiatives to unlock shareholder value (a potential U.S. REIT and/or
asset sales), and its favorable valuation. We are researching possible
investments in additional casino & gaming companies.
Tower Operators (3.6%) (5.7% including tower REIT, American Tower
Corp.):
We remain optimistic about the prospects for our tower investments such
as American Tower Corp. and SBA Communications Corp. These
companies combine the stability of traditional real estate (five to ten year
lease agreements that generate stable and growing cash flow) with the
secular industry tailwind of increasing demand for wireless data-intensive
devices such as iPhones, iPads, and other wireless devices. Barriers to entry
remain high due to zoning restrictions that limit competing tower
development.
Senior Housing Operators (3.4%):
Since the inception of the Fund at the end of 2009, our investments in
senior housing operators have been major positive contributors to
performance. Favorable demographic trends, an improving housing market,
industry consolidation (two of the Fund’s senior housing companies were
acquired in the last five years), cash flow growth, and an improvement in
valuation contributed to the appreciation in the shares of our senior
housing investments. In 2015, however, we have become more cautious
about the prospects for senior housing and decreased the Fund’s
investment in this real estate category from 12.3% at the end of 2014 to
September 30, 2015
only 3.4% of the Fund’s net assets by the end of the third quarter of 2015.
Brookdale Senior Living, Inc. is in the midst of its challenging merger
integration with Emeritus Corp. and is also facing an increase in senior
housing construction activity. In the near term, we are more optimistic
about the prospects for Capital Senior Living Corp., which we believe is
facing fewer challenges than Brookdale.
Other (2.7%):
More than five years ago, we first began acquiring shares in Brookfield
Infrastructure Partners L.P., an owner and operator of a globally diversified
portfolio of high quality infrastructure assets. We remain optimistic about
the prospects for Brookfield because we believe the shares are attractively
valued and the company has several new and exciting growth
opportunities.
Recent Activity
Table V.
Royal Caribbean Cruises Ltd.
Summit Materials, Inc.
MGM Resorts International
Kennedy-Wilson Holdings, Inc.
Quarter End
Market Cap
(billions)
Amount
Purchased
(millions)
$19.6
1.9
22.7
10.4
2.5
$43.0
32.9
15.7
13.8
11.9
As noted earlier in this letter, we are generally optimistic about the
prospects for cruise line companies. Our favorable view is supported by
several factors including: a favorable industry structure whereby the three
largest cruise lines control approximately 80% of the industry, manageable
new ship additions, rational pricing strategies, high barriers to entry, lower
oil prices, emerging growth opportunities in China and Cuba, and favorable
valuations.
Recently, we added to our cruise line portfolio (we have owned Norwegian
Cruise Line Holdings since its January 2013 IPO) with the purchase of
shares of Royal Caribbean Cruises Ltd. The company operates 44 ships
with an additional eight under construction, and serves 480 destinations on
all seven continents. Management is targeting to double its earnings per
share from $3.39 in 2014 to $7.00 in 2017 through moderate capacity
growth, cost containment, and improvements in occupancy and rates. We
believe the company could exceed those goals and generate $7.50 in 2017,
representing an average annual growth rate of 30% between 2014 and
2017.
In our view, the shares are attractively valued at approximately 15 times
2016 estimated earnings. At only 16 times our estimated 2017 earnings per
share of $7.50 (25-30% 2017 estimated earnings growth), the shares would
reach $120 per share in the next 12 to 18 months versus a current price of
$92 per share or 30% upside.
Summit Materials, Inc. is a heavy construction materials company with
good exposure to infrastructure, residential and commercial construction.
The firm operates in materials (aggregates and cements), products (asphalt
and ready-mixed concrete) as well as services (paving operations). We
recently met with management and believe that business prospects, both
organic and potential future acquisitions, are strong. We estimate that the
company may generate approximately $275 million of cash flow in 2015
and that cash flow may grow by more than 50% in the next two years to
$435 million in 2017. At 9 to 10 times 2017 estimated cash flow, the shares
would appreciate approximately 20 - 40% in the next 12 to 18 months. We
are bullish.
In the last few months, we took advantage of the market weakness to
acquire additional shares of some of our high conviction companies. We
added to our position in Hilton Worldwide Holdings, Inc., the largest hotel
company in the world, at what we believe is an attractive valuation of less
than 10 times estimated cash flow. We believe the company’s owned hotels
would be valued in the private market at 13 to 14 times cash flow.
We also acquired additional shares of MGM Resorts International at less
than $20 per share, a 33% discount to our estimate of the company’s $30
per share intrinsic value. We also acquired additional shares in KennedyWilson Holdings, Inc., a global owner and manager of a high quality real
estate portfolio, at prices that are at a significant discount to our
assessment of the company’s private market value and at similar prices to
where management was recently buying shares.
Table VI.
Global Logistic Properties Ltd.
Sunstone Hotel Investors, Inc.
Zillow Group, Inc.
Prologis, Inc.
Quarter End
Market Cap or
Market Cap
When Sold
(billions)
Amount Sold
(millions)
$4.2
10.7
2.9
4.9
20.3
$96.9
27.6
23.8
22.5
22.0
During the most recent quarter, we believe we upgraded the quality of the
portfolio by either decreasing or exiting our investments in some of our
lower conviction holdings (see “Table VI” above) and reallocated the capital
to companies that we believe have stronger return potential.
Outlook
We continue to believe that the prospects for the equity market and
the Baron Real Estate Fund remain attractive.
Q. Why do we remain optimistic about the prospects for the equity
market?
A. Although equity markets may remain choppy in the months ahead
primarily due to increased uncertainty regarding economic growth
prospects and Federal Reserve policy, we continue to believe that the
precursors for a sustained market correction are not evident. We remain
bullish.
The foundation for our constructive view is based on the following
considerations:
1. The U.S. economy appears to be “not too hot, not too cold”. We believe
that economic growth is expanding moderately, without signs that a
recession is on the horizon. This economic environment should, in our view,
be a positive backdrop for stocks.
49
2. Interest rates are likely to remain low. In our opinion, concerns about
interest rates becoming a major headwind to equities and real estate are
unwarranted. Moderate U.S. economic growth and uncertainties abroad do
not portend a rapid increase in interest rates. Once the Fed increases
interest rates, we anticipate a slow and gradual pace of tightening, and
believe that equities can perform well should that occur.
3. Inflation concerns seem well off in the horizon. With no signs of a
significant acceleration in wage and consumer price inflation, the Fed and
the bond market are unlikely to be concerned. Further, lower gasoline and
import prices should be a boon to U.S. consumers. We believe non-inflation
growth should also bode well for equity returns.
4. Investor sentiment is poor. Investor sentiment appears to have swung
from overly optimistic at the beginning of 2015 to overly pessimistic today.
In the cycle of stock market emotions, we believe that the best time to buy
stocks to help generate maximum returns occurs when sentiment is poor,
although we cannot guarantee this will be the case.
5. Valuations are reasonable (and, in some cases, cheap). In the third
quarter, numerous stocks were sold indiscriminately without regard to
value, largely because external influences such as fears about China’s
economy and a possible Fed interest rate hike weighed heavily on the
market. In our opinion, equity valuations are now generally fair (the
S&P 500 P/E is approximately 15 times forward earnings) and remain
attractive versus bonds (especially factoring in longer-term inflation
expectations of at least 2.0%). We believe the valuations of numerous real
estate companies, such as hotels, timeshare, and real estate services, as well
as certain residential real estate-related companies, are cheap relative to
their historical valuations and future growth prospects.
6. Additional reasons to be optimistic. The U.S. banking system has
improved dramatically and is now maintaining strong capital ratios. With
large U.S. cash positions, corporate balance sheets are well positioned for
merger & acquisition activity, capital expenditures, employment growth,
stock buybacks, and dividend increases. There is a large pool of private
equity investment capital poised for deployment. Jobs are being added.
Household formation has been accelerating, and the outlook for housing is
brighter.
With all of these factors in place, we believe the equity market will continue
to successfully climb a “wall of worry” and generate positive returns.
Q. What may be some of the equity market challenges in the next several
months?
A. While we are optimistic about the prospects for equities, we are mindful
of the challenges that may arise such as (i) China’s slowing economy and
the possible spillover effects, (ii) a change in Fed policy and a corresponding
increase in interest rates, and (iii) stock valuations. At this stage, we are not
overly concerned about these items.
China’s slowing economy and the possible spillover effects:
This summer, concerns regarding a rapid decline in China’s economic
growth appear to have been the initial catalyst for a correction in the
global markets. We believe that the U.S. economy will avoid a contagion
from China and will continue to expand. Why? According to a report
published by Goldman Sachs, only 2% of the S&P 500 Index’s revenues
are generated from China. Further, less than 1% of U.S. exports are shipped
to China.
50
The Fed and interest rates:
With respect to the Fed, in our opinion, too much attention has been
focused on the timing of the first hike in the Federal Funds rate. In our view,
the initial Fed tightening will have more of a psychological impact rather
than much of an economic one because minimal fractional changes in
short-term interest rates will still yield historically low borrowing costs.
However, if the market does correct following the initial Fed interest rate
hike, we suspect that may present a buying opportunity. Since 1954, there
have been eight periods when the Fed increased interest rates. In no
instance did the U.S. market peak coincide with the first Fed rate hike. In
fact, on average, the S&P 500 Index increased by approximately 10% in the
12 months following the first Fed tightening. The big picture: Historically,
an improving U.S. economy, despite being accompanied by rising 10-year
U.S. Treasury yields, has been positive for the equity markets.
What appears to be lost in the message about the timing of the first
interest rate hike is that the Fed has indicated that it is going to limit these
hikes to a minimum. The Fed tightening will likely be gradual and slow
rather than aggressive given the still slow pace of inflation, moderate
economic growth, and the sluggishness in the labor force. We believe that
U.S. interest rates will continue to be a long-lasting underpinning for real
estate-related stocks and the broader U.S. stock market.
Lastly, although interest rates may head higher next year, reflecting an
improvement in the economy, macro forces may put a “cap” on Treasury
yields. These include the modest pace of the U.S. economic recovery, the
Fed’s intention to maintain low interest rates, and lingering structural
economic issues in Europe, China, and Japan.
Below, we detail our thoughts on how real estate stocks and the Fund may
perform if interest rates rise.
Stock valuations:
In our opinion, the valuation of the stock market is not expensive, but
generally “fair.” Why? According to data provided by Standard & Poor’s and
Omega Advisors, Inc.:
1. The forward P/E multiple of the S&P 500 Index is 15 times versus its
historical multiple of 17.4 times average forward P/E multiple at bull
market peaks since 1960.
2. We believe that measures of equity market valuation should be
compared to alternative rates of return in bonds. Accordingly, since 1960,
the 10-year Treasury at bull market peaks has ranged from 4.1% to
12.7% and averaged 6.7%. Yet currently, the 10-year Treasury yield is
2.03%! In the context of these historically low interest rates, we do not
believe that the S&P 500 P/E multiple is extreme.
Further, we are identifying several real estate-related companies for which
we believe valuations are not only fair, but cheap! More on this below.
Q. Why do we remain optimistic about the prospects for the Baron Real
Estate Fund?
A. In our opinion, the prospects for real estate-related securities and the
Fund remain attractive.
First, the ingredient package that has fueled the recovery in real estate the
last five years remains in place. We believe business conditions for commercial
September 30, 2015
and residential real estate are generally appealing. In most geographic
markets, demand continues to outstrip supply which bodes well for business
fundamentals. Credit has improved, balance sheets are in solid shape, interest
rates are low and we anticipate they will remain low, and valuations are
reasonable. We believe these factors bode well for real estate securities.
Second, we believe many categories of commercial and residential real
estate are on the cusp of entering the “growth phase” of the real estate
recovery, whereby an increase in employment and capital expenditures
should lead to an increase in revenues and cash flow growth.
Third, we are bullish on the long-term prospects for housing. Today, annual
new home sales levels stand at only 552,000, far below annual household
formation levels of approximately 1,200,000 (and peak new homes sales of
approximately 1,400,000 homes in 2005). We believe the prospects for
housing remain attractive due to an improvement in household formation
and employment, pent-up demand, low inventories, favorable mortgage
rates, and reasonable home ownership affordability relative to renting.
There are signs that the millennial generation (approximately 75 million
people ages 18-34) is beginning to move out of “mom and dad’s” home.
Although we acknowledge that there may be bumps along the way that
could temporarily restrain the recovery in housing (for example, an increase
in mortgage rates, a slowdown in employment growth, or a lack of available
housing inventory), we believe the multi-year prospects are attractive and
the Fund’s investments in homebuilders, land development companies,
building product and service companies, and senior housing real estate
operators should, in our opinion, benefit from an improvement in housing
over the next few years.
Fourth, the severity of the credit crisis and economic slowdown resulted in
a longer economic downturn and slower recovery, to date. This has
contributed to pent-up demand for commercial and residential real estate.
We believe the lack of real estate construction activity and low interest
rates portend a longer lasting real estate recovery cycle than most prior
cycles of five to seven years.
Fifth, we continue to believe that stock valuations of our real estate-related
investments are quite reasonable and, in some cases, particularly attractive,
especially in the context of low interest rates and our expectation of
improving cash flow growth.
Q. What would cause you to turn cautious about real estate?
A. We remain vigilant about monitoring factors that would cause us to turn
more cautious. Key items that we study closely include construction
activity, demand prospects, lending practices, interest rates and credit
spreads, bank liquidity, and valuations. Currently, however, we do not detect
major warning signs.
Our thoughts regarding a few of the most pertinent items are as follows:
1. Construction activity:
According to the commercial real estate market data provided by CBRE and
Citi Research, U.S. commercial real estate construction activity remains at a
historically low level of only 1.2% of total existing square footage. This
compares to the historical average since 1970 of 2.1% annual construction.
Recently, however, construction activity has increased in a few segments of
real estate such as apartments, senior housing, and hotels. We are closely
monitoring these developments.
Residential housing market U.S. housing construction activity (single and
multi-family) is running at approximately 1 million homes annually. This
compares to construction of 1.5 million more than 50 years ago (1960) at a
time when the U.S. population was half of what it is today (and peak
construction of 2.3 million homes in 2006)! This level of extremely low
available supply has helped to fuel otherwise modest demand.
2. Demand activity:
Commercial occupancy and home sales are improving at a modest pace.
Nevertheless, real estate can perform well in this environment because the
lack of new construction activity offsets the modest demand. We believe
supply/demand conditions are likely to improve in the next few years once
economic growth accelerates.
3. Lending practices:
Leading up to the downturn in the housing market and to a lesser extent the
commercial real estate market, lending practices became excessive. Loose
underwriting standards fueled credit availability. In some cases, homes and
office buildings were being purchased with 95% debt and close to zero equity.
Now, given current bank regulations and more prudent capital management,
we don’t see these excesses. We are closely monitoring credit markets, which
have recently weakened, as lenders are requiring wider credit spreads
accompanied by more stringent underwriting, which could lead to a general
increase in capitalization rates (i.e., lower values) for real estate.
4. Interest rates:
At Baron, we do not predict interest rate movements, but it is reasonable to
assume that the overall trend of interest rates may head higher in the next few
years from the historical lows of recent years.
Should interest rates increase in the next few years, we believe the Fund can
continue to generate solid results given our broader approach to investing in real
estate compared to REIT-only funds (although we cannot guarantee it). Our
“play book” for a rising interest rate environment may include: (i) moderating
our investments in dividend yield securities such as REITs because higher bond
yields can decrease the attractiveness of dividend stocks such as REITs;
(ii) focusing on short lease duration real estate (for example, hotels) that can
better offset increases in interest rates and are also likely to grow faster as the
economy improves; (iii) emphasizing real estate companies that will benefit
disproportionately from an improvement in the economy, such as housingrelated securities; (iv) owning real estate companies with strong pipelines of
future development projects that will aid growth; and, (v) investing in companies
with strong balance sheets that can weather a rise in interest rates.
5. Valuations:
We believe valuations of real estate securities are generally attractive, and in
many cases cheap!
Hotels: Hotel investments, such as Hilton Worldwide Holdings, Inc. and
Hyatt Hotels Corp., are trading at approximately 10 times estimated 2016
cash flow. We have found that when we invest in quality hotel stocks for 10
times cash flow, the stocks generate strong returns, although there is no
guarantee this will be the case.
Timeshare Operators: Wyndham Worldwide Corp. and Diamond Resorts
International, Inc. offer tremendous value, in our opinion. Diamond Resorts is
valued at only 4.5 times cash flow despite strong growth prospects, an almost
debt-free balance sheet, and significant management ownership of the stock!
51
Leading Commercial Real Estate Service Firms: CBRE Group, Inc. and
Jones Lang LaSalle, Inc. have 2016 estimated P/E ratios of only 13-14
times versus historical averages of 16-17 times, and we believe business
prospects are strong.
Cruise Line Operators: We believe Norwegian Cruise Line Holdings, Ltd.
and Royal Caribbean Cruises Ltd. may grow earnings by at least 25% over
the next few years, yet are valued at a modest P/E of approximately 15
times.
Housing-Related Securities: We own several housing-related securities,
such as Toll Brothers, Inc., Mohawk Industries Inc., CaesarStone SdotYam Ltd., Masonite International Corp. and Builders FirstSource, Inc.,
which are all attractively valued, in our opinion, and may each increase by
15% or more in the year ahead.
REITS: REITs, such as Boston Properties, Inc., SL Green Realty Corp.,
Douglas Emmett, Inc., AvalonBay Communities, Inc. and Alexandria
Real Estate Equities, Inc. are now attractively valued at 10-20% discounts
to our assessment of intrinsic value despite the fact that REITs historically
have traded at modest premiums to intrinsic value.
Concluding thoughts:
We remain mindful that some of the contributing factors to positive equity
market performance in the last few years such as an accommodating Fed,
an undervalued U.S. dollar, and favorable broad market valuations are now
somewhat less compelling. We also recognize that in the months ahead,
there may be periods of market weakness. Nevertheless, we continue to
believe that the intermediate to long-term prospects for the stock market,
real estate, and the Fund remain promising.
Thank you for taking the time to read our latest shareholder letter. It is our
hope that you always feel “under the tent,” and thoroughly informed with
regard to our perspective and outlook.
Table VII.
Quarter End
Market
Cap
(billions)
Equinix, Inc.
Norwegian Cruise Line Holdings, Ltd.
MGM Resorts International
CBRE Group, Inc.
Jones Lang LaSalle, Inc.
Home Depot, Inc.
Hyatt Hotels Corp.
Masonite International Corp.
$22.7
15.6
13.1
10.4
10.7
6.5
148.3
6.7
3.8
1.8
Quarter End
Investment
Value
(millions)
$74.6
73.4
71.4
64.2
64.2
59.6
54.4
52.2
51.6
48.4
Percent
of
Net
Assets
4.3%
4.2
4.1
3.7
3.7
3.4
3.1
3.0
2.9
2.8
I remain deeply grateful, energized, and committed due to your
support. I continue as a major shareholder of the Baron Real Estate
Fund alongside you.
Sincerely,
Jeffrey Kolitch
Portfolio Manager
October 23, 2015
Baron Real Estate Fund is non-diversified, which means it may invest a greater percentage of its assets in fewer issues, and which increases the volatility of
its returns and exposes it to potentially greater losses in a given period. In addition to general market conditions, the value of the Fund will be affected by
the strength of the real estate markets. Factors that could affect the value of the Fund’s holdings include the following: overbuilding and increased
competition; increases in property taxes and operating expenses; declines in the value of real estate; lack of availability of equity and debt financing to
refinance maturing debt; vacancies due to economic conditions and tenant bankruptcies; losses due to costs resulting from environmental contamination
and its related cleanup; changes in interest rates; changes in zoning laws, casualty or condemnation losses; variations in rental income; changes in
neighborhood values; and functional obsolescence and appeal of properties to tenants. The Fund may not achieve its objectives. Portfolio holdings are subject
to change. Current and future portfolio holdings are subject to risk.
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
This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Real Estate Fund by anyone in any jurisdiction where it would be unlawful under the laws of that
52
September 30, 2015
Dear Baron Emerging Markets Fund Shareholder:
Performance
The Baron Emerging Markets Fund (the “Fund”) declined 14.26%
(Institutional Shares) for the third quarter of 2015, while its principal
benchmark index, the MSCI EM IMI Growth Index, retreated 16.67% for the
quarter. Global equities declined significantly in response to diminishing
growth prospects, particularly in the emerging markets, as well as to
widening credit spreads and a broad increase in risk premium. In our view,
a key catalyst during the quarter was a volatile progression of policy moves
in China - first, a failed attempt to stabilize the local A Share equity
markets, and subsequently a modest, but in our view meaningful,
devaluation of the Chinese RMB. Such measures resulted in rising
uncertainty over economic and financial stability as well as political
leadership in China, an undisputed driver of global investment and growth
over the past decade. We understand the global market reaction but will
detail our perhaps out of consensus interpretation of the RMB devaluation
later in this letter. The other major catalyst of market activity during the
quarter was the shifting market anticipation over an imminent start to the
U.S. Fed rate hike cycle. As we have suspected, expectations of such an
event have been pushed out for now due to concerns over the global
economic and financial growth. We do note however that, although the Fed
currently remains on hold, during the quarter a very significant tightening
of conditions has been priced into the high-yield and emerging market
sovereign bond markets. As such, while we believe we are now in the late
stages of the emerging markets absolute and relative bear market, we note
that the recent tightening of conditions has increased the possibility of a
related credit event, which, in our view, could mark the “ninth inning” and
perhaps set the stage for a sustainable recovery. Also worth noting on the
positive side during the quarter, immediate concerns over a Greek
Table I.
Performance†
MICHAEL KASS
PORTFOLIO MANAGER
Retail Shares: BEXFX
Institutional Shares: BEXIX
insolvency and Euro exit faded as a referendum resulted in a pro-Euro
parliamentary majority. Though the current investment environment
remains somewhat uncertain, we remain enthusiastic about the many
companies and entrepreneurs in which we have invested. Further, we
believe such companies and entrepreneurs in general represent the solution
to the primary challenge facing emerging market economies – a challenge
we would define as deteriorating capital efficiency and economic
productivity coincident with sustained credit growth. We remain confident
that we are well positioned to deliver on the long-term potential inherent
in the emerging markets.
Baron
Emerging
Markets
Fund
Retail
Shares1,2
Three Months3
(14.31)%
Nine Months3
(14.02)%
One Year
(13.80)%
Three Years
1.42%
Since Inception
(December 31, 2010) 0.81%
Baron
Emerging
Markets
Fund
Institutional
Shares1,2
MSCI EM
IMI
Growth
Index1
MSCI
EM IMI
Index1
(14.26)%
(13.90)%
(13.67)%
1.66%
(16.67)%
(12.94)%
(15.65)%
(2.59)%
(17.73)%
(14.74)%
(18.74)%
(4.75)%
1.05%
(3.61)%
(5.03)%
While down in absolute terms, our third quarter return outperformed our
key EM benchmark indexes. During the quarter, the largest drivers of positive
relative performance were our investments in the Consumer Discretionary
and Health Care sectors, as well as our cash position given the market
decline. Within Consumer Discretionary, positive stock selection effect was
largely a result of our India media holdings, led by PVR Ltd., Dish TV India
Ltd., Zee Entertainment Enterprises Ltd. and Sun TV Network Ltd.
Further, within this sector, our sophisticated textile manufacturers and other
investments designed to benefit from an RMB depreciation also noticeably
contributed, as China devalued its currency. Stock selection effect in Health
Care was driven by positive returns from all four holdings within our India
December 31, 2014 was 1.52% and 1.27%, but the net annual expense ratio was 1.50% and 1.25% (net of the Adviser’s fee waivers), respectively. The
For performance information current to the most recent month end, visit www.BaronFunds.com or call 1-800-99BARON.
†
1
2
3
The Fund’s historical performance was impacted by gains from IPOs and/or secondary offerings. There is no guarantee that these results can be repeated or that the Fund’s
level of participation in IPOs and secondary offerings will be the same in the future.
The MSCI EM (Emerging Markets) IMI indexes cited are unmanaged, free float adjusted market capitalization weighted indexes reflected in U.S. dollars. The MSCI EM (Emerging
Markets) IMI Growth Index Net USD and the MSCI EM (Emerging Markets) IMI Index Net USD are designed to measure equity market performance of large, mid and small cap
securities in the emerging markets. The MSCI EM (Emerging Markets) IMI Growth Index Net USD screens for growth-style securities. The indexes and Baron Emerging Markets
Fund include reinvestment of dividends, net of foreign withholding taxes, which positively impact the performance results.
The performance data does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or redemption of Fund shares.
Not annualized.
53
pharmaceuticals theme, comprised of Torrent Pharmaceuticals Ltd., Divi’s
Laboratories Ltd., Lupin Ltd. and Glenmark Pharmaceuticals Ltd. The
largest negative impact to relative returns was adverse stock selection within
the Information Technology sector, where several holdings in the hard hit
markets of China and Brazil retreated meaningfully, led by Kingdee
International Software Group Co. Ltd. and TOTVS SA.
Shares rose on above-consensus earnings growth driven by market share
gains and ongoing cost cutting initiatives. We retain conviction in the
company due to the expected multifold increase in subscription
revenue/earnings post-digitization. (Anuj Aggarwal)
Table III.
Table II.
Percent
Impact
Percent
Impact
PVR Ltd.
Divi’s Laboratories Ltd.
Torrent Pharmaceuticals Ltd.
Amara Raja Batteries Ltd.
Sun TV Network Ltd.
0.19%
0.17
0.16
0.16
0.13
Shares of PVR Ltd. rose in the third quarter. As India’s largest multiplex
operator, the company is benefiting from growing consumption of movie
content in the country. PVR is also taking market share from single screen
cinemas as consumers are spending more to enjoy a high quality moviegoing experience in multiplexes. Shares rose on robust earnings growth
driven by healthy audience growth and new store openings. We retain
conviction in the company owing to strong secular growth opportunities in
the multiplex industry. (Anuj Aggarwal)
Shares of Indian pharmaceutical company Divi’s Laboratories Ltd. rose in
the third quarter. Divi’s benefited from the depreciating Indian rupee, as
over 85% of its business is export oriented. It continues to generate robust
earnings growth, which was the primary driver of stock performance during
the quarter. We believe Divi’s is well positioned to sustain mid-to-high
teens earnings growth for the next three-to-five years and retain conviction
due to its industry-high profitability and long-term relationships with major
pharma clients. (Anuj Aggarwal)
Shares of Torrent Pharmaceuticals Ltd. rose in the third quarter. As a fast
growing Indian generic pharmaceutical player, the company is experiencing
substantial growth in the U.S. as branded drugs continue to go off-patent.
Torrent is also generating above-average growth in India. Shares rose on
above-consensus financial performance driven by strong sales in the U.S.
We retain conviction due to Torrent’s growing product pipeline and healthy
cash flow generation. (Anuj Aggarwal)
Shares of India-based battery manufacturer Amara Raja Batteries Ltd.
increased during the third quarter on the strength of another solid quarter
of revenue and profit growth. After years of strong sales performance in the
auto aftermarket channel, Amara Raja is now selling into industrial markets
that are rebounding within the robust Indian economy. We believe that
Amara Raja has built an excellent distribution network to compete with the
incumbent, Exide Industries, and that Amara Raja will generate significant
cash flow once its capacity expansion is fully complete. (Aaron Wasserman)
Shares of Sun TV Network Ltd. appreciated in the third quarter. The
company is India’s leading media conglomerate, with a dominant audience
market share in South India. Sun TV is a beneficiary of the ongoing
digitization of cable systems as mandated by the Government of India.
54
Haitong Securities Co., Ltd.
Smiles SA
PetroChina Co. Ltd.
–1.03%
–0.87
–0.77
–0.50
–0.50
Haitong Securities Co., Ltd. declined materially during the quarter in
sympathy with the broad decline in China equities, particularly given the
company’s sensitivity to margin balances and equity market trading
volumes. We remain comfortable with Haitong’s long-term prospects given
the anticipated shift in China credit provision from the traditional bank
sector in favor of the securities industry which we believe is currently in the
very early stage. (Michael Kass)
TerraForm Global, Inc. is a divided growth-oriented renewable energy
pipeline will benefit its yieldcos. We think the market dislocation is
technical and temporary and that TerraForm Global will resume future
growth. (Rebecca Ellin)
Smiles SA is a loyalty program affiliated with Brazilian airline GOL. Smiles
sells points to credit card companies, which award them to card users.
Smiles had an extraordinary third quarter, increasing sales, margins, and
earnings, and paying out substantially all of its earnings in dividends. We
believe its business model is solid. However, its association with GOL, which
is near distress due to the impact of the devaluation of the Brazilian Real on
its high debt balance (largely in U.S. dollars), drove down Smiles’ share price
in the third quarter. (Kyuhey August)
PetroChina Co. Ltd. declined during the quarter coincident with a
significant decline in global crude oil prices as well as broader China
equities. We continue to hold shares in PetroChina given the significant
value creation potential we believe is inherent in several state owned
enterprises reform initiatives under consideration. (Michael Kass)
Shares of Kingdee International Software Group Ltd. declined during the
third quarter amid significant volatility in the Chinese market. Kingdee is a
software vendor to small and medium-sized businesses in China. Following
an investment from leading Chinese e-commerce operator JD.com, Kingdee
is undergoing a strategic transformation from a direct to an indirect sales
model. We think the indirect sales model will allow Kingdee to reach more
potential customers more profitably and earn higher returns on its capital
over the long run. (Aaron Wasserman)
September 30, 2015
Portfolio Structure
Recent Activity
Table IV.
Amid rising volatility and rapidly shifting macroeconomic conditions, the
third quarter was relatively quiet in terms of new positions. While no major
new themes emerged, we did initiate investments in Advanced Info
Service plc, a leading Thai mobile telecom and data operator that we
believe is positioned to benefit from an upcoming spectrum auction and a
change in license payment methodology, as well as in Copa Holdings, S.A.,
a very well positioned Latin American airline strategically based in Panama.
We also meaningfully increased an existing investment in SKS Microfinance
Ltd., a niche financial services operator in India that we believe has an
attractive long-term runway for high return growth. During the quarter, we
exited modest positions in CJO Shopping Co. Ltd. of Korea and L.P.N.
Development PCL of Thailand based on a perceived deterioration in
fundamentals.
Percent of
Net Assets
Samsung Electronics Co., Ltd.
Makalot Industrial Co., Ltd.
Sinopharm Group Co., Ltd.
Steinhoff International Holdings Ltd.
Eclat Textile Co., Ltd.
LG Household & Health Care Ltd.
Lupin Ltd.
Shenzhou International Group Holdings Ltd.
2.2%
2.0
1.9
1.9
1.8
1.8
1.8
1.7
1.7
1.7
Outlook
Exposure by Country
Table V.
Percentage of securities by country as of September 30, 2015
Percent of
Net Assets
China
India
Taiwan
Korea
South Africa
Mexico
Philippines
Brazil
Indonesia
Hong Kong
Thailand
Singapore
United States
Panama
United Kingdom
United Arab Emirates
22.6%
19.5
10.1
6.7
6.2
5.2
4.1
3.4
3.3
2.1
1.7
1.0
0.8
0.5
0.2
0.0*
Exposure by Market Cap: The Fund may invest in companies of any market
capitalization, and we have generally been broadly diversified across large,
mid and small cap companies, as we believe developing world companies of
all sizes often exhibit attractive growth potential. At the end of the third
quarter of 2015, the Fund’s median market cap was $4.64 billion, and we
were invested approximately 65.2% in large/giant cap companies, 17.9% in
mid cap companies and 4.3% in small/micro cap companies as defined by
Morningstar, with the remainder in cash and unassigned securities.
In our previous letter, we questioned whether global monetary authorities
had successfully engineered escape velocity and asset reflation; indeed, the
third quarter confirmed our skepticism over an imminent start to a Fed rate
hike cycle as a downgrade in growth and inflation expectations triggered a
widespread retreat in financial markets and a return to “risk-off” sentiment.
While we are not at all surprised by this turn of events, we suspect that we
have now entered the late stages of the absolute and relative bear market
in emerging market equities, currencies and sovereign bonds. While such
asset prices appear cheap relative to historical levels and to developed
world peers, the key question in our view is what will be the catalyst for a
recovery? Or, alternatively, what is the way forward from here?
To answer, we must first analyze the root cause. We believe the strong
headwinds emerging market economies and equities face today stem in
large measure from aggressive quantitative easing by developed world
central banks in recent years. Subsequent to the financial crisis of 2008, U.S.
quantitative easing led to both a significant decline in global interest rates
and expectations for sustained dollar weakness, driving a historic increase
in U.S. dollar bond issuance by emerging market sovereigns and corporates.
As leverage rose in the emerging markets, the U.S. economy slowly healed,
and eventually Fed easing gave way to tapering. As the Fed passed the
monetary baton to Japan and subsequently the ECB, conditions in the
emerging markets markedly changed. An easing in Japan or Europe in the
context of Fed tapering represents a tightening for most EM countries,
particularly China whose competitive position is directly impacted as the
RMB remains largely pegged to the dollar. Outside of China, many EM
countries have commodity sensitive revenue streams and currencies and/or
had previously aggressively borrowed in dollars, and as such, local currency
and commodity weakness also represents a tightening of conditions. We
have consistently suggested that if dollar strength against EM currencies
persists, eventually we should expect China to engineer a depreciation of
the RMB; we see no reason to expect China to unilaterally absorb the
* Represents less than 0.05% of net assets.
55
deflationary pressure resulting from a rising dollar as their Asian neighbors
devalue. In fact, we believe maintaining the peg is one reason why China
appears the epicenter of global weakness and risk. Indeed, in August, China
shocked the markets with a modest currency depreciation, deflecting a
portion of the deflationary impulse back at the developed and neighboring
emerging countries. In our view, this action represents a warning by China,
a precursor of what may come if the Fed engages in a rate hike cycle as
currently envisioned. Given a clear decoupling of economic conditions, we
suspect that China would likely seek a market driven RMB exchange rate in
such a scenario, which could drive the RMB at least 10% lower, and would
likely exacerbate global deflationary pressures.
This brings us back to our previous question: what is the way forward from
here? In the relative near term, we see three possibilities. First, the global
economic indicators could sustainably improve of their own accord in
response to months of developed world easing in the pipeline. We believe
this is a possible but unlikely outcome. Second, China could engage in
aggressive stimulus and/or devalue materially – also possible but, in our
view, not likely given recent official statements. Third, the Fed could shift its
own rhetoric, indefinitely deferring rate hikes and perhaps even signaling a
bias towards further easing, an outcome which we would tend to expect if
the market based tightening referenced above were to result in an
international credit event. While we certainly cannot predict the future, we
do believe any of the above could create an important bottom in global
markets, and would likely trigger in particular a reversal in the relative
performance of hard hit asset classes such as the emerging markets and
commodities. Of course, in the long term, we see the principal source of
value creation in the emerging markets being a shift in capital allocation,
resources and subsidies towards private sector entrepreneurs, as well as
productivity enhancing economic, financial and labor reforms. As our
themes and investments are based on identifying and capturing such longterm value creation, we remain quite confident that we are well positioned
to execute on the promise inherent in the emerging markets.
Thank you for investing in the Baron Emerging Markets Fund.
Sincerely,
Michael Kass
Portfolio Manager
October 23, 2015
In addition to the general stock market risk that securities may fluctuate in value, investments in developing countries may have increased risks due to a
greater possibility of: settlement delays; currency and capital controls; interest rate sensitivity; corruption and crime; exchange rate volatility; and inflation
or deflation. The Fund invests in companies of all sizes, including small and medium sized companies whose 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 portfolio holdings are
subject to risk.
This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Emerging Markets Fund by anyone in any jurisdiction where it would be unlawful under the laws
56
September 30, 2015
Dear Baron Energy and Resources Fund Shareholder:
Performance
The only good thing that we can say about the third quarter is that at least
it is over. The performance of our Fund was awful on both an absolute and
relative basis. The combination of growing global economic unease,
especially related to China and other emerging markets, the nuclear
agreement between the P5+1 countries and Iran, and rising concerns about
a potential interest rate hike in the U.S. took a heavy toll on oil prices and
energy related shares during the quarter. Our Fund posted a decline of
30.6% (Institutional Shares) during the quarter and underperformed our
principal benchmark (S&P North American Natural Resources Sector Index)
by over 11%. While it is of little consolation, despite such awful relative
performance, our trailing three-year performance is essentially in line with
our benchmark. However, the annualized decline of 7.77% for our
Institutional Share class and the 7.73% annualized decline for our
benchmark compared to the 12.40% annualized gain for the S&P 500 Index
also demonstrates how challenging the last three years have been for
investing in energy and resources related companies, and for our strategy
overall. That being said, we believe that many of the imbalances that have
led to the investment headwinds in recent years are beginning to abate. In
particular, we are seeing more positive signs in the oil supply/demand
outlook, leading us to believe that a more favorable environment for
investing in energy is moving more clearly into our field of vision.
The performance of our Fund suffered from declining share prices for our
investments in Oil & Gas Exploration & Production and Oil & Gas
Equipment & Services companies as lower oil prices and declining earnings
and cash flow expectations created significant selling pressure in these
areas. However, for the quarter, the real carnage actually occurred in two
areas of investment where the correlation between oil prices and share
Table I.
Performance†
Three Months3
Nine Months3
One Year
Three Years
Since Inception
(December 30, 2011)
Baron
Baron
Energy and Energy and
Resources Resources
Fund
Fund
Retail
Institutional
Shares1,2
Shares1,2
(30.64)%
(30.57)%
(29.36)%
(29.23)%
(44.09)%
(43.98)%
(7.96)%
(7.77)%
(8.03)%
(7.83)%
S&P North
American
Natural
Resources
Sector
S&P 500
Index1
Index1
(19.55)%
(6.44)%
(22.88)%
(5.29)%
(33.57)% (0.61)%
(7.73)%
12.40%
(4.89)%
14.35%
JAMES STONE
PORTFOLIO MANAGER
Retail Shares: BENFX
Institutional Shares: BENIX
prices should be relatively low – Renewable Energy and Oil & Gas Storage &
Transportation (aka MLP/GP midstream companies). These two areas
represented an average weight in the portfolio of about 35.8% during the
quarter and contributed to over 50% of the decline in the Fund in the
quarter. These two segments’ contribution to return was -16.5% in the
quarter, while the remainder of our holdings contributed the other -14.1%
of the total decline of 30.6%.
Our investments in Renewable Energy and Midstream MLP/GPs have
typically demonstrated a low correlation to the price of oil, generally have
dividends and distributions that do not fluctuate materially with changes in
oil or natural gas prices, and have yields that are above that of the overall
market (S&P 500). Therefore, we expect these investments to act as ballast
and be the portion of our Fund that provide a degree of stability when oil
prices are volatile, especially compared to our more conventional energy
companies. However, this was clearly not what happened in the third
quarter. Instead, it is clear that the sharp decline in oil prices of over 20%
created a negative feedback loop in which investors began to question the
forward growth prospects of many of these companies, which created
concern about valuations, and ultimately led to negative fund flows across
the spectrum of energy yield oriented mutual funds, ETFs, and ETNs. As
valuations compressed and yields expanded, investors worried that a rising
cost of capital would make it increasingly difficult for MLPs and “yieldco”
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,
2014 was 1.79% and 1.52%, respectively, but the net annual expense ratio was 1.35% and 1.10% (net of the Adviser’s fee waivers), respectively. The
†
1
The indexes are unmanaged. The S&P North American Natural Resources Sector Index measures the performance of U.S.-traded natural resources related stocks and the S&P
500 Index of 500 widely held large cap U.S. companies. The indexes and the Fund are with dividends, which positively impact the performance results.
2
The performance data in the table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or redemptions of Fund shares.
Not annualized.
3
57
vehicles to make the types of accretive acquisitions that have been one of
the key elements of the long-term growth strategy for many of these
companies, creating even more doubt about future growth. What
historically has been a virtuous circle in these stocks turned instead into a
vicious cycle.
To put this in perspective, Midstream MLP/GPs are often compared to REITs
and Utilities as alternative yield vehicles and historically the valuations of
all three sub-industries have tracked one another closely with few
exceptions. In the third quarter, REITs, as measured by the MSCI REIT Index,
generated a total return (with dividends reinvested) of 1.75%, while
Utilities, as measured by the Utilities Select Sector SPDR ETF, delivered a
total return of 5.4% (with dividends reinvested). By comparison, the Alerian
MLP Index delivered a total return of -22.1% (with dividends reinvested).
Although there is no established index for renewable energy “yieldcos,”
those stocks fared even worse than most MLPs/GPs in the quarter. While
the financial press and analytical community spent considerable time in the
third quarter reporting on investor concerns regarding the U.S. Federal
Reserve and pending changes in interest rate policy, it appears to us that
rate worries were not nearly as significant a driver of stock performance as
was the vicious cycle triggered by falling oil prices. This phenomenon
appears to have also been compounded by tax loss selling and other
portfolio restructuring late in the quarter, causing a sharp decline in our
Fund’s returns in just the last seven trading sessions of the quarter.
Because we believe both midstream and renewable energy-oriented
businesses have superior long-term growth and return prospects, we have
long maintained a higher than average weighting toward midstream
companies and more recently boosted our weighting of renewable energy
companies relative to our benchmark and peers. We believe that the
indiscriminate selling during the quarter, especially at the tail-end of the
quarter, has created an interesting buying opportunity, particularly for
investors like us who take a long-term view on investing in these
companies.
Overall, it was a challenging quarter that appeared to culminate in a wave
of cathartic, almost “throw the baby out with the bath water” type of
behavior, and, as noted above and spelled out in more detail below, we think
may represent a turning point.
Table II.
Year
Acquired
2013
Percent
Impact
0.84%
It is a sign of how challenging the investment environment was in the past
quarter that there is only one stock in the portfolio which contributed
positively to the Fund’s performance. Flotek Industries, Inc. is primarily a
supplier of chemical additives to the global oil & gas industry with some
other ancillary oilfield service operations. The company has a proprietary
product dubbed the “complex nano-fluid (CnF)” that is a patent-protected
product that utilizes citrus-based chemical products to enhance the flow of
oil & gas from unconventional oil & gas formations such as shales. Through
the analysis of publicly available production and completion data, Flotek
has been able to isolate the effectiveness of its product and demonstrate
the clear economic benefits of using CnF to existing and new clients. Flotek
also is pursuing unique business strategies in the marketing and selling of
its core product as it pursues a direct to end-user model in addition to its
classical distributor-based model. The direct model appears to be gaining
traction and, in our view, has the potential to enhance the revenue and
58
margin opportunity in its core business. As a result, it has grown sales in the
past two quarters despite the sharp declines in overall U.S. drilling and well
completion activity. Following stronger than expected second quarter
revenues and earnings, the company’s shares rebounded sharply in the third
quarter, generating a total return of 33.3%. We continue to like Flotek
shares at current prices.
Table III.
SunEdison, Inc.
Bonanza Creek Energy, Inc.
SemGroup Corporation
Year
Acquired
2014
2013
2015
2014
2014
Percent
Impact
–3.43%
–1.73
–1.69
–1.38
–1.23
In the second quarter, SunEdison, Inc. and its “yieldco” (a dividend growthoriented public company, that bundles renewable long-term contracted
operating assets to generate predictable cash flows and attractive income)
subsidiary TerraForm Power, Inc. were among the top contributors to the
Fund’s performance, all of which was wiped away in the third quarter as
renewable energy companies accounted for a substantial portion of the
Fund’s decline and relative underperformance. Up until this quarter,
SunEdison had been successfully executing on its strategy to become the
first renewable “supermajor” and had been developing its renewable energy
project development engine both organically and through acquisition,
ultimately becoming the world’s largest renewable energy developer.
SunEdison’s plan was to own these projects and access a lower cost of
capital through its “yieldco” subsidiaries, which are dividend-growthoriented companies with stable cash flow streams that would be valued
separately from the developer parent. This ownership model results in
SunEdison retaining a significantly higher net present value in the assets it
develops versus the previous model of selling those assets to third parties
upon completion. SunEdison could either develop renewable power assets
and retain the assets on its balance sheet or retain them within
“warehouse” financing facilities for future sale to TerraForm Power
(developed world assets) or TerraForm Global (emerging market assets),
with the “yieldcos” benefiting from visible long-term growth in distributions
per share (these retained assets become a source of future dividend growth
for the TerraForm entities). A portion of the cash flow from the projects
owned by the “yieldcos” is transferred back to the parent company,
SunEdison, in the form of dividends and incentive-based distributions (IDRs)
through its ownership of the general partnership of the “yieldco,” which
completes the virtuous circle. This virtuous circle works as long as the
TerraForms or the “yieldcos” can make value enhancing acquisitions, which
is a function of having an attractive enough cost of capital and
demonstrating to investors the ability to grow distributions per share over
a multi-year period. This business model is extremely similar to that which
energy MLPs have successfully executed for nearly 30 years, with dividend
and IDRs providing a separate valuation lever that can be quite powerful for
shareholders.
During the third quarter, equity capital markets for all types of energy
companies including MLPs and “yieldcos” were under severe pressure as oil
prices slid and fund flows in energy-related yield products turned negative.
With limited growth potential expected due to diminished or no access to
capital markets, investor estimates of discounted cash flow value of both
the “yieldco” and the parent company’s future dividend streams were
negatively impacted by assumptions of lower future retained cash flow and
September 30, 2015
a higher assumed cost of capital causing the stock prices to decline. In
addition, it now appears in hindsight that the multiple equity offerings from
renewable energy companies between late June and early July also
overwhelmed investor appetite for these deals, which contributed to a fall
in share prices that may have been an additional trigger for the share price
declines. This was a time when the virtuous circle turned into a vicious
cycle.
It is one thing to understand what circumstances or events led to the
performance that so badly hurt the Fund in the quarter, but it is another to
figure out what the future might hold and what to do about it. As painful
as this experience has been across all of the renewable energy holdings in
the portfolio, we are not giving up on the sector or our investments in it.
We believe that the biggest problem this quarter was a short-term lack of
investor appetite and not a near-term fundamental change in the expected
underlying economics surrounding renewable energy projects at either the
utility or residential distributed generation scale. During the quarter, we
met extensively with a number of companies and talked to other experts
and performed extensive analysis to more fully understand the unit
economics, returns, financing options, and growth potential for renewable
energy projects in the U.S. and around the globe. Our research has led us to
the following conclusions:
1. There has been little change in the underlying economics of
projects;
2. The demand for solar and wind electricity generation facilities is
robust and strengthening, particularly in emerging markets;
3. While public market access to capital slowed in the quarter, public
financing through “yieldcos” is a small percentage of the capital
that funds the growth in Renewable Energy;
4. Project financing availability and costs, as well as equity financing
from more traditional sources such as infrastructure funds, pension
funds, insurance companies etc…has neither changed nor gotten
more expensive in recent months; and
5. While investors have made a connection between oil prices and
renewable energy demand, it is a specious connection as oil prices
are rarely ever considered to be a factor in renewable energy
project development discussions and electricity prices are rarely set
by the price of oil.
These conclusions lead us to believe there is still a significant opportunity
for long-term investors like ourselves to benefit as companies such as
SunEdison and its subsidiaries create value from the substantial growth in
renewable energy demand that we foresee over the next 5-10 years. We are
always skeptical when we are told something abnormal or illogical will
persist forever, and, in this case, we doubt that capital markets will forever
be closed to these companies. Our confidence stems from the fact that we
have seen this movie a few times in the last 25 years in the MLP sector.
Considering the high quality and predictable nature of the cash flows that
renewable energy facilities produce, their attractive internal rates of return,
and the options for these facilities to generate additional value over the
long term, it is hard to believe that equity investors will not want to
underwrite the ownership of these projects and correct the valuation
anomalies that we currently see in these stocks.
Portfolio Structure
At the end of the quarter, the portfolio was broken down into the following
sub-industries or categories:
Oil & Gas Exploration & Production – The E&P sub-industry represented
36.2% of the Fund at the end of the quarter and continued to be mostly
focused on U.S.-based producers that operate in a number of different
unconventional resource plays in the U.S. While we have exposure to a
number of the key shale plays in the U.S., the Fund had its biggest
allocations to the Permian and Appalachian Basins, which represented over
50% of our investments in E&P and which we believe will be the premier,
low cost and high return sources for U.S. oil and natural gas production
growth over the next 5 to 10 years.
Oil & Gas Storage & Transportation – This sub-industry, which is largely
composed of MLPs and publicly traded general partnerships, is the second
largest sub-industry for the Fund and represented 26.1% of its assets at the
end of the quarter. As noted, this sub-industry accounted for a meaningful
portion of this quarter’s underperformance. However, we continue to view
these stocks as having excellent long-term risk/reward characteristics.
Oil & Gas Equipment, Services & Drilling – Our exposure to this subindustry fell again in the third quarter to 11.1% due largely to relative
performance differences with other parts of the portfolio. The earnings
outlook for this sub-industry remains quite poor amid low rig counts and
intense pricing competition, which should continue at least through yearend and perhaps into early 2016 before bottoming and beginning to
recover.
Renewable Energy – Renewable or Alternative Energy is not a specific GICS
sub-industry, but we think this is really the appropriate classification for our
investments in the Utilities and Information Technology industries, since
our investments in these two areas are primarily companies involved in the
construction and operation of solar and wind electricity generation assets.
As detailed above, this segment of the Energy sector was a big drag on
performance during the third quarter and its weighting fell to 6.4% from
9.8% by the end of the period.
59
Industrials, Materials & Other – About 14.7% of the portfolio is invested
in these areas, but most of our investments are in businesses that are
closely related to the Energy sector and we believe will benefit from our
long-term view on key growth trends affecting various parts of the Energy
sector.
over the next several years due to high incremental margins and low selling
costs, which we think should help earnings grow faster than revenue.
Table VI.
Amount
Sold
(millions)
Table IV.
Market Quarter
Cap
End
When
Market
Percent
Year
Acquired
Cap
Amount of Net
Concho Resources, Inc.
Parsley Energy, Inc.
Newfield Exploration Co.
Halliburton Co.
SM Energy Co.
Gulfport Energy Corp.
Scorpio Tankers, Inc.
Tallgrass Energy GP, LP
2012
2014
2015
2013
2012
2012
2013
2012
2013
2015
$10.1
2.5
3.9
1.2
31.4
4.9
4.1
1.7
0.5
5.0
$11.8
2.3
5.4
0.9
30.2
2.2
3.2
2.9
1.7
3.1
$3.3
3.3
3.1
3.0
2.2
2.0
1.9
1.9
1.8
1.8
4.9%
4.9
4.6
4.5
3.2
3.0
2.9
2.8
2.7
2.6
C&J Energy Services Ltd.
Flowserve Corp.
Globe Specialty Metals, Inc.
Laredo Petroleum, Inc.
$0.8
0.7
0.5
0.3
0.3
We generally don’t write too much about our portfolio sales during the
quarter. However, in the case of Flotek, it is unusual for a company to be a
“top net sale” and still be a top five position. Our conviction on the longterm growth and return case for Flotek has not changed. In fact, based on
the company’s differentiated financial performance over the past couple of
quarters, it might actually have strengthened. However, we trimmed our
position late in the quarter in order to keep the position at a size that
seemed in our opinion more prudent and more comfortable in the context
of the rest of the portfolio.
Recent Activity
Outlook
Table V.
Despite the magnitude of the share price declines in the third quarter, or
perhaps because of them, we are increasingly constructive on the
investment outlook for energy companies over the next 12-36 months for
the following reasons:
Quarter End Amount
(billions)
(millions)
SunEdison, Inc.
Aspen Technology, Inc.
Bonanza Creek Energy, Inc.
Oasis Petroleum, Inc.
$2.3
3.2
2.9
0.2
1.2
$1.2
0.8
0.7
0.4
0.4
As valuations became more attractive across a number of companies that
we track, including those already in the portfolio, we were fortunate to have
had positive net inflows into the Fund, enabling us to add to 22 existing
positions, the largest investments being in SunEdison and Targa Resources
Corp.
In addition, we initiated a new position in Aspen Technology, Inc. after the
shares pulled back on what we believe were misplaced concerns related to
oil price weakness. Aspen is the leading provider of engineering, design,
operations and supply chain management software to the energy and
process industries. Its software is used globally by engineering &
construction companies, oil & gas companies and chemical companies
among others. Aspen recently completed transitioning its business model
from selling one off “perpetual” licenses to a “term” license model where
customers must pay an annual subscription fee to use the software. The
new model also introduced the concept of “tokens” as a means to
encourage wider adoption of its 70+ proprietary software modules. Aspen’s
customers increase their token consumption when they use additional
modules or allow more users to adopt the suite. Both innovations, coupled
with a robust innovation pipeline, have helped to create a business with
extremely high levels of recurring revenue, high retention rates, and a visible
growth trajectory. The company has demonstrated strong margin
expansion over the past six years as it has transitioned to a recurring
revenue model. We expect to see margins continue to expand towards 50%
60
1. There is an increasing volume of data points that lead us to believe
that a more imminent tightening of the oil supply/demand balance
could happen that will drive oil prices higher than what is currently
priced into the oil futures curve. We think the factors that are
particularly underestimated by the investor community are the
robustness of Chinese product demand, particularly for gasoline and
jet fuel, as well as the magnitude of non-OPEC supply declines,
especially in the U.S. onshore and international offshore fields;
2. Investor sentiment toward commodities, including oil, and equities
related to commodities is very negative. In addition, the degree to
which investors are underweight energy stocks in their portfolios is at
or below the lowest levels we have seen in at least 10-15 years; and
3. The decline in share prices has resulted in much more attractive
valuations, particularly on a normalized cash flow or net asset value
basis.
Throughout the year, we have maintained the view that the imbalance in
the oil market that has been the primary driver of lower oil prices has been
overstated in its magnitude, and would slowly shift direction from
oversupply to balance to deficit. It remains our view that prices are simply
too low for the industry to generate enough cash flow and adequate returns
to fund and justify the capital investments needed to offset ongoing
reservoir depletion and grow production to meet future demand growth.
Even as costs in the industry are reduced cyclically and secularly, it remains
our opinion that the ongoing capital intensity of the business still mandates
a higher long-term oil price.
Based on the data that we track, we feel even stronger that oil markets have
passed the point of maximum oversupply and that the gap between supply
September 30, 2015
and demand has consistently been narrowing since late in the first quarter.
We have seen significant evidence that lower oil and refined product prices
have more than offset diminished global economic growth expectations to
drive 2015 oil and refined product demand substantially higher than it was
forecast to be at the beginning of the year. This is particularly true in the
U.S. and China, where gasoline and jet fuel consumption have made
significant gains this year. While the rate of change is likely to slow heading
into 2016, the absolute change in barrels per day for 2016 is already looking
to be greater than consensus forecasts from earlier this year.
At the same time that global oil demand is looking more robust, it is also
increasingly clear that non-OPEC supply growth is not only dwindling but
is now expected to decline over the next three to six months. This is
particularly true in the U.S., where production appears to have peaked in the
first quarter. According to our analysis and that of the U.S. Department of
Energy, the ongoing collapse in drilling and well completion activity is
expected to result in further declines in supply through at least the majority
of 2016. In addition, a recent report from a well-respected, European energy
consultant concludes that production from mature offshore oil fields
around the world could decline by over 10% in 2016 due to sharp cutbacks
in capital investment. These fields represent over 15% of global production.
The expected declines in production from the U.S. and perhaps from mature
offshore fields around the globe, in the face of rising demand, will likely
leave a widening gap between supply and demand. This gap could result in
OPEC straining to or being unable to satisfy demand (even after the easing
of Iranian sanctions in early 2016) implying inventory drawdowns in
contrast to this year’s inventory builds. We believe that a reversal of
inventory trends will be a key catalyst for investors to begin returning to the
Energy sector.
As noted, investor sentiment toward the Energy sector of the market
remains quite poor. We have referenced the BofA Merrill Lynch Global Fund
Manager Survey in prior letters as a good proxy for investor sentiment and
portfolio manager positioning. The most recent survey showed that fund
manager weightings toward this sector at or near 10 year historical lows.
The fact that the relative weightings have weakened further throughout the
year, puts us deeper into the contrarian camp. We think the fact that
investors are so apathetic toward this sector, combined with an improving
outlook for oil and oil-related entities, could result in a more favorable
environment for investing in Energy and related industries than has been
the case for at least the last year. We continue to focus on taking a longterm approach, focusing our research efforts on companies that we think
can grow in a profitable manner over the next several years, and positioning
the Fund to best capitalize on the opportunities that we see coming down
the pipe.
I am pleased to have had the opportunity to share my thoughts with
you in this letter. Thank you for having the confidence to join me in
investing in Baron Energy and Resources Fund.
Sincerely,
James Stone
Portfolio Manager
October 23, 2015
The Fund is non-diversified, which means the volatility of the Fund’s returns may increase and expose the Fund to greater risk of loss in any given period.
Energy companies can be affected by fluctuations in energy prices and supply and demand of energy fuels. Resources industries can be affected by
international political and economic developments, the success of exploration projects, and meteorological events.
This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Energy and Resources Fund by anyone in any jurisdiction where it would be unlawful under the
laws of that jurisdiction to make such offer or solicitation.
61
Dear Baron Global Advantage Fund Shareholder:
Performance
The Baron Global Advantage Fund declined 18.3% (Institutional Shares) in
the third quarter compared to the declines of 8.6% and 9.5% for the MSCI
ACWI Growth and MSCI ACWI Indexes, respectively. Year-to-date through
September 30, 2015, the Fund is down 13.5% compared to the declines of
4.2% and 7% for its respective benchmarks.
The portfolio has high active share, which means it is not uncommon for
the Fund’s results to deviate significantly from its benchmarks. Needless to
say, we were disappointed with quarterly performance, although, we did get
a good chunk of it back after the Fund gained 11.0% from quarter end
through the date of this letter, October 23.
We had an unusually high number of significant losers, as 23 out of the 43
investments we held in the Fund during the quarter declined at least 20%. The
weakness was broad based as the markets declined 21% in China, 19% in
Indonesia, 27% in Brazil, 18% in South Africa, and 22% in Norway. These were
all markets to which the Fund had exposure. In addition, our investments in
energy-related MLPs, which we believed had little to no correlation to the
price of energy, have fallen 41% on average. However, the biggest damage to
the portfolio came from our investment in SunEdison (SUNE) and its related
Yieldco’s TerraForm Global (GLBL) and TerraForm Power (TERP).
SunEdison is one of the largest developers of solar and wind projects. Major
utilities and other commercial customers typically sign long-term (20 years
or longer) Power Purchase Agreements (PPAs) to buy the electricity
Table I.
Performance†
Three Months3
Nine Months3
One Year
Three Years
Since Inception
(April 30, 2012)
Baron
Global
Advantage
Fund
Retail
Shares1,2
Baron
Global
Advantage
Fund
Institutional
Shares1,2
MSCI
ACWI
Growth
Index1
MSCI
ACWI
Index1
(18.31)%
(13.59)%
(12.67)%
7.60%
(18.28)%
(13.47)%
(12.55)%
7.82%
(8.59)%
(4.17)%
(2.48)%
8.33%
(9.45)%
(7.04)%
(6.66)%
6.95%
6.17%
6.39%
7.70%
6.71%
ALEX UMANSKY
PORTFOLIO MANAGER
Retail Shares: BGAFX
Institutional Shares: BGAIX
generated by the power plants at a pre-negotiated price. Because these
customers are high credit-worthy, SUNE was able to finance these projects
at an attractive cost of capital and produce low double-digit unlevered
returns. Though we believed in the viability and attractiveness of alternative
energy, the business model had little appeal to us. We viewed SUNE as little
more than a construction company with high capital intensity and
moderate competitive advantages at best. That changed in the middle of
2014 when management announced the creation of its own yieldco, a
dividend growth-oriented public company that bundles renewable longterm contracted operating assets to generate predictable cash flows and
attractive income, (TERP). Taking advantage of the low interest rate
environment, SUNE would be able to finance its developed markets projects
at an even lower cost of capital by dropping down completed projects into
its yieldco. TERP would buy the completed power plant with 20-year
guaranteed cash flows, which it would dividend out to its shareholders, of
which SUNE would be the largest one. TERP went public in July of 2014 at
$25 per share, completed a sizeable follow-on offering in January of 2015
at $29.33, and had a larger offering in June of 2015 at $38. TERP’s success
and ability to raise increasing amounts of capital was a significant
competitive advantage for SUNE in our view. The market seemed to agree
Performance listed in the table above is net of annual operating expenses. Annual expense ratio for the Retail Shares and Institutional Shares as of
December 31, 2014 was 3.61% and 2.92%, but the net annual expense ratio is 1.50% and 1.25% (net of the Adviser’s fee waivers), respectively. The
For performance information current to the most recent month-end, visit www.BaronFunds.com or call 1-800-99BARON.
†
1
2
3
The indexes are unmanaged. The MSCI ACWI indexes cited are unmanaged, free float-adjusted market capitalization weighted indexes reflected in US dollars. The MSCI ACWI
Growth Index Net USD measures the equity market performance of large and mid cap growth securities across developed and emerging markets. The MSCI ACWI Index Net
USD measures the equity market performance of large and mid cap securities across developed and emerging markets. The indexes and the Baron Global Advantage Fund
include reinvestment of dividends, net of foreign withholding taxes, which positively impact the performance results.
Not annualized.
62
September 30, 2015
as the shares of SUNE rose from about $19 per share in June of 2014 to
$32 by late June of 2015. All along, SunEdison was readying to bring its
emerging markets yieldco (GLBL) to public investors. We believed that
GLBL’s ability to raise equity was going to make the SUNE story even more
attractive and committed more capital to both entities.
While on the roadshow marketing the shares of GLBL, SUNE, together with
TERP, announced an acquisition of Vivint Solar, a Utah-based, residential
solar installer. After an initial positive reaction, the shares started to fall
rapidly. We thought the acquisition was ill-timed and unnecessarily
complicated the story, but we did not think it was a thesis changer. In the
meantime, oil and gas prices renewed their decline taking the value of
energy-related MLPs down with them. Though the TERP and GLBL
businesses have little to nothing to do with the prices of energy, the market
lumped them together with other energy dividend flow-through structures.
Shares of GLBL began falling immediately after its IPO, and TERP followed
shortly. As the price of their shares continued to fall, they effectively lost
access to capital markets, and SUNE collapsed because it could no longer
sell its projects to its yieldcos and continue to grow. In our view, we
experienced a “run on the bank” caused mostly by erroneous perceptions.
SUNE responded by selling some of its projects to third parties, slowing
down its development pipeline and raising additional equity, which, in our
view, has stabilized the situation. Though it is not clear when this perception
will change, we believe that both TERP and GLBL have the opportunity to
buy projects at returns that considerably exceed the risks, which suggests
that the capital markets will fund them. That, in turn, should restart the
growth engine at SUNE.
Table II.
Quarter End
Market Cap
(billions)
Amazon.com, Inc.
Google, Inc.
Acxiom Corp.
Facebook, Inc.
$239.4
426.5
1.5
253.4
8.9
Percent
Impact
0.97%
0.29
0.17
0.15
0.13
Shares of Amazon.com, Inc., continued to inflect during the
September quarter, up 18%, as the sheer size, growth rate, and actual
profitability of Amazon Web Services (AWS) became more apparent. We
believe the meaningful re-rating of the shares over the last nine months
was due to increased transparency and disclosures allowing investors to
better appreciate all the various ways that Amazon has continued to grow
and outperform expectations – Amazon Prime, Third Party sales and
fulfillment, AWS, Streaming and original content, better operating margins
and profitability, and so on. Our investment thesis, premised on the secular
shift towards e-commerce, which still represents less than 10% of global
retail sales, benefiting the pure play e-commerce platforms, continues to be
intact, and Amazon.com remains our highest conviction long-term
investment idea.
We think a phenomenon some investors refer to as “pattern recognition” is
responsible for the strong performance of the shares of Google, Inc., up
17% in the third quarter. The company announced a change in the
corporate structure and the creation of a “holdco,” appropriately named
Alphabet, which would hold Google’s core search engine business and
separate out its newer, less mature endeavors, such as Google Fiber,
Artificial Intelligence, Calico (Google’s foray into longevity), and others.
Google veteran Sundar Pichai will become the CEO of Google, Inc., a
subsidiary of Alphabet, allowing Google’s co-founders Larry Page and Sergey
Brin to spend more time on Alphabet’s other businesses. We continue to
believe that Google is one of the most innovative companies on Earth, with
a powerful business model that benefits from the network effect, and the
greatest collection of human talent in any one place in the world. Data is
becoming increasingly more important, and they own more data than any
other company we know. We think the value of that data and its
monetization opportunities will become more apparent over time.
Acxiom Corp. is a leader in marketing data services and identity
management. Shares rose 12% in the quarter based on improving
performance in the legacy Marketing Data Services business and, more
importantly, continued outperformance of its fast-growing LiveRamp
business. Acxiom continues to be the leader in identity management and
has several new products forthcoming, many of which we expect to be well
received.
It’s been a while since we mentioned the shares of Facebook, Inc., the
world’s largest social network, which rose 5% in the third quarter. It was a
year ago that we argued that the word “mobile” was no longer describing a
device, but rather a behavior. Facebook’s early focus on driving and
improving consumer engagement on mobile platforms is starting to bear
fruit. The company is the obvious beneficiary of a structural shift of
advertising dollars from “analog” to digital, and with one billion active
monthly mobile users, Facebook has positioned itself as one of the largest
beneficiaries of the mobile way of life by presenting global advertisers with
what we believe is the most compelling advertising platform. We think the
company is in the middle stages of scaling and building out its monetization
structures and stands to benefit from expected improvements in the price
of advertising on its platform. We believe Facebook is continually expanding
the size of its addressable market by acquiring and investing in newer
synergistic offerings such as Instagram, WhatsApp, and Oculus VR.
Constellation Software, Inc. is a holding company that owns and operates
over 250 small and medium-sized software businesses. These software
businesses allow customers across a wide range of verticals to automate
mission-critical activities, with the goal of saving labor costs. Constellation
has valuable experience that it can offer its acquisition targets, largely
around advice to build high touch, low cost
modules, and around
contract pricing. We see this experience as a competitive advantage, and we
think it remains sustainable as long as the company continues to acquire
targets. Since we believe that there are thousands of small owner-operated
vertical market software businesses in the U.S. and Europe, we think
Constellation’s successful acquisition program will continue, and its moat
will remain intact for years to come.
Table III.
Quarter End
Market Cap
(billions)
SunEdison, Inc.
Smiles SA
$
2.3
1.1
2.0
0.9
148.2
Percent
Impact
–3.82%
–1.68
–1.48
–1.14
–1.01
63
Vivint Solar, with plans to drop down its solar portfolio to its yieldco
TerraForm Power, Inc. Investors questioned aspects of the deal, including its
$2.2 billion cost. We believe in the secular renewable energy story and that
SunEdison’s large development pipeline will benefit it and its yieldcos. We
think the market dislocation is technical and temporary and that SunEdison
will resume future growth.
TerraForm Global, Inc. is a dividend growth-oriented renewable energy
pipeline will benefit its yieldcos. We think the market dislocation is technical
and temporary and that TerraForm Global will resume future growth.
TerraForm Power, Inc. is a dividend growth-oriented company (a yieldco)
focused on solar power. The stock dropped after the acquisition of
residential solar developer Vivint Solar by parent SunEdison, Inc. Investors
questioned aspects of the deal, including its $2.2 billion price tag. We
believe in the secular renewable energy story and that SunEdison’s large
development pipeline will benefit its yieldcos. We think the market
dislocation is technical and temporary and that TerraForm Power will
resume future growth.
Smiles SA is a loyalty program affiliated with Brazilian airline GOL. Smiles
sells points to credit card companies, which award them to card users.
Smiles reported what we believe to be excellent third quarter results with
increasing sales, margins, and earnings, and paying out substantially all of
its earnings in dividends. We believe its business model is solid. However, its
association with GOL, which is near distress due to the impact of the
devaluation of the Brazilian Real on its high debt balance (largely in U.S.
dollars), drove down Smiles’ share price over the last three months.
Alibaba Group Holding Ltd. is the largest e-commerce company in the
world. Alibaba owns and operates the two largest online shopping platforms
in China, Taobao and Tmall. The shares were hit hard during the quarter due
to continued slowdown in the growth of the Chinese economy and the
2.5% devaluation of the Chinese currency relative to the U.S. dollar. We
continue to be optimistic about Alibaba’s prospects given its market leading
position, positive network effects, high cash generation, and what we
believe to be its long runway for continued growth. Over the long term, we
see further upside from its cloud computing business, as well as its interest
in Alipay, the largest online payments provider in China.
Portfolio Structure
The portfolio is constructed on a bottom-up basis with the quality of ideas
and conviction level having the highest roles in determining the size of each
individual investment. Sector or country weights tend to be an outcome of
the portfolio construction process and are not meant to indicate a positive
or a negative “view.”
64
The top 10 positions represented 48.0% of the Fund, the top 20 were
71.6%, and we exited the quarter with 41 holdings.
Table IV.
Quarter End Quarter End
Market
Investment
Cap
Value
Percent of
(billions) (thousands) Net Assets
Google, Inc.
Amazon.com, Inc.
Facebook, Inc.
TAL Education Group
JUST EAT plc
Naspers Ltd.
Mobileye N.V.
Illumina, Inc.
$426.5
239.4
253.4
2.6
4.2
52.5
8.9
9.9
25.4
148.2
$800.7
795.0
664.8
492.0
450.1
400.2
395.3
371.3
343.6
328.8
7.6%
7.6
6.3
4.7
4.3
3.8
3.8
3.5
3.3
3.1
Exposure by Country
Table V.
Percentage of securities by country as of September 30, 2015
Percent of
Net Assets
United States
China
Israel
United Kingdom
Indonesia
South Africa
Canada
Brazil
India
Netherlands
Norway
45.0%
14.1
9.5
5.7
4.4
3.8
3.8
3.0
2.6
1.6
0.4
Recent Activity
Table VI.
Quarter End
Amount
(billions)
(thousands)
Google, Inc.
FireEye, Inc.
TAL Education Group
Naspers Ltd.
Mobileye N.V.
$426.5
5.1
2.6
52.5
9.9
$436.7
375.5
337.2
278.3
272.6
We used the market weakness and the positive inflows in the Fund to add
to some of our highest conviction ideas.
September 30, 2015
Table VII.
Market Cap
When Sold
(billions)
MakeMyTrip Ltd.
Unilife Corporation
$0.7
0.2
Amount
Sold
(thousands)
$48.1
11.0
competitive advantages that have the ability to reinvest capital at high
rates of return. We are excited about the long-term prospects of the
companies in which we are invested and continue to search for new ideas
and investment opportunities.
Thank you for investing in the Baron Global Advantage Fund.
Sincerely,
We eliminated small positions in MakeMyTrip, Ltd., and Unilife Corporation
and reallocated capital to higher conviction ideas.
Outlook
Our goal remains to maximize long-term returns without taking significant
risks of permanent loss of capital. Our focus continues to be on identifying
and investing in what we believe are unique companies with sustainable
Alex Umansky,
Portfolio Manager
October 23, 2015
Growth stocks can react differently to issuer, political, market and economic developments than the market as a whole. Non-U.S. investments may involve
additional risks to those inherent in U.S. investments, including exchange-rate fluctuations, political or economic instability, the imposition of exchange
controls, expropriation, limited disclosure and illiquid markets, resulting in greater share price volatility. Securities of small and medium-sized companies may
be thinly traded and more difficult to sell.
This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Global Advantage Fund by anyone in any jurisdiction where it would be unlawful under the laws
Active Share: Active Share a term used to describe the share of a portfolio’s holdings that differ from that portfolio’s benchmark index. It is calculated by comparing the weight of each holding in the
Fund to that holding’s weight in the benchmark. Positions with either a positive or negative weighting versus the benchmark have Active Share. An Active Share of 100% implies zero overlap with the
benchmark. Active Share was introduced in 2006 in a study by Yale academics, M. Cremers and A. Petajisto, as a measure of active portfolio management.
65
Dear Baron Discovery Fund Shareholder:
Performance
The Baron Discovery Fund (the “Fund”) decreased 19.80% (Institutional
Shares) in the quarter which underperformed the Russell 2000 Growth
Index which was down 13.06%. The negative performance in the quarter
was due mostly to companies that missed Wall Street earnings
expectations (more explanation below). While we are disappointed in the
results, we believe the majority of these earnings misses are temporary and
not reflective of the long-term fundamentals and growth prospects of these
businesses. We continue to remain excited by the opportunities for growth
that we believe our portfolio companies possess.
The Baron Discovery Fund reached two years of age at the end of the quarter.
While we are disappointed that we followed up our first year of outperformance
with a disappointing second year, since inception, the Fund’s performance
continues to outpace the Russell 2000 Growth Index. And despite a difficult
start to 2015, we continue to believe a long-term approach to investing in fast
growing small-cap companies combined with our disciplined investment
process should generate outperformance over a full economic cycle.
RANDY GWIRTZMAN AND LAIRD BIEGER
PORTFOLIO MANAGERS
Retail Shares: BDFFX
Institutional Shares: BDFIX
Table I.
Performance†
For period ended September 30, 2015
Baron
Discovery
Fund Retail
Shares1,2
Three Months3
(19.87)%
Nine Months3
(15.94)%
One Year
(4.71)%
Since Inception
(Annualized)
5.50%
Since Inception
(Cumulative)3
11.30%
Baron
Discovery Fund
Institutional
Shares1,2
Russell
2000
Growth
Index1
S&P 500
Index1
(19.80)%
(15.81)%
(4.53)%
(13.06)%
(5.47)%
4.04%
(6.44)%
(5.29)%
(0.61)%
5.74%
3.92%
9.09%
11.80%
7.99%
19.00%
Table II.
Percent
Impact
Neos Therapeutics, Inc.
Chuy’s Holdings, Inc.
Mercury Systems, Inc.
0.56%
0.36
0.34
0.31
0.18
Flotek Industries, Inc. is primarily a supplier of chemical additives to the
global oil & gas industry with some additional ancillary oilfield service
operations. The company has a proprietary product called “complex nanofluid (CnF)” that is proving to be extremely effective at increasing oil & gas
shale well productivity. The company’s shares rebounded sharply in the
third quarter following much stronger-than-expected results in the second
quarter that were principally driven by stronger-than-expected CnF sales
and margins. CnF sales growth is outpacing industry activity levels by a
wide margin as customers seek to optimize production in the most capital
efficient manner. Flotek also is pursuing unique business strategies in
marketing and selling its core product directly to end users that are gaining
traction and should further enhance the revenue and margin opportunity in
its core business. We continue to like Flotek shares at current prices.
Neos Therapeutics, Inc. is a specialty pharmaceutical company that excels
at creating unique extended release versions of drugs with FDA approved
active pharmaceutical ingredients (APIs). We like these types of companies
as the risks of approval tend to be lower than those for companies that are
developing drugs with new methods of action (MOAs) that might have hard
to predict side effects. Neos is developing extended release versions of
attention deficit hyperactivity disorder (ADHD) drugs that have a unique
melt-away composition. This enables patients (a majority of whom are very
young) to avoid taking hard to swallow pills and hard to prepare doses of
September 30, 2014 was 2.16% and 1.91%, but the net annual expense ratio was 1.35% and 1.10% (net of the Adviser’s fee waivers), respectively. The
†
1
2
3
Not annualized.
66
September 30, 2015
liquids. There is tremendous opportunity for Neos as the current market for
ADHD drugs is approximately $5 billion. We expect the company to gain
FDA approval for two products in mid-2016, with launches soon thereafter.
However, we have recently trimmed our position substantially, taking
profits on the position while we await the uncertainty of FDA approval
events.
Chuy’s Holdings, Inc., an operator of Mexican themed casual dining
restaurants, was a contributor in the quarter. The company, which had been
undergoing a turn-around over the last year, reported earnings that were
much better than expectations. While we are fans of the concept and the
company’s opportunity to expand the chain, the stock appreciated
meaningfully since initial purchase and traded significantly above our price
target. We exited the position as a result.
Strategic Hotels & Resorts, Inc., a luxury hotel REIT, was a contributor in
the quarter because it agreed to be purchased by Blackstone for $14.25 per
share. We continue to believe that we will have a handful of companies that
get taken over each year, and were happy to see that Blackstone seemed to
see the same value in Strategic Hotels that we did.
Mercury Systems, Inc. is a provider of complex electronic subsystems to
major defense contractors. Its devices allow customers to develop more
quickly and with lower risk systems that gather, process and send
information from military platforms including planes, UAVs, ships, ground
vehicles and missile defense systems. Mercury Systems outperformed in the
quarter as it continued to successfully execute on its business strategy, and
investors started to believe that the U.S. defense budget has essentially
bottomed out.
Table III.
Percent
Impact
The Spectranetics Corporation
Sientra, Inc.
Barracuda Networks, Inc.
Amber Road, Inc.
–1.44%
–1.25
–1.23
–1.16
–0.92
The Spectranetics Corporation is a medical device company that
specializes in equipment that clears plaque from cardiac and peripheral
(arm and leg) arteries. It missed revenues in the first quarter by 4.5% due
to softness in one of its product segments (cutting balloons for the U.S.
market, which we estimate to be a single-digit percentage of Spectranetics’
business). As a result, the mid-point of full year guidance was lowered by
3.4% ($9 million on $261.5 million). Then, in July, the company lowered full
year revenue guidance again by about 6%, due to lower growth in its lead
management products (to remove heart leads used by pacemakers and
other devices). We believe that the market has misunderstood some of the
dynamics here, and that the company is trading at far too low a multiple
given its market positioning and product opportunity set.
Sientra, Inc. is a designer and manufacturer of silicone-based breast
implants for sale in the U.S. Our investment premise was based on the
oligopoly like structure of the business (there are only three U.S.-based
competitors, and FDA approval can take at least seven years for new
entrants). We had earned solid returns until the company announced that
there was a regulatory issue relating to its manufacturing plant. While no
patients are in danger, the issue has created thesis-killing risks to the
investment. We immediately sold at the time of the announcement.
surfaces for kitchens and bathrooms. The company was a detractor in the
quarter as its stock price fell sharply in August after the company reduced
its full-year revenue guidance on its second quarter earnings call. Weighing
further on the stock price was the publication of a negative report by a
hedge fund that was selling the stock short. We believe that the stock price
has overreacted to both events and remain positive on our investment in
CaesarStone, as earnings growth continues to accelerate from successful
new product launches and quartz market share gains vs. other countertop
materials, such as granite and marble.
Barracuda Networks, Inc. is a provider of cybersecurity services to small
and medium-sized businesses around the world. At the end of the quarter,
the company announced unexpected reductions in its growth expectations
for both its storage and cybersecurity-based products (the latter more
affected by European sales). We exited the position as a result. We found the
commentary at odds with our own due diligence in the cybersecurity
industry. The explanations also contradicted prior management
commentary from last quarter. We believe that we have better risk/return
opportunities elsewhere in the sector.
Amber Road, Inc. is a software company that has a unique database that
helps customers to efficiently and economically comply with complex
worldwide trade regulations. It has huge customers like Honeywell, GE and
Walmart. It has mostly recurring revenues with high incremental margins
and is about breakeven on free cash flow (even as it invests to grow the
company). In the December quarter (reported in February), Amber lost a big
customer that wanted such extreme customizations to its installation that
the contract would have been only marginally profitable for Amber. It took
down operating income guidance by about $3 million on its May call. Then
ensuing delays in closing other large contracts led management to lower
full year 2015 revenue guidance by 6% at the midpoint when it reported
results in August. These issues have led to about a 50% cut to the
company’s market valuation. Amber currently has four large RFP’s that
could close this year and lead to re-acceleration of growth in 2016. We
believe that the stock will perform well as revenue growth gets back on
track.
Portfolio Structure
As of September 30, 2015, the Fund had $73.8 million under management
and was invested in 55 publicly traded stocks. At the end of the quarter, the
top 10 positions represented 31.8% of the Fund’s assets.
Our key sector weightings at the end of September 2015 were 26.1%
Health Care (0.5% less than the Russell 2000 Growth Index), 22.3%
Information Technology (2.2% below the Index), 20.7% Consumer
Discretionary (2.2% greater than the Index), 10.5% Financials (2.6% above
the Index), and 7.9% Industrials (4.9% below the Index).
As we begin the fourth quarter, we continue to position the portfolio with
what we believe is a slightly more conservative bias. This can be seen in our
top 10 positions which, for the most part, are being valued on current cash
flows/profitability as opposed to a multiple of revenues (revenue multiples
are typically used when a company has not yet reached profitability).
67
Table IV.
Quarter End
Investment Percent
Year
Value
of Net
Acquired (millions)
Assets
Pinnacle Entertainment, Inc.
JUST EAT plc
Press Ganey Holdings, Inc.
ExamWorks Group, Inc.
Mercury Systems, Inc.
DigitalGlobe, Inc.
Valero Energy Partners LP
Chesapeake Lodging Trust
M/A-COM Technology
Solutions Holdings, Inc.
2014
2014
2015
2014
2013
2015
2014
2015
2015
$3.2
2.8
2.7
2.4
2.3
2.1
2.1
2.0
2.0
2015
1.9
4.3%
3.8
3.6
3.3
3.2
2.9
2.8
2.7
2.6
2.6
opportunities to acquire small manufacturing assets at highly accretive
multiples. We believe the company is well managed and is poised to
generate attractive earnings growth via new store openings, accretive
acquisitions and de-leveraging.
The Habit Restaurants, Inc. owns and operates the Habit Burger Grill
chain of fast casual restaurants. We participated in the company’s IPO last
year and subsequently sold our position when its valuation became
extended. Recently, the shares have sold off on concerns that the company
is heading into difficult comparisons in the second half of 2015. We have
taken advantage of the sell-off to reinstate our position, as we believe the
company’s long-term prospects for highly return generative unit growth
remain unchanged. We like the company’s restaurant concept, industryleading unit economics and, in our view, highly competent management
team whom we know from previous investments, and we believe 20%+
earnings growth is possible for many years to come.
Table VI.
Recent Activity
Market Quarter End
Cap Market Cap or
When
Market Cap
Amount
Year
Acquired When Sold
Sold
Acquired (billions) (billions)
(millions)
Table V.
Quarter End Amount
Year
Acquired (billions)
(millions)
Chesapeake Lodging Trust
Essent Group Ltd.
Pinnacle Entertainment, Inc.
Party City Holdco Inc.
The Habit Restaurants, Inc.
2015
2015
2014
2015
2015
$1.6
2.3
2.1
1.9
0.6
$2.3
2.1
1.7
1.3
1.0
Chesapeake Lodging Trust is a real estate investment trust that invests in
upscale lodging assets in gateway cities. The company has been a long-time
investment of the Baron Small Cap Fund, and we have always held the
management in high regard. The company’s stock has declined significantly
as the lodging sector had seen some macro-economic headwinds. We
believe the company trades at a significant discount to net asset value and
we expect it will continue to grow via acquisitions. Additionally, it pays a
hefty dividend and trades at a 5.5% dividend yield.
Essent Group Ltd. is a mortgage insurance company that provides credit
protection on residential mortgages. The private mortgage insurance
industry should grow over the next several years as the housing market
recovers and the government pulls back from the mortgage finance market.
Essent began underwriting in 2010, so it is unencumbered by pre-crisis
liabilities and should grow premiums much faster than peers off a smaller
base. Margins should expand as the company scales up, and credit losses
should remain low due to stringent underwriting standards. The company is
led by an experienced and capable management team. We expect earnings
to double in the next two to three years, so we believe today’s share price
represents an attractive valuation.
Party City Holdco Inc. is a manufacturer, wholesaler and retailer of
decorative party supplies, operating the Party City chain of specialty party
stores. The company has a dominant North American market share position
(in both retail and wholesale) in a relatively resilient consumer products
category, and its vertically integrated model (from manufacture to retail)
provides margin integrity, a scale advantage relative to competitors and
68
Chuy’s Holdings, Inc.
Fidelity National Financial
Inc. - FNFV Group
Parsley Energy, Inc.
Strategic Hotels &
Resorts, Inc.
INC Research Holdings, Inc.
2015
$0.3
$0.6
$2.1
2015
2015
1.4
2.4
4.1
2.2
2.1
2.1
2014
2014
2.1
1.0
3.8
2.3
2.1
1.2
Fidelity National Financial Inc. is a tracking stock that represents the
investments of Fidelity National Corp. We sold the stock in the quarter
because we felt some of the businesses within the structure were beginning
to face macro headwinds, which we ultimately thought would produce
earnings that were lower than we expected when we initially purchased the
stock.
Strategic Hotels & Resorts, Inc., is a luxury hotel REIT. A portion of the
position was sold in the quarter because the company agreed to be
purchased by Blackstone for $14.25 per share. We used the stock sales as a
source of funds to purchase new stock positions.
INC Research Holdings, Inc. is a contract research organization (CRO) for
the biotech and pharmaceutical industry. We believe INC Research is well
managed and attractively positioned in the space. We trimmed the position
based on valuation. We would be buyers again at lower levels.
Outlook
We continue to see a choppy macro environment, which is something we
have been calling out since the third quarter of last year. While we had
hoped to see more improvement in the economy by this point, the reality
is that the economic data has not meaningfully improved. That being said,
while we are mindful of the macro-economic landscape, we are primarily
driven by the prospects of the individual companies that we own in the
portfolio. On that front, we remain much more upbeat based on the
September 30, 2015
conversations we have had with these companies. Generally speaking, we
are still excited by the opportunities for growth that our portfolio
companies have. In addition, we believe that many of the companies in
which we invest will have the ability to grow through any economic
choppiness.
While the year-to-date performance has been disappointing, we continue
to stay focused on “discovering” the next great growth company. We do not
think that the more recent performance of the Fund is indicative of our
ability to accomplish that goal over the longer term.
Thank you for investing in the Fund.
Randy Gwirtzman & Laird Bieger
Portfolio Managers
October 23, 2015
respective portfolio manager only through the end of the period stated in this report. The portfolio managers’ views are not intended as recommendations or investment advice to any person reading
This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Discovery Fund by anyone in any jurisdiction where it would be unlawful under the laws of that
69
Baron Funds
Portfolio Market Capitalization (Unaudited)
Baron Asset Fund
Baron Asset Fund invests in mid-sized growth companies with market capitalizations above $2.5 billion or the smallest market cap stock in the Russell Midcap
Growth Index at reconstitution, whichever is larger, and below the largest market cap stock in the Russell Midcap Growth Index at reconstitution.
Company
The Priceline Group, Inc. . . . . . . . . . . . . . . . . . . . . . .
The Charles Schwab Corp. . . . . . . . . . . . . . . . . . . . . .
Illumina, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LinkedIn Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cerner Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
T. Rowe Price Group, Inc. . . . . . . . . . . . . . . . . . . . . . .
Nielsen Holdings Plc . . . . . . . . . . . . . . . . . . . . . . . . .
Roper Technologies Inc. . . . . . . . . . . . . . . . . . . . . . . .
Equinix, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA Communications Corp. . . . . . . . . . . . . . . . . . . .
Norwegian Cruise Line Holdings, Ltd. . . . . . . . . . . .
FleetCor Technologies, Inc. . . . . . . . . . . . . . . . . . . . .
Verisk Analytics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Universal Health Services, Inc. . . . . . . . . . . . . . . . . .
CarMax, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stericycle, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Concho Resources, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Tractor Supply Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Henry Schein, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CBRE Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fastenal Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ralph Lauren Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tiffany & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mobileye N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arch Capital Group Ltd. . . . . . . . . . . . . . . . . . . . . . . .
First Republic Bank . . . . . . . . . . . . . . . . . . . . . . . . . . .
Western Gas Equity Partners LP . . . . . . . . . . . . . . . .
Quintiles Transnational Holdings, Inc. . . . . . . . . . . .
Westinghouse Air Brake Technologies Corporation
Towers Watson & Co. . . . . . . . . . . . . . . . . . . . . . . . . .
70
Equity
Market Cap
(in millions)
$62,711
37,574
25,441
24,785
20,691
17,807
16,314
15,774
15,572
13,376
13,131
12,671
12,453
12,412
12,341
11,836
11,825
11,452
11,068
10,662
10,623
10,120
9,957
9,855
8,996
8,899
8,632
8,537
8,512
8,133
% of
Net
Assets
1.7%
2.9
3.7
1.2
0.4
0.9
1.3
1.7
1.7
2.9
0.7
3.1
3.8
1.8
1.6
1.4
1.0
1.6
1.8
2.5
1.2
0.5
1.0
0.9
3.8
1.1
0.3
1.2
1.7
2.1
Company
Verisign, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ANSYS, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mettler-Toledo International, Inc. . . . . . . . . . . . . . .
CDK Global, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Cooper Companies, Inc. . . . . . . . . . . . . . . . . . . .
Gartner, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SS&C Technologies Holdings, Inc. . . . . . . . . . . . . . .
IDEXX Laboratories, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Hyatt Hotels Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Airgas, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FactSet Research Systems, Inc. . . . . . . . . . . . . . . . . .
WABCO Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . .
The Middleby Corp. . . . . . . . . . . . . . . . . . . . . . . . . . .
Dick’s Sporting Goods, Inc. . . . . . . . . . . . . . . . . . . . .
IDEX Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Zillow Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core Laboratories N.V. . . . . . . . . . . . . . . . . . . . . . . . .
Shell Midstream Partners, L.P. . . . . . . . . . . . . . . . . . .
West Pharmaceutical Services, Inc. . . . . . . . . . . . . .
Vail Resorts, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Guidewire Software, Inc. . . . . . . . . . . . . . . . . . . . . . .
Blue Buffalo Pet Products, Inc. . . . . . . . . . . . . . . . . .
Bio-Techne Corporation . . . . . . . . . . . . . . . . . . . . . . .
Tallgrass Energy GP, LP . . . . . . . . . . . . . . . . . . . . . . . .
Inovalon Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Choice Hotels International, Inc. . . . . . . . . . . . . . . .
United Natural Foods, Inc. . . . . . . . . . . . . . . . . . . . .
Alexander’s, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TerraForm Global, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$8,008
7,945
7,887
7,616
7,237
6,970
6,962
6,831
6,740
6,669
6,619
6,074
6,030
5,882
5,518
4,875
4,426
4,198
3,897
3,826
3,734
3,512
3,438
3,124
3,077
2,745
2,430
1,910
1,051
% of
Net
Assets
1.7%
1.9
2.8
0.4
1.6
5.2
1.8
4.8
1.6
0.6
3.1
0.4
1.9
0.3
1.0
0.9
0.4
0.8
1.6
4.1
2.2
0.2
1.0
0.7
1.3
1.0
0.5
1.1
0.2
96.6%
Baron Funds
Baron Growth Fund
Baron Growth Fund invests in small-sized growth companies with market capitalizations up to the largest market cap stock in the Russell 2000 Growth Index
at reconstitution, or companies with market capitalizations up to $2.5 billion, whichever is larger.
Company
Under Armour, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Edwards Lifesciences Corp. . . . . . . . . . . . . . . . . . . . .
Church & Dwight Co., Inc. . . . . . . . . . . . . . . . . . . . . .
LKQ Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ANSYS, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IHS, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gartner, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SS&C Technologies Holdings, Inc. . . . . . . . . . . . . . .
MSCI, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alexandria Real Estate Equities, Inc. . . . . . . . . . . . .
CoStar Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITC Holdings Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Community Health Systems, Inc. . . . . . . . . . . . . . . .
Panera Bread Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Penske Automotive Group, Inc. . . . . . . . . . . . . . . . .
Douglas Emmett, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Juno Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
MAXIMUS, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bright Horizons Family Solutions, Inc. . . . . . . . . . . .
West Pharmaceutical Services, Inc. . . . . . . . . . . . . .
Booz Allen Hamilton Holding Corp. . . . . . . . . . . . . .
Vail Resorts, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MSC Industrial Direct Co., Inc. . . . . . . . . . . . . . . . . .
Colfax Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Morningstar, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bio-Techne Corporation . . . . . . . . . . . . . . . . . . . . . . .
Gaming and Leisure Properties, Inc. . . . . . . . . . . . .
TreeHouse Foods, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
ACADIA Pharmaceuticals Inc. . . . . . . . . . . . . . . . . . .
LaSalle Hotel Properties . . . . . . . . . . . . . . . . . . . . . .
Genesee & Wyoming, Inc. . . . . . . . . . . . . . . . . . . . . .
Virtu Financial, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Air Lease Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hudson’s Bay Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$20,872
15,286
10,987
8,996
8,648
7,945
7,909
7,887
6,970
6,962
6,831
6,619
6,520
6,122
6,030
5,882
5,619
5,206
5,054
4,989
4,363
4,202
4,092
3,928
3,899
3,897
3,854
3,826
3,766
3,734
3,716
3,551
3,438
3,401
3,350
3,331
3,211
3,196
3,173
3,172
3,081
% of
Net
Assets
5.2%
0.3
1.7
4.2
0.7
2.3
0.4
2.2
3.4
3.1
1.9
3.7
1.8
0.9
3.9
2.7
2.5
3.1
1.8
1.3
0.5
1.5
0.1
2.6
2.1
0.8
1.3
3.1
0.4
0.9
0.7
1.3
1.2
1.5
1.5
0.3
0.7
1.3
0.4
0.9
0.2
Company
FEI Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manchester United plc . . . . . . . . . . . . . . . . . . . . . . .
The Boston Beer Company, Inc. . . . . . . . . . . . . . . . .
Landstar System, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Oaktree Capital Group, LLC . . . . . . . . . . . . . . . . . . .
Primerica, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BRP, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valmont Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Marriott Vacations Worldwide Corp. . . . . . . . . . . . .
Nord Anglia Education Inc. . . . . . . . . . . . . . . . . . . . .
Generac Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Pinnacle Entertainment, Inc. . . . . . . . . . . . . . . . . . . .
Alexander’s, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pegasystems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Masonite International Corp. . . . . . . . . . . . . . . . . . .
American Assets Trust, Inc. . . . . . . . . . . . . . . . . . . . .
Diplomat Pharmacy, Inc. . . . . . . . . . . . . . . . . . . . . . .
Diamond Resorts International, Inc. . . . . . . . . . . . .
Neogen Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Engines, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Moelis & Company . . . . . . . . . . . . . . . . . . . . . . . . . . .
ClubCorp Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Penn National Gaming, Inc. . . . . . . . . . . . . . . . . . . .
The Carlyle Group . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cohen & Steers, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Smart & Final Stores, Inc. . . . . . . . . . . . . . . . . . . . . .
CaesarStone Sdot-Yam Ltd. . . . . . . . . . . . . . . . . . . .
AO World plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trex Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interval Leisure Group, Inc. . . . . . . . . . . . . . . . . . . . .
Bottomline Technologies (de), Inc. . . . . . . . . . . . . . .
Benefitfocus, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Atara Biotherapeutics, Inc. . . . . . . . . . . . . . . . . . . . .
ConforMIS, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Whistler Blackcomb Holdings, Inc. . . . . . . . . . . . . .
Iridium Communications Inc. . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$3,077
3,038
2,812
2,774
2,766
2,745
2,430
2,394
2,235
2,220
2,206
2,145
2,116
2,084
2,054
1,910
1,883
1,837
1,835
1,829
1,710
1,681
1,525
1,430
1,389
1,346
1,318
1,247
1,159
1,073
1,073
1,068
1,055
1,030
899
897
735
613
583
% of
Net
Assets
0.7%
0.7
1.3
0.7
0.4
2.1
1.4
1.0
1.8
0.2
0.4
1.4
0.7
0.7
1.2
0.7
0.7
1.3
0.4
0.4
0.1
0.2
1.0
0.4
0.4
0.9
0.5
0.9
0.7
0.7
0.9
0.7
0.7
0.2
1.0
0.3
0.5
0.3
0.8
99.8%
71
Baron Funds
Baron Small Cap Fund invests 80% of its net assets in small-sized growth companies with market capitalizations up to the largest market cap stock in the
Russell 2000 Growth Index at reconstitution, or companies with market capitalizations up to $2.5 billion, whichever is larger.
Company
Equinix, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FleetCor Technologies, Inc. . . . . . . . . . . . . . . . . . . . .
Liberty Media Corp. . . . . . . . . . . . . . . . . . . . . . . . . . .
TransDigm Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
SL Green Realty Corp. . . . . . . . . . . . . . . . . . . . . . . . .
CBRE Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acuity Brands, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gartner, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DexCom, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Waste Connections, Inc. . . . . . . . . . . . . . . . . . . . . . .
The Madison Square Garden Company . . . . . . . . . .
Liberty Broadband Corporation . . . . . . . . . . . . . . . .
The Ultimate Software Group, Inc. . . . . . . . . . . . . .
ICON plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brookdale Senior Living, Inc. . . . . . . . . . . . . . . . . . . .
Phillips 66 Partners LP . . . . . . . . . . . . . . . . . . . . . . . .
Bright Horizons Family Solutions, Inc. . . . . . . . . . . .
Nordson Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Berry Plastics Group, Inc. . . . . . . . . . . . . . . . . . . . . . .
Gaming and Leisure Properties, Inc. . . . . . . . . . . . .
WEX Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cepheid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LaSalle Hotel Properties . . . . . . . . . . . . . . . . . . . . . .
Aspen Technology, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
FEI Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Catalent Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cognex Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Targa Resources Corp. . . . . . . . . . . . . . . . . . . . . . . . . .
Sarana Menara Nusantara Tbk PT . . . . . . . . . . . . . .
Houghton Mifflin Harcourt Company . . . . . . . . . . .
Platform Specialty Products Corp. . . . . . . . . . . . . . .
The Cheesecake Factory, Inc. . . . . . . . . . . . . . . . . . .
Armstrong World Industries, Inc. . . . . . . . . . . . . . . .
Valero Energy Partners LP . . . . . . . . . . . . . . . . . . . . .
Clean Harbors, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
ACI Worldwide, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Healthcare Services Group, Inc. . . . . . . . . . . . . . . . .
Cantel Medical Corp. . . . . . . . . . . . . . . . . . . . . . . . . .
72
Equity
Market Cap
(in millions)
$15,572
13,376
12,671
11,723
11,371
10,919
10,662
7,887
7,645
6,970
6,876
6,831
5,995
5,470
5,288
5,206
5,117
4,426
4,371
4,237
4,034
3,899
3,793
3,734
3,602
3,401
3,357
3,258
3,211
3,196
3,185
3,038
3,026
2,994
2,887
2,779
2,756
2,668
2,648
2,640
2,627
2,569
2,488
2,430
2,423
2,359
% of
Net
Assets
1.8%
3.4
2.3
1.1
4.0
0.6
0.8
1.4
3.2
3.7
2.4
2.2
2.4
1.6
0.5
0.5
2.8
0.6
1.7
1.1
0.4
3.3
1.0
1.7
1.8
1.8
1.3
0.8
0.3
1.0
0.0
1.4
1.1
1.3
0.9
0.9
0.8
0.6
1.1
0.2
1.0
1.0
1.6
1.6
0.6
0.9
Company
PRA Health Sciences, Inc. . . . . . . . . . . . . . . . . . . . . .
Essent Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INC Research Holdings, Inc. . . . . . . . . . . . . . . . . . . .
Monro Muffler Brake, Inc. . . . . . . . . . . . . . . . . . . . . .
Dominion Midstream Partners, L.P. . . . . . . . . . . . . .
Electronics For Imaging, Inc. . . . . . . . . . . . . . . . . . . .
On Assignment, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Party City Holdco Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Summit Materials, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Diplomat Pharmacy, Inc. . . . . . . . . . . . . . . . . . . . . . .
comScore, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rexnord Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
HealthEquity, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Scorpio Tankers Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Abengoa Yield plc . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Press Ganey Holdings, Inc. . . . . . . . . . . . . . . . . . . . .
Chesapeake Lodging Trust . . . . . . . . . . . . . . . . . . . . .
Acxiom Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interface, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mattress Firm Holding Corp. . . . . . . . . . . . . . . . . . . .
Moelis & Company . . . . . . . . . . . . . . . . . . . . . . . . . . .
RBC Bearings Incorporated . . . . . . . . . . . . . . . . . . . .
Artisan Partners Asset Management Inc. . . . . . . . .
Builders FirstSource, Inc. . . . . . . . . . . . . . . . . . . . . . .
DigitalGlobe, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Penn National Gaming, Inc. . . . . . . . . . . . . . . . . . . .
Columbia Pipeline Partners LP . . . . . . . . . . . . . . . . .
ExamWorks Group, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Tumi Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
BJ’s Restaurants, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Western Refining Logistics, LP . . . . . . . . . . . . . . . . .
Flotek Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Globe Specialty Metals, Inc. . . . . . . . . . . . . . . . . . . .
National CineMedia, Inc. . . . . . . . . . . . . . . . . . . . . . .
The Container Store Group, Inc. . . . . . . . . . . . . . . . .
Iconix Brand Group, Inc. . . . . . . . . . . . . . . . . . . . . . .
PBF Logistics LP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Spectranetics Corporation . . . . . . . . . . . . . . . . .
Westlake Chemical Partners LP . . . . . . . . . . . . . . . .
The Chefs’ Warehouse, Inc. . . . . . . . . . . . . . . . . . . . .
Del Frisco’s Restaurant Group, Inc. . . . . . . . . . . . . .
The KEYW Holding Corporation . . . . . . . . . . . . . . . .
SFX Entertainment, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$2,336
2,303
2,253
2,158
2,116
2,085
2,048
1,942
1,905
1,865
1,829
1,807
1,704
1,691
1,660
1,659
1,557
1,555
1,540
1,525
1,478
1,471
1,430
1,403
1,384
1,377
1,350
1,346
1,274
1,215
1,196
1,102
977
895
895
825
676
653
592
501
474
372
326
237
50
% of
Net
Assets
0.8%
0.8
1.2
0.7
1.4
0.3
1.0
1.8
0.4
0.9
0.5
0.5
0.2
0.9
1.0
0.1
1.3
0.7
0.5
1.4
0.4
1.3
0.7
0.6
0.6
0.5
0.9
1.1
0.2
0.4
0.6
1.0
0.2
0.9
1.0
0.1
0.5
0.4
0.3
0.5
0.2
0.6
0.6
0.1
0.0
96.6%
Baron Funds
Baron Opportunity Fund invests in high growth businesses of any market capitalization selected for their capital appreciation potential.
Company
Google, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facebook, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amazon.com, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MasterCard, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
salesforce.com, inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Netflix, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Charles Schwab Corp. . . . . . . . . . . . . . . . . . . . . .
Tesla Motors, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illumina, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LinkedIn Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Under Armour, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equinix, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Red Hat, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CarMax, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicenow, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mobileye N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ANSYS, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gartner, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$426,500
253,435
239,416
102,025
62,711
45,824
43,820
37,574
32,352
25,441
24,785
20,872
15,572
13,376
13,189
12,453
12,341
11,825
10,841
9,855
7,945
6,970
6,030
% of
Net
Assets
4.6%
3.6
3.5
2.6
2.6
2.0
2.6
2.5
3.5
3.8
1.3
1.3
3.8
2.6
2.9
3.0
2.5
1.5
1.3
1.3
3.4
4.2
1.3
Company
CoStar Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
athenahealth, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FireEye, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Zillow Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
JUST EAT plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restoration Hardware Holdings, Inc. . . . . . . . . . . . .
MarketAxess Holdings Inc. . . . . . . . . . . . . . . . . . . . .
Cepheid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Golar LNG Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mellanox Technologies Ltd. . . . . . . . . . . . . . . . . . . . .
Acxiom Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AO World plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Qualys, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$5,619
5,152
5,073
4,875
4,190
3,751
3,734
3,464
3,258
3,185
3,077
2,812
2,601
1,753
1,691
1,540
1,073
1,073
1,051
970
899
% of
Net
Assets
3.9%
1.7
0.8
0.6
1.4
1.6
5.7
1.1
1.2
1.0
1.0
2.7
1.0
1.5
1.1
2.3
0.8
0.0
0.6
0.6
2.4
94.7%
73
Baron Funds
Baron Partners Fund
Baron Partners Fund is a non-diversified fund that invests primarily in U.S. companies of any size with significant growth potential.
Company
The Charles Schwab Corp. . . . . . . . . . . . . . . . . . . .
Tesla Motors, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illumina, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Under Armour, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Norwegian Cruise Line Holdings, Ltd. . . . . . . . . .
Verisk Analytics, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
CarMax, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fastenal Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mobileye N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arch Capital Group Ltd. . . . . . . . . . . . . . . . . . . . . .
Gartner, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IDEXX Laboratories, Inc. . . . . . . . . . . . . . . . . . . . . .
Hyatt Hotels Corp. . . . . . . . . . . . . . . . . . . . . . . . . .
FactSet Research Systems, Inc. . . . . . . . . . . . . . . .
The Middleby Corp. . . . . . . . . . . . . . . . . . . . . . . . . .
Equity
% of
Market Cap
Total
(in millions) Investments
$37,574
32,352
25,441
20,872
13,131
12,453
12,341
10,623
9,855
8,996
6,970
6,831
6,740
6,619
6,030
4.6%
8.6
3.7
0.4
0.7
4.7
5.0
2.9
3.8
7.6
2.3
3.3
5.2
5.2
1.2
Company
Dick’s Sporting Goods, Inc. . . . . . . . . . . . . . . . . . .
CoStar Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
ITC Holdings Corp. . . . . . . . . . . . . . . . . . . . . . . . . .
Panera Bread Co. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Zillow Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Douglas Emmett, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Vail Resorts, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gaming and Leisure Properties, Inc. . . . . . . . . . . .
Air Lease Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inovalon Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . .
Manchester United plc . . . . . . . . . . . . . . . . . . . . . .
The Carlyle Group . . . . . . . . . . . . . . . . . . . . . . . . . .
TerraForm Global, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Equity
% of
Market Cap
Total
(in millions) Investments
$5,882
5,619
5,206
4,989
4,875
4,202
3,826
3,401
3,172
3,077
2,812
1,318
1,051
4.3%
8.0
5.5
0.3
2.9
0.3
4.1
2.8
3.4
2.3
3.9
2.4
0.3
99.7%
Baron Fifth Avenue Growth Fund invests in large-sized growth companies with market capitalizations above the smallest market cap stock in the top 85%
of the Russell 1000 Growth Index at reconstitution, or companies with market capitalizations above $10 billion, whichever is smaller.
Company
Equity
Market Cap
(in millions)
Apple, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $629,010
Google, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426,550
Facebook, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253,435
Amazon.com, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 239,416
Visa, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169,476
Alibaba Group Holding Ltd. . . . . . . . . . . . . . . . . . . 148,158
MasterCard, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,025
Starbucks Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84,362
Biogen, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68,625
Costco Wholesale Corp. . . . . . . . . . . . . . . . . . . . . .
63,537
The Priceline Group, Inc. . . . . . . . . . . . . . . . . . . . .
62,711
Naspers Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52,494
Regeneron Pharmaceuticals, Inc. . . . . . . . . . . . . .
48,230
Monsanto Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,925
ASML Holding N.V. . . . . . . . . . . . . . . . . . . . . . . . . .
38,125
The Charles Schwab Corp. . . . . . . . . . . . . . . . . . . .
37,574
Alexion Pharmaceuticals, Inc. . . . . . . . . . . . . . . . .
35,368
YUM! Brands, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
34,475
VMware, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33,255
74
% of
Net
Assets
4.2%
7.1
6.5
10.2
4.0
2.9
4.0
4.0
1.9
1.2
3.7
2.1
1.8
1.4
1.8
1.6
2.2
1.9
1.7
Company
CME Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brookfield Asset Management, Inc. . . . . . . . . . . .
Illumina, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LinkedIn Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Twitter, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equinix, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Red Hat, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Verisk Analytics, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Concho Resources, Inc. . . . . . . . . . . . . . . . . . . . . . .
Fastenal Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mobileye N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ctrip.com International, Ltd. . . . . . . . . . . . . . . . . .
FireEye, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shell Midstream Partners, L.P. . . . . . . . . . . . . . . . .
Tallgrass Energy GP, LP . . . . . . . . . . . . . . . . . . . . . .
SunEdison, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TerraForm Global, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$31,324
30,985
25,441
24,785
18,220
15,572
13,189
12,453
11,825
10,623
9,855
8,882
5,073
4,198
3,124
2,262
1,051
% of
Net
Assets
2.2%
3.0
4.1
1.4
2.0
3.2
2.1
1.7
0.5
1.3
2.5
1.2
3.0
1.2
1.2
0.9
0.9
96.6%
Baron Funds
Baron Focused Growth Fund is a non-diversified fund that invests in small and mid-sized growth companies with market capitalizations up to the largest
market cap stock in the Russell Midcap Growth Index at reconstitution.
Company
Tesla Motors, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CarMax, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Church & Dwight Co., Inc. . . . . . . . . . . . . . . . . . . . . .
Fastenal Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mobileye N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Airgas, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CoStar Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
% of
Net
Assets
$32,352
12,453
12,341
10,987
10,623
9,855
8,996
6,740
6,669
6,619
5,882
5,619
5,206
11.7%
3.4
4.1
2.4
2.1
2.7
4.2
7.0
1.5
6.9
3.1
7.5
3.8
Company
Vail Resorts, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Virtu Financial, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Carlyle Group . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Iridium Communications Inc. . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$3,826
3,734
3,196
3,173
2,812
2,745
1,525
1,318
1,073
899
583
% of
Net
Assets
8.2%
3.1
2.0
0.8
5.4
4.1
3.4
2.5
2.1
4.0
3.1
99.1%
75
Baron Funds
Baron International Growth Fund is a diversified fund that invests in non-U.S. companies with significant growth potential. Investments may be made across
all market capitalizations. The Fund invests principally in companies of developed countries and may invest up to 30% in companies of developing countries.
Company
Tencent Holdings, Ltd. . . . . . . . . . . . . . . . . . . . . . . . .
Alibaba Group Holding Ltd. . . . . . . . . . . . . . . . . . . .
Industria de Diseño Textil SA . . . . . . . . . . . . . . . . . .
Intesa Sanpaolo S.p.A. . . . . . . . . . . . . . . . . . . . . . . . .
Softbank Group Corp. . . . . . . . . . . . . . . . . . . . . . . . . .
China Telecom Corp. Ltd. . . . . . . . . . . . . . . . . . . . . . .
Suncor Energy Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
FANUC Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bridgestone Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mitsui Fudosan Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . .
Panasonic Corporation . . . . . . . . . . . . . . . . . . . . . . . .
Fresenius Medical Care Ag & Co . . . . . . . . . . . . . . .
Steinhoff International Holdings Ltd. . . . . . . . . . . .
Ryanair Holdings plc . . . . . . . . . . . . . . . . . . . . . . . . . .
Haitong Securities Co., Ltd. . . . . . . . . . . . . . . . . . . . .
Larsen & Toubro Ltd. . . . . . . . . . . . . . . . . . . . . . . . . .
Rakuten, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Axis Bank Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aena SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experian plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Check Point Software Technologies Ltd. . . . . . . . . .
Sumitomo Mitsui Trust Holdings, Inc. . . . . . . . . . . .
Grifols SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agilent Technologies, Inc. . . . . . . . . . . . . . . . . . . . . .
Daiwa Securities Group, Inc. . . . . . . . . . . . . . . . . . . .
ProSiebenSat.1 Media AG . . . . . . . . . . . . . . . . . . . . .
easyJet plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Julius Baer Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . .
Mobileye N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Burberry Group plc . . . . . . . . . . . . . . . . . . . . . . . . . . .
Constellation Software, Inc. . . . . . . . . . . . . . . . . . . .
Brenntag AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Symrise AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ingenico Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
lululemon athletica, inc. . . . . . . . . . . . . . . . . . . . . . .
Newcrest Mining Ltd. . . . . . . . . . . . . . . . . . . . . . . . . .
76
Equity
Market Cap
(in millions)
$156,843
148,158
104,233
58,916
55,967
38,952
38,652
32,076
27,891
27,520
25,069
24,329
22,660
21,190
21,138
20,789
18,424
17,953
16,552
15,533
14,347
14,180
12,814
11,377
11,182
10,718
10,678
10,155
9,855
9,207
8,996
8,882
8,315
7,785
7,347
7,119
6,811
% of
Net
Assets
1.3%
0.9
1.3
0.7
1.1
1.0
1.3
1.2
1.5
1.4
0.7
1.7
1.5
2.2
0.7
0.7
1.8
1.0
3.3
1.1
3.0
1.7
1.1
0.8
1.5
2.6
2.0
1.9
1.1
1.1
2.3
4.0
1.9
2.0
2.7
0.8
0.9
Company
Qihoo 360 Technology Co. Ltd. . . . . . . . . . . . . . . . .
Intertek Group plc . . . . . . . . . . . . . . . . . . . . . . . . . . .
Crescent Point Energy Corp. . . . . . . . . . . . . . . . . . . .
Zee Entertainment Enterprises Ltd. . . . . . . . . . . . . .
Inchcape plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eurofins Scientific SE . . . . . . . . . . . . . . . . . . . . . . . . .
William Hill PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
JUST EAT plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PT Matahari Department Store Tbk . . . . . . . . . . . . .
Azimut Holding S.p.A. . . . . . . . . . . . . . . . . . . . . . . . .
MonotaRO Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . .
SouFun Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . .
Nomad Foods Limited . . . . . . . . . . . . . . . . . . . . . . . .
Golar LNG Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TAL Education Group . . . . . . . . . . . . . . . . . . . . . . . . .
Domino’s Pizza Enterprises Ltd. . . . . . . . . . . . . . . . .
Sanrio Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domino’s Pizza Group plc . . . . . . . . . . . . . . . . . . . . .
Tower Bersama Infrastructure Tbk PT . . . . . . . . . . .
Lancashire Holdings Limited . . . . . . . . . . . . . . . . . . .
Abcam plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dish TV India Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Luk Fook Holdings (International) Ltd. . . . . . . . . . .
TOTVS SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kingdee International Software Group Co. Ltd. . . .
AO World plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMIS Group plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Smiles SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SKS Microfinance LTD . . . . . . . . . . . . . . . . . . . . . . . .
RIB Software AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hathway Cable & Datacom Limited . . . . . . . . . . . .
DEN Networks Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$6,167
5,934
5,774
5,742
4,779
4,696
4,690
4,190
3,207
3,070
2,840
2,779
2,725
2,678
2,601
2,569
2,492
2,439
2,235
2,145
2,072
1,767
1,753
1,727
1,473
1,243
1,090
1,073
1,051
1,006
933
783
736
465
329
% of
Net
Assets
0.5%
1.2
0.4
1.0
1.3
2.4
1.5
1.4
1.0
1.0
1.7
0.4
0.5
1.5
0.7
1.3
2.2
1.3
1.9
0.9
1.6
1.9
2.0
1.1
0.5
0.8
1.2
1.1
0.9
1.6
0.3
0.5
1.9
0.2
0.2
97.7%
Baron Funds
Baron Real Estate Fund is a non-diversified fund that invest 80% of its net assets in equity securities of U.S. and non-U.S. real estate and real estate-related
companies of any size. The Fund’s investment in non-U.S. companies will not exceed 25%.
Company
Home Depot, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lowe’s Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Simon Property Group, Inc. . . . . . . . . . . . . . . . . . . . .
American Tower Corp. . . . . . . . . . . . . . . . . . . . . . . . .
Brookfield Asset Management, Inc. . . . . . . . . . . . . .
AvalonBay Communities, Inc. . . . . . . . . . . . . . . . . . .
General Growth Properties, Inc. . . . . . . . . . . . . . . . .
Hilton Worldwide Holdings, Inc. . . . . . . . . . . . . . . . .
Royal Caribbean Cruises Ltd. . . . . . . . . . . . . . . . . . . .
Boston Properties, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Aena SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equinix, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mohawk Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Norwegian Cruise Line Holdings, Ltd. . . . . . . . . . . .
Starwood Hotels & Resorts Worldwide, Inc. . . . . .
SL Green Realty Corp. . . . . . . . . . . . . . . . . . . . . . . . .
CBRE Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MGM Resorts International . . . . . . . . . . . . . . . . . . . .
Wyndham Worldwide Corp. . . . . . . . . . . . . . . . . . . .
Jones Lang LaSalle, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$148,301
63,767
56,846
37,240
30,985
23,234
23,001
22,652
19,595
18,183
16,552
15,572
13,437
13,376
13,131
11,327
10,919
10,662
10,389
8,428
6,740
6,464
% of
Net
Assets
3.1%
1.7
1.9
2.1
2.0
1.6
1.5
4.3
2.5
1.4
1.8
4.2
2.6
1.8
4.1
1.7
1.4
3.7
3.7
2.6
3.0
3.4
Company
Alexandria Real Estate Equities, Inc. . . . . . . . . . . . .
Toll Brothers, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brookfield Infrastructure Partners L.P. . . . . . . . . . . .
Forest City Enterprises, Inc. . . . . . . . . . . . . . . . . . . . .
Zillow Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Howard Hughes Corp. . . . . . . . . . . . . . . . . . . . . . . . .
Brookdale Senior Living, Inc. . . . . . . . . . . . . . . . . . . .
Douglas Emmett, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Strategic Hotels & Resorts, Inc. . . . . . . . . . . . . . . . .
Armstrong World Industries, Inc. . . . . . . . . . . . . . . .
Kennedy-Wilson Holdings, Inc. . . . . . . . . . . . . . . . . .
Kennedy Wilson Europe Real Estate PLC . . . . . . . .
Summit Materials, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Masonite International Corp. . . . . . . . . . . . . . . . . . .
Diamond Resorts International, Inc. . . . . . . . . . . . .
Builders FirstSource, Inc. . . . . . . . . . . . . . . . . . . . . . .
Capital Senior Living Corp. . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$6,122
6,035
6,018
5,223
4,875
4,557
4,237
4,202
3,799
2,779
2,640
2,503
2,337
2,145
1,865
1,837
1,710
1,389
1,377
1,073
592
% of
Net
Assets
1.8%
2.6
2.7
2.0
1.2
2.0
0.9
1.9
2.9
0.9
1.1
2.2
2.1
0.9
1.4
2.8
2.7
1.8
2.5
2.0
2.5
97.0%
77
Baron Funds
Baron Emerging Markets Fund is a diversified fund that invests 80% of its net assets in non-U.S. companies of all sizes domiciled, headquartered or whose
primary business activities or principal trading markets are in developing countries. The Fund may invest up to 20% in companies in developed market
countries and in Frontier Countries.
Company
China Moblie Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PetroChina Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tencent Holdings, Ltd. . . . . . . . . . . . . . . . . . . . . . . . .
Samsung Electronics Co., Ltd. . . . . . . . . . . . . . . . . . .
China Life Insurance Co. Ltd. . . . . . . . . . . . . . . . . . . .
Taiwan Semiconductor Manufacturing
Company Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wal-Mart de Mexico S.A.B. de C.V. Class V . . . . . .
China Telecom Corp. Ltd. . . . . . . . . . . . . . . . . . . . . . .
Coal India Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Unicom (Hong Kong) Ltd. . . . . . . . . . . . . . . .
Fomento Económico Mexicano, S.A.B. de C.V. . . . .
Steinhoff International Holdings Ltd. . . . . . . . . . . .
Haitong Securities Co., Ltd. . . . . . . . . . . . . . . . . . . . .
Larsen & Toubro Ltd. . . . . . . . . . . . . . . . . . . . . . . . . .
Advanced Info Service Plc . . . . . . . . . . . . . . . . . . . . .
Sasol Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Axis Bank Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Samsung Life Insurance Co. Ltd. . . . . . . . . . . . . . . . .
Huatai Securities Co., Ltd. . . . . . . . . . . . . . . . . . . . . .
Bank Rakyat Indonesia (Persero) Tbk PT . . . . . . . . .
Lupin Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MediaTek Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LG Household & Health Care Ltd. . . . . . . . . . . . . . .
Ayala Land, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aspen Pharmacare Holdings Ltd. . . . . . . . . . . . . . . .
Sinopharm Group Co. Ltd. . . . . . . . . . . . . . . . . . . . . .
Universal Robina Corp. . . . . . . . . . . . . . . . . . . . . . . . .
Ctrip.com International, Ltd. . . . . . . . . . . . . . . . . . . .
Bangkok Bank Public Co. Ltd. . . . . . . . . . . . . . . . . . .
BDO Unibank, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bidvest Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shenzhou International Group Holdings Ltd. . . . . .
Far EasTone Telecommunications Co., Ltd. . . . . . . .
China Mengniu Dairy Co. Ltd. . . . . . . . . . . . . . . . . . .
Global Logistic Properties Ltd. . . . . . . . . . . . . . . . . .
Qihoo 360 Technology Co. Ltd. . . . . . . . . . . . . . . . .
Wynn Macau Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sihuan Pharmaceutical Holdings Group Ltd. . . . . .
Grupo Lala, S.A.B. de C.V. . . . . . . . . . . . . . . . . . . . . .
Zee Entertainment Enterprises Ltd. . . . . . . . . . . . . .
Infraestructura Energetica Nova S.A.B. de C.V. . . .
Motherson Sumi Systems Ltd . . . . . . . . . . . . . . . . . .
78
Equity
Market Cap
(in millions)
$242,529
224,223
156,843
148,158
140,427
109,350
107,611
42,924
38,952
31,524
30,312
30,199
22,660
21,138
20,789
18,840
18,216
17,953
16,502
15,304
14,566
13,947
11,622
11,306
10,690
9,681
9,676
8,961
8,882
8,415
8,072
7,890
7,203
7,026
6,884
6,800
6,167
5,886
5,875
5,846
5,742
4,713
4,642
% of
Net
Assets
1.7%
1.1
1.4
1.1
2.2
1.3
1.6
1.4
1.2
1.5
0.5
1.7
1.8
1.4
0.8
1.1
1.3
1.2
1.3
0.5
0.9
1.7
0.5
1.7
1.2
1.0
1.9
1.1
1.0
0.6
1.0
1.3
1.7
1.6
1.1
1.0
0.6
0.2
0.5
1.2
1.4
0.9
0.5
Company
Glenmark Pharmaceuticals Ltd. . . . . . . . . . . . . . . . .
Divi’s Laboratories Ltd. . . . . . . . . . . . . . . . . . . . . . . . .
Eclat Textile Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . .
Torrent Pharmaceuticals Ltd. . . . . . . . . . . . . . . . . . .
China Everbright Ltd. . . . . . . . . . . . . . . . . . . . . . . . . .
Mr Price Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . .
PT Matahari Department Store Tbk . . . . . . . . . . . . .
WuXi PharmaTech (Cayman) Inc. . . . . . . . . . . . . . .
Metro Pacific Investments Corp. . . . . . . . . . . . . . . .
SouFun Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . .
Amara Raja Batteries Ltd. . . . . . . . . . . . . . . . . . . . . .
Cetip SA - Mercados Organizados . . . . . . . . . . . . . .
Sun TV Network Ltd. . . . . . . . . . . . . . . . . . . . . . . . . .
Exide Industries Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . .
Novatek Microelectronics Corp. . . . . . . . . . . . . . . . .
Man Wah Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . .
Copa Holdings, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grand Korea Leisure Co., Ltd. . . . . . . . . . . . . . . . . . .
Dish TV India Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
M. Dias Branco SA . . . . . . . . . . . . . . . . . . . . . . . . . . .
Makalot Industrial Co., Ltd. . . . . . . . . . . . . . . . . . . . .
Luk Fook Holdings (International) Ltd. . . . . . . . . . .
HIWIN Technologies Corp. . . . . . . . . . . . . . . . . . . . .
Jumei International Holding Ltd. . . . . . . . . . . . . . . .
Multiplus SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTVS SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Biostime International Holdings Ltd. . . . . . . . . . . . .
Kingdee International Software Group Co. Ltd. . . .
Smiles SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ginko International Co., Ltd. . . . . . . . . . . . . . . . . . . .
SKS Microfinance LTD . . . . . . . . . . . . . . . . . . . . . . . .
PVR Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Linx SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hathway Cable & Datacom Limited . . . . . . . . . . . .
i-SENS, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DEN Networks Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . .
SHUAA Capital psc . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lekoil, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$4,510
4,509
4,122
3,873
3,836
3,713
3,207
3,091
2,971
2,779
2,725
2,679
2,569
2,182
2,157
2,145
2,016
1,904
1,890
1,860
1,748
1,727
1,663
1,628
1,473
1,431
1,413
1,308
1,243
1,208
1,090
1,051
933
932
783
579
520
465
429
329
164
117
% of
Net
Assets
1.1%
1.8
1.8
2.0
1.0
0.7
1.1
0.9
0.8
0.5
0.6
1.4
1.5
0.8
0.8
0.9
1.0
0.8
1.2
0.5
1.0
1.4
0.2
1.9
0.7
0.7
0.3
0.6
0.8
0.4
1.1
0.8
0.7
1.1
1.0
1.2
0.3
0.2
0.5
0.4
0.0
0.2
87.4%
Baron Funds
Baron Energy and Resources Fund is a non-diversified fund that invests 80% of its net assets in equity securities of U.S. and non-U.S. energy and resources
companies and related companies of any size.
Company
EOG Resources, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Anadarko Petroleum Corporation . . . . . . . . . . . . . . .
Halliburton Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marathon Petroleum Corp. . . . . . . . . . . . . . . . . . . . .
Energy Transfer Equity, L.P. . . . . . . . . . . . . . . . . . . . .
Noble Energy, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cabot Oil & Gas Corp. . . . . . . . . . . . . . . . . . . . . . . . .
Western Gas Equity Partners LP . . . . . . . . . . . . . . . .
Antero Resources Corporation . . . . . . . . . . . . . . . . .
Newfield Exploration Co. . . . . . . . . . . . . . . . . . . . . . .
Helmerich & Payne, Inc. . . . . . . . . . . . . . . . . . . . . . .
Shell Midstream Partners, L.P. . . . . . . . . . . . . . . . . . .
Phillips 66 Partners LP . . . . . . . . . . . . . . . . . . . . . . . .
Gulfport Energy Corp. . . . . . . . . . . . . . . . . . . . . . . . .
Methanex Corporation . . . . . . . . . . . . . . . . . . . . . . . .
Golar LNG Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tallgrass Energy Partners, LP . . . . . . . . . . . . . . . . . . .
Parsley Energy, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
SunEdison, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$39,980
30,679
30,215
24,840
21,948
12,918
11,825
9,046
8,632
5,862
5,362
5,092
4,426
4,198
4,034
3,212
3,185
3,124
2,987
2,887
2,627
2,601
2,380
2,349
2,262
% of
Net
Assets
1.6%
1.7
3.2
2.5
1.8
2.4
4.9
2.6
1.1
0.7
4.6
1.1
1.8
1.8
0.9
2.9
1.1
2.6
1.2
2.8
1.7
1.3
2.1
4.9
1.9
Company
SM Energy Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Laredo Petroleum Inc. . . . . . . . . . . . . . . . . . . . . . . . .
TerraForm Power, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
SemGroup Corporation . . . . . . . . . . . . . . . . . . . . . . .
Superior Energy Services, Inc. . . . . . . . . . . . . . . . . . .
RSP Permian, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Scorpio Tankers Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Abengoa Yield plc . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oil States International, Inc. . . . . . . . . . . . . . . . . . . .
Oasis Petroleum, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
MRC Global, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forum Energy Technologies, Inc. . . . . . . . . . . . . . . .
Western Refining Logistics, LP . . . . . . . . . . . . . . . . .
Primoris Services Corp. . . . . . . . . . . . . . . . . . . . . . . . .
Rose Rock Midstream, L.P. . . . . . . . . . . . . . . . . . . . . .
Globe Specialty Metals, Inc. . . . . . . . . . . . . . . . . . . .
RigNet, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bonanza Creek Energy, Inc. . . . . . . . . . . . . . . . . . . . .
Lekoil, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$2,177
2,085
2,017
1,995
1,930
1,904
1,843
1,660
1,659
1,340
1,274
1,208
1,139
1,102
1,051
977
926
896
895
895
474
451
203
117
% of
Net
Assets
3.0%
1.3
1.7
1.3
2.3
1.7
2.2
2.7
1.3
1.1
1.6
1.4
0.8
1.4
1.9
1.7
1.7
0.3
4.5
1.4
1.7
0.8
1.0
0.5
94.5%
79
Baron Funds
Baron Global Advantage Fund is a diversified fund that invests primarily in established and emerging markets companies located throughout the world with
capitalization within the range of companies included in the MSCI ACWI Growth Index Net.
Company
Google, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facebook, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amazon.com, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Naspers Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Baidu, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ASML Holding N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illumina, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ICICI Bank Limited . . . . . . . . . . . . . . . . . . . . . . . . . . .
ARM Holdings plc . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Axis Bank Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Check Point Software Technologies Ltd. . . . . . . . . .
Mobileye N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ctrip.com International, Ltd. . . . . . . . . . . . . . . . . . . .
Constellation Software, Inc. . . . . . . . . . . . . . . . . . . .
Brookfield Infrastructure Partners L.P. . . . . . . . . . . .
FireEye, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
JUST EAT plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Qunar Cayman Islands Ltd. . . . . . . . . . . . . . . . . . . . .
80
Equity
Market Cap
(in millions)
$426,500
253,435
239,416
148,158
62,711
52,494
48,300
38,125
25,441
24,334
20,127
17,953
14,347
9,855
8,882
8,882
6,018
5,073
4,190
3,933
3,124
% of
Net
Assets
7.6%
6.3
7.6
3.1
1.9
3.8
2.0
1.6
3.3
1.4
1.4
0.7
3.0
3.5
2.0
3.8
2.2
2.5
4.3
2.2
1.2
Company
Medidata Solutions, Inc. . . . . . . . . . . . . . . . . . . . . . .
SunEdison, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cetip SA - Mercados Organizados . . . . . . . . . . . . . .
TerraForm Power, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Acxiom Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Just Dial Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Smiles SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Seadrill Partners, LLC . . . . . . . . . . . . . . . . . . . . . . . . .
Glaukos Corporation . . . . . . . . . . . . . . . . . . . . . . . . . .
Aerie Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . .
Atlas Energy Group, LLC . . . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$2,887
2,779
2,569
2,329
2,262
2,182
2,145
1,995
1,753
1,540
1,274
1,056
1,051
933
899
863
775
474
456
58
% of
Net
Assets
0.7%
2.9
4.7
1.4
1.8
1.9
1.5
1.1
3.0
1.8
0.4
0.5
1.6
1.2
1.3
0.4
0.6
1.0
0.4
0.3
93.9%
Baron Funds
Baron Discovery Fund invests in small sized growth companies with market capitalizations up to the weighted median market capitalization of the Russell
2000 Growth Index at reconstitution, or companies with market capitalizations up to $1.5 billion, whichever is larger.
Company
JUST EAT plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strategic Hotels & Resorts, Inc. . . . . . . . . . . . . . . . .
Cepheid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Essent Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INC Research Holdings, Inc. . . . . . . . . . . . . . . . . . . .
Pinnacle Entertainment, Inc. . . . . . . . . . . . . . . . . . . .
Party City Holdco Inc. . . . . . . . . . . . . . . . . . . . . . . . .
American Assets Trust, Inc. . . . . . . . . . . . . . . . . . . . .
Press Ganey Holdings, Inc. . . . . . . . . . . . . . . . . . . . .
Chesapeake Lodging Trust . . . . . . . . . . . . . . . . . . . . .
M/A-COM Technology Solutions Holdings, Inc. . .
Pacira Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . .
Mattress Firm Holding Corp. . . . . . . . . . . . . . . . . . . .
Coherent, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DigitalGlobe, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sage Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Fiesta Restaurant Group, Inc. . . . . . . . . . . . . . . . . . .
ExamWorks Group, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Envestnet, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TherapeuticsMD, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Qualys, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inogen, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$4,190
3,799
3,258
2,627
2,303
2,253
2,116
2,085
2,054
1,905
1,835
1,691
1,557
1,555
1,535
1,506
1,471
1,389
1,359
1,350
1,220
1,217
1,215
1,073
1,068
1,040
970
939
% of
Net
Assets
3.8%
1.5
0.7
2.7
2.5
1.5
1.1
1.1
4.3
1.6
1.3
1.4
3.6
2.6
2.6
0.4
1.0
1.7
1.7
2.8
0.8
1.9
3.3
1.3
2.1
1.3
2.5
2.1
Company
ESCO Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Krispy Kreme Doughnuts, Inc. . . . . . . . . . . . . . . . . . .
Glaukos Corporation . . . . . . . . . . . . . . . . . . . . . . . . . .
Rexford Industrial Realty, Inc. . . . . . . . . . . . . . . . . . .
Zoe’s Kitchen, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Coupons.com Incorporated . . . . . . . . . . . . . . . . . . . .
Wingstop Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intersect ENT, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Iconix Brand Group, Inc. . . . . . . . . . . . . . . . . . . . . . .
Foundation Medicine, Inc. . . . . . . . . . . . . . . . . . . . . .
Novadaq Technologies Inc. . . . . . . . . . . . . . . . . . . . .
The Habit Restaurants, Inc. . . . . . . . . . . . . . . . . . . . .
Mercury Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Esperion Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . .
The Spectranetics Corporation . . . . . . . . . . . . . . . . .
NN, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boot Barn Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . .
Cerus Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Varonis Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Kornit Digital Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Neos Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . . . . .
The KEYW Holding Corporation . . . . . . . . . . . . . . . .
Amber Road, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Barfresh Food Group, Inc. . . . . . . . . . . . . . . . . . . . . .
Equity
Market Cap
(in millions)
$937
920
899
895
775
766
765
749
685
655
653
634
586
557
548
531
501
497
482
474
439
388
372
333
237
111
42
% of
Net
Assets
0.6%
1.2
1.5
3.2
2.0
2.5
1.9
1.1
2.3
1.7
1.2
1.9
1.0
1.3
2.9
0.4
1.9
2.0
1.2
1.5
1.1
2.1
0.1
1.2
1.0
2.0
0.5
96.5%
81
Baron Funds
Baron Asset Fund — PORTFOLIO HOLDINGS
September 30, 2015 (Unaudited)
Shares
Cost
Value
Shares
Common Stocks (96.54%)
Common Stocks (continued)
Consumer Discretionary (14.15%)
Financials (continued)
Apparel, Accessories &
Luxury Goods (0.48%)
102,000 Ralph Lauren Corp.
Automotive Retail (1.59%)
675,000 CarMax, Inc.1
Hotels, Resorts & Cruise
Lines (3.36%)
525,400 Choice Hotels International, Inc.
875,000 Hyatt Hotels Corp., Cl A1
325,000 Norwegian Cruise Line
Holdings Ltd.1,2
Real Estate Services (2.47%)
1,950,000 CBRE Group, Inc., Cl A1
$
1,768,282 $
12,316,047
12,052,320
40,041,000
$
Regional Banks (1.12%)
450,000 First Republic Bank
Specialized REITs (1.72%)
158,659 Equinix, Inc.
Total Financials
Cost
Value
25,633,716 $
62,400,000
13,544,042
28,246,500
11,424,289
78,559,116
43,377,371
353,061,707
9,382,831
46,452,000
2,254,244
25,095,011
25,035,310
41,212,500
17,946,803
45,296,058
18,622,500
84,870,310
Internet Retail (1.66%)
34,000 The Priceline Group, Inc.1
5,449,298
42,053,240
Health Care Equipment (4.80%)
1,630,000 IDEXX Laboratories, Inc.1
32,146,764
121,027,500
Leisure Facilities (4.15%)
1,000,000 Vail Resorts, Inc.
19,491,425
104,680,000
Health Care Facilities (1.85%)
375,000 Universal Health Services, Inc., Cl B
23,304,910
46,803,750
3,597,441
10,043,985
15,846,066
29,487,492
113,808,602
7,441,500
25,096,500
40,895,200
73,433,200
357,130,070
34,262,522
33,583,774
67,846,296
39,447,900
40,048,800
79,496,700
3,255,767
44,719,593
47,975,360
8,994,000
32,778,255
41,772,255
14,611,786
13,340,250
29,043,890
22,887,377
15,496,167
25,426,500
92,305,500
71,185,000
20,659,909
88,087,343
268,743,504
30,610,800
219,527,800
555,080,005
10,455,704
9,434,700
35,548,952
46,004,656
44,025,000
53,459,700
7,016,768
34,827,500
Human Resource & Employment
Services (2.10%)
450,000 Towers Watson & Co., Cl A
50,757,096
52,821,000
Industrial Conglomerates (1.68%)
270,000 Roper Technologies Inc.
22,869,631
42,309,000
25,990,370
23,539,575
49,529,945
25,668,000
47,335,500
73,003,500
17,797,011
33,418,943
51,215,954
33,352,500
96,083,000
129,435,500
Specialty Stores (2.91%)
150,000 Dick’s Sporting Goods, Inc.
325,000 Tiffany & Co.
485,000 Tractor Supply Co.
Total Consumer Discretionary
Health Care (22.00%)
Health Care Distributors (1.84%)
350,000 Henry Schein, Inc.1
Health Care Supplies (3.15%)
265,000 The Cooper Companies, Inc.
740,000 West Pharmaceutical Services, Inc.
Health Care Technology (1.66%)
150,000 Cerner Corp.1
1,573,608 Inovalon Holdings, Inc., CI A1
Consumer Staples (0.71%)
Food Distributors (0.53%)
275,000 United Natural Foods, Inc.1
Packaged Foods &
Meats (0.18%)
254,364 Blue Buffalo Pet Products, Inc.1
Total Consumer Staples
5,087,280
19,699,066
4,555,659
17,895,909
275,000
525,000
250,000
440,000
Life Sciences Tools &
Services (8.70%)
Bio-Techne Corp.
Illumina, Inc.1
Mettler-Toledo International, Inc.1
Quintiles Transnational
Holdings, Inc.1
Energy (3.07%)
Oil & Gas Equipment &
Services (0.37%)
93,000 Core Laboratories N.V.2
Oil & Gas Exploration &
Production (0.97%)
249,500 Concho Resources, Inc.1
Oil & Gas Storage &
Transportation (1.73%)
689,746 Shell Midstream Partners, L.P.
846,939 Tallgrass Energy GP LP
164,934 Western Gas Equity Partners LP
Total Energy
Total Health Care
6,334,307
10,983,600
16,500,094
24,619,431
3,628,548
44,748,073
62,065,980
9,281,400
24,525,850
20,299,225
16,828,678
6,503,347
43,631,250
77,438,500
Financials (13.99%)
Asset Management &
Custody Banks (0.90%)
325,000 T. Rowe Price Group, Inc.
7,848,785
22,587,500
Investment Banking &
Brokerage (2.89%)
2,550,000 The Charles Schwab Corp.
2,490,233
72,828,000
Office REITs (1.11%)
75,164 Alexander’s, Inc.4
3,467,447
28,111,336
Property & Casualty
Insurance (3.78%)
1,300,000 Arch Capital Group Ltd.1,2
14,150,604
95,511,000
82
Industrials (16.53%)
Construction Machinery &
Heavy Trucks (2.12%)
90,000 WABCO Holdings, Inc.1
500,000 Westinghouse Air Brake
Technologies Corporation
Environmental & Facilities
Services (1.38%)
250,000 Stericycle, Inc.1
Industrial Machinery (2.89%)
360,000 IDEX Corporation
450,000 The Middleby Corp.1
Research & Consulting
Services (5.13%)
750,000 Nielsen Holdings PLC
(formerly, Nielsen N.V.)2
1,300,000 Verisk Analytics, Inc.1
Baron Funds
Baron Asset Fund — PORTFOLIO HOLDINGS (Continued)
Shares
Cost
Value
Shares
Private Equity Investments (0.24%)
Industrials (continued)
Financials (0.24%)
Trading Companies &
Distributors (1.23%)
850,000 Fastenal Co.
Total Industrials
$
15,216,174 $
242,610,224
31,118,500
416,974,700
Information Technology (22.36%)
550,000
200,000
495,000
1,035,000
525,000
652,000
Application Software (10.35%)
ANSYS, Inc.1
CDK Global, Inc.
FactSet Research Systems, Inc.
Guidewire Software, Inc.1
Mobileye N.V.1,2
SS&C Technologies
Holdings, Inc.
Data Processing & Outsourced
Services (3.14%)
575,000 FleetCor Technologies, Inc.1
155,000
600,000
350,000
450,000
Internet Software &
Services (3.72%)
LinkedIn Corp., Cl A1
Verisign, Inc.1
Zillow Group, Inc., CI A1
Zillow Group, Inc., Cl C1
IT Consulting & Other
Services (5.15%)
1,550,000 Gartner, Inc.1
Total Information Technology
14,771,000
9,896,922
27,063,232
48,419,990
17,145,372
48,477,000
9,556,000
79,105,950
54,420,300
23,877,000
36,761,317
154,057,833
45,666,080
261,102,330
20,969,885
79,131,500
8,240,400
27,498,020
10,419,626
13,576,575
59,734,621
29,470,150
42,336,000
10,055,500
12,150,000
94,011,650
33,739,350
268,501,689
130,091,500
564,336,980
0 $
5,997,789
Short Term Investments (2.85%)
$72,048,598 Repurchase Agreement with
Fixed Income Clearing Corp.,
dated 9/30/2015, 0.00%
due 10/1/2015; Proceeds at
maturity - $72,048,598;
(Fully collateralized by
$68,525,000 U.S. Treasury
Note, 2.75% due 11/15/2023;
Market value - $73,493,063)
72,048,598
TOTAL INVESTMENTS (99.63%)
$1,170,262,477
9,328,910
$2,523,377,249
RETAIL SHARES (Equivalent to $60.88
per share based on 29,637,713
shares outstanding)
$1,804,303,648
INSTITUTIONAL SHARES (Equivalent to
$62.19 per share based on 11,563,216
shares outstanding)
$ 719,073,601
%
1
3
11,449,835
15,632,750
4
20,275,863
73,318,000
12,500,000
1,098,213,879
5,133,331
2,436,001,952
72,048,598
2,514,048,339
CASH AND OTHER ASSETS LESS
LIABILITIES (0.37%)
NET ASSETS
2
Telecommunication Services (2.91%)
Wireless Telecommunication
Services (2.91%)
700,000 SBA Communications Corp., Cl A1
Value
Principal Amount
Materials (0.62%)
Industrial Gases (0.62%)
175,000 Airgas, Inc.
Asset Management & Custody
Banks (0.24%)
7,056,223 Windy City Investments
Holdings, L.L.C.1,3,4
$
Cost
Represents percentage of net assets.
Non-income producing securities.
Foreign corporation.
At September 30, 2015, the market value of restricted and fair valued securities
amounted to $11,131,120 or 0.44% of net assets. These securities are not
deemed liquid.
The Adviser has reclassified/classified certain securities in or out of this subindustry. Such reclassifications/classifications are not supported by S&P or
MSCI.
Utilities (0.20%)
Renewable Electricity (0.20%)
833,333 TerraForm Global, Inc.1,3
TOTAL COMMON STOCKS
83
Baron Funds
Baron Growth Fund — PORTFOLIO HOLDINGS
Shares
Cost
Value
Shares
Cost
Value
39,093,982 $
50,546,400
84,617,613
97,020,000
52,359,551
46,822,917
26,399,845
121,543,161
54,433,219
105,016,500
256,904,210
420,948,978
46,651,360
56,371,912
66,477,437
64,458,848
35,280,000
59,703,750
67,864,046
70,794,653
233,959,557
233,642,449
13,584,759
29,092,320
Hotel & Resort REITs (0.67%)
1,650,000 LaSalle Hotel Properties
38,657,293
46,843,500
Brokerage (0.78%)
1,027,064 Moelis & Co., Cl A
1,202,936 Virtu Financial, Inc., Cl A
30,082,105
24,650,068
26,970,700
27,571,293
54,732,173
54,541,993
Life & Health Insurance (1.75%)
2,700,000 Primerica, Inc.4
65,591,464
121,689,000
135,000 Alexander’s, Inc.5
3,675,000 Douglas Emmett, Inc.
28,435,047
49,788,118
50,490,000
105,546,000
78,223,165
156,036,000
Property & Casualty
Insurance (4.18%)
38,581,866
290,206,500
Specialized Finance (1.84%)
2,150,000 MSCI, Inc.
42,521,078
127,839,000
27,962,881
63,502,500
3,700,000 Under Armour, Inc., Cl A1
Brewers (0.73%)
240,000 The Boston Beer Co., Inc., Cl A1 $
$
700,000 Penske Automotive Group, Inc.
Casinos & Gaming (2.15%)
3,870,620 Penn National Gaming, Inc.1
2,502,267 Pinnacle Entertainment, Inc.1
Department Stores (0.17%)
680,000 Hudson’s Bay Co. (Canada)2
1,600,000 LKQ Corp.1
Education Services (2.77%)
2,257,170 Bright Horizons Family
Solutions, Inc.1
2,350,000 Nord Anglia Education, Inc.1,2
3,007,500
271,739
2,491,544
1,450,000
Lines (4.23%)
Choice Hotels International, Inc.4
Diamond Resorts
International, Inc.1
Interval Leisure Group, Inc.
Marriott Vacations
Worldwide Corp.
25,000,000 AO World plc
(United Kingdom)1,2,4
1,404,145 ClubCorp Holdings, Inc.
2,064,800 Vail Resorts, Inc.4
1,358,700 Whistler Blackcomb
Holdings, Inc. (Canada)2
Leisure Products (0.15%)
551,400 BRP, Inc. (Canada)1,2
Movies & Entertainment (1.35%)
5,465,000 Manchester United plc, Cl A2
Publishing (1.27%)
1,100,000 Morningstar, Inc.
Restaurants (1.25%)
450,000 Panera Bread Co., Cl A1
3,800,000 Dick’s Sporting Goods, Inc.
84
29,125,536 $
358,086,000
12,084,107
33,908,000
33,038,240
39,163,343
64,949,004
84,676,715
72,201,583
149,625,719
11,600,405
11,505,732
9,134,298
45,376,000
2,000,000 United Natural Foods, Inc.1
Food Retail (0.67%)
2,980,453 Smart & Final Stores, Inc.1
Household Products (1.75%)
1,448,667 Church & Dwight Co., Inc.
Packaged Foods &
Meats (1.51%)
1,350,000 TreeHouse Foods, Inc.1
74,787,601
44,365,050
145,000,601
47,775,500
119,152,651
192,776,101
73,061,456
143,307,375
3,804,346
46,619,575
6,355,975
45,744,748
78,402,844
98,803,000
201,888,221
294,211,098
99,659,723
63,686,752
26,479,209
59,870,980
30,132,951
216,143,264
15,542,103
21,889,884
101,892,292
268,166,099
11,130,296
10,461,932
77,397,834
93,834,050
23,159,632
88,286,000
15,602,751
87,034,500
63,931,549
188,518,000
847,960,878
1,885,475,983
Financials (17.65%)
2,100,000
2,175,000
2,302,818
1,430,195
Asset Management &
The Carlyle Group
Cohen & Steers, Inc.
Oaktree Capital Group, LLC
Diversified REITs (0.42%)
712,000 American Assets Trust, Inc.
750,000 Alexandria Real Estate
Equities, Inc.5
3,496,074 Gaming and Leisure
Properties, Inc.
Total Financials
89,395,106
103,833,398
117,357,987
167,335,898
683,209,342
1,227,226,660
Baron Funds
Baron Growth Fund — PORTFOLIO HOLDINGS (Continued)
Shares
Cost
Value
Shares
Cost
Biotechnology (0.68%)
600,000 ACADIA Pharmaceuticals, Inc.1 $
620,000 Atara Biotherapeutics, Inc.1
200,000 Juno Therapeutics, Inc.1
Drug Retail (0.43%)
1,046,016 Diplomat Pharmacy, Inc.1
1,810,489 ConforMIS, Inc.1
150,000 Edwards Lifesciences Corp.1
3,000,000 Community Health
Systems, Inc.1
365,038 Neogen Corp.1
1,077,686 West Pharmaceutical
Services, Inc.
Services (3.32%)
880,943 Bio-Techne Corporation
525,000 Mettler-Toledo International, Inc.1
Total Health Care
15,387,424 $
34,397,107
8,293,584
19,842,000
19,492,800
8,138,000
58,078,115
47,472,800
31,709,808
30,052,040
33,358,196
1,984,334
28,558,026
32,697,431
21,325,500
133,650,000
63,900,556
187,672,931
53,139,705
128,310,000
8,075,677
16,423,060
37,684,652
58,324,366
45,760,329
74,747,426
58,656,911
48,524,714
46,631,249
25,797,239
81,451,990
149,488,500
72,428,488
230,940,490
383,673,912
747,720,401
Building Products (2.77%)
1,700,000 CaesarStone Sdot-Yam Ltd.1,2
1,498,500 Masonite International Corp.1,2
1,500,000 Trex Company, Inc.1
Electrical Components &
Equipment (0.69%)
1,600,000 Generac Holdings, Inc.1
1,700,000 Colfax Corp.1
2,550,000 The Middleby Corp.1
300,000 Valmont Industries, Inc.
Railroads (1.32%)
1,550,000 Genesee & Wyoming, Inc., Cl A1
Services (0.42%)
250,000 IHS, Inc., Cl A1
30,268,064
84,509,238
55,878,426
51,680,000
90,779,130
49,995,000
170,655,728
192,454,130
Trading Companies &
1,950,000 Air Lease Corp.
485,000 MSC Industrial
Direct Co., Inc., Cl A
Trucking (0.41%)
450,000 Landstar System, Inc.
Total Industrials
48,144,000
37,976,607
74,456,719
24,213,009
50,847,000
268,234,500
28,467,000
136,646,335
347,548,500
1,850,000
464,902
1,600,000
1,173,796
2,075,000
3,087,713
ANSYS, Inc.1
Bottomline Technologies (de), Inc.1
FactSet Research Systems, Inc.
Pegasystems, Inc.
SS&C Technologies Holdings, Inc.
Services (2.57%)
3,000,000 MAXIMUS, Inc.
Electronic Equipment &
Instruments (0.66%)
625,000 FEI Company
Internet Software &
Services (3.53%)
2,324,374 Benefitfocus, Inc.1,4
999,653 CoStar Group, Inc.1
Services (4.69%)
3,400,000 Booz Allen Hamilton
Holding Corp.
91,574,000
10,136,469
29,000,000
60,294,000
17,282,737
29,599,550
63,571,201
89,893,550
10,251,096
28,561,500
422,026,743
827,175,680
44,326,673
12,217,617
80,624,740
37,834,851
31,022,554
52,369,848
163,059,000
11,627,199
255,696,000
61,718,194
51,065,750
216,263,418
258,396,283
759,429,561
57,528,621
178,680,000
23,308,886
45,650,000
86,529,482
44,116,616
72,636,688
172,999,948
130,646,098
245,636,636
39,962,977
45,240,023
89,114,000
237,102,250
85,203,000
326,216,250
555,082,888
1,555,612,447
45,709,971
46,084,638
Alternative Carriers (0.66%)
7,493,437 Iridium Communications, Inc.1,4
Utilities (3.06%)
Electric Utilities (3.06%)
6,375,000 ITC Holdings Corp.
TOTAL COMMON STOCKS
23,006,433
46,288,464 $
7,759,481
$
Value
63,665,650
212,542,500
3,258,233,594
6,922,787,287
85
Baron Funds
Baron Growth Fund — PORTFOLIO HOLDINGS (Continued)
Shares
Cost
Value
Preferred Stocks (0.14%)
41,074 Iridium Communications, Inc.,
$
Series B, 6.75%4
10,268,500 $
10,021,645
Financials (0.03%)
Asset Management &
LIABILITIES (0.24%)
0
2,018,898
$3,268,502,094
6,934,827,830
16,772,721
NET ASSETS
$6,951,600,551
RETAIL SHARES (Equivalent to $68.25 per
share based on 51,446,148 shares
outstanding)
$3,511,166,178
shares outstanding)
$3,440,434,373
%
1
2
3
4
5
86
amounted to $2,018,898 or 0.03% of net assets. This security is not deemed
liquid.
An “Affiliated” investment may include any company in which the Fund owns
5% or more of its outstanding shares.
MSCI.
Baron Funds
Baron Small Cap Fund — PORTFOLIO HOLDINGS
Shares
Cost
Value
Shares
Energy (4.87%)
Advertising (0.13%)
433,000 National CineMedia, Inc.
$
1,250,000 Iconix Brand Group, Inc.1
1,500,000 Tumi Holdings, Inc.1
450,000 Monro Muffler Brake, Inc.
Broadcasting (1.15%)
300,000 Liberty Media Corporation, Cl A1
1,200,000 Liberty Media Corporation, Cl C1
Cable & Satellite (0.51%)
150,000 Liberty Broadband Corp., Cl A1
300,000 Liberty Broadband Corp., Cl C1
3,000,000 Penn National Gaming, Inc.1
2,350,000 Bright Horizons Family
Solutions, Inc.1
1,750,000 Houghton Mifflin Harcourt
Company1
3,000,000 Nord Anglia Education, Inc.1,2
Homefurnishing Retail (1.29%)
1,400,000 Mattress Firm Holding Corp.1
1,000,000 The Madison Square Garden
Company, Cl A1
2,500,000 SFX Entertainment, Inc.1
Restaurants (2.75%)
1,050,000 BJ’s Restaurants, Inc.1
950,000 The Cheesecake Factory, Inc.
2,000,000 Del Frisco’s Restaurant
Group, Inc.1,3
1,632,120 The Container Store Group, Inc.1
1,000,000 Party City Holdco, Inc.1
3,371,852 $
5,810,860
16,900,000
26,430,000
45,803,188
43,330,000
23,776,386
30,397,500
860,747
3,543,461
10,716,000
41,352,000
4,404,208
52,068,000
Total Energy
621,054
1,184,602
7,716,000
15,351,000
Financials (9.55%)
1,805,656
23,067,000
17,926,778
50,340,000
80,177,149
150,964,000
41,783,170
54,983,018
35,542,500
60,990,000
176,943,337
247,496,500
35,360,733
58,464,000
750,000
500,000
800,000
400,000
5,000,000
750,000
1,000,000
500,000
$
Oil & Gas Storage &
Columbia Pipeline Partners LP
Dominion Midstream Partners, L.P.
PBF Logistics LP
Scorpio Tankers Inc.2
Western Refining Logistics, LP
17,281,060
28,522,128
195,497,000
174,384,438
220,447,000
28,065,351
48,440,910
26,422,500
63,360,500
76,506,261
89,783,000
21,043,544
10,543,919
32,575,000
14,195,000
31,587,463
46,770,000
Brokerage (0.73%)
1,250,000 Moelis & Co., Cl A
34,517,400
32,825,000
250,000 SL Green Realty Corp.
5,347,806
27,040,000
5,154,322
35,200,000
16,843,880
54,427,945
82,020,000
81,675,000
71,271,825
163,695,000
Asset Management &
750,000 Artisan Partners Asset
Management, Inc., Cl A
2,150,000 Financial Engines, Inc.
1,250,000 Chesapeake Lodging Trust
500,000 LaSalle Hotel Properties
35,000,417
73,414,750
38,592,640
18,719,871
45,181,500
51,262,000
2,750,000 Gaming and Leisure Properties, Inc.
27,780,000
124,223,500
51,419,945
17,220,293
22,980,250
15,970,000
68,640,238
38,950,250
511,624,921
747,562,360
31,942,898
65,739,597
28,320,000
72,765,000
97,682,495
101,085,000
24,950,000
165,144,930
98,592,128
9,239,508 $
9,495,000
13,425,000
13,784,000
19,708,000
45,850,000
38,640,000
44,160,000
10,435,000
72,140,000
1,274,750
41,279,617
Value
18,334,868
10,628,771
20,465,744
10,709,223
42,287,905
17,965,719
33,705,253
11,047,447
25,000,417
10,000,000
2,000,000 The Chefs’ Warehouse, Inc.1,3
1,500,000 United Natural Foods, Inc.1
Services (0.55%)
250,000 Core Laboratories N.V.2
Cost
Thrifts & Mortgage
Finance (0.81%)
1,480,950 Essent Group, Ltd.1,2
30,375,123
36,801,607
254,760,200
432,114,607
750,000 Cepheid1
24,504,439
33,900,000
Drug Retail (0.54%)
850,000 Diplomat Pharmacy, Inc.1
25,099,444
24,420,500
29,626,774
17,100,776
21,699,129
39,690,000
107,325,000
99,631,917
68,426,679
246,646,917
Total Financials
700,000 Cantel Medical Corp.
1,250,000 DexCom, Inc.1
87
Baron Funds
Baron Small Cap Fund — PORTFOLIO HOLDINGS (Continued)
Shares
Cost
Value
Shares
Cost
Health Care (continued)
2,250,000 Brookdale Senior Living, Inc.1
$
35,691,142 $
51,660,000
Health Care Services (0.39%)
600,000 ExamWorks Group, Inc.1
22,136,386
17,544,000
2,000,000 The Spectranetics Corporation1
59,422,888
23,580,000
2,000,000 Press Ganey Holdings, Inc.1
54,404,371
59,180,000
1,050,000
1,350,000
225,000
965,200
Services (5.09%)
ICON plc1,2
INC Research Holdings, Inc., Cl A1
Mettler-Toledo International, Inc.1
PRA Health Sciences, Inc.1
Managed Health Care (0.90%)
1,384,271 HealthEquity, Inc.1
Pharmaceuticals (1.07%)
2,000,000 Catalent, Inc.1
Total Health Care
31,621,418
33,621,467
12,603,211
17,856,523
74,518,500
54,000,000
64,066,500
37,478,716
95,702,619
230,063,716
25,010,140
40,905,208
49,879,444
48,600,000
460,277,552
776,500,341
66,689,631
9,777,971
646,870
42,795,000
6,150,000
180,548,500
77,114,472
229,493,500
8,346,124
22,750,459
7,161,000
22,190,000
31,096,583
29,351,000
Aerospace & Defense (5.07%)
2,250,000 DigitalGlobe, Inc.1
1,000,000 The KEYW Holding Corporation1
850,000 TransDigm Group, Inc.1
150,000 Armstrong World Industries, Inc.1
1,750,000 Builders FirstSource, Inc.1
Diversified Support
Services (0.56%)
750,000 Healthcare Services Group, Inc.
22,923,876
25,275,000
Electrical Components &
Equipment (3.20%)
825,000 Acuity Brands, Inc.
44,094,137
144,853,500
Environmental & Facilities
Services (3.44%)
1,050,000 Clean Harbors, Inc.1
2,250,000 Waste Connections, Inc.
Human Resource &
Employment Services (1.83%)
2,250,000 On Assignment, Inc.1
684,082 Nordson Corp.
473,157 RBC Bearings, Inc.1
400,000 Rexnord Corp.1
Office Services &
Supplies (0.37%)
750,000 Interface, Inc.
Railroads (0.98%)
750,000 Genesee & Wyoming, Inc., Cl A1
Total Industrials
88
26,906,827
39,693,030
46,168,500
109,305,000
66,599,857
155,473,500
3,500,000
13,900
1,500,000
700,000
ACI Worldwide, Inc.1
$
Aspen Technology, Inc.1
The Ultimate Software Group, Inc.1
83,025,000
20,666,135
31,685,416
6,473,566
43,056,121
28,261,668
6,792,000
58,825,117
78,109,789
278,623,949
18,319,250
35,700,494
103,215,000
60,788,000
54,019,744
164,003,000
34,758,913
33,259,652
60,147,500
62,084,000
68,018,565
122,231,500
Internet Software &
Services (0.51%)
500,000 comScore, Inc.1
17,696,566
23,075,000
Services (4.26%)
1,250,000 Acxiom Corp.1
28,143,704
36,351,619
24,700,000
167,860,000
64,495,323
192,560,000
Data Processing &
Outsourced Services (3.62%)
750,000 FleetCor Technologies, Inc.1
700,000 WEX Inc.1
Instruments (2.70%)
1,750,000 Cognex Corp.
850,000 FEI Company
Technology Hardware, Storage
& Peripherals (0.96%)
1,000,000 Electronics For Imaging, Inc.1
42,154,207
43,280,000
348,185,273
823,773,449
Commodity Chemicals (0.19%)
500,000 Westlake Chemical Partners LP
12,954,988
8,750,000
Construction Materials (0.89%)
2,150,000 Summit Materials, Inc., Cl A1
45,578,267
40,355,500
Diversified Metals &
Mining (1.04%)
3,887,123 Globe Specialty Metals, Inc.3
44,144,115
47,150,802
Metal & Glass Containers (1.83%)
2,750,000 Berry Plastics Group, Inc.1
43,852,147
82,692,500
Specialty Chemicals (1.43%)
2,350,000 Flotek Industries, Inc.1
2,000,000 Platform Specialty Products Corp.1
39,245,000
25,300,000
Materials (5.38%)
16,830,000
18,796,817
44,310,000
388,918,542
806,721,289
44,721,386
32,710,834
77,432,220
64,545,000
223,961,737
243,493,802
30,976,387
5,900,153
40,396,582
151,873,000
36,876,540
192,269,582
Services (4.25%)
148,323,290 Sarana Menara Nusantara
Tbk PT (Indonesia)1,2
1,450,000 SBA Communications Corp., Cl A1
Total Telecommunication Services
10,054,868
73,920,000
526,949
78,870,000
125,307,000
101,800,868
Total Materials
59,412,815
42,795,006 $
514,192
40,880,643
17,611,027
Value
Baron Funds
Baron Small Cap Fund — PORTFOLIO HOLDINGS (Continued)
Shares
Cost
Value
9,427,959 $
22,504,500
Utilities (0.63%)
675,000 ITC Holdings Corp.
$
350,000 Abengoa Yield plc2
Total Utilities
TOTAL COMMON STOCKS
10,150,000
5,792,500
19,577,959
28,297,000
2,516,249,657
4,372,264,430
Principal Amount
Repurchase Agreement (3.07%)
dated 9/30/2015, 0.00%
maturity - $138,898,291;
$125,585,000 U.S. Treasury
Note, 2.75% due 11/15/2023;
Market value - $134,689,913)
and $6,990,000 U.S. Treasury
Note, 2.125% due 5/15/2025;
LIABILITIES (0.30%)
138,898,291
138,898,291
$2,655,147,948
4,511,162,721
13,425,267
NET ASSETS
$4,524,587,988
outstanding)
$2,601,372,306
shares outstanding)
$1,923,215,682
%
1
2
3
An “Affiliated” investment may include any company in which the fund owns
89
Baron Funds
Baron Opportunity Fund — PORTFOLIO HOLDINGS
Shares
Cost
Value
Shares
Cost
Industrials (5.08%)
Apparel, Accessories & Luxury
Goods (1.29%)
43,000 Under Armour, Inc., Cl A1
87,069 CaesarStone Sdot-Yam Ltd.1,2
$
1,224,227
Automobile Manufacturers (3.45%)
45,000 Tesla Motors, Inc.1
9,450,240
56,500 Restoration Hardware Holdings, Inc.1
22,400
145
80,500
6,876
Amazon.com, Inc.1
AO World plc (United Kingdom)1,2
Netflix, Inc.1
The Priceline Group, Inc.1
513,740 Manchester United plc, Cl A2
3,326,226
$
4,161,540
11,178,000
8,000,488
Services (2.99%)
130,800 Verisk Analytics, Inc.1
8,207,531
626
3,460,977
2,427,404
11,466,336
370
8,312,430
8,504,649
14,096,538
28,283,785
8,574,757
8,820,916
40,017,636
65,716,744
4,939,575
Oil & Gas Storage &
118,200 Golar LNG Ltd.2
3,866,498
3,295,416
8,560,916
8,234,991
Financials (7.35%)
Total Financials
8,638,701
8,096,760
3,827,142
3,529,440
1,821,217
12,175,595
14,287,060
23,801,795
Health Care (8.78%)
82,900 Cepheid1
41,500 athenahealth, Inc.1
162,000 Inovalon Holdings, Inc., CI A1
Services (3.82%)
70,415 Illumina, Inc.1
114,954 HealthEquity, Inc.1
Total Health Care
9,667,428
16,437,774
4,230,062
3,382,740
10,288,085
3,946,163
5,697,644
10,863,255
3,241,305
18,455,580
4,206,900
6,491,705
27,544,694
43,258,745
Services (2.63%)
94,500 MasterCard, Inc., Cl A
8,180,728
8,516,340
Internet Software &
Services (17.93%)
Benefitfocus, Inc.1
CoStar Group, Inc.1
Facebook, Inc., Cl A1
Google, Inc., Cl A1
Google, Inc., Cl C1
JUST EAT plc (United Kingdom)1,2
Zillow Group, Inc., Cl A1
Zillow Group, Inc., Cl C1
10,267,458
5,186,361
9,132,831
7,141,371
7,462,772
3,564,383
3,957,496
454,163
969,708
7,756,687
12,770,617
11,731,950
7,532,766
7,301,040
4,634,697
4,220,886
746,980
1,404,000
48,136,543
58,099,623
6,011,813
2,411,317
7,429,760
13,482,851
8,423,130
20,912,611
Semiconductors (1.52%)
130,200 Mellanox Technologies Ltd.1,2
5,349,079
4,920,258
Systems Software (5.60%)
FireEye, Inc.1
Qualys, Inc.1
Red Hat, Inc.1
ServiceNow, Inc.1
2,754,665
2,065,889
6,664,475
4,302,695
2,641,060
1,849,900
9,516,912
4,132,275
123,250
85,500
351,000
92,500
93,500
2,737,070
3,747,080
5,653,477
4,288,428
5,534,025
3,374,460
9,941,905
8,908,485
5,255,417
12,380,365
2,035,994
3,396,891
19,970,386
28,432,821
248,214
73,793
130,500
11,800
12,000
744,925
22,200
26,000
52,000
ANSYS, Inc.1
Aspen Technology, Inc.1
Mobileye N.V.1,2
salesforce.com, Inc.1
Services (6.46%)
376,000 Acxiom Corp.1
160,644 Gartner, Inc.1
83,000
65,000
132,400
59,500
15,787,724
18,140,147
113,421,898
153,847,724
476,760
8,305,882
Services (2.56%)
Utilities (0.60%)
TOTAL COMMON STOCKS
90
4,123,448
4,694,418
38,000 MarketAxess Holdings, Inc.
2,646,898
5,272,015
Production (1.52%)
Brokerage (2.50%)
283,500 The Charles Schwab Corp.
1,894,945
$
6,453,679
Energy (2.54%)
Total Energy
2,013,981
10,362,605
Total Industrials
3,345,648
$
Value
4,500,000
1,945,260
211,597,261
306,722,991
Baron Funds
Baron Opportunity Fund — PORTFOLIO HOLDINGS (Continued)
Principal Amount
Cost
Value
$ 16,521,893
$228,119,154
$ 16,521,893
323,244,884
dated 9/30/2015, 0.00%
maturity - $16,521,893;
Note, 2.75% due 11/15/2023;
LIABILITIES (0.21%)
691,755
NET ASSETS
$323,936,639
outstanding)
$232,186,797
shares outstanding)
$ 91,749,842
%
1
2
3
liquid.
91
Baron Funds
Baron Partners Fund — PORTFOLIO HOLDINGS
Shares
Cost
Value
Shares
Apparel, Accessories & Luxury
Goods (0.51%)
100,000 Under Armour, Inc., Cl A1
$
7,776,014 $
Trading Companies &
2,575,000 Air Lease Corp.
1,850,000 Fastenal Co.
9,678,000
Automobile Manufacturers
(10.76%)
177,823,618
204,930,000
Total Industrials
2,000,000 CarMax, Inc.1
69,489,756
118,640,000
Lines (7.35%)
2,600,000 Hyatt Hotels Corp., Cl A1
304,208 Norwegian Cruise Line
Holdings Ltd.1,2
925,800 Vail Resorts, Inc.
5,374,321 Manchester United plc, Cl A2
Restaurants (0.41%)
40,000 Panera Bread Co., Cl A1
2,075,000 Dick’s Sporting Goods, Inc.
72,054,423
122,460,000
13,954,660
17,431,118
86,009,083
139,891,118
27,801,851
96,912,744
91,547,645
92,277,092
6,855,645
775,000 FactSet Research Systems, Inc.
2,000,000 Mobileye N.V.1,2
Internet Software &
Services (13.64%)
1,100,000 CoStar Group, Inc.1
1,006,350 Zillow Group, Inc., Cl A1
1,500,000 Zillow Group, Inc., Cl C1
Services (2.86%)
649,000 Gartner, Inc.1
7,736,400
Asset Management &
3,345,500 The Carlyle Group
Brokerage (5.74%)
3,825,000 The Charles Schwab Corp.
284,921 Douglas Emmett, Inc.
180,001,500
2,200,000 Gaming and Leisure Properties, Inc.
71,909,656
65,340,000
252,472,045
418,970,831
190,366,000
28,912,435
40,500,000
181,836,735
259,778,435
8,213,331
1,564,335,633
2,368,187,977
Banks (0.34%)
$1,103,502,694
$ 800,965,180
76,677,251
55,720,250
63,840,699
87,910,000
shares outstanding)
186,330,736
221,592,750
%
1
2
3
21,507,177
29,104,706
4
40,826,578
110,865,000
6,442,261
2,374,630,238
(470,162,364)
$1,904,467,874
per share based on 31,834,171 shares
outstanding)
1,832,926
$1,566,168,559
LIABILITIES LESS CASH AND
OTHER ASSETS (-24.69%)
NET ASSETS
92
112,737,432
27,290,319
41,808,984
138,239,331
77,962,500
Services (5.82%)
1,500,000 Verisk Analytics, Inc.1
214,812,750
59,088,705
45,812,786
140,252,452
20,000,000
Total Health Care
123,852,750
90,960,000
Financials (0.34%)
33,071,317
Services (4.62%)
50,806,618
89,445,834
130,026,000
TOTAL COMMON STOCKS
Property & Casualty
Insurance (9.45%)
Total Financials
287,317,206
39,088,705
Total Utilities
8,182,931
178,158,868
1,333,333 TerraForm Global, Inc.1,3
Utilities (7.26%)
8,247,623
147,347,500
3,900,000 ITC Holdings Corp.
102,940,750
109,242,000
115,825,113
54,470,570
773,006,104
49,868,095
79,619,000
67,728,500
529,061,755
57,628,342
56,204,400
82,483,062 $
33,342,051
41,264,138
524,931,954
89,375,354
Value
363,353,325
Financials (22.00%)
$
Cost
amounted to $14,655,592 or 0.77% of net assets. These securities are not
deemed liquid.
MSCI.
Baron Funds
Baron Fifth Avenue Growth Fund — PORTFOLIO HOLDINGS
Shares
Cost
Value
Shares
Cost
Value
1,392,841 $
2,477,907
1,630,676
1,832,989
3,023,517
4,310,896
80,733 Mobileye N.V.1,2
3,692,742
3,671,737
Services (7.98%)
65,205 MasterCard, Inc., Cl A
83,299 Visa, Inc., Cl A
3,418,561
2,537,808
5,876,275
5,802,608
5,956,369
11,678,883
6,364,752
3,559,633
1,256,798
5,368,763
1,793,022
3,872,406
4,297,262
9,453,434
3,203,979
7,239,590
2,121,470
2,930,614
22,215,374
29,246,349
1,960,743
4,431,113
2,567,872
1,318,701
6,391,856
3,886,573
4,672,225
2,166,568
2,990,691
4,328,633
3,068,701
2,556,578
9,829,484
9,953,912
Industrials (2.95%)
Cable & Satellite (2.10%)
24,450 Naspers Ltd., Cl N (South Africa)2
$
29,201 Amazon.com, Inc.1
28,540 Ctrip.com International Ltd., ADR1,2
4,337 The Priceline Group, Inc.1
Restaurants (5.95%)
103,564 Starbucks Corp.
35,123 YUM! Brands, Inc.
3,602,327 $
3,064,247
7,658,239
1,434,707
2,941,040
14,947,700
1,803,157
5,364,262
12,033,986
22,115,119
3,152,385
2,187,167
5,886,578
2,808,084
5,339,552
8,694,662
20,975,865
33,874,028
Hypermarkets & Super Centers (1.15%)
11,648 Costco Wholesale Corp.
835,362
Oil & Gas Storage &
59,206 Shell Midstream Partners, L.P.
86,110 Tallgrass Energy GP LP
Total Energy
782,441
778,045
1,640,792
2,597,763
1,742,432
1,711,006
4,238,555
3,453,438
5,020,996
4,231,483
Financials (9.97%)
Diversified Real Estate Activities (3.03%)
141,066 Brookfield Asset Management, Inc., Cl A2
3,559,949
4,435,115
Brokerage (1.58%)
80,999 The Charles Schwab Corp.
2,321,024
2,313,331
33,985 CME Group, Inc.
1,936,961
3,151,769
Total Financials
Life Sciences Tools & Services (4.05%)
Total Health Care
Total Industrials
2,439,649
4,677,874
10,257,583
14,578,089
72,872
105,155
5,019
11,899
11,158
108,783
Internet Software & Services (20.00%)
Alibaba Group Holding Ltd., ADR1,2
Google, Inc., Cl A1
Google, Inc., Cl C1
Twitter, Inc.1
Semiconductor Equipment (2.66%)
29,187 ASML Holding N.V.2
183,663 SunEdison, Inc.1
136,035 FireEye, Inc.1
42,692 Red Hat, Inc.1
32,448 VMware, Inc., Cl A1
Technology Hardware, Storage &
Peripherals (4.19%)
55,573 Apple, Inc.
Fertilizers & Agricultural
Chemicals (1.43%)
24,552 Monsanto Co.
3,276,370
2,822,095
2,612,226
Utilities (0.92%)
8,116,507
8,710,691
TOTAL COMMON STOCKS
5,929,881
9,352,765
14,640,572
2,186,665
6,129,702
50,272,490
64,567,156
1,879,080
2,095,268
3,100,000
1,340,065
Materials (1.43%)
3,427,695
3,002,108
1,686,704
1,236,258
$
20,950 Alexion Pharmaceuticals, Inc.1
9,671 Biogen, Inc.1
5,616 Regeneron Pharmaceuticals, Inc.1
Trading Companies &
50,068 Fastenal Co.
1,683,951
Energy (2.89%)
Production (0.53%)
Services (1.70%)
104,717,658 141,321,508
93
Baron Funds
Baron Fifth Avenue Growth Fund — PORTFOLIO HOLDINGS (Continued)
Principal Amount
Cost
Value
dated 9/30/2015, 0.00%
maturity - $4,831,534;
Note, 2.75% due 11/15/2023
$
$109,549,192 146,153,042
LIABILITIES (0.06%)
4,831,534 $
4,831,534
81,365
NET ASSETS
$146,234,407
outstanding)
$ 71,467,948
INSTITUTIONAL SHARES (Equivalent to $17.10
outstanding)
$ 74,766,459
%
1
2
3
ADR
94
liquid.
American Depositary Receipt.
Baron Funds
Baron Focused Growth Fund — PORTFOLIO HOLDINGS
Shares
Cost
Value
Shares
75,000 FactSet Research Systems, Inc.
101,870 Guidewire Software, Inc.1
103,036 Mobileye N.V.1,2
Automobile Manufacturers (11.68%)
$ 19,145,973 $ 20,368,800
3,141,825
7,118,400
Lines (11.12%)
150,000 Choice Hotels International, Inc.
260,000 Hyatt Hotels Corp., Cl A1
5,080,139
8,951,569
7,147,500
12,246,000
14,031,708
19,393,500
136,230 Vail Resorts, Inc.
8,272,836
14,260,557
550,000 Manchester United plc, Cl A2
8,719,506
9,443,500
110,000 Dick’s Sporting Goods, Inc.
2,103,256
5,457,100
55,415,104
76,041,857
Brokerage (0.78%)
59,500 Virtu Financial, Inc., Cl A
Property & Casualty
Insurance (4.21%)
100,000 Arch Capital Group Ltd.1,2
Total Financials
Railroads (2.04%)
60,000 Genesee & Wyoming, Inc., Cl A1
Services (3.39%)
Trading Companies &
100,000 Fastenal Co.
Total Industrials
22,028,152
5,980,202
13,824,622
7,031,250
12,979,500
19,804,824
20,010,750
35,696,107
42,038,902
1,865,304
2,679,900
4,273,076
6,668,000
126,514,282
167,362,999
5,814,082
5,440,977
Industrial Gases (1.54%)
30,000 Airgas, Inc.
Utilities (3.82%)
200,000 ITC Holdings Corp.
4,195,000
6,556,081
6,804,436
4,368,000
5,894,000
13,360,517
10,262,000
22,300 Iridium Communications, Inc.,
Series B, 6.75%
Principal Amount
1,130,500
1,363,740
dated 9/30/2015, 0.00% due
10/1/2015; Proceeds at
maturity - $1,537,679;
Note, 2.75% due 11/15/2023;
$
$133,866,043
1,800,056
7,347,000
16,291,073
18,972,740
5,406,710
3,648,000
1,860,705
3,544,800
LIABILITIES (0.01%)
Industrials (9.62%)
5,828,282 $ 11,985,750
4,816,692
5,356,325
5,246,309
4,686,077
15,891,283
Internet Software &
Services (11.48%)
225,000 Benefitfocus, Inc.1
75,000 CoStar Group, Inc.1
TOTAL COMMON STOCKS
1,274,171
Financials (10.88%)
Banks (5.89%)
260,000 The Carlyle Group
200,000 Financial Engines, Inc.
$
Value
Materials (1.54%)
Household Products (2.41%)
50,000 Church & Dwight Co., Inc.
Cost
1,537,679 $
1,537,679
174,341,655
13,472
NET ASSETS
$174,355,127
5,912,800
RETAIL SHARES (Equivalent to $12.56 per share
based on 3,383,719 shares outstanding)
$ 42,491,104
2,169,715
3,661,000
$12.70 per share based on 10,382,903 shares
outstanding)
$131,864,023
11,699,447
16,766,600
2,262,317
%
1
2
95
Baron Funds
Baron International Growth Fund — PORTFOLIO HOLDINGS
Shares
Cost
Value
Total Australia
Cost
Israel (6.11%)
$ 1,019,935 $ 2,138,029
1,105,118
899,877
2,125,053
3,037,906
36,000 Check Point Software Technologies Ltd.1 $ 2,051,140 $ 2,855,880
50,000 Mellanox Technologies Ltd.1
2,032,747
1,889,500
24,000 Mobileye N.V.1
1,134,213
1,091,520
Total Israel
Brazil (1.15%)
40,000 Smiles SA
105,000 TOTVS SA
Total Brazil
486,258
1,127,524
303,191
798,259
1,613,782
1,101,450
Total Canada
1,644,510
1,246,942
1,633,185
3,772,312
400,487
1,229,120
4,524,637
5,401,919
1,138,171
1,178,909
742,452
825,580
915,648
693,307
532,747
664,414
683,365
1,216,341
368,378
1,136,836
478,300
495,000
1,221,700
1,266,200
6,524,777
7,032,571
803,358
959,313
2,306,319
2,585,897
1,762,671
4,892,216
1,738,953
1,769,032
1,834,428
1,641,254
2,236,247
771,671
686,853
2,457,517
1,844,226
1,928,102
7,202,756
9,705,527
China (7.36%)
14,000
1,900,000
475,771
3,001,700
10,000
75,000
38,000
75,000
Alibaba Group Holding Ltd., ADR1
China Telecom Corp. Ltd., Cl H
Haitong Securities Co., Ltd., Cl H
Kingdee International
Software Group Co. Ltd.
Qihoo 360 Technology Co. Ltd., ADR1
SouFun Holdings Ltd., ADR
TAL Education Group, ADR1
Total China
Total France
Germany (10.16%)
34,000 Brenntag AG
21,000 Fresenius Medical Care Ag & Co.
50,066 ProSiebenSat.1 Media SE
(formerly, ProSiebenSat.1 Media AG)
117,100 RIB Software AG
32,000 Symrise AG
Total Germany
Hong Kong (0.53%)
200,700 Luk Fook Holdings International Ltd.
618,391
504,105
684,826
249,773
640,340
238,716
669,317
521,653
797,002
969,957
204,523
1,021,917
217,698
685,928
433,661
931,001
3,801,627
4,464,685
1,064,961
260,297
899,297
938,141
340,444
805,566
2,224,555
2,084,151
986,106
2,114,100
India (4.68%)
127,900
110,700
628,598
388,835
30,600
70,000
155,000
Axis Bank Ltd.
DEN Networks Ltd.1
Dish TV India Ltd.1
Hathway Cable and Datacom Ltd.1
Larsen & Toubro Ltd.
SKS Microfinance Ltd.1
Zee Entertainment Enterprises Ltd.
Total India
Indonesia (2.18%)
849,373 Matahari Department Store Tbk PT
1,250,000 Sarana Menara Nusantara Tbk PT1
1,801,400 Tower Bersama Infrastructure Tbk PT1
Total Indonesia
42,000 Azimut Holding SpA
200,000 Intesa Sanpaolo SpA
96
991,421
710,162
901,295
706,540
1,701,583
1,607,835
984,974
1,880,060
715,566
1,142,215
799,528
846,776
1,807,893
1,366,050
1,384,246
1,455,863
1,184,558
1,370,569
1,603,608
708,409
1,725,630
1,251,117
739,574
1,932,028
1,017,275
1,650,736
12,214,664
13,352,011
811,827
697,000
1,052,624
1,397,699
2,682,219
555,989
3,097,201
1,064,000
Japan (13.98%)
40,000
225,000
7,700
50,000
70,000
70,000
135,000
45,800
22,000
Bridgestone Corp.
Daiwa Securities Group, Inc.
FANUC Corp.
Mitsui Fudosan Co. Ltd.
MonotaRO Co. Ltd.
Panasonic Corp.
Rakuten, Inc.
Sanrio Co. Ltd.
SoftBank Group Corp.
(formerly, SoftBank Corp.)
450,400 Sumitomo Mitsui Trust Holdings, Inc.
Total Japan
Norway (0.73%)
25,000 Golar LNG Ltd.
227,622 Steinhoff International Holdings Ltd.
Spain (5.66%)
28,000 Aena SA, 144A1
35,000 Grifols SA, ADR
37,105 Industria de Diseño Textil SA
(formerly, Inditex SA)
Total Spain
1,067,201
1,244,185
4,305,409
5,405,386
1,399,262
1,819,522
1,384,255
1,399,942
1,362,452
1,227,704
1,633,319
1,395,612
623,019
1,062,155
851,872
926,837
1,484,033
912,600
1,591,434
1,785,152
1,083,220
1,036,432
1,816,489
1,894,983
1,508,968
1,040,250
1,256,386
1,129,218
1,307,546
1,569,007
1,417,500
1,465,815
15,855,234
18,310,966
417,740
1,149,524
953,358
1,900,000
789,590
2,204,100
759,750
808,364
Switzerland (1.91%)
40,067 Julius Baer Group Ltd.
United Kingdom (19.17%)
203,000
425,214
50,000
135,000
70,200
95,000
64,800
115,300
30,600
210,159
150,000
90,000
275,600
Abcam plc
AO World plc1
Burberry Group plc
Domino’s Pizza Group plc
easyJet plc
EMIS Group plc
Experian plc
Inchcape plc
Intertek Group plc
JUST EAT plc1
Lancashire Holdings Ltd.
Nomad Food Limited1
William Hill plc
Total United Kingdom
United States (4.78%)
23,000
30,000
15,000
131,228
Agilent Technologies, Inc.
Arch Capital Group Ltd.1
lululemon athletica, Inc.1
TerraForm Global, Inc.1,2
Total United States
Ireland (2.22%)
27,000 Ryanair Holdings plc, ADR
5,836,900
South Africa (1.46%)
France (5.12%)
7,500 Eurofins Scientific SE
21,400 Ingenico Group SA
5,218,100
Italy (1.68%)
Total Italy
Canada (5.66%)
9,000 Constellation Software, Inc.
35,000 Crescent Point Energy Corp.
46,000 Suncor Energy, Inc.
Value
Australia (3.18%)
75,169 Domino’s Pizza Enterprises Ltd.
100,000 Newcrest Mining Ltd.1
Shares
TOTAL COMMON STOCKS
4,420,622
4,561,804
78,363,680
93,327,753
Baron Funds
Baron International Growth Fund — PORTFOLIO HOLDINGS (Continued)
Principal Amount
Cost
Value
$2,093,608
Repurchase Agreement with
Fixed Income Clearing Corp., dated
9/30/2015, 0.00% due 10/1/2015;
Proceeds at maturity - $2,093,608;
(Fully collateralized by $1,995,000
U.S. Treasury Note, 2.75%
due 11/15/2023 Market
value - $2,139,638)
$ 2,093,608
LIABILITIES (0.09%)
$80,457,288
$ 2,093,608
95,421,361
84,383
NET ASSETS
$95,505,744
$44,766,890
$17.49 per share based on 2,900,536 shares
outstanding)
%
1
2
ADR
144A
Summary of Investments by
Sector as of September 30, 2015
Consumer Discretionary
Information Technology
Industrials
Financials
Health Care
Telecommunication Services
Materials
Energy
Consumer Staples
Utilities
Cash and Cash Equivalents*
Percentage of
Net Assets
26.3%
21.3%
15.3%
14.4%
9.5%
3.2%
3.0%
2.4%
1.5%
0.8%
2.3%
100.0%
*
Includes short term investments.
$50,738,854
amounted to $808,364 or 0.85% of net assets. This security is not deemed
liquid.
Security is exempt from registration under Rule 144A of the Securities Act of
1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers. This security has been
deemed liquid pursuant to policies and procedures approved by the Board of
Trustees, unless otherwise noted. At September 30, 2015, the market value of
Rule 144A securities amounted to $3,097,201 or 3.24% of net assets.
97
Baron Funds
Baron Real Estate Fund — PORTFOLIO HOLDINGS
Shares
Cost
Value
Shares
Financials (continued)
3,478,950 MGM Resorts International1
$
Home Furnishings (2.65%)
254,907 Mohawk Industries, Inc.1
Home Improvement
Retail (4.85%)
471,007 Home Depot, Inc.
442,700 Lowe’s Companies, Inc.
Homebuilding (2.58%)
1,320,800 Toll Brothers, Inc.1
2,000,000
3,251,500
1,108,806
1,246,855
492,600
454,300
639,600
Hotels, Resorts &
Cruise Lines (20.86%)
Diamond Resorts International, Inc.1
Hyatt Hotels Corp., Cl A1
Norwegian Cruise Line
Holdings Ltd.1,2
Royal Caribbean Cruises Ltd2
Starwood Hotels & Resorts
Worldwide, Inc.
Wyndham Worldwide Corp.
1,491,419 ClubCorp Holdings, Inc.
71,924,428 $
64,186,627
33,704,065
46,339,544
38,028,564
18,595,706
54,396,598
30,510,884
56,624,270
84,907,482
Retail REITs (3.37%)
996,800 General Growth Properties, Inc.
180,500 Simon Property Group, Inc.
373,950 Alexandria Real Estate Equities, Inc.3
419,735 American Tower Corp.
Total Financials
45,772,826
45,224,192
39,359,444
85,124,552
51,182,923
46,780,000
74,589,410
52,224,763
46,214,058
42,977,855
71,444,791
43,885,734
28,912,180
39,774,598
30,201,864
45,987,240
333,545,610
365,113,802
31,609,672
32,005,852
573,180,871
637,777,499
32,625,432
34,833,948
3,740,950 Strategic Hotels & Resorts, Inc.1
39,137,143
51,587,701
203,450 Boston Properties, Inc.
1,136,610 Douglas Emmett, Inc.
222,700 SL Green Realty Corp.
26,547,122
28,863,216
22,647,364
24,088,480
32,643,439
24,087,232
78,057,702
80,819,151
40,200,062
34,685,902
Real Estate Operating
Companies (4.10%)
1,722,630 Forest City Enterprises, Inc., Cl A1
2,149,514 Kennedy Wilson Europe Real Estate
plc (United Kingdom)2,3
414,730 Jones Lang LaSalle, Inc.
1,758,082 Kennedy-Wilson Holdings, Inc.
Residential REITs (1.65%)
165,700 AvalonBay Communities, Inc.
98
27,730,971 $
28,798,045
25,886,896
33,161,460
56,529,016
59,048,356
29,518,127
37,082,222
54,571,777
31,662,347
36,928,285
73,426,765
121,172,126
142,017,397
598,671,399
666,420,755
664,450 Brookdale Senior Living, Inc.1
2,197,263 Capital Senior Living Corp.1,4
13,676,539
47,778,405
15,255,772
44,055,123
Total Health Care
61,454,944
59,310,895
30,108,455
30,828,212
23,138,773
26,410,073
39,632,388
49,905,810
20,084,218
43,539,696
35,771,680
48,377,310
Airport Services (1.76%)
278,700 Aena SA, 144A (Spain)1,2
420,700
3,433,730
1,176,700
798,569
Armstrong World Industries, Inc.1
Builders FirstSource, Inc.1
CaesarStone Sdot-Yam Ltd.1,2
Masonite International Corp.1,2
139,087,044
147,772,904
169,195,499
178,601,116
11,436,747
9,822,286
11,560,952
9,321,966
21,259,033
20,882,918
32,877,775
24,351,166
15,144,113
26,183,261
15,581,876
32,312,290
17,742,224
15,225,845
59,069,598
63,120,011
Diversified Real Estate
Activities (1.99%)
1,107,950 Brookfield Asset
Management, Inc., Cl A2
Real Estate Development (1.98%)
302,300 The Howard Hughes Corp.1
Value
Health Care (3.39%)
Total Industrials
Financials (38.07%)
$
Cost
35,329,203
34,676,542
36,608,515
37,004,074
71,937,718
71,680,616
52,262,053
45,576,318
33,190,271
64,177,600
59,625,732
38,976,678
131,028,642
162,780,010
27,983,558
28,967,674
Internet Software &
Services (1.19%)
402,400 Zillow Group, Inc., Cl A1
345,258 Zillow Group, Inc., Cl C1
Materials (1.39%)
Construction Materials (1.39%)
1,297,345 Summit Materials, Inc., Cl A1
Services (3.61%)
57,211,650 Sarana Menara Nusantara
34,047,909 Tower Bersama Infrastructure
Total Telecommunication Services
Utilities (2.73%)
1,298,900 Brookfield Infrastructure
Partners L.P.2
TOTAL COMMON STOCKS
53,915,752
47,760,553
1,569,624,871
1,698,224,913
Baron Funds
Baron Real Estate Fund — PORTFOLIO HOLDINGS (Continued)
Principal Amount
Cost
Value
dated 9/30/2015, 0.00%
maturity - $51,907,342; (Fully
collateralized by $50,610,000
U.S. Treasury Note, 2.50%
due 8/15/2023; Market
value - $52,950,713)
$
51,907,342 $
$1,621,532,213
LIABILITIES (0.01%)
51,907,342
1,750,132,255
175,165
NET ASSETS
$1,750,307,420
outstanding)
$ 782,014,281
outstanding)
$ 968,293,139
% Represents percentage of net assets.
1
2
3
MSCI.
4
An “Affiliated” investment may include any company in which the Fund owns
144A Security is exempt from registration under Rule 144A of the Securities Act of
Rule 144A securities amounted to $30,828,212 or 1.76%% of net assets.
99
Baron Funds
Baron Emerging Markets Fund — PORTFOLIO HOLDINGS
Shares
Cost
Value
Cetip SA - Mercados Organizados $
Linx SA
M. Dias Branco SA
Multiplus SA
Smiles SA
TOTVS SA
Total Brazil
18,102,764 $
8,591,359
9,933,492
13,640,110
22,003,829
23,771,784
12,879,605
4,883,340
3,663,766
9,273,679
11,569,761
12,170,174
96,043,338
54,440,325
China (22.23%)
400,000
48,000,000
24,000,000
200,000
5,200,000
15,000,600
8,350,000
1,500,000
750,515
1,300,000
341,500
China Everbright Ltd.
China Life Insurance Co., Ltd., Cl H
China Mengniu Dairy Co. Ltd.
China Mobile Ltd.
China Telecom Corp. Ltd., Cl H
China Unicom (Hong Kong) Ltd.
Ctrip.com International Ltd., ADR1
Haitong Securities Co., Ltd., Cl H
Huatai Securities Co., Ltd.,
Cl H, 144A1
Jumei International
Holding Ltd., ADR1
Kingdee International Software
Group Co. Ltd.
PetroChina Co. Ltd.
Qihoo 360 Technology
Co. Ltd., ADR1
Shenzhou International Group
Holdings Ltd.
Sihuan Pharmaceutical
Holdings Group Ltd.
Sinopharm Group Co. Ltd., Cl H
SouFun Holdings Ltd., ADR
WuXi PharmaTech
(Cayman), Inc., ADR1
Total China
23,143,182
22,958,189
26,755,805
22,198,442
28,271,704
25,115,460
9,246,809
14,117,114
24,222,547
17,101,300
16,536,203
20,383,595
17,374,042
26,247,402
19,276,805
7,625,347
15,190,051
22,090,693
13,685,516
8,642,247
9,093,851
3,948,000
15,319,031
27,382,430
18,179,081
16,682,540
12,822,195
9,566,000
23,397,303
26,942,510
7,125,260
30,486,050
13,361,120
21,919,286
18,822,063
7,142,175
29,424,039
9,900,000
24,129,057
21,947,463
23,092,000 Bank Rakyat Indonesia
(Persero) Tbk PT
$
15,503,527 Matahari Department
Store Tbk PT
33,000,000 Tower Bersama
Infrastructure Tbk PT1
Total Hong Kong
11,966,087
14,756,215
401,409,444
353,084,765
560,250
880,653
2,475,000
1,500,000
2,600,000
2,200,000
1,351,000
3,754,000
Total India
100
Amara Raja Batteries Ltd.
Axis Bank Ltd.
Coal India Ltd.
DEN Networks Ltd.1
Dish TV India Ltd.1
Exide Industries Ltd.
Glenmark Pharmaceuticals Ltd.
Hathway Cable and
Datacom Ltd.1
Larsen & Toubro Ltd.
Lupin Ltd.
Motherson Sumi Systems Ltd.
PVR Ltd.
SKS Microfinance Ltd.1
Sun TV Network Ltd.
Zee Entertainment
Enterprises Ltd.
13,672,675
19,623,356
8,841,958
17,123,809
7,525,535
18,264,657
14,757,232
64,234,302
53,079,251
550,000
262,500
38,000
37,000
240,000
Grand Korea Leisure Co., Ltd.
i-SENS, Inc.1
LG Household & Health Care Ltd.
Samsung Electronics Co., Ltd.
Samsung Life Insurance Co. Ltd.
19,775,413
9,543,103
23,915,147
46,796,591
24,484,202
15,484,790
8,327,849
27,500,175
35,499,767
20,070,066
Total Korea, Republic of
124,514,456
106,882,647
27,502,978
16,819,981
26,775,000
19,675,795
19,638,544
20,679,839
14,327,207
22,205,987
84,641,342
82,983,989
11,853,028
7,547,400
17,332,890
16,133,084
13,459,244
11,629,869
18,242,749
16,633,324
13,325,706
16,651,554
58,555,087
64,853,333
22,948,015
15,814,652
21,233,364
23,204,158
16,638,409
17,803,578
8,599,642
16,611,368
20,653,694
11,865,603
14,706,680
6,955,000
Mexico (5.22%)
300,000 Fomento Económico Mexicano,
S.A.B. de C.V., ADR
8,317,513 Grupo Lala S.A.B. de C.V.
3,500,000 Infraestructura Energetica
Nova S.A.B. de C.V.
9,000,000 Wal-Mart de Mexico S.A.B. de C.V.
Total Mexico
Panama (0.48%)
Philippines (4.08%)
25,005,000
7,500,000
125,000,000
4,050,000
Ayala Land, Inc.
BDO Unibank, Inc.
Metro Pacific Investments Corp.
Universal Robina Corp.
Total Philippines
Singapore (1.00%)
10,999,918 Global Logistic Properties Ltd.
14,890,081
16,662,882
12,269,473
11,302,803
18,588,919
3,718,351
43,822,436
33,610,073
8,867,611
13,573,608
28,460,609
10,244,650
13,339,936
18,091,286
19,061,869
13,917,779
22,475,706
19,338,478
23,755,701
6,933,223
22,898,075
28,091,420
16,649,449
17,611,266
5,093,897
12,657,774
15,788,490
13,125,494
14,319,858
20,171,221
13,865,745
12,603,537
3,230,462
12,558,539
27,341,013
8,705,677
18,670,550
16,107,398
12,068,563
30,974,629
India (19.51%)
1,427,000
2,550,000
4,750,000
3,752,679
14,084,985
1,650,000
7,000,000
1,100,000
5,770,000
17,504,331 $
Korea, Republic of (6.73%)
180,000 Copa Holdings SA, CL A
Hong Kong (2.12%)
4,500,000 Luk Fook Holdings
International Ltd.
19,000,000 Man Wah Holdings Ltd.
3,250,000 Wynn Macau Ltd.1
Value
Indonesia (3.34%)
Total Indonesia
290,000
7,200,000
5,850,000
4,900,000
2,200,000
40,000,000
6,000,000
240,425
15,159,400
4,320,000
Cost
Brazil (3.43%)
1,552,012
440,000
250,000
1,150,000
1,526,400
1,600,818
Shares
17,537,741
22,548,243
250,721,105
309,958,392
780,700
875,138
850,000
525,000
250,000
4,550,000
Aspen Pharmacare Holdings Ltd.
Bidvest Group Ltd.
Mr Price Group Ltd.
Sasol Limited
Sasol Limited, ADR
Steinhoff International
Holdings Ltd.
Total South Africa
20,090,511
27,939,008
107,569,662
98,731,353
22,432,130
27,787,646
26,332,245
26,770,922
19,497,473
21,675,412
16,588,329
17,653,751
25,882,412
18,126,198
11,830,079
29,716,009
8,185,777
12,244,399
Taiwan, Province of China (10.05%)
1,750,000 Eclat Textile Co., Ltd.
12,001,000 Far EasTone
Telecommunications Co., Ltd.
1,800,000 Ginko International Co., Ltd.
2,215,715 HIWIN Technologies Corp.
3,600,934 Makalot Industrial Co. Ltd.
1,100,000 MediaTek Inc.
3,900,000 Novatek Microelectronics Corp.
1,250,000 Taiwan Semiconductor
Manufacturing Company Ltd., ADR
Total Taiwan, Province of China
24,902,371
25,937,500
175,852,633
159,710,020
Baron Funds
Baron Emerging Markets Fund — PORTFOLIO HOLDINGS (Continued)
Shares
Cost
Value
18,961,101 $
629,574
17,123,571
439,251
Thailand (1.69%)
2,750,000 Advanced Info Service PCL
100,000 Bangkok Bank PCL, Cl F
2,101,000 Bangkok Bank Public Co., Ltd.,
NVDR
$
11,918,045
9,281,517
31,508,720
26,844,339
871,878
515,258
7,340,352
2,776,560
28,100,000
11,943,907
1,509,985,798
1,382,776,264
367,971
415,378
6,590,206
5,870,930
Total Thailand
United Arab Emirates (0.03%)
3,328,598 SHUAA Capital psc1
8,637,363 Lekoil Ltd.1
1,938,946 TerraForm Global, Inc.1,2
Percentage of
Net Assets
23.1%
14.1%
12.5%
11.0%
8.8%
7.5%
4.7%
4.1%
1.6%
12.6%
100.0%
*
TOTAL COMMON STOCKS
Financials
Health Care
Consumer Staples
Industrials
Energy
Utilities
Includes short term investments.
India (0.03%)
30,983,400 Zee Entertainment Enterprises
Ltd., 6% due 3/5/2022
Principal Amount
Convertible Bonds (0.37%)
China (0.37%)
$ 50,000,000 Biostime International Holdings
Ltd., 0.00% due 02/20/20191
197,744,364 Repurchase Agreement with
dated 9/30/2015, 0.00%
maturity - $197,744,364;
$192,785,000 U.S. Treasury
Note, 2.50% due 8/15/2023;
Market value - $201,701,306) $ 197,744,364 $ 197,744,364
$1,714,688,339
LIABILITIES (0.10%)
1,586,806,936
1,642,924
NET ASSETS
$1,588,449,860
outstanding)
$ 660,119,183
outstanding)
$ 928,330,677
%
liquid.
ADR American Depositary Receipt.
NVDR Non-Voting Depositary Receipt.
144A Security is exempt from registration under Rule 144A of the Securities Act of
Rule 144A securities amounted to $8,642,247 or 0.54% of net assets.
1
2
101
Baron Funds
Baron Energy and Resources Fund — PORTFOLIO HOLDINGS
Shares
Cost
Value
Shares
Energy (75.82%)
Oil & Gas Drilling (1.10%)
15,546 Helmerich & Payne, Inc.
11,950
73,742
61,196
28,431
20,690
91,257
19,039
21,900
166,548
78,200
33,599
15,068
64,736
118,700
1,095,600
93,800
52,649
107,538
219,000
73,300
62,548
Services (9.99%)
Core Laboratories N.V.2
Forum Energy Technologies, Inc.1
Halliburton Co.
Oil States International, Inc.1
RigNet, Inc.1
Superior Energy Services, Inc.
Production (36.20%)
Anadarko Petroleum Corporation
Antero Resources Corp.1
Bonanza Creek Energy, Inc.1
Cabot Oil & Gas Corp.
Concho Resources, Inc.1
EOG Resources, Inc.
Gulfport Energy Corp.1
Laredo Petroleum, Inc.1
Lekoil Ltd. (United Kingdom)1,2
Newfield Exploration Co.1
Noble Energy, Inc.
Oasis Petroleum, Inc.1
Parsley Energy, Inc., Cl A1
RSP Permian, Inc.1
SM Energy Co.
Oil & Gas Refining &
Marketing (2.45%)
35,356 Marathon Petroleum Corp.
81,875
33,411
57,000
31,035
12,340
9,242
195,004
36,100
41,279
88,576
35,140
36,463
25,600
19,076
54,839
Oil & Gas Storage &
Dominion Midstream Partners, L.P.
Energy Transfer Equity LP
Golar LNG Ltd.2
Rose Rock Midstream, L.P.
Scorpio Tankers Inc.2
SemGroup Corporation, Cl A
Shell Midstream Partners, L.P.
Tallgrass Energy GP LP
Tallgrass Energy Partners, LP
Western Gas Equity Partners LP
Western Refining Logistics, LP
Total Energy
$ 1,204,575 $
Semiconductor Equipment (1.93%)
179,500 SunEdison, Inc.1
1,689,899
2,033,127
3,159,996
1,239,977
784,460
2,372,433
1,192,610
900,390
2,163,278
742,902
527,595
1,152,576
11,279,892
6,679,351
1,717,256
1,001,084
4,353,244
2,547,057
3,596,110
1,341,148
3,335,427
1,313,348
829,128
2,851,107
2,652,561
2,844,800
3,891,255
1,678,128
3,528,550
1,149,765
463,404
677,850
1,709,452
3,302,782
1,096,950
1,921,365
1,119,341
352,191
3,086,020
1,588,947
933,430
3,300,330
1,484,325
2,004,038
37,480,203
24,190,190
Trading Companies &
45,400 MRC Global, Inc.1
Total Industrials
102
$
Value
783,549 $
750,618
3,388,859
1,288,810
4,172,408
2,039,428
1,263,226
1,736,359
819,052
1,118,810
2,999,585
1,937,862
1,206,489
921,140
2,941,817
2,973,468
7,147,891
5,832,470
1,625,819
3,000,000
1,648,206
889,530
1,296,840
830,590
Materials (8.73%)
24,700 Methanex Corp.2
Diversified Metals & Mining (1.38%)
75,939 Globe Specialty Metals, Inc.
178,052 Flotek Industries, Inc.1
Total Materials
Utilities (4.51%)
53,748 Abengoa Yield plc2
58,410 TerraForm Power, Inc., Cl A
Total Utilities
TOTAL COMMON STOCKS
6,274,025
3,016,960
93,215,498
63,172,595
Principal Amount
1,574,646
1,638,044
2,083,049
816,038
1,645,523
1,100,339
391,269
301,560
1,840,228
2,583,628
1,117,633
2,638,257
822,385
2,996,491
970,582
946,075
1,452,136
1,036,537
897,085
1,186,170
865,256
607,992
224,950
1,788,187
1,560,964
1,214,841
1,760,005
1,380,650
1,878,574
1,130,496
752,167
1,144,490
21,705,193
17,428,364
73,244,509
50,670,653
1,256,444
1,106,874
Industrials (2.41%)
Construction & Engineering (1.65%)
61,802 Primoris Services Corp.
19,800 Aspen Technology, Inc.1
734,704
Cost
dated 9/30/2015, 0.00% due
maturity - $3,144,955;
Note, 2.75% due 11/15/2023;
LIABILITIES (0.77%)
506,210
1,613,084
513,456
$66,831,006
$34,985,006
outstanding)
$31,846,000
1
2
3
2,376,665
3,144,955
66,317,550
NET ASSETS
%
1,120,221
3,144,955
$96,360,453
liquid.
Baron Funds
Baron Global Advantage Fund — PORTFOLIO HOLDINGS
Shares
Cost
Value
Value
United States (continued)
$
Total Brazil
244,353
248,613
$
195,160
121,079
492,966
316,239
278,852
395,254
469,807
219,237
201,888
177,755
456,716
328,758
208,451
214,812
232,682
491,991
1,525,403
1,476,694
1,954
3,364
157
25,934
6,495
1,341
28,070
7,814
6,118
Canada (3.77%)
943 Constellation Software, Inc.
China (14.10%)
5,575
1,517
3,400
7,738
15,303
Cost
Brazil (3.02%)
23,517 Cetip SA - Mercados Organizados
15,974 Smiles SA
Shares
Baidu, Inc., ADR1
Ctrip.com International Ltd., ADR1
Qunar Cayman Islands Ltd., ADR1
Total China
Illumina, Inc.1
Medidata Solutions, Inc.1
The Priceline Group, Inc.1
SunEdison, Inc.1
Tallgrass Energy GP LP
TerraForm Global, Inc.1,2
TerraForm Power, Inc., Cl A
Westlake Chemical Partners LP
Total United States
TOTAL COMMON STOCKS
$
122,487
145,160
118,920
434,738
200,267
132,183
400,000
217,733
164,098
$
343,552
141,658
194,187
186,206
129,056
69,088
172,911
111,115
107,065
4,814,850
4,712,814
10,108,426
9,834,975
Principal Amount
India (2.56%)
9,400 Axis Bank Ltd.
17,613 ICICI Bank Limited, ADR
3,291 Just Dial Ltd.
Total India
85,163
131,722
49,159
71,287
147,597
49,447
266,044
268,331
321,392
157,981
304,158
153,760
479,373
457,918
$682,458 Repurchase Agreement with
dated 9/30/2015, 0.00% due
maturity - $682,458;
$650,000 U.S. Treasury
Note, 2.75% due 11/15/2023;
Market value - $697,125)
Indonesia (4.37%)
343,836 Tower Bersama Infrastructure Tbk PT1
Total Indonesia
Israel (9.55%)
3,964 Check Point Software
Technologies Ltd.1
8,321 Mellanox Technologies Ltd.1
8,164 Mobileye N.V.1
Total Israel
307,720
332,019
413,789
314,464
314,450
371,299
1,053,528
1,000,213
143,850
166,840
Netherlands (1.59%)
1,898 ASML Holding N.V.
4,853 Seadrill Partners, LLC
45,618
445,555
400,169
3,193 Naspers Ltd., Class N
10,079 ARM Holdings plc
72,340 JUST EAT plc1
Total United Kingdom
158,166
336,518
144,807
450,078
494,684
594,885
185,152
56,204
475,611
115,601
117,819
272,742
85,665
368,809
375,453
67,243
758,965
185,843
43,428
794,965
29,681
137,469
227,275
41,575
664,811
264,806
67,442
800,681
9,405
2,448
1,553
13,310
4,399
6,181
3,284
7,395
8,322
2,788
1,316
Acxiom Corp.1
Aerie Pharmaceuticals, Inc.1
Amazon.com, Inc.1
Atlas Energy Group LLC1
Benefitfocus, Inc.1
Brookfield Infrastructure Partners L.P.
FireEye, Inc.1
Glaukos Corp.1
Google, Inc., Cl C1
(42,100)
$10,475,333
share based on 455,058 shares
outstanding)
$ 5,566,478
per share based on 399,063 shares
outstanding)
$ 4,908,855
1
113,321
682,458
10,517,433
NET ASSETS
%
Norway (0.44%)
682,458
$10,790,884
2
ADR
amounted to $172,911 or 1.65% of net assets. This security is not deemed
liquid.
Health Care
Utilities
Financials
Energy
Materials
Percentage of
Net Assets
47.6%
23.4%
5.7%
4.9%
4.4%
3.9%
3.0%
1.0%
6.1%
100.0%
* Includes short term investments.
103
Baron Funds
Baron Discovery Fund — PORTFOLIO HOLDINGS
Shares
Cost
Value
Shares
Cost
Health Care (continued)
Apparel Retail (1.25%)
50,000 Boot Barn Holdings, Inc.1
65,000 Iconix Brand Group, Inc.1
$
906,888
$
921,500
890,815
878,800
94,000 Pinnacle Entertainment, Inc.1
3,008,628
3,180,960
40,000 Nord Anglia Education, Inc.1,2
870,474
813,200
1,024,965
709,920
17,000 Mattress Firm Holding Corp.1
58,000 ClubCorp Holdings, Inc.
31,000
44,000
60,000
72,000
35,000
Restaurants (8.59%)
Fiesta Restaurant Group, Inc.1
The Habit Restaurants, Inc., CI A1
Krispy Kreme Doughnuts, Inc.1
Wingstop, Inc.1
Zoe’s Kitchen, Inc.1,4
75,000 Party City Holdco, Inc.1
1,054,741
1,244,680
1,406,455
952,789
917,577
1,630,997
928,848
1,406,470
942,040
877,800
1,726,560
1,382,150
5,836,666
6,335,020
1,277,250
1,197,750
14,870,427
15,281,830
300,000
324,000
Oil & Gas Storage &
30,000 Dominion Midstream Partners, L.P.
45,000 Valero Energy Partners LP
Total Energy
794,741
2,200,749
805,500
1,987,200
2,995,490
2,792,700
Financials (10.50%)
Diversified REITs (1.30%)
23,500 American Assets Trust, Inc.
Health Care Services (3.30%)
83,200 ExamWorks Group, Inc.1
2,869,740
2,432,768
175,000 Cerus Corp.1
120,500 The Spectranetics Corporation1
962,501
2,672,381
794,500
1,420,695
3,634,882
2,215,195
2,376,385
2,663,100
Services (1.47%)
27,028 INC Research Holdings, Inc., Cl A1
500,018
1,081,120
35,000 HealthEquity, Inc.1
637,775
1,034,250
678,665
624,000
427,929
845,460
1,287,000
874,016
283,590
937,600
90,000 Press Ganey Holdings, Inc.1
55,000
41,600
6,900
160,000
Pharmaceuticals (4.58%)
Intersect ENT, Inc.1
Neos Therapeutics, Inc.1
Pacira Pharmaceuticals, Inc.1
TherapeuticsMD, Inc.1
2,576,054
3,382,206
19,312,963
19,297,287
2,983,339
1,292,749
2,086,494
752,262
4,276,088
2,838,756
1,657,332
972,800
13,000 ESCO Technologies, Inc.
6,500 Kornit Digital Ltd. (Israel)1,2
80,500 NN, Inc.
462,473
65,000
1,975,981
466,700
82,095
1,489,250
2,503,454
2,038,045
8,436,874
5,849,601
Industrials (7.93%)
863,562
960,210
2,328,913
867,928
1,954,500
1,103,200
Total Industrials
3,196,841
3,057,700
2,106,826
1,861,650
Instruments (1.68%)
22,660 Coherent, Inc.1
1,400,255
1,239,502
Thrifts & Mortgage Finance (2.54%)
2,068,665
75,300 Essent Group, Ltd.1,2
1,871,205
Electronic Manufacturing
Services (2.90%)
134,303 Mercury Systems, Inc.1
2,151,536
2,136,761
3,510,543
1,098,113
1,079,561
2,192,877
2,162,739
1,478,266
1,109,375
810,000
1,558,440
2,799,763
10,043,833
7,755,844
75,000 Chesapeake Lodging Trust
80,000 Strategic Hotels & Resorts, Inc.1
Industrial REITs (2.52%)
135,000 Rexford Industrial Realty, Inc.
Total Financials
8,235,894
7,750,765
10,600
12,200
77,500
13,500
104
1,451,400
1,539,035
730,100
3,720,535
Aerospace & Defense (3.85%)
109,700 DigitalGlobe, Inc.1
122,319 The KEYW Holding Corporation1
Energy (3.78%)
$
3,139,090
Total Health Care
Packaged Foods & Meats (0.44%)
600,000 Barfresh Food Group, Inc.1
60,000 Glaukos Corporation1
$ 1,587,779
31,700 Inogen, Inc.1
661,082
70,000 Novadaq Technologies, Inc.1,2
890,229
Value
Cepheid1
Esperion Therapeutics, Inc.1
Foundation Medicine, Inc.1
Sage Therapeutics, Inc.1
525,332
610,004
1,737,435
706,248
479,120
287,798
1,429,875
571,320
3,579,019
2,768,113
350,300
35,500
90,000
52,000
450,000
Internet Software &
Services (10.51%)
Amber Road, Inc.1
Benefitfocus, Inc.1
Coupons.com, Incorporated1
Envestnet, Inc.1
JUST EAT plc (United Kingdom)1,2
Baron Funds
Baron Discovery Fund — PORTFOLIO HOLDINGS (Continued)
Shares
Cost
Value
Principal Amount
Information Technology (continued)
Repurchase Agreement (3.51%)
dated 9/30/2015, 0.00%
maturity - $2,587,687;
Note, 2.75% due 11/15/2023;
Semiconductors (2.55%)
65,000 M/A-COM Technology Solutions
Holdings, Inc.1
66,000 Qualys, Inc.1
98,000 Varonis Systems, Inc.1
$ 2,177,053
1,763,545
2,106,084
$
1,884,350
1,878,360
1,526,840
3,869,629
3,405,200
19,642,306
16,421,657
140,000 Flotek Industries, Inc.1
Total Materials
TOTAL COMMON STOCKS
1,355,914
1,120,000
Securities Lending Collateral (1.85%)
1,365,000 State Street Navigator
Securities Lending
Prime Portfolio5
2,092,129
2,338,000
TOTAL SHORT TERM INVESTMENTS
3,448,043
3,458,000
77,241,997
71,175,840
Warrants (0.07%)
Packaged Foods & Meats (0.07%)
300,000 Barfresh Food Group, Inc.
Warrants Exp 2/23/20201,3
Value
$ 2,587,687
$ 2,587,687
1,365,000
1,365,000
Shares
Materials (4.69%)
Cost
0
48,000
3,952,687
3,952,687
$81,194,684
75,176,527
(1,384,250)
NET ASSETS
$73,792,277
outstanding)
$19,912,682
outstanding)
$53,879,595
%
1
2
3
4
5
amounted to $48,000 or 0.07% of net assets. This security is not deemed liquid.
The value on loan at September 30, 2015 amounted to $1,382,150 or 1.87% of
net assets.
Represents investment of cash collateral received from securities lending
transactions.
105
Notes
106
Notes
107
Notes
108
Notes
109
Notes
110
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September 30

Baron Funds - Baron Capital Management

Transcription

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