Review and Outlook

as of 03/31/24

The bull market that started at the end of October of 2023 kept running throughout the first quarter of 2024. Gains were led by technology stocks, especially the companies seen as most likely to benefit from the artificial intelligence boom. Even the renewed threat of "higher for longer" interest rates did not put a check on equity performance. Investors entered the new year optimistic that a soft landing was in store for the economy, in which a recession would be avoided, inflation would continue to dissipate, and the Fed would start cutting interest rates in March. The economy has not only avoided recession but has been stronger than market forecasts. Meanwhile, inflation has again turned sticky, and Fed rate cuts have been delayed to at least June.

Economic data was slightly mixed during the quarter. Strong growth in the U.S. labor supply, driven by increased labor force participation and a surge in immigration, supported job gains without higher inflation. The U.S. unemployment rate, though still low, rose slightly to 3.8%. The S&P Global US Services PMI, an index of the prevailing direction of economic trends in the U.S. service sector, pulled back modestly. Existing home sales jumped 9.5% in February 2024, the highest percentage increase in a year and above consensus expectations. At a 3.2% annualized rate, U.S. inflation, although it has yet to decline to the Fed’s stated 2% preferred level, is significantly less than the June 2022 peak of more than 9%. Looking ahead, a more normalized supply chain and moderating wage growth bode well for a continued slow decline in inflation.

Baron Fifth Avenue Growth Fund increased in the quarter. Information Technology (IT), Communication Services, and Health Care holdings contributed the most. Consumer Discretionary investments detracted. Positive performance within IT was led by top contributor NVIDIA Corporation, while appreciation within Communication Services was led by second largest contributor Meta Platforms, Inc. Intuitive Surgical, Inc. led gains within Health Care. Shares of the maker of the da Vinci surgical robot increased after the company announced the planned launch of the da Vinci 5, its next-generation, multiport robotic system. Tesla, Inc. and Rivian Automotive, Inc., respectively, the second and third largest detractors from performance, led declines within Consumer Discretionary.

The outlook for 2024 continues to create a challenging environment for investors. But since we are not macro investors, we stick to focusing on well-managed, high-quality businesses with durable competitive advantages for the long term. We continue to speak with company management teams as often as we can, test our investment theses, look for disconfirming evidence, and measure how well our businesses are performing fundamentally. We believe investing in great businesses at attractive valuations will enable us to earn excess risk-adjusted returns over the long term. We are optimistic about the prospects of the companies in which we are invested and continue to search for new ideas and opportunities.

Top Contributors/Detractors to Performance

as of 03/31/24

Contributors

  • NVIDIA Corporation sells semiconductors, systems, and software for accelerated computing, gaming, and generative AI (GenAI). NVIDIA's stock rose in the first quarter, driven by continued strong demand for its GPUs that stand at the epicenter of the GenAI revolution. NVIDIA closed 2023 with unprecedented revenue growth at massive scale, with a fourth-quarter revenue run rate just shy of $90 billion, growing over 3.5 times year-on-year with operating margins of 67%. In addition to GenAI-driven demand, NVIDIA is benefiting from the transition to accelerated computing. NVIDIA continues to improve the performance of its chips and systems while removing hurdles for adoption through software innovation, such as the recently announced NVIDIA Inference Microservices, which make it easier for companies to adopt GenAI at scale.
  • Shares of Meta Platforms, Inc., the world’s largest social network, were up in the quarter due to robust topline growth and first-quarter guidance indicating roughly 29% year-over-year revenue growth. Our industry checks have validated advertiser adoption and satisfaction, with particular improvements in monetizing Instagram Reels and click- to-message ads. Meta continues to innovate in generative AI (GenAI), with a leading research lab and the best open-source models to date; we are beginning to see Meta's core apps incorporate GenAI in the user experience. Core app engagement remains healthy, with video daily watch time growing 25% year-over-year and the total number of monthly active users rising to 3.98 billion in the fourth quarter. We believe Meta will utilize its leadership in mobile advertising, massive user base, innovative culture, leading GenAI research and potential distribution, and technological scale to perform, with further monetization opportunities ahead.
  • Amazon.com, Inc. is the world’s largest retailer and cloud services provider. Shares increased on quarterly results that exceeded consensus expectations, particularly with a large beat in overall operating profit. We believe Amazon is well positioned in the short to medium term to meaningfully improve core North American retail profitability to above pre-pandemic levels, benefiting from its new regionalized fulfillment network and its fast-growing, margin-accretive advertising business. Amazon has substantially more runway in eCommerce, where it has less than 15% penetration in its total addressable market. We also believe Amazon's cloud service, AWS, has many years ahead of meaningful growth, with customer cloud optimizations attenuating, although we continue to monitor its positioning in generative AI (GenAI). It remains the clear leader in the vast and growing cloud infrastructure market, with large opportunities in application software, including enabling GenAI workloads.

Detractors

  • Shares of IT services provider Endava plc fell after management cut guidance for the fiscal year ending June 30, 2024. Growth has slowed over the last year as business customers pulled back on discretionary IT spending due to macroeconomic uncertainty. Last fall, management was seeing early signs of a recovery, but new projects have been taking longer to materialize as customers delay spending decisions. Higher expenses due to increased staffing to meet anticipated demand weighed on margins as well. Management acknowledged that it misread the market and is taking steps to right-size the cost structure to improve margins. We remain invested because we expect these near-term headwinds to abate over time, leading to better growth as clients embrace digital transformation.
  • Tesla, Inc. designs, manufactures, and sells electric vehicles, related software and components, and solar and energy storage products. Shares fell as the core automotive segment remained under pressure due to a complex macroeconomic environment, factory shutdowns, growing competitive risks in China, and Tesla’s price reductions throughout 2023. During the first quarter of 2024, production was negatively impacted by Red Sea maritime supply chain interferences, sabotage at a Tesla factory power supply in Berlin, and the launch of the refreshed Model 3. We remain shareholders. Tesla has started delivery of its highly anticipated Cybertruck pickup, which features new technologies within the car and its manufacturing lines. Tesla also launched version 12 of its Full Self Driving product, which features material improvements and should enhance investor confidence in Tesla's unique software and hardware capabilities. Lastly, we expect energy storage sales to continue to grow over the coming years.
  • Shares of Rivian Automotive, Inc., a U.S.-based electric vehicle manufacturer, detracted from performance. Despite substantial improvements in production and delivery volumes in 2023 as well as improved unit economics, Rivian's business remains constrained by its limited scale, negative gross margins, and elevated cash outflows. Additionally, Rivian expects to temporarily shut down its production facilities for upgrades, impeding anticipated production growth in 2024. Compounding these challenges is the potential for demand constraints, which may not keep pace with production. Nevertheless, the recent unveiling of Rivian's mass-market products, the R2 and R3, garnered enthusiastic responses, evidenced by over 68,000 pre-orders within the first 20 hours post-launch. In a strategic move, management opted to produce the R2 in Rivian's existing facility, deferring the construction of a new factory. This decision should help reduce mid-term capital expenditure obligations while ensuring higher utilization of current facilities as the R2 ramps production in 2025.

Quarterly Attribution Analysis (Institutional Shares)

as of 03/31/24

When reviewing performance attribution on our portfolio, please be aware that we construct the portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio if it meets our rigorous investment criteria. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to achieve a target sector allocation or to approximate an index. Our exposure to any given sector is purely a result of our stock selection process.

as of 03/31/24

Baron Fifth Avenue Growth Fund (Institutional Shares) gained 12.62% in the first quarter, outperforming the Russell 1000 Growth Index by 121 basis points due to stock selection.

Strong stock selection in Information Technology (IT) and Communication Services was the primary driver of outperformance in the period. Fabless semiconductor company NVIDIA Corporation led the way in IT, accounting for most of the relative gains in the sector. NVIDIA’s stock continued its swift ascent during the quarter, aided by ongoing strong demand for its GPUs that stand at the epicenter of the GenAI revolution. The company closed 2023 with unprecedented revenue growth at massive scale, with a fourth-quarter revenue run rate just shy of $90 billion, growing over 3.5 times year-on-year with operating margins of 67%. In addition to GenAI-driven demand, NVIDIA is benefiting from the transition to accelerated computing. The Fund also benefited from its lack of exposure to benchmark heavyweight Apple Inc., whose shares fell double digits in the period, adding 250-plus basis points of relative gains.

Strength in Communication Services came from social network Meta Platforms, Inc. and internet advertising demand-side platform The Trade Desk, whose shares rose 37.3% and 21.5%, respectively, in the period. Meta’s stock was up in response to robust topline growth and first-quarter guidance indicating roughly 29% year-over-year revenue growth. Our industry checks have validated advertiser adoption and satisfaction, with improvements in monetizing Instagram Reels and click-to-message ads. Meta continues to innovate in GenAI, with a leading research lab and the best open-source models to date. Core app engagement remains healthy, with video daily watch time growing 25% year-over-year and the total number of monthly active users rising to 3.98 billion in the fourth quarter. We believe Meta will utilize its leadership in mobile advertising, massive user base, innovative culture, leading GenAI research and potential distribution, and technological scale to perform, with further monetization opportunities ahead. Trade Desk’s shares bounced back during the quarter. The company delivered a solid beat and raise quarter after experiencing some macroeconomic-related softness in late 2023. The 2024 setup appears promising for Trade Desk, as the company continues to benefit from tailwinds in Connected TV, a secular growth category capturing spend at an increasing pace from linear TV, retail media, platform upgrade adoption, audio, and more. Longer term, we remain positive on the company given its technology, scale, and estimated 10% share in the $100 billion programmatic advertising market, a small and growing subset of the $700 billion global advertising market.

Somewhat offsetting the above was disappointing stock selection in the Consumer Discretionary sector, where sharp losses from electric vehicle manufacturers Rivian Automotive, Inc. and Tesla, Inc. hampered performance. Rivian's business remains constrained by its limited scale, negative gross margins, and elevated cash outflows. Moreover, Rivian expects to temporarily shut down its production facilities for upgrades, impeding anticipated production growth in 2024. Compounding these challenges is the potential for demand constraints, which may not keep pace with production growth. Tesla is confronting its own set of challenges as the core automotive segment remains under pressure due to a complex macroeconomic environment, factory shutdowns, growing competitive risks in China, and recent vehicle price reductions. We remain shareholders of both companies.

Additional headwinds to performance in Consumer Discretionary came from MercadoLibre, Inc., which hosts the largest online commerce and payments ecosystem in Latin America. MercadoLibre’s shares fell after reporting below-consensus operating margins for the fourth quarter of 2023 due to the impact of seasonality, which the Street failed to properly account for. The margin miss was poorly received by the investors considering that MercadoLibre’s stock had nearly tripled since bottoming in June 2022. We continue to believe that MercadoLibre will be the dominant player in a growing Latin American e-commerce industry. The company’s bourgeoning fintech business also continues to scale profitably.

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.

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.

Risks:All investments are subject to risk and may lose value.

The discussion of market trends is not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed on this page reflect those of the respective writer. Some of our comments are based on 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 and are subject to change at any time based on market and other conditions and Baron has no obligation to update them

Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.

The index performance is not fund performance; one cannot invest directly into an index.