Fund Performance
The Baron Focused Growth Fund (the “Fund”) increased 1.68% (Institutional Shares) in the first quarter. This performance fell short of the Russell 2500 Growth Index (the “Benchmark”), which increased 8.51% during the same period.
Despite strong economic growth in the United States, the market anticipated a smaller number of Federal Reserve interest rate cuts this year. This led to losses in the Fund’s Disruptive Growth investments, including Tesla, Inc., FIGS, Inc., and Iridium Communications Inc.
However, gains in Financials investments, such as Interactive Brokers Group, Inc. and Arch Capital Group Ltd., as well as Real/Irreplaceable Asset investments, including Hyatt Hotels Corporation, Red Rock Resorts, Inc., and Choice Hotels International, Inc., partially offset the declines.
Investment Strategy
The Fund remains committed to long-term investing in competitively advantaged growth businesses, believing that these investments can protect and increase the purchasing power of investors’ savings. The Fund’s focused portfolio emphasizes quality, with investments exhibiting stronger sales growth, higher margins, and stronger returns on invested capital than the Benchmark.
The Fund’s sector weightings differ significantly from the Benchmark, with a heavy emphasis on Consumer Discretionary businesses (39.9% of net assets versus 13.5% for the Benchmark). Conversely, the Fund has no exposure to Energy, Materials, or Utilities, which are considered cyclical or commodity-linked with limited competitive advantages.
The Fund also has lower exposure to Health Care stocks (4.8% versus 19.9% for the Benchmark) due to their potential for rapid changes and binary outcomes. Instead, the Fund invests in competitively advantaged Health Care companies such as IDEXX Laboratories, Inc., BioNTech SE, and Illumina, Inc.
Portfolio Holdings
As of March 31, 2024, the Fund’s top 10 holdings represented 55.3% of net assets. These investments have been successful and were purchased when they were much smaller businesses. The Fund believes they continue to offer significant appreciation potential.
Outlook
The Fund believes that many of its portfolio investments are currently reflecting overly pessimistic earnings estimates for 2024. If the expected economic slowdown and decline in earnings are less severe, the Fund anticipates significant upside potential in the near term. The Fund also believes its portfolio companies are well-positioned to weather an economic downturn, as they have strengthened their balance sheets since the COVID-19 pandemic.
