Baron Funds Q2 2024 Performance: A Comprehensive Analysis of Multiple Portfolios

Baron Asset Fund Q2 2024 Shareholder Letter (Mutual Fund:BARAX)

The Fund participated in the recent Series B fundraising round for X.AI Corp. It also initiated a position in Vulcan Materials Company, the largest producer of construction aggregates in the U.S. Gains in broad market stock indexes during the quarter were driven by the Magnificent Seven, a group of mega-cap companies Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla. These stocks appreciated 17% during the quarter, accounting for all the gains in the NASDAQ Composite (COMP:IND) and S&P 500 (SP500) Indexes. The remaining securities in these benchmarks modestly declined in the period, demonstrating these companies' outsized impact on the market. Sector performance mirrored the lopsided market dynamic brought on by the Magnificent Seven, as Information Technology and Communication Services were among the few sectors that managed gains in the period. Semiconductors (NVIDIA (NVDA)), technology hardware storage & peripherals (Apple (AAPL)), and interactive media & services (Alphabet (GOOG)) were the leaders in these sectors. Other standouts were Utilities and Consumer Staples, helped by solid gains from electric utilities and tobacco stocks, respectively. Real Estate underperformed, as REITs were pressured by the prospect of interest rates staying higher for longer. Other laggards were cyclical and/or commodity-sensitive sectors, such as Materials, Industrials, Energy, Financials, and Consumer Discretionary, all of which fell in the quarter. Mid-cap growth stocks declined in the period, trailing large-cap growth stocks (as measured by the Russell 1000 Growth Index) by 11.5%. This was a continuation of mid-caps' historic relative underperformance-during the past three years, mid-caps have underperformed by 11.4% annualized. Baron Asset Fund's® (the Fund) relative performance has been challenged since the beginning of 2023. After declining 26.72% in 2022, the Russell Midcap Growth Index (the Index) rebounded 25.87% in 2023, while the Fund rose 17.35% (Institutional Shares). The Fund is trailing the Index this year, though by a more modest amount. We believe there are similarities between this period and the last time the Fund meaningfully trailed the Index, which was also in the aftermath of a rapid rebound from a bear market. After the Index declined 44.32% in 2008 (during the Great Financial Crisis), the Index rebounded 46.29% in 2009. The Fund rose 31.85% in 2009, lagging considerably behind the Index return. However, over the subsequent 10 years ended 12/31/2019, the Fund outperformed the Index by 11.65% on a cumulative basis, or 0.35% annualized. The Fund is a long-term investor in high quality companies with durable competitive advantages and growing, predictable earnings streams. We believe these types of companies have been out of favor relative to the more speculative companies that tend to outperform during sharp market rebounds. The Fund's underexposure to stocks with short-term momentum and idiosyncratic volatility have contributed to its underperformance during this period. During the second quarter, the Fund declined 3.51%, performing similarly to the Index as moderately positive stock selection was offset by differences in sector weights. Favorable stock selection in Industrials and Financials together with higher exposure to the better performing Information Technology sector and lack of exposure to the lagging Consumer Staples sector added the most value. Industrials benefitted from data and analytics vendor Verisk Analytics, Inc. and private rocket and spacecraft manufacturer Space Exploration Technologies Corp. (SpaceX). As discussed below, Verisk gained following strong quarterly earnings and management optimism about the state of its property and casualty (P&C) insurance end-market. SpaceX continued to record substantial growth in users of Starlink, its satellite-based broadband service. SpaceX also continued to make progress on developing Starship, the largest, most powerful rocket ever launched. We believe this next-generation vehicle represents a significant leap forward in rocket reusability and space exploration capabilities. Strength in Financials came from specialty insurer Arch Capital Group Ltd., whose shares increased after the company's financial results exceeded expectations. Operating ROE reached 21% in the first quarter, while book value per share rose 40% due to strong underwriting profitability and higher investment income. Entirely offsetting the above was disappointing stock selection in Real Estate and Consumer Discretionary combined with adverse impacts from the Fund's active weights in Energy, Health Care, and Communication Services. As discussed below, CoStar Group, Inc., which provides marketing and data analytics services to the real estate industry, was impacted by concerns about near-term subscription trends in its residential brokerage segment. Weakness in Consumer Discretionary was driven by global ski resort operator Vail Resorts, Inc., whose shares were pressured by slowing season ticket sales and a disappointing ski season in Australia. We retain conviction. Vail has said that it believes skiers are delaying buying season passes given poor snow conditions for the past two seasons, and it still expects to generate almost $950 million in season pass revenue this year, representing close to a third of 2023 revenue. An 8% increase in prices combined with a favorable year-over-year comparison should result in a double-digit increase in EBITDA with strong free cash flow generation. The company is now trading at more than 6% free cash flow yield, all of which is being returned to shareholders through dividends and share buybacks. Verisk Analytics, Inc. is a leading provider of proprietary data and analytics to the property and casualty (P&C) insurance market. Its shares contributed to performance, as the company reported strong first quarter 2024 earnings, especially relative to investors' muted expectations. The CEO expressed optimism about the state of the P&C insurance end-market and Verisk's ability to continue to increase its pricing and expand its product offerings. We maintain conviction in the company's competitive positioning, as well as its prospects for long-term revenue growth, margin expansion, and capital deployment opportunities. Guidewire Software, Inc. is a software vendor to the P&C insurance sector, and its shares contributed to quarterly performance. After a multi-year transition period, we believe the company's transition from an on-premise software provider to a cloud-based solution is substantially complete. We believe that cloud will be Guidewire's sole path forward, with annual recurring revenue (ARR) benefiting from new customer wins and migrations of the existing customer base to the company's InsuranceSuite Cloud. We also expect the company to shift R&D resources from infrastructure investment to product development, which will help to drive cross sales into its sticky installed base and potentially accelerate ARR over time. We are also encouraged by Guidewire's subscription gross margin expansion, which improved by more than 1,000 basis points in its most recently reported quarter. We believe that Guidewire will be the critical software vendor for the global P&C insurance industry, eventually capturing 30% to 50% of its $15 billion to $30 billion total addressable market and generating margins above 40%. Fair Isaac Corporation (FICO) is a data and analytics company focused on predicting consumer behavior. It is probably best known for its FICO score, which is widely used to assess consumers' credit worthiness. Shares increased on reported solid second fiscal quarter 2024 earnings results and increased fiscal year 2024 guidance. The company also hosted its annual user conference in April where CEO Will Lansing expressed confidence that the business can perform well across different macroeconomic backdrops and optimism about the magnitude of the opportunity in its software business. There are some near-term areas of uncertainty, most notably the impact of interest rates on its FICO scores business and a potential Consumer Financial Protection Bureau investigation into Scores pricing. Long term, we believe FICO will be a steady earnings compounder, which should drive solid returns for the stock over a multi-year period. CoStar Group, Inc. provides marketing and data analytics services to the real estate industry. Shares detracted from performance in the quarter, mirroring the broader software sector. We believe CoStar shares were impacted by concerns that the company's second quarter financial results will show a deceleration in net new sales of its residential product following outstanding first quarter performance. We remain encouraged by traction in CoStar's residential offering although recognize that progress may not be linear. CoStar began to monetize its new Homes.com platform in February. We believe early momentum can be amplified by the recent National Association of Realtors' class action settlement, which has the potential to disrupt the residential brokerage industry and enhance the return on investment for brokers advertising on Homes.com. Shares of veterinary diagnostics leader IDEXX Laboratories, Inc. detracted from performance. Foot traffic into U.S. veterinary clinics remained uneven, causing a modest headwind to the company's revenue growth. Despite this headwind, management has continued to deliver robust financial results. We believe IDEXX's competitive position remains outstanding, and we expect new proprietary tests and field sales force expansion to be meaningful contributors to growth in 2024. In addition, we see increasing evidence that long-term secular trends around pet ownership and pet care spending have been structurally accelerated, which should help support IDEXX's long-term growth rate. Shares of Gartner, Inc., a provider of syndicated research, detracted from performance in the quarter as the company's contract value fell modestly short of investor expectations. Despite this, Gartner's core subscription research businesses continue to compound at attractive rates, and we believe growth is poised to accelerate over the next several quarters. We believe Gartner will emerge as a critical decision support resource for every company evaluating the opportunities and risks of AI on its business. We expect this development to provide a tailwind to Gartner's volume growth and pricing realization over time. We expect Gartner's sustained revenue growth and focus on cost control to drive continued margin expansion and enhanced free cash flow generation. The company's balance sheet remains in excellent shape and can support ongoing share repurchases and bolt-on acquisitions. At June 30, 2024, Baron Asset Fund held 53 positions. The Fund's 10 largest holdings represented 48.5% of net assets, and the 20 largest represented 71.2%. The Fund's largest weighting was in the IT sector at 30.0% of net assets. This sector includes software companies, IT consulting firms, electronics components companies, and technology distributors. The Fund held 21.5% of its net assets in the Health Care sector, which includes investments in life sciences companies, and health care equipment, supplies, and technology companies. The Fund held 18.1% of its net assets in the Industrials sector, which includes investments in research and consulting companies, environmental firms, and construction & engineering companies. The Fund also had significant weightings in Financials at 13.4% and Consumer Discretionary at 7.5% of net assets. As the chart below shows, the Fund's largest investments all have been owned for significant periods - 7 of the 10 largest holdings have been owned for longer than a decade. This is consistent with our approach of investing for the long term in companies benefitting from secular growth trends with significant competitive advantages and best-in-class management teams. The Fund participated in the recent multibillion dollar Series B fundraising round for X.AI Corp. Founded by Elon Musk, we believe X.AI is a promising investment opportunity in the rapidly evolving landscape of AI companies. X.AI's ambitious goal is to develop AI "to understand the true nature of the universe." X.AI's growth potential is underpinned by the increasing demand for credible AI solutions and continuous product improvements. The company intends to revolutionize the market for AI models and applications. In the short period since its inception, X.AI launched its first AI model and product, Grok, which has shown impressive results compared with more established AI models. We believe this early demonstration, coupled with the ongoing development of two newer versions, showcases the company's ability to drive rapid innovation cycles. X.AI's new funding is expected to allow the company to purchase significant computational power and attract top engineering talent. We believe that the company's leadership is a significant asset. Musk's track record in AI development spans many years, including co-founding OpenAI, developing related software and hardware capabilities at Tesla, and deploying AI to improve X.com's (formerly Twitter) functionality. Across his other businesses, Musk has demonstrated abilities as a capable leader who drives tremendous innovation in complex environments. The founding management team includes key figures from OpenAI, Google's DeepMind, Tesla, Microsoft, and Meta, bringing extensive and relevant experience. We believe that X.AI's competitive position is enhanced by its access to differentiated data, computational power, software and hardware integration, and its distribution opportunities. The company has unique access to the data of X.com, which represents one of the largest and fastest-growing repositories of real time, multimodal, diverse, human to human interaction data sets. Nearly 600 million people use X.com's application each month, and its users spend 362 billion seconds and watch more than 8 billion videos each day on the platform. We believe that X.AI will expand its access to additional unique data assets. On the computational front, X.AI is making bold moves and advancing rapidly. The company plans to deploy one of the world's largest, densest computing clusters, boasting 100,000 GPUs. These dense computing centers, though complex, can drive significant improvements in compute utilization and cost efficiencies. Musk recently noted that "it will be the most powerful training cluster in the world by a large margin." In just a few months, the company identified a location, secured power allocation, and started to deploy hardware with a goal to start utilizing this data center before the end of 2024. Considering most new data center development cycles take two to three years, we believe this is a tremendous achievement by the company. By bringing more efficient computing resources online faster than its competitors, we believe X.AI can build and improve its products faster than others. The company's first data center will be followed by additional large data centers with the goal to deploy 300,000 even stronger GPUs by summer of 2025. The founding team's experience in chip development, related software, thermal, and energy management is expected to allow further hardware innovation. We believe that the integration of hardware and software expertise provides a unique advantage in the AI space, where computational efficiency is crucial. X.AI also has substantial distribution opportunities. The company's collaboration with X.com provides immediate access to hundreds of millions of users, offering a valuable user base early in its development. Additionally, X.AI is well positioned to explore more traditional distribution channels, including business-to-business integrations and dedicated standalone consumer solutions. Although these remain early days in the development of artificial intelligence, we are confident in the disruptive potential and value creation opportunities that lie ahead. We believe that X.AI's focused strategy, formidable talent, and innovative approach position it to become a significant player in shaping the future of AI. We initiated an investment in Vulcan Materials Company. Vulcan is the largest producer of construction aggregates in the U.S. and generates approximately 90% of its gross profit from mining, processing, and transporting crushed stone, sand, and gravel (collectively, "aggregates") from its quarries. The balance of its gross profit is derived from strategically located ready-mix concrete and asphalt. Vulcan's products are utilized in infrastructure projects such as roads, highways, and bridges, as well as in residential and non-residential construction. We believe the aggregates industry contains high barriers to entry and strong pricing power. The approval process for a new quarry typically takes 5 to 10 years. This limits new competition and constrains supply, placing companies with existing quarries in an advantaged position. In addition, a high weight-to-price ratio makes transportation expensive, limiting the distance that aggregates can be shipped economically. As a result, aggregates producers have historically enjoyed pricing power. During the past 30 years, aggregate prices have increased, on average, 4% annually. Pricing power has been exceptionally robust during the past several years in response to inflationary cost pressures, and we expect above-trend price growth to continue. We believe the multi-year growth prospects for Vulcan are especially attractive. Infrastructure-related spending, which accounts for approximately 40% of Vulcan's aggregate shipments, is accelerating. It should remain elevated as the Infrastructure and Investment Jobs Act allocates significant sums from the federal government towards new and existing infrastructure projects. Outsized state-level infrastructure spending will also drive demand across the company's footprint. Private construction spending (residential and non-residential) may accelerate over the next few years as well. Residential construction may respond to an acute need for more new homes following a 15-year period of underbuilding relative to the demographic needs of our country. Non-residential spending may accelerate to meet the real estate needs in growing areas such as logistics warehouses, data centers, and manufacturing. We continued to reduce our position in VeriSign, Inc. as the company experienced an ongoing slowdown in new internet domain registrations. We reduced our position in Fair Isaac Corporation as its shares reached new all-time highs. We reduced our position in FactSet Research Systems Inc. as the sales environment became more challenging among its core financial services customers. We sold T. Rowe Price Group, Inc., an asset management company, on concerns about a slowdown in its ability to attract additional investor assets. As discussed, returns of the broad equity market indexes have been disproportionately driven by a narrow group of mega-cap technology stocks. This has contributed to the unprecedented underperformance of mid-cap growth stocks relative to their large-cap peers. We do not believe that this phenomenon can continue indefinitely, and we believe this presents a compelling long-term opportunity for mid-cap growth stocks. Since the end of the second quarter, inflation, as measured by the Consumer Price Index, has fallen, and the Federal Reserve appears poised to begin the process of reducing interest rates. This has been an important factor that has caused mid-cap and small-cap stocks to begin outperforming large caps. We are hopeful that this will continue. We believe that lower rates should result in the market ascribing a higher valuation to the future earnings streams of all companies. We believe this development would disproportionately benefit the types of businesses we favor-companies that benefit from long-term secular growth drivers with highly visible and growing earnings streams. In addition, we believe these types of companies have been out of favor relative to more speculative businesses, and we are optimistic that this trend will reverse.

Baron Global Advantage Fund Q2 2024 Shareholder Letter

We established a new position in Tempus AI, Inc., an intelligent diagnostics and health care data company. Baron Global Advantage Fund® (the Fund) gained 3.4% (Institutional Shares) during the second quarter, compared to the 2.9% gain for the MSCI ACWI Index (the Index), and the 6.2% gain for the MSCI ACWI Growth Index, the Fund's benchmarks. Global equity indexes continued to move higher as the calendar turned to the second quarter of 2024. If this sentence seems familiar... it is because we have used it, or one like it, in the last four shareholder letters. The TL;DR for the second quarter - is really more of the same. The gains were far from uniform and were narrowly concentrated in the Magnificent Seven, yet again. Index returns continue to be driven by the largest market cap stocks, with giant caps up 7.9% in the second quarter, while large caps, mid-caps and small caps were down 0.9%, 2.8%, and 8.7%, respectively. For the time being, the center of gravity for returns continues to be the large domestic platforms. NVIDIA, Alphabet, Microsoft, Tesla, Apple, Amazon, and Meta were responsible for 105% of the Index's return in the second quarter. We trust the reader can do the math to calculate the combined return of all other stocks in the Index. Bernstein calculated that while technology stocks outperformed the market by 1,470bps year-to-date (YTD), an equal weighted technology index underperformed the market by 470bps, with the worst breadth of technology outperformance since 2002. Once again, this quarter was not a favorable investing environment for the Fund, considering it was, on average, 17.9% underweight the U.S. and 15.3% overweight micro-, small-, and mid-caps, not to mention lack of ownership of Apple, Microsoft, Amazon, Alphabet, or Meta. In that context, the Fund's 3.4% gain and 50bps of outperformance compared to the Index in the quarter, once again felt like a small win to us. From a sector attribution perspective, stock selection was strong in Consumer Discretionary and Industrials contributing 471bps to relative returns. Unfortunately, it appears we "lost" our ability to "pick" technology stocks as stock selection in Information Technology detracted 452bps (and a staggering 638bps YTD). Fortunately, we have remained significantly overweight in IT, by far the best sector during the quarter and YTD, which contributed 214bps for the quarter, and 344bps YTD, respectively, to relative returns. From a company-specific perspective, we had 17 gainers against 18 decliners with a significant dispersion of returns between contributors and detractors. Once again, the Fund's returns were led by NVIDIA (NVDA), which continued its remarkable run, up another 36.8% during the quarter, and 150.7% YTD. NVIDIA, CrowdStrike (CRWD), Coupang (CPNG), SpaceX (SPACE), MercadoLibre (MELI), and Wix (WIX) contributed over 50bps each to absolute returns while the share prices of Tesla (TSLA), InPost (OTCPK:INPOY), Codere (CDRO), Rivian (RIVN), Fiverr (FVRR), and Innovid (CTV) each posted double-digit gains during the quarter. Of course, Tesla and Rivian were two of our largest detractors just last quarter, owing to complex macro environment and challenging near-term business fundamentals. Tesla's shareholders approved, or rather once again re-approved Elon Musk's compensation plan, which helped assuage concerns of Elon's commitment to the EV leader. The company continues to show progress in its quest for full-self-driving, which could unlock a much larger opportunity in the longer term. There are over 3 trillion miles driven annually in the U.S. alone. Since robo-Teslas won't need a driver, imagine if Tesla started by charging $1 per mile, which is significantly lower than what the ridesharing companies charge today, the opportunity in the U.S. alone could be in the hundreds of billions of dollars, at very high incremental margins. It seems that other market participants are starting to underwrite this possibility. Rivian announced a deal with Volkswagen to license its software-defined electronic architecture, which shores up the company's future capital needs through the R2 model introduction via a $5 billion investment, in several tranches over the next few years. At the same time, the company is significantly expanding its scale, driving better component prices from suppliers, sharing future ongoing R&D costs, and increasing the likelihood of reaching sustainable profitability levels sooner than previously expected. We think the Volkswagen deal serves as validation of the value of Rivian's vertically integrated, software-defined architecture, and opens the opportunity for additional future IP licensing deals. These strong results and positive outcomes were partially offset by poor stock performance by several of our software and internet holdings - Shopify (SHOP), Cloudflare (NET) and Snowflake (SNOW), which detracted 293bps combined from the Fund's absolute returns, due to multiple contraction as investors continue to be hyper-focused on short-term profitability and both Shopify and Snowflake announced near-term investment cycles, while Cloudflare's guidance for the year disappointed amid a more uncertain macro environment. Unlike the stocks of Tesla and Rivian which reversed most of last quarter declines, our digital IT consulting companies, Endava (DAVA) and Globant (GLOB), continued to struggle, detracting 116bps from the Fund's results, due to the ongoing headwinds to large digitization projects. Discretionary IT budgets are strained by accelerating investments into generative AI (GenAI) which seem to be crowding out everything else. Investors continue to penalize these stocks, which, in our opinion, now trade at trough (mid-teen EPS) multiples on what we believe to be cyclically depressed earnings. To better understand stock performance, we deconstructed returns into two components - the change in multiples, and the change in fundamentals. We analyzed the change in the weighted average multiple of the Fund and the weighted average change in consensus expectations for 2024, for revenues, operating income, and operating margins. The weighted average multiple for the Fund contracted by 1% during the quarter (or by 2.7% if we exclude NVIDIA). As relates to near-term fundamentals, during the second quarter, revenue expectations for 2024 increased by 1.7% (or by 0.9% excluding NVIDIA), operating income expectations decreased by 2.4% (declined by 3.9% excluding NVIDIA) and operating margin expectations declined by 58bps (down by 70bps excluding NVIDIA). These trends are broadly in line with what we have seen in the first quarter and are driven by a slow recovery in business fundamentals (compared to low expectations) which is being reinvested back by some of our companies, hurting short-term margins but expanding long-term opportunities. While short-term focused investors penalize these stocks as can be seen by multiple contraction for the companies that have entered investment cycles (such as Shopify or Snowflake), we believe their investments make sense, and, as long-term investors, we are willing to accept some short-term pain for the benefit of long-term gain. NVIDIA Corporation sells semiconductors, systems, and software for accelerated computing, gaming, and GenAI. NVIDIA's stock continued its run, rising 36.8% in the second quarter and finishing the first half of 2024 up 150.7%. NVIDIA continued to report unprecedented growth at scale, with quarterly revenues of $26 billion growing 262% year-over-year, datacenter segment revenues of $22.6 billion up 427% year-over-year, and operating margins of 69.3%. NVIDIA's growth is even more impressive as it is approaching a new product cycle with Blackwell going into production in the third quarter and speaks to the urgency of demand for GPUs as customers are not waiting for the next generation architecture despite its improved performance to cost ratio. The Blackwell architecture, and in particular, the new GB200 NVL72/36 racks, which the company believes would become "the new unit of compute" (and will start shipping in 2025) would in our view: 1) increase the company's content per server (for example an NVL72 rack would have 18 compute trays with 4 Blackwell GPUs and 2 Grace CPUs in each, and 9 switch trays with NVIDIA content); and 2) further strengthen its competitive advantages as the demand for datacenter-scale computing grows due to scaling laws (models become more capable with size and as they are trained on more data), new model types (such as Mixture of Experts that increase the demand on sharing of data between GPUs) and model optimization mechanisms (such as tensor parallelism, pipeline parallelism, and expert parallelism - which also increase the demands from the connectivity layer), and increase the relative importance of NVIDIA's networking and full-system capabilities and in particular the capabilities enabled by the latest generation of NVLink - connecting up to 576 GPUs together, up from 8. While the stock's strong performance has pulled forward some of the longer-term upside (which we manage through position sizing), we remain early in the accelerated computing platform shift and in the adoption of AI across industries and therefore remain shareholders. NVIDIA's CEO, Jensen Huang described the opportunity in his June COMPUTEX keynote: "In the late 1890s, Nikola Tesla invented an AC generator. We invented an AI generator. The AC generator generated electrons. NVIDIA's AI generator generates tokens. Both of these things have large market opportunities. It's completely fungible in almost every industry, and that's why it's a new industrial revolution. "We have now a new factory producing a new commodity for every industry that is of extraordinary value. And the methodology for doing this is quite scalable, and the methodology of doing this is quite repeatable. Notice how quickly so many different AI models, generative AI models are being invented literally daily. Every single industry is now piling on. "For the very first time, the IT industry, which is $3 trillion, $3 trillion IT industry is about to create something that can directly serve $100 trillion of industry. No longer just an instrument for information storage or data processing but a factory for generating intelligence for every industry... What started with accelerated computing led to AI, led to generative AI and now an industrial revolution." CrowdStrike Holdings, Inc. is a cloud-architected SaaS cybersecurity vendor offering endpoint security, threat intelligence, and cyberattack response services. Shares continued their strong performance from the first quarter and were again a top contributor, rising 19.6% in the second quarter on better execution than peers in the broader security space. The company reported strong quarterly results with 33% year-over-year revenue growth, driven by customers standardizing their cyber-security spend on CrowdStrike with free cash flow margins reaching 35%. With accelerating share gains in its core endpoint detection and response market, emerging products including Cloud, Identity, and SIEM reaching material scale, and newer products in Data Protection and AI ramping quickly, net new annual recurring revenue and total revenue look to sustain a long duration of growth. With its leading competitive positioning in cybersecurity, the growing threat landscape (which is also driven by the advancements in AI, making hackers more dangerous), its unique lightweight, single-agent, architecture, and its platform approach, we retain conviction in CrowdStrike, which is emerging as the security platform to beat in terms of scale, profitability, and free cash flow conversion. Shares of Coupang, Inc., Korea's largest e-commerce marketplace, appreciated 17.8% in the second quarter on strong quarterly results with revenue growth of 33% year-over-year (in constant currency, excluding the impact of an accounting change for fulfillment services and the acquisition of Farfetch), showing continued acceleration from 20% growth in the first quarter of 2023, and 29% growth in the fourth quarter of 2023, driven by market share gains within Korean e-commerce and retail overall. EBITDA margins in its core Product Commerce segment also continued to surprise to the upside, reaching 7.2%, up 210bps year-over-year. We view Coupang as one of the most competitively advantaged e-commerce businesses globally, with significant runway for both revenue and earnings growth as the company continues to gain market share in the U.S. $500 billion-plus Korean retail market, while expanding its offerings into additional categories, expanding its ecosystem via a third-party marketplace, expanding internationally and continuing to invest in infrastructure density to further capture inefficiencies, enhancing the customer experience and improving profit margins. Shopify Inc. is a cloud-based software provider for multi-channel commerce. Shares declined 14.4% in the second quarter despite reporting solid quarterly results with revenue growth of 23% year-over-year, which implies continued market share gains, after the company announced it is entering an investment cycle. Since the increased investment period comes after over a year of consistent margin expansion, it left short-term-focused investors disappointed. We, however, believe that this is the right course of action for several reasons. First, the company expects solid returns on the increased marketing spend with 18-month payback periods. Second, the investment should help solidify Shopify's competitive position and drive further market share gains. Finally, the increased spend should contribute to the probability of success in newer areas of opportunity with large addressable markets, including offline commerce, international, and enterprise. Shopify shared several metrics showing early success, with gross merchandise value up 130%, 38%, and 32% year-over-year in B2B, EMEA, and offline, respectively. We remain shareholders due to Shopify's strong competitive positioning, innovative culture, and long runway for growth, as it still holds less than a 2% share of the global commerce market. Cloudflare, Inc. provides content delivery network services, cloud cybersecurity, denial-of-service mitigation, Domain Name Service, and ICANN-accredited domain registration services. Shares fell 14.5% during the quarter on remarks from the CEO about worsening macro conditions, citing the negative impact of geopolitical uncertainties on customer buying behavior. On the positive side, the company posted strong quarterly results with revenue growth of 30% year-over-year, showing evidence that the changes to the company's go-to-market strategy were resonating with solid growth across its large customer cohorts (revenues from customers spending over $100,000 represented 67% of the total, up from 62% in the first quarter of 2023), double-digit improvement in sales productivity, and new pipeline attainment ahead of plan. Cloudflare reiterated revenue guidance for the year on resilience in cybersecurity spend. While we fine-tuned our model on the back of the company's increased macro headwind commentary, pushing out revenue reacceleration estimates from the second quarter of 2024 to the first quarter of 2025, this is still ahead of guidance. We retain conviction in the long-term thesis: a strong founder-led business with a unique global network and significant pricing advantages powering a disruptive multi-product growth story with improving margins. We therefore remain shareholders. Shares of IT services provider Endava plc fell 23.1% during the second quarter on continued soft demand trends. Revenue declined in the most recent reported quarter as customers pulled back on discretionary IT spending and delayed decisions on new projects to better incorporate recent advancements in GenAI. However, management believes demand is stabilizing as they are seeing a growing pipeline of new projects. While timing the cycle remains a challenge, we remain invested because we expect these near-term headwinds to abate over time, leading to better growth as clients embrace digital transformation, and as the current valuation offers a positively skewed risk/reward equation for long-term investors, in our view. The portfolio is constructed on a bottom-up basis with the quality of ideas and conviction level having the most significant roles in determining the size of each individual investment. Sector and country weights are an outcome of the stock selection process and are not meant to indicate a positive or a negative "view." As of June 30, 2024, the top 10 positions represented 60.1% of the Fund's net assets, and the top 20 represented 88.2%. We ended the second quarter with 36 investments compared to 34 at the end of 2023. Note that our top 25 investments represented over 96% of net assets. Our investments in the IT, Consumer Discretionary, Industrials, Financials, and Health Care sectors, as classified by GICS, represented 99.9% of the Fund's net assets. Our investments in non-U.S. companies represented 53.4%, and our investments in emerging markets and other non-developed countries (Argentina) totaled 27.6%. During the second quarter, we initiated one new investment: a health care diagnostics company, Tempus AI (TEM), and continued building our position in the automotive focused fabless semiconductor company indie Semiconductor (INDI). We reduced 15 existing holdings and exited a small investment in the connectivity-focused fabless semiconductor company Astera Labs (ALAB), as the stock's run up post its IPO led to better opportunities elsewhere. During the quarter, we established a new position in Tempus AI, Inc., an intelligent diagnostics and health care data company. Founder/CEO Eric Lefkofsky says, "Tempus was designed to bring AI to diagnostics, because diagnostics sit at the epicenter of life and death decisions. Physicians rely on test results at each pivot point. When that data is connected to medical records for the patient for whom it was ordered, we have the necessary ingredients to contextualize the diagnostic and personalize it, resulting in more tailored and optimal therapies." Tempus has two synergistic business units: Genomics and Data & Other. Within the genomics business, Tempus provides diagnostic tests, particularly for cancer treatment selection. The company's labs sequence the tumor's genome and transcriptome (gene expression) and can help oncologists select the best treatment for their patients. Compared with other cancer diagnostics companies, Tempus has industry-leading tests in terms of breadth, accuracy, and turnaround time and it is the only lab that provides data on how other patients with similar clinical profiles have fared on different therapies. We think the cancer treatment selection sequencing market has a long runway for growth and Tempus is well positioned as a leader in the field. There are approximately 700,000 patients in the U.S. diagnosed with metastatic cancer each year and each patient could benefit from several therapy selection tests (solid and liquid biopsy, as well as testing upon recurrence). As access and reimbursement improves, we think cancer therapy selection diagnostics could address a $10 billion total addressable market (TAM) in the U.S. alone. We believe that Tempus's diagnostic business could more than triple in size and exceed $1 billion in revenues by 2030. The genomics testing data also feeds into Tempus's value as a data company. Tempus has amassed a huge (over 200 petabytes) proprietary multimodal dataset that combines clinical patient data (which includes clinical records and imaging data from two-way collaborations with health systems) with genomic testing data from the Genomics business. Tempus's dataset includes 7.7 million clinical records, over 1 million imaging records, over 910,000 matched clinical and molecular dataset profiles, and over 970,000 samples that were sequenced. In addition to using this data to empower more intelligent diagnostics, Tempus licenses this data to biopharmaceutical companies who use it to design smarter clinical trials and identify potential new drug targets. Tempus works with 19 of the top 20 pharmaceutical companies in this capacity and has disclosed 9-figure deals with three biopharmaceutical companies. In total, Tempus has $620 million in remaining contract value and an additional $300 million in opt-ins, compared to approximately $169 million in Data revenues in 2023. Based on our discussions with customers, they see immediate value using the data to better define biomarkers and stratify patient populations. We think this proprietary dataset is unique and would prove challenging for competitors to replicate. We also believe that it brings meaningful value to biopharmaceutical R&D and are therefore willing to underwrite a long runway for growth for Tempus as more customers take advantage of its data in their drug development programs. We also continued adding to our position in indie Semiconductor, Inc., which we initiated last quarter. As a reminder, indie is a fabless designer, developer, and marketer of automotive semiconductors for applications including advanced driver assistance systems, car connectivity, user experience, and electrification. While indie is not immune from the cyclical slowdown that is currently impacting the automotive semiconductor market, we believe the company is well positioned over the long term, whereas the cyclical backdrop creates an opportunity for us to build our position at an attractive valuation. During the quarter, we sold our small position in the fabless semiconductor company, Astera Labs, Inc., as the company's stock shot up immediately post-IPO, which didn't enable us to build it into a core position with a favorable enough risk/reward. Additionally, we reduced 15 of our other existing positions in order to fund investor outflows and reallocate to the names we added. These included a reduction in our NVIDIA Corporation position. We would note that our conviction level in the company has not changed although the stock's incredible recent performance pulled forward some of its future returns, which by definition, tilts the risk/reward equation, prompting us to slightly reduce our position. Nevertheless, NVIDIA remains our largest position in the Fund as we remain in the early innings of AI adoption across industries from health care to automotive, and as the race for Artificial General Intelligence continues. The demand growth curve for accelerated computing remains exponential as newer frontier models continue to get larger and are trained on more data.8 In addition, as we continue to go down the demand elasticity curve through innovation by NVIDIA and as AI algorithms become more compute-efficient and go up the level of intelligence generated per unit of compute curve, the demand for accelerated computing will continue to grow, benefiting NVIDIA, in our view. As in years past, we have little to offer in the way of a market outlook. Has inflation been tamed? Will the economy continue to slow down? Will we get the three interest rate cuts or none? Trump or Biden or someone else? While these questions are not new, the answers remain elusive, and once they will get answered, other, similar questions will arise. We practice a probabilistic approach to investing and for the time being we expect to continue to operate in an environment where the range of outcomes will remain unusually wide. Importantly, we do not structure or position the portfolio to benefit from any particular market environment. Instead, we focus on investing in what we believe are high quality businesses - companies with sustainable competitive advantages, exceptional management teams with a proven track record of operational excellence and successful capital allocation, and importantly, businesses that we believe have a long runway for growth and an opportunity to become materially larger than they are today. The rapid advancement of GenAI technology presents both clear risks and compelling opportunities. While the implications of AI on the global economy and on particular industries and businesses are not yet clear, we believe our portfolio includes many companies that are well positioned to benefit from this technological paradigm shift. Every day, we live and invest in an uncertain world. Well-known conditions and widely anticipated events, such as Federal Reserve rate changes, ongoing trade disputes, government shutdowns, and the unpredictable behavior of important politicians the world over, are shrugged off by the financial markets one day and seem to drive them up or down the next. We often find it difficult to know why market participants do what they do over the short term. The constant challenges we face are real and serious, with clearly uncertain outcomes. History would suggest that most will prove passing or manageable. The business of capital allocation (or investing) is the business of taking risk, managing the uncertainty, and taking advantage of the long-term opportunities that those risks and uncertainties create. We are optimistic about the long-term prospects of the companies in which we are invested and continue to search for new ideas and investment opportunities while remaining patient and investing only when we believe the target companies are trading at attractive prices relative to their intrinsic values.

Baron FinTech Fund Q2 2024 Shareholder Letter

In the quarter ended June 30, 2024, Baron FinTech Fund® (the Fund) fell 2.25% (Institutional Shares) compared with a 5.78% decline for the FactSet Global FinTech Index (the Benchmark). Since inception, the Fund has risen at a 9.41% annualized rate compared with 0.80% for the Benchmark. Table I. Performance - Annualized for periods ended June 30, 2024 U.S. equities rose in the second quarter with major market indices hitting new highs. Corporate earnings were better than expected and mixed economic data suggests that inflation continues to moderate. However, the equity rally was driven by a narrow segment of the market, mostly in the mega-cap technology sector. The so-called Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla) appreciated 17.0% during the quarter, accounting for all the gains in the S&P 500 (SP500) and NASDAQ Composite (COMP:IND) Indexes. The remaining securities in these benchmarks collectively declined during the period with the equal-weighted S&P 500 Index down about 3%, demonstrating the outsized impact of the Magnificent Seven. Outside of the U.S., emerging market equities outperformed due to a rebound in China and strength in India following election results. Small- and mid-cap stocks declined in the period, trailing large caps by almost 7%. Growth outperformed value across most size segments, with the differential being most prominent in large cap where the Magnificent Seven comprise more than half of the Russell 1000 Growth Index's assets. During the second quarter, the Fund outperformed the Benchmark but trailed the broader market given the Fund's smaller market cap profile and lack of exposure to the Magnificent Seven. The general underperformance of Financials stocks, where the Fund has heavy exposure, was also a headwind to relative performance versus the broader market. Leaders outperformed Challengers (down 1.3% versus down 4.7%, respectively). Stock selection in five of our seven themes contributed to relative performance (Capital Markets, Information Services, Tech-Enabled Financials, E-Commerce, and Enterprise Software). Despite equity market performance being driven by large-cap stocks, the Fund's smaller cap holdings outperformed our mid- and large-cap holdings during the quarter. Favorable stock selection in the Capital Markets theme contributed the most to relative performance. Shares of global electronic broker Interactive Brokers Group, Inc. (IBKR) outperformed due to solid execution with 25% growth in client accounts and 20% growth in revenue. IBKR also benefited from persistently high interest rates as the company earns interest income on customer cash balances. Global investment bank Houlihan Lokey, Inc. (HLI) performed well on expectations for M&A activity to improve from cyclically depressed levels due to stabilizing interest rates, firming corporate valuations, and significant dry powder across private equity funds that will eventually be deployed into new investments. Shares of electronic fixed income marketplace Tradeweb Markets Inc. (TW) rose due to strong volume trends driven by favorable market conditions and share gains in key products. The Information Services theme also contributed to performance thanks to double-digit gains from data and analytics companies Fair Isaac Corporation (FICO) and Verisk Analytics, Inc. (VRSK). FICO was the largest contributor due to a beat-and-raise quarter and optimism about the large potential earnings benefit from a drop in interest rates leading to greater consumer lending activity. Verisk performed well due to better-than­ expected quarterly results and favorable trends in the company's insurance end market. Stabilizing interest rates and favorable debt capital markets activity drove outperformance at rating agencies S&P Global Inc. (SPGI) and Moody's Corporation (MCO). Non-financial corporate debt issuance was up by double digits, most notably in high yield bonds, leveraged loans, and structured finance where rating agencies earn higher fees. Strength in Tech-Enabled Financials was broad based, led by gains from alternative asset manager Apollo Global Management, Inc. (APO) and specialty insurer Arch Capital Group Ltd (ACGL). Apollo continues to benefit from disruptive trends in financial services, most notably the shift of retirement assets into higher-yielding private credit given the company's dual role as an asset manager and an annuity provider. Arch outperformed after reporting strong quarterly results with a 21% operating ROE and 40% growth in book value per share due to strong underwriting profitability and the establishment of a deferred tax asset at the end of 2023. Favorable conditions persist in the property and casualty (P&C) insurance market with rapid premium growth and attractive margins after several years of significant price increases. Partially offsetting the above were adverse impacts associated with the Fund's meaningfully lower exposure to the better performing Enterprise Software theme and unique exposure to Digital IT Services, where Endava plc (DAVA) and Accenture plc (ACN) were detractors. Shares of these companies underperformed due to weak revenue growth as business customers pulled back on discretionary IT spending and delayed decisions on new projects to better incorporate recent advancements in generative AI (GenAI). Our Digital IT Services holdings have been a persistent drag on performance due to less durable demand trends than we expected. We believe a revenue growth recovery is a question of when, not if, so we continue to own these stocks at what we believe to be attractive valuations, but they collectively represent a small 3.0% portion of Fund net assets. Table II. Top contributors to performance for the quarter ended June 30, 2024 Fair Isaac Corporation is a data and analytics company focused on predicting consumer behavior and is best known for its ubiquitous FICO scores. Shares increased after the company reported solid quarterly results and raised annual guidance. During the quarter, we attended the company's annual user conference where CEO Will Lansing expressed confidence about the business's performance under varying macroeconomic conditions and was optimistic about the growth potential for the software business. The market brushed off areas of near-term uncertainty, such as the impact of consumer lending activity on Scores volumes and a potential regulatory investigation into Scores pricing, and instead focused on the likely benefits of Federal Reserve rate cuts. Mortgage originations are running 50% below the long-term historical average, so we estimate that a return to normal activity would increase FICO's earnings by half. We continue to own the stock because of FICO's significant competitive advantages and expect that consistent earnings growth will drive attractive returns for the stock over the long term. Shares of P&C insurance software vendor Guidewire Software, Inc. (GWRE) outperformed after the company reported strong quarterly results that exceeded consensus expectations and raised full-year guidance. Annual recurring revenue (ARR) growth accelerated to 15%, subscription revenue grew 35%, and subscription gross margins expanded by over 10 percentage points during the recent quarter. We believe the company's multi-year cloud transition is nearly complete. ARR should benefit from new customer wins and migrations of existing on-premise software customers to InsuranceSuite Cloud. We also expect the company to shift R&D resources from infrastructure investment to product development, which will help drive cross-sales into the large installed base and potentially accelerate ARR over time. We believe that Guidewire will be the critical software vendor for the global P&C insurance industry, capturing 30% to 50% of its $15 billion to $30billion total addressable market and generating margins above 40%. Shares of Verisk Analytics, Inc., a leading data and analytics vendor for the insurance industry, contributed to performance. The company reported strong quarterly earnings, especially relative to muted expectations, with accelerating revenue growth and significant margin expansion. Management expressed optimism regarding the state of the P&C insurance end-market with strong premium growth and improving profitability leading to better growth prospects for Verisk. We maintain conviction in the competitive positioning, long-term growth, margin expansion, and capital deployment potential for the business. Table III. Top detractors from performance for the quarter ended June 30, 2024 Wise Plc (OTCPK:WPLCF) is a UK-based provider of money transfer services for individuals and businesses across the world. Despite reporting solid operational trends and a large earnings beat in its half-year results, Wise shares declined as commission price cuts led to weaker-than-expected fiscal year 2025 earnings guidance. Medium-term guidance of 15% to 20% underlying income growth was also below consensus expectations. We believe the guidance is conservative and aligned with the company's strategy to reduce fees and reinvest in the business. Wise captures less than 5% of the $2.6 trillion that individuals transfer across borders each year and less than 1% of the $11.6 trillion that businesses move internationally. We remain bullish on Wise as we believe its platform, licenses, and global connections are competitive advantages that enable the company to deliver a better value proposition to customers and gain share in a large global market. Shares of payment processor Global Payments Inc. (GPN) fell due to concerns about margins in its merchant acquiring segment as well as weak performance of payments stocks overall during the quarter. Nevertheless, the company reported solid quarterly results with revenue growth of 7% and earnings per share growth of 8% or mid-teens excluding a business divestiture. Management reaffirmed annual guidance, calling for 6% to 7% revenue growth and 11% to 12% EPS growth on an adjusted basis. We view the shares as significantly undervalued at less than nine times earnings given our expectations for continued double-digit EPS growth. Block, Inc. (SQ) provides point-of-sale technology to small businesses and operates the Cash App ecosystem of financial services for individuals. Shares gave back gains from earlier this year despite reporting strong quarterly results and raising full-year guidance. In the first quarter, gross profit grew 22% and EBITDA grew 91%, both exceeding Street expectations. Given the strong start to the year, second-quarter guidance of 16% to 17% gross profit growth may have disappointed some investors. Management remains committed to a "Rule of 40" investment framework in 2026 with at least mid-teens gross profit growth and a mid-20% operating margin. We continue to own the stock due to Block's long runway for growth, durable competitive advantages, and innovative product offering. We seek to invest in competitively advantaged, growing fintech companies for the long term. We conduct independent, fundamental research and take a long-term perspective. We invest in companies across all market capitalizations and geographies. The quality of the ideas and level of conviction determine the position size of each investment. We do not try to mimic an index, and we expect the Fund will look very different from the Benchmark. As of June 30, 2024, we held 45 positions (or 35excluding positions smaller than 1%). The Fund's 10 largest holdings represented 42.5% of net assets, and the 20 largest holdings represented 70.4% of net assets. International stocks represented 12.0% of net assets. The market capitalization range of the investments in the Fund was $699 million to $539 billion with a median of $30.3 billion and a weighted average of $99.9 billion. The Fund's active share versus the Benchmark was 86.8%. We segment the Fund's holdings into seven investment themes. As of June 30, 2024, Tech-Enabled Financials represented 25.9% of net assets, Information Services represented 23.8%, Payments represented 17.1%, Enterprise Software represented 14.1%, Capital Markets represented 9.5%, E-Commerce represented 5.1%, and Digital IT Services represented 3.0%. Relative to the Benchmark, the Fund remains underweight in Enterprise Software and Payments, and has overweight positions in Tech-Enabled Financials, Information Services, Capital Markets, Digital IT Services, and E-Commerce. We also segment the Fund's holdings between Leaders and Challengers. Leaders are generally larger, more established companies with stable growth rates, higher margins, and moderate valuation multiples. Challengers are generally smaller, earlier-stage companies with higher growth rates, lower margins, and higher valuation multiples. As of June 30, 2024, Leaders represented 77.6% of net assets and Challengers represented 20.9%, with the remainder in cash. Table V. Fund investments in GICS sub-industries as of June 30, 2024 * Individual weights may not sum to the displayed total due to rounding. During the quarter, we initiated one new position. Below we discuss some of our top net purchases and sales. Table VI. Top net purchases for the quarter ended June 30, 2024 We initiated a position in KKR & Co. Inc. (KKR), one of the largest alternative asset managers in the world with $578 billion of assets under management (AUM). We believe alternative asset management is one of the best secular growth areas of financial services, and KKR should be a prime beneficiary. Global alternatives AUM totaled $16.3 trillion at the end of 2023 and grew at an 11% CAGR since 2010, according to Preqin. Annual industry growth is expected to exceed 8% over the next five years with private equity (PE), venture capital, and private credit expected to grow at double-digit annual rates. Founded in 1976 as one of the earliest leveraged buyout firms, KKR was led for decades by co-founders Henry Kravis and George Roberts. Since going public in 2010 as a pure-play PE firm, KKR has successfully diversified into other private asset classes, including private credit, real estate, and infrastructure investing. AUM has risen nearly 10-fold since 2010 (an 18% CAGR), and PE's share of firm AUM has shrunk to less than one-third. These non-PE asset classes are less penetrated than PE and provide a substantial runway for KKR to continue growing its funds, fees, and earnings. KKR also has significant growth opportunities in Asia. The firm entered the Asian market in 2005 and has a scaled presence with 570 employees in a region where alternative asset management is far less penetrated compared to Western countries. In 2021, KKR successfully transitioned leadership from Kravis and Roberts to co-CEOs Scott Nuttall and Joe Bae, longtime KKR employees responsible for many of the growth initiatives that are driving KKR's success today. In addition to its globally diversified asset management business, KKR has significant exposure to the growth of private credit through its ownership of Global Atlantic, an insurance company with $177 billion of AUM. Like Athene (an insurer owned by Apollo Global Management, Inc., another holding of the Fund), Global Atlantic is a beneficiary of the shift of illiquid credit assets into the private markets where they are better matched from a funding duration perspective and can deliver higher yields than publicly traded fixed income securities with the same credit ratings. KKR also has a strategic holdings segment that includes co-investments in a portfolio of high-quality businesses managed by KKR's PE funds. These balance sheet investments should generate a durable stream of earnings and dividends for KKR that will be reinvested back into the business or returned to shareholders. As KKR enters a new fundraising cycle, management expects to raise over $300 billion of capital over the next three years. When we attended the company's investor day in April, management guided to 20% annualized growth in fee-related earnings and 30% annualized growth in earnings per share, reaching $7 to $8 by 2026. We believe our initial purchase of the stock around $100 per share represents an attractive valuation of 12.5 times earnings (using the top end of the 2026 guidance range) for a durable growth business. Furthermore, KKR management expects earnings to more than quadruple to over $15 per share within ten years, representing a 16% CAGR. We think KKR's diversified platform of leading businesses gives the company multiple ways to grow earnings as they execute into the expanding market for alternative assets, which should bode well for the stock over the long run. Table VII. Top net sales for the quarter ended June 30, 2024 We trimmed Accenture plc and Globant S.A. due to continued weak demand for IT services. Business customers are spending on cost-optimization projects, while discretionary spending on revenue-generating projects remains under pressure. We had expected GenAI excitement to be a more meaningful contributor to demand by now, but GenAI-related projects represent a small portion of revenue, AI infrastructure spending is crowding out software spending, and uncertainty about the impact of GenAI is likely causing delays in client decision-making. We believe most of these issues are temporary and expect growth to eventually improve, but we redeployed the proceeds from these sales into higher conviction ideas. We also made small trims of Fair Isaac Corporation and The Progressive Corporation (PGR) on strength to manage position sizes and fund purchases elsewhere in the portfolio. Fintech sector returns in the first half of 2024 haven't matched the strong returns in the broader equity market over the same period or the 23% return that the fintech Benchmark produced last year. The year-to-date return for the Fund is nearly 4% and the fintech sector is down more than 2% (as measured by the Benchmark), both of which are well below the 15% return for the S&P 500 Index. As mentioned earlier, U.S. equity market indices have been driven by a small number of very large technology companies, most of which are direct beneficiaries of the massive infrastructure spending on GenAI (e.g., NVIDIA chips) or are spending massively on GenAI with the potential for a future payoff (e.g., Alphabet, Amazon, Meta, Microsoft). Meanwhile, returns for most stocks have been relatively muted, with the equal-weighted S&P 500 Index up 5% year-to-date, only somewhat better than the Fund's performance. GenAI has captured the market's imagination, but it's still very early in the user adoption of this new technology, and the financial payoff from investments into GenAI models and infrastructure is still unknown. We are focused on investing in strong businesses that will be improved by AI, even if this improvement takes time to materialize. For example, FactSet Research Systems Inc. (FDS) recently launched new products that use GenAI to extract insights from earnings call transcripts and to draft portfolio commentary at the click of button, reducing the time and effort needed to write quarterly letters like this. Intuit Inc. (INTU) has been rolling out Intuit Assist, a GenAI­ powered digital assistant, across its product lines to help Credit Karma users select new credit cards, QuickBooks customers forecast cash flow, Mailchimp customers create targeted email marketing campaigns, and TurboTax customers understand changes in their tax returns from the prior year. Klarna, the privately held consumer lending and payments company, is cutting costs by using GenAI assistants to handle two-thirds of customer service chats and reduce its dependency on external marketing agencies. We consider these GenAI advancements to be evolutionary rather than revolutionary, but we continue to closely monitor the impact of new technologies on the fintech industry. Despite share price performance in the fintech sector lagging broad market indices, fintech sector fundamentals remain strong with mid-teens earnings growth across the Fund. We continue to invest behind secular themes where the intersection of financial services and technology should drive innovation and growth for years to come. One of these themes is the growth of private markets, which are the fastest growing segment of asset management with alternative assets expected to reach nearly $40 trillion by 2030. BlackRock Inc. (BLK) is acquiring Global Infrastructure Partners, a leading independent infrastructure fund manager with over $100 billion in AUM, to capitalize on the growing need to modernize digital infrastructure, upgrade supply chains and logistics infrastructure, and invest in renewable energy. BlackRock also announced the acquisition of Preqin, a leading private markets data vendor, to provide standardized information, benchmarks, and analytics in an $8 billion data market expected to grow 12% annually through the end of the decade. This $3.2 billion acquisition of Preqin should underscore the significant value of Morningstar, Inc.'s (MORN) private market data provider, Pitchbook, which generates more than twice as much revenue as Preqin and is growing at a double-digit rate. Another theme we're investing in is the growth of private credit in life insurance investment portfolios. In contrast to commercial banks which fund long-duration loans with short-duration deposits that can be unexpectedly withdrawn or repriced at any time, life insurance companies create more stable funding by selling multi-year fixed annuities to investors. These annuities have fixed terms and are usually protected from early surrender, which allows the proceeds to be invested in highly rated private credit with higher yields but less liquidity than publicly traded fixed income securities with the same credit risk. This illiquidity premium is highly valuable in an industry with narrow spreads, providing a competitive edge to well-managed annuity providers that invest in private credit. In addition, higher interest rates combined with a growing population of retirees are spurring greater demand for guaranteed income products. Fixed annuity sales grew 37% in 2023 and have more than doubled since 2021, providing a greater supply of capital that can be invested in highly rated private credit. Apollo Global Management, Inc. and KKR & Co. Inc. are capitalizing on this trend through their ownership of life insurers Athene and Global Atlantic, which are also driving growth in those firms' private credit asset management businesses. While the Magnificent Seven and GenAI enthusiasm have been the primary drivers of equity market performance in the first half of the year, we sense that momentum may shift over the rest of the year. In the first three weeks of July, small caps outperformed large caps with returns for the equal-weighted S&P 500 Index exceeding the market cap-weighted version. While this recent trend could reverse, a broadening of market performance beyond mega-cap technology stocks could shift attention back to the fast-growing, competitively advantaged, and well-managed fintech companies in which we invest. Thank you for investing in the Fund. We remain significant shareholders alongside you.

Baron Fifth Avenue Growth Fund Q2 2024 Shareholder Letter

Top detractors were Shopify Inc., Snowflake Inc., and Cloudflare, Inc. Baron Fifth Avenue Growth Fund® (the Fund) gained 5.7% (Institutional Shares) during the second quarter, which compares to gains of 8.3% for the Russell 1000 Growth Index (R1KG) and 4.3% for the S&P 500 Index (SPX), the Fund's benchmarks. Year-to-date, the Fund is up 19.1% compared to gains of 20.7% for the R1KG and 15.3% for the SPX. U.S. large-cap was once again the place to be in the second quarter of 2024. The theory behind last year's ferocious bounce back with the R1KG gaining 42.7% and the SPX rising 26.3% (the Fund gained 57.6%) was the Federal Reserve's gearing up for significant reductions in interest rates with the consensus pricing in seven rate cuts in 2024, which would ostensibly support the economy and be bullish for growth equities. How many would have expected the R1KG to appreciate an additional 20.7% with zero rate cuts in the first six months of the year? We think there are two main reasons for markets decoupling from interest rates and continuing to power higher: 1) the economy is proving to be surprisingly resilient even at much higher rates; and 2) generative AI (GenAI). Inflation continues to come down to normalized levels with June's 3% CPI reading the slowest since March 2021. While the economy has slowed down, real GDP growth was 1.4% in the first quarter and the early reading for the second quarter is for stronger growth. The current dot plot and consensus expectation is for three rate cuts starting in September. Unemployment remains low at 4.1%, and a "soft landing" or maybe even "no landing" now seem to be the most likely outcome. U.S. large-cap stocks continue to outperform most other asset classes and just like in recent quarters past returns were driven by a narrow group of stocks currently referred to as the Magnificent Seven. For the June quarter, NVIDIA, Amazon, Microsoft, Apple, Alphabet, Tesla, and Meta accounted for 99.7% of the R1KG's gain. No math skills are required to realize that the remaining members of the Index have combined to generate essentially no return at all. What do these Semiconductor, Consumer Discretionary/Retailer, Software, Hardware, Communication Services, Automobile Manufacturer and Interactive Media companies have in common? A credible GenAI story! The largest market cap category within the RIKG was up 12.4% in the second quarter, while all other market cap categories in the Index declined 1.5% in the quarter. These seven stocks now represent 51.9% of the RIKG (Microsoft, Apple, and NVIDIA represent 32.9%). The Fund was on average 25.9% underweight the largest market cap category and 10.6% underweight the Magnificent Seven. Since they continued to get larger during the quarter, we ended up with an even greater, 12.8% underweight. In that context, we feel reasonably good about the Fund's absolute and relative returns at the mid-point of the year. From a sector attribution perspective, we did well in Consumer Discretionary and Industrials, and were helped by not having investments in Consumer Staples, Materials, Real Estate, and Energy. After adding the most relative outperformance in the first quarter, Information Technology was our weakest sector and stock selection in Financials and Communication Services also detracted from relative returns. From a company-specific standpoint, we had 17 contributors against 13 detractors in the quarter. NVIDIA (NVDA), CrowdStrike (CRWD), Amazon (AMZN), Intuitive Surgical (ISRG), Trade Desk (TTD), Alphabet (GOOG), Coupang (CPNG), Tesla (TSLA), MercadoLibre (MELI), Microsoft (MSFT), and Meta (META) each contributed 25bps or more to absolute gains, while Shopify (SHOP), Snowflake (SNOW), Cloudflare (NET), Block (SQ), Adyen (OTCPK:ADYEY), Veeva (VEEV), and Endava (DAVA) each detracted 25bps or more. The challenging performance of the Fund's internet and software securities within IT, as well as its Financials stocks was not limited only to the companies listed here. These sectors saw a significant multiple contraction during the quarter, with declines ranging from 4.4% for software to 23.0% for Financials. We analyzed the Fund's performance by breaking down returns into two key components: changes in valuation multiples and changes in company fundamentals.4 This quarter, the Fund's weighted average multiple declined 0.8% (excluding NVIDIA, the decline was 2.8%), which means the Fund's quarterly performance was driven in its entirety by the growth in businesses' earnings. For the overall portfolio, during the second quarter, revenue expectations for 2024 increased by 1.3% (or by 0.3% excluding NVIDIA), operating income expectations increased by 1.4% (up 0.2% excluding NVIDIA), and operating margin rose 5bps (down 1bp excluding NVIDIA). These trends were broadly in line with what we have seen in the first quarter and were driven by a slow recovery in business fundamentals compared to low expectations. Many of our companies continue to reinvest heavily, hurting short-term profit margins but expanding long-term opportunities. While short-term focused investors penalize these stocks as can be seen by multiple contraction for the companies that have entered investment cycles (such as Shopify or Snowflake which now trade at low multiples on cyclically depressed earnings), we believe their investments make sense and as long-term investors we are willing to accept some short-term pain for the benefit of long-term gain. NVIDIA Corporation sells semiconductors, systems, and software for accelerated computing, gaming, and GenAI. NVIDIA's stock continued its run, rising 36.3% in the second quarter and finishing the first half of 2024 up 149%. NVIDIA continued to report unprecedented growth at scale, with quarterly revenues of $26 billion growing 262% year-over-year, datacenter segment revenues of $22.6 billion up 427% year-over-year, and operating margins of 69.3%. NVIDIA's growth is even more impressive as it is approaching a new product cycle with Blackwell going into production in the third quarter, which speaks to the urgency of demand for GPUs as customers are not waiting for the next generation architecture despite its improved performance to cost ratio. The Blackwell architecture, and in particular, the new GB200 NVL72/36 racks, which the company believes would become "the new unit of compute" (and will start shipping in 2025) would in our view: 1) increase the company's content per server (for example an NVL72 rack would have 18 compute trays with 4 Blackwell GPUs and 2 Grace CPUs in each, and 9 networking trays with NVIDIA content); and 2) further strengthen its competitive advantages as the demand for datacenter-scale computing grows due to scaling laws (models become more capable with size and as they are trained on more data), new model types (such as Mixture of Experts that increase the demand on sharing of data between GPUs) and model optimization mechanisms (such as tensor parallelism, pipeline parallelism, and expert parallelism - which also increase the demands from the connectivity layer), and increase the relative importance of NVIDIA's networking and full-system capabilities and in particular the capabilities enabled by the latest generation of NVLink - connecting up to 576 GPUs together, up from 8. While the stock's strong performance has pulled forward some of the longer-term upside (which we manage through position sizing), we remain early in the accelerated computing platform shift and in the adoption of AI across industries and therefore remain shareholders. NVIDIA's CEO, Jensen Huang described the opportunity in his June COMPUTEX keynote: "In the late 1890s, Nikola Tesla invented an AC generator. We invented an AI generator. The AC generator generated electrons. NVIDIA's AI generator generates tokens. Both of these things have large market opportunities. It's completely fungible in almost every industry, and that's why it's a new industrial revolution. "We have now a new factory producing a new commodity for every industry that is of extraordinary value. And the methodology for doing this is quite scalable, and the methodology of doing this is quite repeatable. Notice how quickly so many different AI models, generative AI models are being invented literally daily. Every single industry is now piling on. "For the very first time, the IT industry, which is $3 trillion, $3 trillion IT industry is about to create something that can directly serve $100 trillion of industry. No longer just an instrument for information storage or data processing but a factory for generating intelligence for every industry... What started with accelerated computing led to AI, led to generative AI and now an industrial revolution." CrowdStrike Holdings, Inc. is a cloud-architected SaaS cybersecurity vendor offering endpoint security, threat intelligence, and cyberattack response services. Shares continued their strong performance from the first quarter and were again a top contributor, rising 19.5% in the second quarter on better execution than peers in the broader security space. The company reported strong quarterly results with 33% year-over-year revenue growth, driven by customers consolidating their cybersecurity spend on CrowdStrike with free cash flow margins reaching 35%. With accelerating market share gains in its core endpoint detection and response offering, emerging products including Cloud, Identity, and SIEM reaching material scale, and newer products in data protection and AI ramping quickly, net new annual recurring revenue and total revenue look to sustain a long duration of growth. With its leading competitive positioning in cybersecurity, the growing threat landscape (which is also driven by the advancements in AI, making hackers more dangerous), its unique lightweight, single-agent, architecture, and its platform approach, we retain conviction in CrowdStrike, which is emerging as the security platform to beat in terms of scale, profitability, and free cash flow conversion. Amazon.com, Inc. is the world's largest retailer and cloud services provider. Shares increased 7.1% on quarterly results that exceeded consensus expectations, with revenue growth of 12.5% year-over-year and operating margins of 10.7% (up from 3.7% in the first quarter of 2023). We believe that Amazon is well positioned in the short to medium term to continue improving its core North American margins, which were 5.8% in the first quarter thanks to its continuous efficiency and cost-to-serve improvements, while AWS margins inflected higher, reaching 37.6% (or 34% excluding an accounting change in the useful life of servers). Additionally, Amazon continues to benefit from its fast-growing, margin-accretive advertising business winning market share in digital advertising thanks to its structural advantages of a closed loop system (which enables a deterministic calculation of Return on Ad Spend). We also believe that AWS is re-accelerating from a period of customer cloud optimization. Longer term, e-commerce has a long duration of growth, still accounting for less than 20% of retail. Similarly, Amazon's cloud service, AWS remains relatively early on its s-curve with cloud representing around 13% of worldwide IT spend, with incremental tailwinds across the three layers of the GenAI stack - infrastructure (with NVIDIA's own AI chips - Trainium and Inferentia as well as with its offering of NVIDIA chips), platform (Bedrock) and applications (1st and 3rd party). Shopify Inc. is a cloud-based software provider for multi-channel commerce. Shares declined 14.4% in the second quarter despite reporting solid quarterly results with revenue growth of 23% year-over-year, which implies continued market share gains, after the company announced it is entering an investment cycle. Since the increased investment period comes after over a year of consistent margin expansion, it left short-term-focused investors disappointed. We however believe that this is the right course of action for several reasons. First, the company expects solid returns on the increased marketing spend with 18-month payback periods. Second, the investment should help solidify Shopify's competitive position and drive further market share gains. Finally, the increased spend should contribute to the probability of success in newer areas of opportunity with large addressable markets, including offline commerce, international, and enterprise. Shopify shared several metrics showing early success, with gross merchandise value up 130%, 38%, and 32% year-over-year in B2B, EMEA, and offline, respectively. We remain shareholders due to Shopify's strong competitive positioning, innovative culture, and long runway for growth, as it still holds less than a 2% share of the global commerce market. Snowflake Inc. is a leading cloud data platform that is predominantly used for data analytics. The stock declined 16.4% as investors evaluated the impact of a recently announced CEO transition, an investment cycle driven by spend on AI, a cybersecurity incident, and a rapidly changing competitive environment. With GenAI capturing a larger portion of the public discourse, Snowflake's positioning in the future data stack is under scrutiny by both investors and customers. We believe Sridhar Ramaswamy, the newly appointed CEO, can help the business more efficiently transition toward an AI-first world. While Databricks and other key competitors are presenting strong results, we believe Snowflake's brand, existing customer base, and accelerating product innovation should allow it to continue to capture share in a relatively large and strategic market. Management continues to describe strong demand trends for its core data analytics, which is also demonstrated by the relatively healthy expansion rates among existing customers while new go-to-market initiatives can help grow the customer base further. Longer term, we remain excited about the Snowflake's strategic opportunity as the data platform for its customers. Cloudflare, Inc. provides content delivery network services, cloud cybersecurity, denial-of-service mitigation, Domain Name Service, and ICANN-accredited domain registration services. Shares fell 14.4% during the quarter on remarks from the CEO about worsening macro conditions, citing the negative impact of geopolitical uncertainties on customer buying behavior. On the positive side, the company posted strong quarterly results with revenue growth of 30% year-over-year, showing evidence that the changes to the company's go-to-market strategy were resonating with solid growth across its large customer cohorts (revenues from customers spending over $100,000 represented 67% of the total, up from 62% in the first quarter of 2023), double-digit improvement in sales productivity, and new pipeline attainment ahead of plan. Cloudflare reiterated revenue guidance for the year on resilience in cybersecurity spend. While we fine- tuned our model on the back of the company's increased macro headwind commentary, pushing out revenue reacceleration estimates from the second quarter of 2024 to the first quarter of 2025, this is still ahead of guidance. We retain conviction in the long-term thesis: a strong founder-led business with a unique global network and significant pricing advantages powering a disruptive multi-product growth story with improving margins. We therefore remain shareholders. The Fund is constructed on a bottom-up basis with the quality of ideas and level of conviction playing the most significant role in determining the size of each investment. Sector weights tend to be an outcome of the portfolio construction process and are not meant to indicate a positive or a negative view. As of June 30, 2024, the top 10 holdings represented 62.8% of the Fund's net assets, and the top 20 represented 89.6%. The total number of investments in the portfolio was 31 at the end of the second quarter, up from 30 investments at the end of last quarter. IT, Consumer Discretionary, Communication Services, Health Care, and Financials made up 98.0% of net assets. The remaining 2% was made up of SpaceX (SPACE) and GM Cruise, our two private investments classified as Industrials, and cash. During the second quarter, we added to 9 existing positions including: Microsoft, Alphabet, Shopify, Adyen, and Illumina (ILMN). We funded those purchases by reducing 3 existing positions: NVIDIA, Mastercard (MA), and Veeva. The number of holdings in the portfolio increased from 30 at the end of the first quarter to 31 due to Illumina's spin-off of Grail (GRAL), a health care company developing a test for multi-cancer detection. Our largest two additions in the second quarter were Microsoft Corporation and Alphabet Inc. We continued adding to our position in Microsoft. The company continues to make progress in AI, disclosing that 7% of Azure revenue growth in the quarter was driven by AI, about two-thirds of Fortune 500 companies are now using the Azure OpenAI service, that over half of Azure AI customers now also use Microsoft's data and analytics tools, suggesting a potentially significant pull through from AI to Microsoft's other offerings, and that GitHub co-pilot (a coding assistant) continues growing rapidly, reaching 1.8 million subscribers (up 35% sequentially). The company also continues to report strong overall financial results with revenue growth of 17% year-over-year at massive scale of $62 billion, operating income growth of 23% and EPS growth of 20%. The revenue growth was driven by Microsoft cloud which surpassed $35 billion in revenues, up 23% year-over- year, and Azure which accelerated 3% sequentially and grew 31% year-over- year in constant currency. We continue to believe that Microsoft presents an attractive combination of a limited risk of AI disruption on the one hand with a potentially material AI tailwinds on the other, through its positioning as the enterprise platform and its relationship with OpenAI. We also added to Alphabet. The company reported solid financial results with first quarter revenue growth of 15% year-over-year, driven by 14% growth in search, 21% growth in YouTube, and 28% growth in cloud (which accelerated from 26% growth in the fourth quarter). The company has also increased its cost discipline efforts, which drove operating margins to 31.6% (compared to 25% in the first quarter of 2023). With regard to GenAI, while we are cognizant of the potential risks to the dominance of search, we believe that on the range of outcomes, Alphabet remains well positioned through its massive user distribution (9 products with over 1 billion users each), long-standing AI research labs (DeepMind and Google Brain), top AI talent, a solid cloud computing division in Google Cloud, and deep pockets for investing in AI. During the quarter, Alphabet also held its annual I/O conference, where it provided an update on its efforts in AI including: Gemini is now used by 1.5 million developers; model quality is expanding rapidly (e.g., context window is now 2 million tokens of length); the new genomics model, Alphafold 3 can predict structures of molecules and potentially accelerate drug discovery; new TPU6 AI chips has shown a 4.7 times improvement in compute performance compared to the prior generation; and Gemini for workspace is showing early data on a 30% increase in user productivity. Alphabet also has real value in assets such as Waymo, which are not factored into valuation today (and are potentially included at a negative valuation as they currently generate losses, hurting EPS). We continue to believe that the current valuation of Alphabet presents an attractive risk/reward for long-term owners of the business and have therefore increased our position. We took advantage of share price volatility to add to our position in the commerce software platform provider Shopify Inc., the multi-channel payments solution provider Adyen N.V., and the DNA sequencing tool provider Illumina, Inc. We believe that the stock sell-offs (these holdings were down 14.4%, 29.6%, and 21.9%, respectively) were driven more by near-term investor concerns rather than fundamental issues. Valuation multiples contracted by 16%, 34%, and 24%, respectively. Shopify is investing more in the near term but we believe the investments will have high ROI (see discussion above); Adyen saw volatility with its take rate which spooked investors, but we believe that this is more due to mix rather than market share losses; and Illumina continues to operate in a more challenging part of the cycle which is impacting its near-term results, but we believe its competitive positioning remains solid and DNA sequencing will become a much larger market over time as genetic advancements continue to progress. During the quarter, we reduced three existing positions. The largest was NVIDIA Corporation. We would note that our conviction level in the company has not changed although the stock's incredible recent performance pulled forward some of its future returns, which by definition, tilts the risk/reward equation, prompting us to reduce our position. Nevertheless, NVIDIA remains our largest position in the Fund as we remain in the early innings of AI adoption across industries from health care to automotive, and as the race for Artificial General Intelligence continues. The demand growth curve for accelerated computing remains exponential as newer frontier models continue to get larger and are trained on more data - see graph below. In addition, as we continue to go down the demand elasticity curve through innovation by NVIDIA and as AI algorithms become more compute-efficient and go up the level of intelligence generated per unit of compute curve, the demand for accelerated computing will continue to grow, benefiting NVIDIA, in our view. We also slightly reduced our positions in Mastercard Incorporated and Veeva Systems Inc. as the companies continue progressing on their growth s-curves and as we saw a more attractive risk/reward equation elsewhere. As in years past, we have little to offer in the way of a market outlook. Has inflation been tamed? Will the economy continue to slow down? Will we get the three interest rate cuts or none? Trump or Biden or someone else? While these questions are not new, the answers remain elusive, and once they will get answered, other, similar questions will arise. We practice a probabilistic approach to investing and for the time being we expect to continue to operate in an environment where the range of outcomes will remain unusually wide. Importantly, we do not structure or position the portfolio to benefit from any particular market environment. Instead, we focus on investing in what we believe are high quality business - companies with durable competitive advantages, exceptional management teams with a proven track record of operational excellence and successful capital allocation, and importantly, businesses that we believe have a long runway for growth and an opportunity to become materially larger than they are today. These companies tend to be leaders in their industries and sell critical products and services to their customers that are hard to replace. That creates stickiness, high switching costs, and pricing power. That enables them to be resilient in the face of macro-economic challenges while continuing to invest in future growth opportunities to take market share and to emerge stronger when the environment inevitably improves. The rapid advancement of GenAI technology presents both clear risks and compelling opportunities. While the implications of AI on the global economy and on particular industries and businesses are not yet clear, we believe our portfolio includes many companies that are well positioned to benefit from this technological paradigm shift. Every day, we live and invest in an uncertain world. Well-known conditions and widely anticipated events, such as Federal Reserve rate changes, ongoing trade disputes, government shutdowns, and the unpredictable behavior of important politicians the world over, are shrugged off by the financial markets one day and seem to drive them up or down the next. We often find it difficult to know why market participants do what they do over the short term. The constant challenges we face are real and serious, with clearly uncertain outcomes. History would suggest that most will prove passing or manageable. The business of capital allocation (or investing) is the business of taking risk, managing the uncertainty, and taking advantage of the long-term opportunities that those risks and uncertainties create. We are optimistic about the long-term prospects of the companies in which we are invested and continue to search for new ideas and investment opportunities while remaining patient and investing only when we believe target companies are trading at attractive prices relative to their intrinsic values.

Baron New Asia Fund Q2 2024 Shareholder Letter

We were most active in adding to our global security/supply chain diversification theme by initiating positions in GMR Power and Urban Infra Limited, Bharat Electronics Limited, and Precision Wires India Limited. Baron New Asia Fund® (MUTF:BNAIX, the Fund) gained 10.77% (Institutional Shares) during the second quarter of 2024, while its primary benchmark, the MSCI AC Asia ex Japan Index (the Benchmark), was up 7.20%. The MSCI AC Asia ex Japan IMI Growth Index (the Proxy Benchmark) gained 7.58% for the quarter. The Fund outperformed both the Benchmark and the Proxy Benchmark during a solid quarter for global equity returns. During the second quarter, inflation readings failed to slow sufficiently to clearly warrant the initiation of a Federal Reserve (the Fed) easing cycle, while global growth and employment conditions offered mixed signals. As a result, global equity market breadth and leadership continued to narrow as the uncertain macro environment, contrasted by strong near-term fundamentals for the so-called Magnificent Seven and associated AI proxies and beneficiaries worldwide, ensured that such AI proxies drove the lion's share of second quarter returns. Beneath this surface level, we note that in contrast to the first quarter, the momentum of U.S. and global growth and employment conditions seemed to peak early in the quarter and moderate, with consumption clearly weakening late in the quarter. This allowed bond yields, and more importantly real yields, to moderate through the quarter, ending notably below the April highs and well below the recent peak levels of October 2023, which preceded the Fed's subsequent pivot. Our current bias is that recent moderating trends will trigger a Fed easing cycle sooner rather than later, a development which would likely warrant a mean- reverting inflection point for many market underperformers including developing Asia equities. Interestingly, we point out that despite the year-to-date rise in bond yields and the U.S. dollar, the MSCI AC Asia ex Japan Index outperformed the S&P 500 Index (SP500, SPX) during the second quarter, while strongly outperforming the Dow Jones Industrial Average (DJIA), the equal- weighted S&P 500 Index, and the Russell 2000 Index (RTY). We find this performance particularly admirable and perhaps a foreshadowing in the face of widespread skepticism towards developing world equities. As we referenced in our previous letter, a portion of this surprisingly solid showing can be attributed to the broadening recognition of AI-related equities in the Benchmark. Further, as AI enthusiasm has spread from the "GPU/data center arms race" to the notion of "edge AI," or AI on server/PC/ handset, many more individual companies can be seen as at least cyclical beneficiaries as edge AI would necessitate a significant and long-deferred replacement cycle for such edge devices. As the second quarter progressed, updates from Apple (AAPL), Taiwan Semiconductor (TSM), Dell (DELL), Lenovo (OTCPK:LNVGY) and others drove growing interest in the many companies in the hardware/handset ecosystem - a substantial portion of which reside in developing Asia jurisdictions, in addition to the well-recognized semiconductor and high-bandwidth memory leaders, and, in our view, this phenomenon helped drive solid relative performance. We remain confident that emerging markets (EM)/Asia equities currently offer an attractive long-term entry point, and as always, we remain confident that our diversified portfolio of well-positioned and well-managed companies can capitalize on their potential over the coming years regardless of the external environment. For the second quarter of 2024, we comfortably outperformed our Benchmark, as well as our all-cap growth Proxy Benchmark. From a sector or theme perspective, strong stock selection in the Consumer Discretionary sector, owing to select Indian investments in our Asia consumer theme (Trent Limited and Mahindra & Mahindra Limited) and global security/ supply chain diversification theme (Dixon Technologies Ltd.), contributed the most to relative performance this quarter. In addition, our overweight positioning and solid stock selection in the Communication Services sector, primarily attributable to our digitization-related investments in India (Bharti Airtel Limited and Indus Towers Limited), also bolstered relative results. Lastly, favorable stock selection effect in the Industrials sector, largely driven by our power/infrastructure related investments in India, as part of the global security/supply chain diversification theme (Kirloskar Oil Engines Limited and GMR Power and Urban Infra Limited), also stood out as a contributor. Partially offsetting the above was adverse stock selection in the Financials sector, primarily attributable to our exposure to South East Asian bank (PT Bank Rakyat Indonesia (Persero) Tbk) along with a few holdings in our India wealth management/consumer finance theme (Jio Financial Services Limited, Bajaj Finance Limited, SBI Life Insurance Company Limited, and Nuvama Wealth Management Limited). Adverse allocation effect together with weak stock selection in the Information Technology sector also modestly detracted from relative results. From a country perspective, strong stock selection combined with our large overweight positioning in India drove the vast majority of outperformance this quarter. In addition, positive allocation effect together with solid stock selection in Korea also bolstered relative results. Lastly, our lack of exposure to Thailand and the Philippines also contributed. Mildly offsetting the above was our active exposure to Japan through investments in our digitization theme (Tokyo Electron Limited and Hoya Corporation) and automation/ robotics/AI theme (Keyence Corporation), along with adverse stock selection effect in China. We are delighted with our year-to-date solid performance in India and remain excited about our investments in the country. The recent re-election of Prime Minister Modi for a historic third term bodes well for policy continuity and further implementation of productivity enhancing economic reforms. In our view, India has become a standout investment destination within Asia/EM and has entered a multi-year virtuous investment cycle that is positioning the country as the fastest growing large economy in the world this decade. We remain busy identifying and populating the portfolio with new investments that, in our view, should meaningfully benefit from rising infrastructure spend and supply-chain diversification opportunities. Semiconductor giant Taiwan Semiconductor Manufacturing Company Limited (TSMC)contributed in the second quarter due to expectations for a continued strong cyclical recovery in semiconductors and significant incremental demand for AI chips. We retain conviction that TSMC's technological leadership, pricing power, and exposure to secular growth markets, including high-performance computing, automotive, 5G, and IoT, will allow the company to sustain strong double-digit earnings growth over the next several years. Bharti Airtel Limited contributed during the quarter, driven by steady earnings performance and visibility into strong future free cash flow generation as the company is likely at its peak capex intensity. As India's dominant mobile operator, the company is benefiting from ongoing industry consolidation. In particular, Vodafone Idea, a key player and competitor, is on the verge of bankruptcy amid severe pricing pressure and an unsustainable balance sheet. We retain conviction as Bharti transforms into a digital services company and benefits from rising mobile tariffs. Shares of Trent Limited contributed to performance during the quarter. Trent is a leading retailer in India that sells private label apparel direct-to-consumer through its proprietary retail network. Shares were up this quarter on better-than-expected quarterly sales performance as well as continued footprint expansion of its Zudio value fashion franchise. We remain investors, as we believe the company will generate over 25% revenue growth in the near-to-medium term, driven by same-store-sales growth and outlet expansion. In addition, we believe operating leverage and a growing franchisee mix will lead to better profitability and return on capital, driving more than 30% EBITDA CAGR over the next three to five years. PT Bank Rakyat Indonesia (Persero) Tbk is a lender serving Indonesia's micro, consumer, and small-to-medium-enterprise segments. Shares declined after the company reported higher-than-expected credit costs driven by the impact of rising inflation on clients' repayment capacity. Management decided to tighten underwriting standards to prioritize asset quality over loan growth. While this decision is having a negative impact on near-term earnings expectations, it does not alter our thesis of increasing credit penetration within the segments Bank Rakyat serves. We expect Bank Rakyat to deliver above-industry returns in a growing segment for credit in Indonesia. Semiconductor production equipment manufacturer Tokyo Electron Limited detracted in the second quarter, driven by investor concerns about a slower-than-expected near-term revenue growth recovery. We remain optimistic about Tokyo Electron's long-term prospects. We expect semiconductor production equipment spend will grow robustly for years to come, as chipmakers expand capacity to meet rising demand, with AI as a key long-term catalyst. We believe the company will remain a critical enabler of major chipmakers' technological advancements. Shares of Titan Company Limited, India's largest organized jewelry retailer, detracted from performance due to a weak margin outlook amid rising competitive pressure. We retain conviction in Titan, as we believe the company will benefit from the continued formalization of the jewelry retail market in India and will gain market share from unorganized players. In addition, we think Titan is uniquely positioned with best-in-class brand equity and access to financing enabled by its Tata Group parentage. We continue to believe Titan can sustain 15% to 20% earnings growth in the next three to five years. 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 companies of all sizes in Asia can exhibit attractive growth potential. At the end of the second quarter of 2024, the Fund's median market cap was $14.7 billion, and we were invested 55.0% in giant-cap companies, 29.6% in large-cap companies, 8.4% in mid-cap companies, and 3.4% in small-cap companies, as defined by Morningstar, with the remainder in cash. During the second quarter, we added several new investments to our existing themes, while also increasing exposure to various positions that we established in earlier periods. We continue our endeavor to add to our highest conviction ideas. We were most active in adding to our global security/supply chain diversification theme by initiating positions in GMR Power and Urban Infra Limited (GPUIL), Bharat Electronics Limited (BEL), and Precision Wires India Limited. GPUIL, based in India, specializes in power generation, railway and road construction, and urban development. The company operates power generation plants across India with a total installed capacity of 3 GW, utilizing a mix of coal, gas, hydro, and renewable energy sources. We believe GPUIL is well positioned to participate in India's power upcycle, as the government is committed to expanding overall power generation capacity by approximately 10% annually from 2024 to 2030, while renewable energy capacity is expected to grow at a 15% to 20% compounded rate. The company has also won a smart electricity meter contract in the state of Uttar Pradesh through competitive bidding, which involves installing 7.6 million smart meters over a period of 10 years. In addition to participating in growth in the power sector, we also expect the company to strengthen its balance sheet by monetizing stranded power and land assets, recovering receivables from state-owned power distribution companies, and continually reducing corporate debt. We expect GPUIL to deliver low double-digit EBITDA growth over the next three to five years, with further upside from improving balance sheet health. BEL is a leading defense electronics manufacturer in India with approximately 60% market share. It is also the second largest Defense Public Sector Unit under India's Ministry of Defense. The company develops a wide range of equipment and systems in fields such as defense communication, radars, tank electronics, electro optics, arms and ammunition, and unmanned systems. Most of its revenue comes from the Indian government and government-related entities, with customers including India's Army, Navy, Air Force, and state governments. As India implements policy initiatives to encourage indigenous design, development, and manufacturing of defense equipment, we believe BEL will be a key beneficiary of such reforms. Other growth drivers for the company include India's rising defense budget and growing export and non-defense businesses. We expect BEL to deliver mid-teens compounded earnings growth in the next three to five years. Precision Wires is the largest manufacturer of enameled copper winding wire in India with over 50% market share. Winding wire is a key component in power transformers, generators, automotive motors, and industrial motors. The company sells its products to OEMs across various industries, including automotive, aerospace and defense, power, electronics, home appliances, and infrastructure. Its competitive advantages include long-term relationships with OEM customers, scale of operations, and R&D capabilities. We believe Precision Wires is well positioned to benefit from structural growth opportunities in the power sector as well as the rising penetration of EVs and hybrid vehicles in India. As per company management, winding wire content in EVs/hybrids is 7x/2.5x, respectively, as compared to a traditional ICE vehicle. This creates significant opportunities for Precision Wires over the next 5 to 10 years as EV penetration in India is currently under 2%. We expect the company to generate mid-teens earnings growth over the next 3 to 5 years, with further long-term revenue upside from new business wins in EVs/hybrids. During the quarter, we also increased exposure to our digitization theme by building positions in Tips Industries Limited and ASPEED Technology Inc. Tips is a leading music production company in India with approximately 10% market share. The company owns a repertoire of over 32,000 songs across various genres and languages. Tips monetizes its content library by collecting a share of advertising and subscription fees from digital streaming platforms, including YouTube, Spotify, and JioSaavn. The company is a key beneficiary of India's fast growing digital ecosystem, with over 700 million Indians now having access to a smartphone, consuming various digital services online. Tips has maintained an EBITDA margin above 60% and is committed to returning excess capital to shareholders via dividends and share repurchases. In our view, Tips will generate about 25% to 30% compounded revenue and earnings growth over the next three to five years. Over the longer term, we expect further earnings upside as digital platforms begin to more effectively monetize their subscriber base through monthly streaming plans, which should significantly improve the payout potential for Tips. ASPEED is a Taiwanese semiconductor design company and the dominant global supplier of Baseboard Management Controllers ('BMC'), a mission- critical chip used to remotely monitor and manage the key components in a server, such as the processor, memory, and power supply. We expect the company to maintain 70%-plus market share in BMCs, given its superior technology, scale advantages, and strong relationships with all the major Taiwanese server manufacturers and U.S. hyperscale customers. AI servers have significantly higher BMC content than traditional servers, and we expect surging demand for AI servers to drive a dramatic acceleration in demand for BMCs. ASPEED's growth will be further boosted by the transition to its new-generation BMC, which is priced at a significant premium, reflecting major advancements in performance and functionality. We are also optimistic that the company will leverage its customer relationships and strong design capabilities to successfully expand into new products, including a Platform Firmware Resilience chip which prevents malware attacks. In our view, ASPEED is uniquely positioned as a long-term AI beneficiary, and we expect it to maintain industry-leading top-line growth and profit margins over the next five years. In many ways, we see the evolution of market behavior in the second quarter 2024 as an extension of the first quarter: inflation readings failed to slow sufficiently to clearly warrant the initiation of a Fed easing cycle, while global growth and employment conditions offered mixed signals, and global equity market breadth and leadership continued to narrow into nearly the exclusive confines of the Magnificent Seven and associated AI proxies and beneficiaries worldwide. Under the hood, we observe that the details are more nuanced. First, in contrast to Q1, the momentum of U.S. and global growth and employment conditions seemed to peak early in the quarter and moderate, with consumption clearly weakening into late Spring/early Summer. This allowed bond yields, and more importantly real yields, to moderate through the quarter, ending notably below the April highs and well below the recent peak levels of October 2023, which preceded the Fed's pivot. We will be carefully following ongoing employment and consumption indicators, and the related implications for growth and inflation expectations, as our current bias is that recent moderating trends will trigger a Fed easing cycle sooner rather than later. Such a development would likely warrant a mean-reverting inflection point for many market underperformers, including EM equities - much as we experienced during the final quarter of 2023; though, if viewed as a more lasting economic inflection point, we would expect any associated leadership change to be more durable. Interestingly, we point out that despite the year-to-date rise in bond yields and the U.S. dollar, the MSCI AC Asia ex Japan Index outperformed the S&P 500 Index during the second quarter, while strongly outperforming the Dow Jones Industrial Average, the equal-weighted S&P 500 Index, and the Russell 2000 Index, and year-to-date, stands ahead of all of the above, excluding the S&P 500 Index, which is skewed by the dominant performance of NVIDIA and other members of the Magnificent Seven. We find this performance particularly admirable in the face of widespread skepticism towards developing world equities. A portion of this surprisingly solid showing can be attributed to the considerable weighting and number of AI-related equities in the Benchmark, which we highlighted in our previous letter. More recently, as AI enthusiasm has broadened and spread from the "GPU/data center arms race" to the notion of "edge AI," or AI on server/PC/handset, many more individual companies can be seen as at least cyclical beneficiaries as edge AI would necessitate a significant and long-deferred replacement cycle for such edge devices. As the second quarter progressed, updates from Apple, Taiwan Semiconductor, Dell, Lenovo and others drove growing interest in the many companies in the hardware/handset ecosystem, a substantial portion of which reside in developing Asia jurisdictions, in addition to the well-recognized semiconductor and high-bandwidth memory leaders, and in our view this phenomenon helped drive solid relative performance. This nuance we believe has potential implications going forward for the traditional AI/ Magnificent Seven plays; while the long-term opportunity appears compelling (and consensus), given current valuations, any pause in the momentum of the GPU arms race in the transition from training to inference, or from data center capex to the rollout of software-driven AI applications at scale, would likely spark a major inflection in market leadership. In other words, it is possible or even likely that it will take time to utilize the vast expansion in AI processing capacity that is building up at the hyperscale/data center level in the pursuit of productivity promise of AI, notwithstanding a potentially imminent global handset/server/PC upgrade cycle. In such a scenario, we would expect to see a notable change in Magnificent Seven/U.S. equity dominance with improved relative performance for non-U.S. and EM/Asia equities. Thank you for investing in the Baron New Asia Fund. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Baron Real Estate Income Fund Q2 2024 Shareholder Letter

We initiated a position in health care REIT Healthpeak Properties, Inc. Following solid performance in the first quarter of 2024, Baron Real Estate Income Fund's® (the Fund) performance reversed course in the second quarter and declined 1.92% (Institutional Shares), underperforming the MSCI US REIT Index (the REIT Index), which fell 0.22%, and the S&P 500 Index, which increased 4.28%. In the first six months of 2024, the Fund's performance is flat at 0.01%, modestly outperforming the REIT Index, which declined 0.84%. Since inception on December 29, 2017 through June 30, 2024, the Fund's cumulative return of 61.31% was more than double that of the REIT Index, which increased 25.86%. As of June 30, 2024, the Fund has maintained high rankings from Morningstar for its performance: Notably, the only real estate fund that is ranked higher than Baron Real Estate Income Fund for the trailing 5-year period and since the Fund's inception on December 29, 2017, is the other real estate fund that we manage, Baron Real Estate Fund, which has three share classes. We believe the Fund is populated with several attractively valued REITs and real estate-related companies and believe the two- to three-year prospects for the Fund are compelling. Table I. Performance - Annualized for periods ended June 30, 2024 At the half-way point of 2024, we have several top-of-mind thoughts: We believe it is an attractive time to increase exposure to public real estate The valuations of several public real estate-related companies are compelling Fed interest rate cuts should be positive for real estate stocks and our Fund The 5-year period from 2019-2023 is an excellent case study that highlights the long-term appeal of the Fund As of June 30, 2024, we invested the Fund's net assets as follows: REITs (82.6%), non-REIT real estate companies (14.7%), and cash (2.7%). We currently have investments in 11 REIT categories. Our exposure to REIT and non-REIT real estate categories is based on our research and assessment of opportunities in each category on a bottom-up basis (See Table III below). * Individual weights may not sum to the displayed total due to rounding. Business fundamentals and prospects for many REITs remain solid although, in most cases, growth is slowing due to debt refinancing headwinds, a moderation in organic growth (occupancy, rent and/or expense pressures), reduced investment activity (acquisitions and development), and, in a few select instances, the impacts from transitory oversupplied conditions. Most REITs enjoy occupancy levels of more than 90% with modest new competitive supply forecasted in the next few years due to elevated construction costs and contracting credit availability for new construction. Balance sheets are in good shape. Several REITs have inflation-protection characteristics. Many REITs have contracted cash flows that provide a high degree of visibility to near-term earnings growth and dividends. Dividend yields are generally well covered by cash flows and are growing. REIT valuations are attractive on an absolute basis relative to history and relative to private market valuations, but not relative to fixed income alternatives. If economic growth contracts and evolves into no worse than a mild recession and the path of interest rates peaks at levels not much higher than current rates, we believe the shares of certain REITs may begin to perform relatively well. Should long-term interest rates begin to decline and credit spreads compress, REIT return prospects may also benefit from an improvement in valuations as valuation multiples expand (e.g., capitalization rates compress). Notable changes to the Fund's REIT exposures since the end of the first quarter include: We continue to prioritize secular growth REITs and short-lease duration REITs with pricing power: Secular growth REITs: Our long-term focus remains on real estate companies that benefit from secular tailwinds where cash-flow growth tends to be durable and less sensitive to a slowdown in the economy. Examples include our investments in data center, wireless tower, and industrial REITs. As of June 30, 2024, secular growth REITs represented 26.7% of the Fund's net assets. Short-lease duration REITs with pricing power: We have continued to emphasize REITs that are able to raise rents on a regular basis to combat inflation's impact on their businesses. Examples include our investments in multi-family, single-family rental, manufactured housing REITs, and self-storage REITs. As of June 30, 2024, short-lease duration real estate companies represented 36.8% of the Fund's net assets. Data Center REITs (11.9%): We believe the multi-year prospects for real estate data centers are compelling. Data center landlords such as Equinix, Inc. (EQIX) and Digital Realty Trust, Inc. (DLR) are benefiting from record low vacancy, demand outpacing supply, and rising rental rates. Regarding the demand outlook, several secular demand vectors are contributing to robust demand for data center space globally. They include outsourcing of information technology, increased cloud computing adoption, ongoing growth in mobile data and internet traffic, and artificial intelligence as a new wave of data center demand. Wireless Tower REITs (8.7%): We are optimistic about the long-term growth prospects for wireless tower REIT American Tower Corporation (AMT), given strong secular growth expectations for mobile data usage, 5G spectrum deployment and network investment, edge computing (possible requirement of mini data centers next to a tower presents an additional revenue opportunity), and connected homes and cars, which will require increased wireless bandwidth and increased spending by the mobile carriers. In the most recent quarter, we acquired additional shares of American Tower because we believe growth is likely to accelerate in 2025 and the shares are attractively valued. Industrial REITs (6.1%): In the second quarter, we lowered the Fund's exposure to industrial REITs due to expectations that demand will continue to normalize to pre-pandemic levels (elongated corporate decision-making), elevated supply deliveries in the first half of 2024, and expectations of moderating rent growth in certain geographic markets. We remain optimistic about the long-term prospects for industrial REITs. With industrial vacancies at approximately 5%; moderating new supply in the second half of 2024; rents on in-place leases significantly below market rents; and multi-faceted secular demand drivers including the ongoing growth in e-commerce, companies seeking to improve inventory supply chain resiliency by carrying more inventory (shift from just in time to just in case inventory), and on-shoring, we believe our investments in industrial warehouse REITs Prologis, Inc. (PLD), Rexford Industrial Realty, Inc. (REXR), and First Industrial Realty Trust, Inc. (FR) have compelling multi-year cash-flow growth runways. Multi-Family REITs (20.5%): In the second quarter, we significantly increased the Fund's allocation to multi-family REITs from 8.8% at March 31, 2024 to 20.5% at June 30, 2024. Rental apartments are benefiting from the current homeownership affordability challenges. Multi-family REITs provide partial inflation protection to offset rising costs due to leases that can be reset at higher rents, in some cases, annually. We believe the supply outlook is likely to be attractive over the next few years. Balance sheets are well capitalized with low leverage thereby positioning certain multi-family REITs to take advantage of M&A opportunities should they arise. In summary, we are long-term bullish on multi-family REITs. For additional thoughts on multi-family REITs Equity Residential (EQR) and AvalonBay Communities, Inc. (AVB), please see the "Top net purchases" section later in this letter. Single-Family Rental REITs (9.8%): Demand conditions for single-family rental home REITs, Invitation Homes, Inc. (INVH) and American Homes 4 Rent (AMH), are attractive due to the sharp decline in home purchase affordability; the propensity to rent in order to avoid mortgage down payments, avoid higher monthly mortgage costs, and maintain flexibility; and the stronger demand for home rentals in the suburbs rather than apartment rentals in cities. Rising construction costs are limiting the supply of single-family rental homes in the U.S. housing market. This limited inventory combined with strong demand is leading to robust rent growth. Both Invitation Homes and American Homes 4 Rent have an opportunity to partially offset the impact of inflation given that their in-place annual leases are significantly below market rents. Valuations are compelling at mid-5% capitalization rates, and we believe the shares are currently valued at a discount to our assessment of net asset value. We remain mindful that expense headwinds and slower top-line growth could weigh on growth in 2024. We continue to closely monitor business developments and will adjust our exposures accordingly. Hotel REITs (4.0%): We remain long-term bullish about the prospects for hotel REITs and other travel-related real estate companies. Several factors are likely to contribute to multi-year tailwinds, including a favorable shift in consumer preferences, a growing middle class, and other encouraging demographic trends. Even though travel-related business conditions may moderate in the year ahead, which would negatively impact leisure spending and business travel, we maintain an allocation to select travel-related real estate because we believe the long-term investment case for travel is compelling and valuations are compelling. Manufactured Housing REITs (1.8%): In the most recent quarter, we visited the management team of Sun Communities, Inc. (SUI) at the company's corporate headquarters in Michigan and toured one of their properties. We have maintained our position in Sun Communities because demand for the company's core business (manufactured housing, RVs, and marinas) remains strong, we believe the shares are attractively valued, and we have a favorable view of CEO Gary Shiffman, whose interests are aligned given his significant investment in the company. Manufactured housing REITs such as Sun Communities represent a niche real estate category that we expect to benefit from favorable long-term demand/ supply dynamics. They are beneficiaries of strong demand from budget-conscious home buyers such as retirees and millennials, and negligible new inventory due to high development barriers. Manufactured housing REITs Sun Communities and Equity Lifestyle Properties have solid long-term cash-flow growth prospects and lower capital expenditure requirements than a number of other REIT categories. Self-Storage REITs (0.7%): The Fund has modest exposure to self-storage REITs and will discuss our latest thoughts in our third quarter letter. Health Care REITs (13.7%): In the second quarter, we significantly increased the Fund's allocation to health care REITs from 7.5% at March 31, 2024 to 13.7% at June 30, 2024. We are optimistic about our health care REIT investments in Welltower Inc. (WELL), Ventas, Inc. (VTR), and Healthpeak Properties, Inc. (DOC). Our bullish outlook for Welltower and Ventas is largely due to our favorable view of the multi-year prospects for senior housing. We believe senior housing real estate is likely to benefit from favorable cyclical and secular growth opportunities in the next few years. Fundamentals are improving (rent increases and occupancy gains) against a backdrop of muted supply growth due to increasing financing and construction costs and supply chain challenges. The long-term demand outlook is favorable, driven in part by an aging population (baby boomers and the growth of the 80-plus population), which is expected to accelerate in the years ahead. Expense pressures (labor shortages/other costs) are abating, and we believe highly accretive acquisition opportunities may surface, particularly for Welltower given its cost of capital advantage. In the most recent quarter, we initiated a position in Healthpeak Properties. Please see the "Top net purchases" section of this letter for our more complete thoughts on the company. Mall REITs (4.2%): We remain optimistic about the prospects for the Fund's investments in mall REITs Simon Property Group, Inc. (SPG) and The Macerich Company (MAC). We believe both companies are attractively valued and their real estate portfolios are benefiting from strong tenant demand for space, positive rent growth, and limited store closures and bankruptcies. In the most recent quarter, we met with Jackson Hsieh, the newly appointed CEO of Macerich. We came away impressed and believe he will implement a strategy to improve the quality of Macerich's real estate portfolio and enhance the company's valuation by selling non-core real estate properties and repaying debt. Shopping Center REITs (1.0%): We recently established a modest position in Federal Realty Investment Trust (FRT), a recognized leader in the ownership, operation, and redevelopment of high-quality, shopping center-focused retail properties located primarily in major coastal markets from Washington, D.C. to Boston as well as San Francisco and Los Angeles. Non-REIT Real Estate Companies (14.7%): We emphasize REITs but have the flexibility to invest in non-REIT real estate companies. We tend to limit these to no more than approximately 25% of the Fund's net assets. At times, some of our non-REIT real estate holdings may present superior growth, dividend, valuation, and share price appreciation potential than some REITs. Following strong share price performance for several of the Fund's non-REIT real estate holdings in 2023 and in the first quarter of 2024 and our expectation that growth may slow for some of the companies, we lowered exposure to non-REIT real estate investments from 22.1% at March 30, 2024 to 14.7% at June 30, 2024. Current non-REIT holdings include GDS Holdings Limited, Toll Brothers, Inc., Wynn Resorts, Limited, Lennar Corporation, Hilton Worldwide Holdings Inc., Brookfield Asset Management Ltd., Blackstone Inc., Lowe's Companies, Inc., Brookfield Renewable Corporation, Brookfield Corporation, and Tri Pointe Homes, Inc. The shares of Welltower Inc. continued to perform well in the second quarter. Share price appreciation was driven by continued strong cash flow growth in its senior housing portfolio driven by strong occupancy and rent growth, strong execution on its highly accretive proprietarily sourced capital deployment opportunities, and an improved full-year growth outlook. Welltower is a REIT that is an operator of senior housing, life science, and medical office real estate properties. We recently met with the entire Welltower senior management team and remain encouraged that the shares can continue to be a strong multi-year contributor for the Fund. We are optimistic about the prospects for both cyclical growth (a recovery from depressed occupancy levels following COVID-19) and secular growth (the senior portion of the population is the fastest growing portion of the population and people are living longer) in senior housing demand against a backdrop of muted supply that will lead to several years of compelling organic growth. Welltower is a "best-in-class" operator with a high-quality curated portfolio that is led by astute capital allocators, thereby allowing it to capture outsized organic and inorganic growth opportunities. In the second quarter, the shares of Equity Residential and AvalonBay Communities, Inc., two large U.S. multi-family REITs, appreciated due to continued strong operating updates, improved full-year growth outlooks, and faster-than expected improvements in each company's West Coast markets. Both management teams have assembled excellent portfolios of Class A apartment buildings located in high barrier-to-entry coastal markets with favorable long-term demographic trends and muted overall supply growth. Please see our section on "Top net purchases" for further thoughts on both companies. The shares of Prologis, Inc. underperformed during the second quarter. Prologis is a REIT that is the global leader in logistics real estate with a focus on high-barrier, high-growth markets. The share price began to correct in April when the company reported strong first quarter financial results but slightly lowered its full-year outlook. Rent growth has been moderating in the industrial logistics real estate sector as tenants slow their decision-making amidst an environment of heightened macroeconomic uncertainty, while a wave of recently delivered new development projects provide tenants with more real estate options. We view these near-term headwinds as transitory and remain quite optimistic about Prologis's multi-year growth prospects. We expect industry fundamentals will firm up in the coming quarters in light of still healthy levels of demand combined with a dearth of expected new development deliveries. Long-term demand is poised to benefit from several ongoing secular tailwinds, including the growth of e-commerce, the build out of "last mile" supply chains, and the desire for more "just-in-case" inventory of goods. Management, who we think is top notch, expects to grow cash flow at close to 10% per year over the next several years as the company resets the portfolio's low in-place rents up to market levels and investments in development, data centers and energy begin to bear fruit. In the second quarter, the shares of Equinix, Inc., a leading global data center REIT, lagged following a hedge fund report in late March questioning the company's accounting practices. Equinix's Board subsequently launched an independent investigation. Over the course of nearly two months, a highly respected U.S. forensic accounting firm completed an in-depth outside review and concluded that there were no issues with either the GAAP or non-GAAP financial metrics that the company presented to investors. Equinix filed its quarterly financials and reported results that were above expectations. We recently met with long-time CFO Keith Taylor, who we have known for 20 years, in our offices and continue to be optimistic about the long-term growth prospects for the company due to its interconnection focus among a highly curated customer ecosystem, irreplaceable global footprint, strong demand and pricing power, favorable supply backdrop, and evolving incremental demand vectors such as AI. Equinix continues to be a core position in the Fund - the company has multiple levers to drive outsized bottom-line growth with operating leverage. Equinix should compound its earnings per share at approximately 10% over the next few years and we believe the prospects for outsized shareholder returns remain compelling from here given the superior secular growth prospects combined with a discounted valuation. Following strong share price performance in the first quarter, the shares of Wynn Resorts, Limited, an owner and operator of hotels and casino resorts, declined in the second quarter despite strong quarterly results. We remain optimistic about the multi-year prospects for Wynn. We believe the ongoing re-emergence of business activity in Macau will drive additional shareholder value. If cash flow returns to the level achieved in 2019 prior to COVID-19, we believe Wynn's shares will increase 30% to 50% from where they have recently traded. We believe additional drivers for future value creation beyond a re-emergence in Macau business activity include: (i) our expectation for long-term growth opportunities in the company's U.S.-centric markets of Las Vegas and Boston, including an expansion of Wynn's Encore Boston Harbor resort; (ii) Wynn's plans to develop an integrated resort in the United Arab Emirates with 1,500 hotel rooms and a casino that is similar in size to that of Encore Boston Harbor; (iii) opportunities to improve cash-flow margins by rightsizing labor and achieving lower staff costs in Macau; (iv) the possibility that Wynn is granted a New York casino license; and (v) an expansion in the company's valuation multiple to levels achieved prior to the pandemic. In the second quarter, we increased the Fund's REIT exposure to best-in-class multi-family owners/operators Equity Residential and AvalonBay Communities, Inc. Our meetings with each management team supported our view that both companies are led by astute executives who are highly focused on driving value creation for shareholders. Equity Residential and AvalonBay each own approximately 80,000 apartment homes primarily in coastal markets. We believe these portfolios offer superior long-term growth prospects due to: In our opinion, the shares of Equity Residential and AvalonBay have been highly discounted relative to private market values and the underlying replacement cost of their portfolios. Our view was further cemented when Blackstone, one of the largest real-estate owners in the world, privatized Apartment Income REIT Corp., a multi-family REIT that owns and operates 27,000 apartments, in April 2024 for $10 billion or a 25% premium to its public market price. Blackstone's purchase price was at a premium to where the higher quality portfolios of Equity Residential and AvalonBay were trading in the public markets. Despite strong performance in the second quarter, we continue to believe that Equity Residential's and AvalonBay's shares are attractively valued relative to private market values and each company owns and operates excellent and relevant real estate that should perform well over the long term. In the most recent quarter, we initiated a position in Healthpeak Properties, Inc. following our meeting with CEO Scott Brinker and CFO Peter Scott. Healthpeak is one of the largest health care REITs and owns a diversified portfolio of lab, outpatient medical, and continuing care retirement community (CCRC) properties. We are excited about the long-term prospects for health care real estate, driven by an aging senior population and accelerating scientific discovery and drug approvals. We believe the multi-year growth prospects for Healthpeak are especially attractive for four reasons: We believe the company can grow cash flow at a mid-high single-digit rate in the next few years. We view the current valuation as depressed relative to historical levels, publicly traded peers and the private market, and we expect the valuation multiple to expand in time. In the meantime, we earn a 6.2% dividend yield that is well covered, while management continues to look for opportunities to sell non-core properties at high multiples and recycle proceeds into share repurchases at low multiples. In the most recent quarter, we trimmed the Fund's position in Prologis, Inc., the global leader in logistics real estate with a focus on high-barrier, high- growth markets, due to greater-than-expected near-term industry and business headwinds and less clarity around the timing of a positive inflection in the business. We believe these headwinds are transitory and should abate over the next several quarters, and that the multi-year secular growth prospects remain bright. Prologis continues to be a core position in the Fund, and we remain optimistic about the long-term growth prospects for the company due to its competitively advantaged global footprint and capabilities, property portfolio with highly visible embedded rent growth potential, and meaningful long-term potential upside from ongoing investments in development, energy storage, and ancillary services. We believe Prologis can continue to compound earnings at approximately 10% over the next few years. In the second quarter, we trimmed our position in Toll Brothers, Inc. following exceptionally strong share price appreciation over the last year. Toll Brothers remains a position in the Fund, and we remain enthusiastic about the company's prospects over the next few years. We believe that Toll Brothers has the ability to grow its community count of homes by approximately 10% per year as the company continues to gain market share against its smaller competitors who lack scale advantages, brand awareness, and access to attractively priced financing. For additional reasons we remain optimistic on our investment in Toll Brothers, please see the "Top contributors" section of our first quarter 2024 shareholder letter. Following strong share price performance in the first quarter, we trimmed the Fund's large position in Wynn Resorts, Limited, an owner and operator of hotels and casino resorts. We have maintained a position in the company and remain optimistic about the multi-year prospects for Wynn. We believe many of the real estate-related challenges of the last few years are subsiding and brighter prospects for real estate are on the horizon. We are optimistic about the prospects for the Fund with a two- to three-year view. In our opinion, several of the headwinds since 2020 are reversing course and may become tailwinds for real estate. Examples include the lingering headwinds from COVID-19, the most aggressive Fed interest rate tightening campaign in decades, a spike in mortgage rates from 3% to 8%, fears of a commercial real estate crisis, a tightening of credit availability, multi-decade high inflation, and supply chain challenges. We continue to believe the narrative about a commercial real estate crisis is hyperbole and unlikely to materialize. Public real estate generally enjoys favorable demand versus supply prospects, maintains conservatively capitalized balance sheets, and has access to credit. We believe we have assembled a portfolio of best-in-class competitively advantaged REITs and non-REIT real estate companies with compelling long-term growth and share price appreciation potential. We have structured the Fund to capitalize on high-conviction investment themes. We believe valuations and return prospects are attractive. We continue to believe our approach to investing in REITs and non-REIT real estate companies will shine even brighter in the years ahead, in part due to the rapidly changing real estate landscape which, in our opinion, requires more discerning analysis. For these reasons, we remain positive on the outlook for the Fund. One final thought on return prospects. History suggests that if investors wait for the "all-clear signal" (e.g., a Fed interest rate cut), they may miss a good portion of the total return prospects for real estate. Markets tend to be anticipatory. For example, following Fed Chairman Powell's commentary in the fourth quarter of 2023 which implied that the Fed may no longer increase interest rates due to several months of improving inflationary data and may begin to cut interest rates in 2024, real estate stocks rebounded sharply in the last two months of 2023 - way in advance of a Fed interest rate cut. After bottoming on October 27, 2023, the Fund and the REIT Index both increased, in just over two months, by 22% and 24%, respectively, by the end of 2023. I would like to thank our core real estate team - assistant portfolio manager David Kirshenbaum, George Taras, David Baron, and David Berk - for their outstanding work, dedication, and partnership. I, and our team, remain fully committed to doing our best to deliver outstanding long-term results, and I proudly continue as a major shareholder, alongside you.

Diamond Hill Small-Mid Cap Fund Q2 2024 Market Commentary

On an individual holdings basis, top contributors to return in Q2 included Mid-America Apartment Communities, UDR, and GoDaddy. Markets moved modestly higher in Q2, delivering positive returns across most regions and countries. US stocks rose +3% (as measured by the Russell 3000 Index) -- though gains were primarily thanks to large-cap stocks, which were up nearly +4%. Down the cap spectrum, returns were negative, with mid caps and small caps each down roughly -3%, as measured by their respective Russell indices. From a style perspective, growth maintained its sizeable lead over value, with large-cap growth up +8%, while large value was down -2%; mid-cap growth and value each fell roughly -3%, while small-cap growth fell -3% and small-cap value fell nearly -4% (all returns as measured by the respective Russell indices). From a sector perspective, only utilities (+6.2%) was in the black in Q2 -- resilience likely due to a combination of the ongoing AI boom, which is driving higher electricity demand, and a growing preference among investors for more defensive sectors as the economic and market cycles get increasingly long in the tooth. Conversely, consumer discretionary (-7.2%) led the way down, followed by materials (-6.5%), industrials (-6.4%) and health care (-5.3%). Financials (-3.2%), information technology (-2.8%), communication services (-2.2%), energy (-1.9%), real estate (-1.5%) and consumer staples (-1.4%) were all also in the red. As has been expected for several months, monetary policy among major central banks diverged in Q2 as the European Central Bank cut rates while the Bank of England and the Federal Reserve held. Further, Fed chair Jerome Powell maintained his position that US rates are likely to remain higher for longer, signaling that there is expected to be only one rate cut before the end of the calendar year. Given the US's economic resilience -- exemplified by resilient employment numbers -- and inflation's ongoing stickiness, Powell's commitment is not particularly surprising. What naturally remains to be seen is how durable the economic data prove to be in the coming months. Meanwhile, in the wake of finally exiting its protracted negative interest-rate regime, the Japanese Central Bank (JCB) faces ongoing challenges maintaining the yen's value, which has continued sliding relative to the dollar as US interest rates remain high. Though inflation in Japan has finally ticked up, which should give the JCB room to contemplate rate hikes, domestic consumer sentiment has been fragile as a weak yen has translated into high import and fuel costs. The JCB undoubtedly faces a delicate balancing act in the months and quarters ahead as it seeks to finally end decades of economic malaise. Similarly, the ongoing global monetary policy and macroeconomic mix continues complicating the picture for a Chinese government which is seeking to boost its economy while facing growing trade tensions with Western countries -- especially the US and the European Union, both of which have been ratcheting up restrictions related to electric vehicles and technology more broadly. Positively, Chinese GDP grew 5.3% year over year in Q1 -- beating expectations and incrementally better than Q4's 5.2%. However, much of the growth has been attributable to the economy's supply side, which the government has provided ample support, while the demand side and the country's consumers continue struggling to recover from a deep real estate crisis that has crimped wealth and led many to cut back on spending. It's been hard to miss the recent performance of AI-related stocks -- which has contributed to an increasingly narrow market as a small number of massive technology stocks drive the majority of index returns. Against this market backdrop, it's natural to question whether and how long the bull market can continue. However, this affords us an opportunity to add value for our clients as we avoid the temptations of swimming with the tide and maintain our disciplined adherence to our philosophy, which looks out past the latest trends to the longer term. We also believe it offers an increasingly interesting environment to deploy our time-tested, fundamental approach to identifying high-quality, underappreciated companies that may be easy to miss when they aren't necessarily on the obvious front lines of the latest fad. Our portfolio trailed the Russell 2500 Index in Q2. Relative weakness was concentrated among our industrials and health care holdings, which trailed benchmark peers. Conversely, our above-benchmark exposure to real estate, which outperformed the broad index, as well as our holdings in the sector contributed positively to relative performance. Our materials and technology holdings also held up relatively better than benchmark peers, providing a relative tailwind. On an individual holdings basis, top contributors to return in Q2 included Mid-America Apartment Communities (MAA), UDR and GoDaddy (GDDY). Apartment real estate investment trusts (REITs) Mid-America Apartment Communities and UDR benefited in Q2 from rents and occupancy rates that remain stronger than expected -- positioning both companies well as we head into peak leasing season over the summer and into the fall. GoDaddy designs and develops cloud-based web platforms primarily for small businesses. Shares rose in the quarter on the back of strong applications and commerce segment bookings, which contributed to a notable acceleration in revenue growth. Though management has been conservative in its guidance, we believe the market is increasingly recognizing the magnitude of the opportunity in front of the company, giving a boost to shares. Other top Q2 contributors included Mr. Cooper Group (COOP) and Wolverine World Wide (WWW). Mortgage-servicing company Mr. Cooper Group is benefiting from a high interest-rate environment, which is supporting increased profitability in the mortgage-servicing business. Shares of footwear and apparel company Wolverine World Wide rose as the company is capitalizing on improving underlying demand for its brands as well as continued improvement in its financial leverage. Among our bottom individual contributors in Q2 were Red Rock Resorts (RRR) and Enovis Corporation (ENOV). Red Rock Resorts, a casino operator controlling over half the Las Vegas locals market, is facing some concerns about the near-term competitive environment. However, we maintain our conviction in the business's long-term underlying fundamentals and anticipate it will actually take market share. Shares of innovative medical technology company Enovis were pressured amid some short-term headwinds related to the integration of a recent acquisition. While some were quick to conclude the boost Enovis and the medical technology industry overall received from a COVID-era backlog of surgeries is winding down, we believe Enovis remains well-positioned to continue taking share as it cross-sells new products. Further, we believe the market is undervaluing the company's ability to use its continuous improvement-focused business system to drive above-market organic growth, make accretive acquisitions and meaningfully expand margins over the long term. Other bottom contributors included Allegiant Travel, WESCO International (WCC) and Regal Rexnord (RRX). Regional airline Allegiant Travel underperformed amid further delays in the delivery of its new Boeing 737M fleet. Shares of leading industrial distributor WESCO and electric motors and power transmission components manufacturer Regal Rexnord were pressured against a backdrop of macroeconomic concerns, which are seemingly making investors hesitant to own leveraged cyclical companies like WCC and RRX. However, we believe WCC remains well-positioned to capitalize on several secular tailwinds and to leverage its significant scale advantage to take market share and improve margins. Similarly, we maintain our conviction in the outlook for RRX and believe that over the long term, it will capitalize on merger synergies to improve margins, increase organic growth and generate meaningful free cash flow, which should allow it to deleverage. Despite rising valuations, we continue finding attractively valued, quality companies the market is overlooking amid its increasingly narrow focus on the mega-cap technology stocks dominating the major indices. In Q2, we introduced new positions in Magnolia Oil & Gas Corp. (MGY), Labcorp Holdings (LH), Fortrea Holdings (FTRE), Synovus Financial Corp. (SNV) and VeriSign (VRSN). Magnolia Oil & Gas is a small-cap exploration and production company based in the Eagle Ford shale region. The company has a strong and experienced management team with a disciplined capital-allocation framework, owner mindset and strong balance sheet. Further, the company's low well-ahead breakeven numbers and low debt levels make it an attractive, relatively lower-risk opportunity to gain exposure to the commodities cycle's upside. Labcorp is a leading US diagnostic lab operating in a duopolistic market that is steadily growing. Labcorp has a strong competitive position in the lab market with significant scale that is difficult for new entrants to replicate. Its diagnostics business continues growing, driven by M&A and increasing utilization. We believe the company is making smart decisions with respect to its acquisitions and divestitures and capitalized on what we consider an attractive valuation to initiate a position in a high-quality company with an attractive growth outlook. Fortrea Holdings is a contract research organization providing biopharmaceutical product and medical device development services globally. Fortrea's new CEO, Tom Pike, has a track record of increasing growth and driving margin expansion through cost-cutting and new business development. We expect him to increase margins at Fortrea, potentially positioning it to either be acquired or execute a merger as the industry continues consolidating. Synovus Financial Corp. is a commercial and consumer bank. Over the past decade, the bank has significantly changed its portfolio exposures and underwriting process, contributing to improved credit quality. Nevertheless, investors have been concerned about SNV's recent credit quality and ability to drive growth amid near-term headwinds. We capitalized on the resulting depressed valuation to initiate a position in what we believe is a high-quality bank that will be able to generate attractive returns in a normalized operating environment. VeriSign provides registry services for .com and .net top-level domains, as well as infrastructure essential to the internet's functioning. The company's services are mission-critical in supporting the internet's domain name system (DNS). We initiated a position in the company based on our belief it has a unique position and competitive advantages thanks to high switching costs and proprietary technology. We believe the market is narrowly focused on short-term concerns as post-COVID demand normalizes and capitalized on an attractive valuation entry point to initiate a position. We exited three positions in Q2, including Generac Holdings (GNRC), Sanmina Corporation (SANM) and BankUnited (BKU). As the share prices of energy technology products and solutions provider Generac and integrated manufacturing solutions provider Sanmina Corporation approached our estimates of intrinsic value, we exited our positions in favor of more attractively valued alternatives. We likewise exited regional bank BankUnited in favor of more compelling opportunities. Strong corporate earnings and economic growth continued in Q2, which helped bring the Russell 1000 Index's year-to-date performance to +14.2%. However, the market has narrowed again, with a large portion of returns driven by a small handful of mega-cap tech stocks. Nearly two-thirds of this year's return has been driven by six stocks: NVIDIA, Meta Platforms, Microsoft, Alphabet, Amazon and Apple. Year to date, NVIDIA alone has contributed nearly one-third of equity market returns with its +150% increase. Over the past 10 years, growth stocks' outperformance relative to value stocks has been astounding at over 8 percentage points annually. However, it is interesting to note this has not been driven by value stocks' poor performance. On the contrary, the Russell 1000 Value Index has increased more than 8% annually over the past 10 years -- in the range of long-term equity returns. Similar to the performance disparity among growth and value stocks, small caps continue to underperform large caps. Year to date, small caps have underperformed by more than 12 percentage points, and over the past 10 years, they have underperformed by about 5.5 percentage points, annualized. By some measures, small caps are trading near a historically low valuation premium relative to large caps. Corporate earnings are expected to grow at a double-digit rate in 2024, driven by mega-cap tech stocks, a rebound in health care sector earnings after a large decline in 2023 and growth from the financial services sector. With the continued rally, equity market valuations remain at above-average levels. While this has been somewhat supported by the fall in interest rates since their peak in October 2023, it may still be difficult to generate returns from current levels that match historical averages over the next five years. However, we continue to seek attractive opportunities with the potential to generate above-average returns over that period. Our primary focus is always on achieving value-added results for our existing clients, and we believe we can achieve better-than-market returns over the next five years through active portfolio management.

Aegis Value Fund H1 2024 Portfolio Manager's Letter

Table 1: Performance of the Aegis Value Fund as of June 30, 2024 The Aegis Value Fund delivered a 3.08 percent return in the first half of 2024, substantially outperforming its primary deep-value index, the S&P Small Cap 600 Pure Value, which declined by 6.68 percent. Small cap stocks significantly lagged large caps, and mega-cap technology stocks were the performance champions by far and away, lifting the broad-based, capitalization-weighted S&P 500 Index to a massive 15.29 percent gain. Market performance in the first half of the year remained unusually narrow, driven to an extraordinary extent by the same small number of surging "Magnificent Seven" tech stocks (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla) that drove more than half of 2023's S&P 500's (SP500, SPX) gains. Shares of Nvidia (NVDA) alone surged an incredible 149 percent in the first six months of 2024, a climb which briefly even managed to pump the company's market cap above Index leader Microsoft (MSFT). The S&P 500 Top-10 Index returned a mammoth 28.86 percent in the first half, with the biggest 10 stocks in the S&P 500 surging to 35.8 percent of total Index value by mid-year. Gains in the largest stocks in the S&P 500 masked substantially lower returns in the rest of the market. To illustrate the point, consider the S&P 500 Equal Weighted Index, in which each of the 500 stocks in the S&P 500 is provided an equal index weighting rather than being weighted by market-cap. This index registered substantially more restrained gains of just 5.08 percent in the first six months of 2024, more than ten percentage points less than the cap-weighted S&P 500. According to Bespoke Investment Group, this six-month performance differential between the cap-weighted S&P 500 and the S&P 500 Equal Weight Index has recently been at its highest level since the peak of the Dotcom bubble in March of 2000 just before the bubble burst. In the first half of 2024 only about one quarter of stocks in the S&P 500 actually managed to beat the Index - the lowest proportion in at least the last 30 years. Within this environment, the performance of small-cap value equities has been horrible, with many of these stocks losing money, driving declines as seen above in the S&P 600 Small Cap Pure Value Index. Fortunately, despite being focused on deep-value small caps, an area of the market that has not showed much distinction this year, the Aegis Value Fund benefitted in the first half from its substantial position in energy stocks, comprising approximately a third of Fund assets at the start of 2024. Several of these energy positions experienced strong gains as NYMEX oil prices climbed 13.8 percent and Henry Hub natural gas prices increased 3.46 percent. The position most positively impacting Fund performance in the first half was Natural Gas Services, one of last year's largest Fund purchases. Shares in the oilfield compression rental company rose by 25 percent in the first half as the substantial capital spending made in recent quarters to expand the rental fleet began to generate strong growth in reported cash flow. Gains on the Fund's Natural Gas Services position, spurred along after the company was selected for inclusion in the Russell 2000 Index, added an estimated 1.35 percentage points to Fund returns. Gains on positions in Nigerian oil & gas producer Seplat (SEPLF), as well as Canadian heavy oil producers MEG Energy and International Petroleum Corp (OTCPK:MEGEF) also bolstered Fund returns, together adding another 2.95 percentage points. Oil supply appears to have been temporarily and unsustainably supplemented in recent years with significant inventory liquidations. In the US, the Strategic Petroleum Reserve was drained of nearly half of its reserves by the Biden Administration, sending US oil inventories to near 40-year lows (see Figure 1). Oil supply growth from US shale, responsible for an immense eight million barrels per day of additional oil production since 2010, appears to now be structurally leveling off, as new well drilling activity is increasingly serving to primarily offset the characteristically rapid decline rates on producing shale wells. Furthermore, reserve life, particularly for the top "Tier 1" locations, appears to be far more limited after more than a decade of shale drilling has exhausted inventory. Moreover, global exploration and development has been hindered in recent years, a casualty of politically driven fossil fuel divestment initiatives and Covid-related oil price volatility. This dampened investor appetite has driven capital costs in the industry substantially higher. Furthermore, we suspect Russian oil exports may eventually become significantly more constrained as the country struggles to maintain field production and new field development initiatives while under western sanctions. Additionally, while the International Energy Agency reportedly suggests the existence of several million barrels per day of excess OPEC production capacity that many fear could enter and drown the market in oil at any time, we suspect this perception may prove to be quite overstated. While bears fret over Saudi Arabia's excess capacity, we take some solace in the fact that Saudi production has never been consistently in excess of 10 million barrels per day, well south of the 12 million barrels of capacity often suggested. As a result, the roughly 100 million barrel per day oil market may be substantially tighter than many currently imagine. The oil market has been concerned that the anemic growth experienced in recent years under the market interventionist policies of the Chinese communist dictatorship is putting a wet blanket on near-term Chinese oil demand. While we share these concerns, we believe that long-standing per-capita oil consumption trends, not only in China, but also in other massively populated developing regions will offset these worries over time. For example, Arjun Murti at Veriten recently showed that if Southeast Asia, India, and Africa, three massively populated developing regions outside of China, merely grew their per-capita oil demand to a level roughly equal to one quarter of US per-capita consumption, global oil demand would rise by almost 60 percent. Figure 1: DOE Crude Oil Total Inventory Data including Strategic Petroleum Reserve ('000 bbls) We imagine those governing these countries will be far more concerned morally with alleviating the crushing energy poverty prevalent amongst their own population than adhering to any anti-fossil fuel carbon pontifications ordained on them by conference-trotting global elites in regions consuming over ten times the oil per-capita. And while many suggest that oil demand growth will soon peak in the developed world on account of rapid electric vehicle adoption, this argument may also be flawed. Consider that Norwegian oil consumption has remained relatively stable since 2006 despite Norway having an EV adoption rate among the highest in the world, with 82 percent of all cars sold and 20 percent of all passenger vehicles on the road now being EVs. We believe closing off the world from fossil fuel use by mandate will eventually prove to be a tall and politically unsustainable order. With powerful, long-term demand growth trends in place, and with supply growth looking constrained in the near-term, we continue to hold an outsized position in global energy stocks in anticipation of higher prices and strong returns. However, we take comfort in the fact that while higher oil prices would be a benefit, these positions still pencil-out as attractive based on today's oil prices. A number of our oil & gas producers also have long-lived reserves - decades in some cases - and are therefore well-positioned to ride out any near-term price volatility. Furthermore, most of our energy holdings have used the last several years to strengthen their balance sheets by reducing debt, leaving these companies significantly less vulnerable to any global economic downturn that may arise. Moreover, having paid down debt, several of our producers are now engaged in share buybacks, given the modest valuation levels prevalent today. We believe such activity is likely to prove extraordinarily accretive, driving substantial value to the remaining shareholders over time, particularly if energy prices do rise. The Fund continues to hold an outsized position in precious metals mining equities, with approximately 23 percent of Fund assets invested in 21 different precious metals mining companies. We calculate that these holdings, in aggregate, added an estimated 1.3 percentage points to Fund performance in the first half as spot gold climbed by 12.79 percent. However the Fund's aggregation of mining positions trailed the MVIS Global Junior Gold Miners Index, which gained a substantial 11.35 percent in the first half. Losses on the Fund's Orezone Gold (OTCQX:ORZCF) position alone was a primary culprit, negatively impacting Fund returns by an estimated 0.77 percentage points over the first half as shares in the Burkina Faso gold miner lost 22.4 percent. Investor sentiment towards Orezone has continued to sour amid a barrage of negative news flow out of Burkina Faso as the country struggles with civil unrest that has witnessed multiple military coups and an ejection of French troops from the Francophone country. An Islamic jihadist insurgency in the north of the country has further roiled investor sentiment. Orezone's single producing mine, Bomborè, has recently faced ore grade challenges after an indigenous village relocation to a new, superior, Orezone-built residential community took longer than expected, delaying the mine's access to higher-grade ore. Fortunately, the mine is now retrieving higher grade ore, which should soon improve financial results. Furthermore, Bomborè is located in a relatively safe and well defended area of Burkina Faso close to its capital and far from the insurgency. Moreover, we take comfort that Orezone is managed by well-respected industry veterans. While there has been some concern over corporate liquidity in recent months given the company was looking to finance an expansion of its processing capability through the addition of a hard-rock crushing unit, Orezone recently secured the required project funding and is expected to complete the project over the next 18 months and grow production by approximately 50 percent to 175,000 ounces per year in 2026, resulting in annual free cash-flow yields that we estimate should climb to above 30 percent at today's prevailing gold price and market valuation. We continue to hold our position in Orezone, comprising 2.32 percent of Fund assets at mid-year, pending an anticipated share price recovery. The Fund's biggest purchase in the first half was a new position established in Perseus Mining (OTCPK:PMNXF), an Australian-traded gold mining company with three producing gold mines in West Africa: two in Còte d'Ivoire and one in Ghana. Additionally, the company has a mine soon to be under construction in Tanzania. All three countries are preferred jurisdictions for African mining investment. The US $2.25 billion market cap company is well managed, has a debt-free balance sheet and holds approximately $800 million in cash and bullion on its balance sheet. Perseus is also a lower-cost producer, having mined approximately 500,000 ounces over the last 12 months at a competitive AISC ("all-in sustaining cost") of approximately $1,100 per ounce, generating excellent cash flow yields (in excess of 20 percent). Historically, Perseus has exhibited excellent cost control at their mines, and has hedged-out approximately a quarter of its production over the next three years at a sales price of approximately $2,100 per ounce as the company builds its new Nyanzaga mine in Tanzania. Nyanzaga is expected to cost $500 million, and is likely to be fully funded out of cash flow. When finished, the mine should increase gold production at Perseus by 230,000 ounces at an AISC perhaps as low as $1,000 per ounce. Furthermore, the company owns a 3 million ounce orebody in Sudan, the highly economic Meyes Sands project. While Sudan's civil war has ensured that analysts today give Perseus little credit for the asset, the company may have the opportunity to unlock significantly more value from Meyes Sands if the conflict cools and Perseus is able to develop the project. At mid-year, Perseus was 2.43 percent of Fund assets. Figure 2: S&P/TSX Global Gold Index to the Price of Gold Overall, the Fund remains heavily allocated to precious metals mining investments with nearly a quarter of Fund assets invested in precious metals miners at mid-year. As can be seen in Figure 2, the ratio of the price of mining stocks to the price of gold is close to its lows of at least the last ten years, suggesting that mining stocks are currently priced for substantially lower gold prices, and as a result, could exhibit significant upwards movement, even if gold prices remain stagnant. We have underwritten our mining investments with an eye towards achieving acceptable returns even in the context of lower gold prices and believe our holdings in gold miners offer the opportunity for attractive price appreciation, even with today's gold prices. Assets under management at funds specializing in precious metals mining investments have dropped materially over the last 10-15 years amid losses and redemptions, with one study of Canadian mining specialist funds showing a drop from $16 billion in aggregate assets under management in 2010 to just $2.8 billion by the end of 2022. US mining-focused ETFs have also been recently experiencing net liquidations, further limiting capital investment in the sector. As a result, many precious metals projects around the world appear to have been capital constrained with a number of good opportunities in the sector offering strong return prospects for those willing to commit capital. Gold itself also appears well-positioned for further future gains. With over $35 trillion in gross federal debt and trillions more in unfunded future liabilities, the US Government appears to be in quite a financial bind having made immense promises it will almost certainly struggle to keep. As the Federal Reserve has jacked rates higher in recent years to impede rapidly accelerating inflation, interest payments on the Federal debt, much of which is financed on a short-term basis, have been surging higher, climbing from $400 billion annually in 2019 to a level expected to be approaching $1.6 trillion annually by the end of 2024. Despite the fiscal catastrophe in the making, there has been little political appetite to rein-in runaway deficit spending, currently amounting to a hefty 6 percent of GDP per annum, a level almost unheard of outside of deep recessions in previous years. With the ratio of gross federal debt to GDP already at post-World War II highs and still surging higher, we suspect it will only be a matter of time before the Federal Reserve will once again be engaging in another phase of dollar debasement through money-printing as it is forced to jump in to assist the government in rolling over its ever-increasing debt. Under such scenario of dollar debasement, a rapid erosion of confidence in the dollar is a distinct possibility, with holdings of cash and bonds likely proving ineffective in preserving purchasing power- a scenario which would mark a huge change in the economic playbook from previous cycles where cash and bonds proved highly effective in preserving capital in economic downturns. We may be closer to this point than many think. Foreign investor appetite for US Treasuries has already waned in recent years, particularly after the dollar-based reserve-system was weaponized against Russia following the invasion of Ukraine in 2022. Given the backdrop, it is not surprising that gold purchases by central banks around the world have been surging. Clearly, central bankers understand the increasing risk of US dollar debasement and realize that in such a scenario, dollar denominated gold prices are likely to surge higher. If this were to occur, we suspect our own positions in gold mining stocks could experience substantial further gains. Outside of energy and precious metals, we were the beneficiaries of strong performance on our position in the Bank of Cyprus, which continued to generate excellent returns on the back of higher interest rates in the Eurozone which has pumped-up the bank's net-interest margins. Further consolidation has also occurred on the island as Eurobank (OTCPK:EGFEY) is merging with Hellenic Bank, resulting in fewer banking competitors of scale, which we imagine is likely to bolster banking margins in Cyprus over the longer-term. We also experienced gains on our large position in Amerigo Resources (OTCQX:ARREF), our Chilean copper producer, as copper prices climbed 12.85 percent in the first half of 2024. Bank of Cyprus (OTCPK:BKCYF) positively impacted the Fund by 0.62 percentage points while Amerigo added 0.78 percentage points. The Fund also sold its entire position in Matrix Service Company (MTRX) as shares surged as much as 30 percent amid news the downstream energy-focused, engineering & construction company would be added to the Russell 2000 Index (RTY). Gains in Matrix added 0.89 percentage points to first-half Fund returns. On the negative side, the Fund experienced declines in Interfor (OTCPK:IFSPF) as high interest rates continued to bite into lumber demand. While Interfor was the position most negatively impacting first half Fund performance, costing 1.65 percentage points, we currently intend to hold the position through what we believe will be a cyclical industry low pending an expected recovery. First half Fund performance was also negatively impacted by 1.42 percentage points as the Fund's position in Delta Apparel (OTCPK:DLAPQ) continued its decline. The T-shirt and apparel manufacturer, owner of the popular outdoor beach brand Salt Life, declared bankruptcy as it struggled with liquidity and fought to adjust production levels after the post Covid wave of demand dramatically and rapidly receded, leaving the leveraged company with too much recently added manufacturing capacity and high levels of expensive inventories. While we will not experience further losses from our now immaterial Delta Apparel position going forward, it appears this frustratingly poor investment may unfortunately prove to have been a permanent loss of capital. Today, broad US equity markets, dominated by the Magnificent Seven, appear priced for perfection. Nvidia, the poster child for the AI mania-driven, mega-cap tech rally, now comprises approximately seven percent of the weighting in the S&P 500. Trading at approximately 90 times trailing earnings (fiscal yr. ended Jan '24) and 43 times forward earnings (fiscal yr. ended Jan '25), Nvidia's valuation presumes that the company's recent blistering sales growth and extremely high margins will both be sustained. We suspect that Nvidia investors are likely to be disappointed going forward. The company, with a market capitalization already in excess of 11 percent of US GDP, appears to be just too large to grow substantially enough to meet today's lofty growth expectations, particularly given the moderate growth prospects of the overall economy. Crescat Capital recently calculated that the market cap of former tech-darling Cisco Systems (CSCO) summed to just 5.5 percent of US GDP at the height of the 2000 Dotcom Bubble and the aggregate of the top-ten tech stocks summed to 30 percent of US GDP. In recent months, the aggregate market cap of the ten largest tech stocks has climbed to an astounding 60 percent of US GDP, double the previous Dotcom-era peak. We suspect that these valuations will, like last time around, prove to be unsustainable. Figure 3: Cyclically Adjusted Price Earnings Ratio P/E10 Figure 4: Aegis Value Fund, Russell 2000, and S&P 500 Index Historical Price-to-Book Ratio Figure 5: Number of Stocks Selling Below Tangible Book Value (Market Cap. Greater Than $70 Mil) From our perspective, we see immense bottlenecks developing that will likely impede the pace of technology's blistering growth. Consider that Paul Churnock, a Microsoft engineer early this year reportedly calculated that the 2 million H100 GPUs expected to be sold in 2024 alone by just Nvidia will require the residential power consumption of a city almost the size of Houston, Texas. We suspect maintaining the power supply to accommodate technology's expansion overall will likely prove to be an immensely difficult task, particularly considering the age of the distribution grid, not to mention the removal in recent years of reliable baseload fossil fuel electricity generation for political reasons in favor of highly subsidized, intermittent, and unreliable wind and solar generation. Skewed higher by the priced-for-perfection Magnificent Seven, the S&P 500 today trades at approximately 22 times current year earnings estimates, which appears to be a fairly full, if not stretched valuation, particularly in the context of today's significantly higher interest rates. As seen in Figure 3, the market's Shiller Cyclically adjusted P/E ratio ('CAPE') is also nearing levels consistent with previous market tops. Currently, with inflation reportedly having declined from its peak in 2022, the Federal Reserve is now steaming home with a massive "Mission Accomplished" banner across the bow and the market has already priced in several rate cuts over the next 18 months. We suspect defeating inflation won't prove to be so easy and an inflationary insurgency may well be in the cards. Should we see inflation reignite, the Fed may well have to choose between fighting inflation and funding the almost $10 trillion per annum of new and rollover Treasury issuances. Should the Fed choose to raise rates again, we would expect to see significantly more blood, particularly in the highly levered sectors of the economy such as commercial real estate, private equity and real-estate focused regional banks. Fortunately, the market today is highly bifurcated, with large swaths of small-caps trading at modest valuations far cheaper than the mega-cap tech stocks. International stocks are also looking relatively inexpensive versus their American counterparts. As can be seen in Figure 4, stocks in the Aegis Value Fund today trade at less than a quarter of the valuation of the S&P 500 on price-to-book, a near all-time record discount. We believe there is opportunity in this increasingly divided market. As seen in Figure 5, the number of stocks on our discount-to-book watchlist has been expanding. We continue to work diligently to research and select securities with the most optimal risk/return tradeoffs available in the equity markets today. Aegis employees and their families own in excess of $50 million of Fund shares. We continue to monitor the portfolio and the investment landscape for emerging risks. Should you have any questions, our shareholder representatives are available at (800) 528-3780. You are also welcome to call me personally at (571) 250-0051. Sincerely, Scott L. Barbee Portfolio Manager Aegis Value Fund Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Baron Health Care Fund Q2 2024 Shareholder Letter

We re-established a position in heart valve manufacturer Edwards Lifesciences Corporation. Dear Baron Health Care Fund Shareholder: In the quarter ended June 30, 2024, Baron Health Care Fund® (the Fund) declined 2.55% (Institutional Shares), compared with the 1.02% decline for the Russell 3000 Health Care Index (the Benchmark) and the 3.22% gain for the Russell 3000 Index (the Index). Since inception (April 30, 2018), the Fund increased 12.55% on an annualized basis compared with the 10.78% gain for the Benchmark and the 13.52% gain for the Index. Table I. Performance - Annualized for periods ended June 30, 2024 Performance listed in the above table is net of annual operating expenses. The gross annual expense ratio for the Retail Shares and Institutional Shares as of December 31, 2023 was 1.20% and 0.88%, respectively, but the net annual expense ratio was 1.10% and 0.85% (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 waives and/ or reimburses certain Fund expenses pursuant to a contract expiring on August 29, 2034, unless renewed for another 11-year term and the Fund's transfer agency expenses may be reduced by expense offsets from an unaffiliated transfer agent, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted. For performance information current to the most recent month end, visit BaronCapitalGroup.com or call 1-800-99-BARON. (1)The Russell 3000® Health Care Index is an unmanaged index representative of companies involved in medical services or health care in the Russell 3000 Index, which is comprised of the 3,000 largest U.S. companies as determined by total market capitalization. The Russell 3000® Index measures the performance of the broad segment of the U.S. equity universe comprised of the largest 3000 U.S. companies representing approximately 96% of the investable U.S. equity market, as of the most recent reconstitution. All rights in the FTSE Russell Index (the "Index") vest in the relevant LSE Group company which owns the Index. Russell® is a trademark of the relevant LSE Group company and is used by any other LSE Group company under license. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. The Fund includes reinvestment of dividends, net of withholding taxes, while the Russell 3000® Health Care and Russell 3000® Indexes include reinvestment of dividends before taxes. Reinvestment of dividends positively impacts the performance results. The indexes are unmanaged. Index performance is not Fund performance. Investors cannot invest directly in an index. (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 (3)Not annualized. Click to enlarge The Fund trailed the Benchmark by 153 basis points during the June quarter primarily due to active sub-industry/market cap weights. The Fund's meaningfully lower exposure to strong performing large-cap stocks, specifically pharmaceutical giant Eli Lilly and Company (LLY), was a material headwind to performance as this group managed gains during the quarter. In contrast, small- and mid-cap stocks, where the Fund is significantly overweight, declined between 3% and 8% in the period, accounting for the remainder of the relative shortfall. From a sub-industry perspective, most of the underperformance was attributable to adverse stock selection in biotechnology together with higher exposure to the lagging life sciences tools & services sub-industry, which was down nearly 8% in the Benchmark. Stock selection in biotechnology was a 200 basis point drag on performance, driven by sharp declines from small caps Rocket Pharmaceuticals, Inc. (RCKT) and Arcellx, Inc. (ACLX). Rocket specializes in the development of gene therapies for rare genetic diseases outside of oncology. Currently, these include Danon disease, Fanconi's anemia, LAD-I, and Pyruvate kinase disorder. The first three drug treatments should all commercially launch by 2025, generating substantial potential revenue for the company. In the near term, Rocket's shares continue to be pressured by a three-month FDA delay to their initial commercial asset in LAD-1 and the added overhang of slow gene therapy launches from bluebird bio in sickle cell disease and BioMarin in hemophilia B. Given the life-saving nature of Rocket's therapies and the high unmet need for treatments and cures for each of these diseases, we retain conviction in our investment. Arcellx develops cellular therapies for multiple myeloma and is in the midst of pivotal clinical trials for its BCMA cell therapy, approval of which is expected by 2025. There have been no recent developments aside from the well-telegraphed dynamics around competitor programs scaling the complex manufacturing involved in cell therapy. The next significant event will occur later in 2024 when Arcellx is expected to release updates from the pivotal Phase 3 trial with partner Kite of its iMMagine-3 treatment for multiple myeloma. This trial is widely expected to succeed and is the penultimate event required before filing for FDA approval to begin commercial efforts within the next year. Another source of weakness in the sub-industry was Viking Therapeutics, Inc. (VKTX), whose shares pulled back after increasing nearly 300% in the prior quarter. Viking develops metabolic disease medicines with focus on diabetes/obesity and MASH (metabolic steatohepatitis, i.e., fatty liver). The company's lead asset is VK2735, an injectable and oral version of a GLP-1/GIP combination weight loss medication that directly competes with Lilly's Mounjaro/Zepbound. Both of Viking's main assets appear to be more efficacious than their competitors' in two exceptionally large revenue end markets. Viking's stock detracted as biotechnology specialists have leaned into an alternative mechanism for obesity called amylin inhibition and don't view the company as an attractive acquisition target (an opinion we disagree with). The recent rebalance of the well-known SPDR S&P Biotech ETF (XBI) also pressured Viking's share price due to forced selling by many long/short strategies to reweight their positions. Somewhat offsetting the above was solid stock selection in health care equipment, pharmaceuticals, and health care distributors, though these positive effects were somewhat offset by the Fund's active weights in these sub-industries. Strength in health care equipment was driven by continued strong performance from global medical device manufacturer Boston Scientific Corporation (BSX) and robotic surgical system leader Intuitive Surgical, Inc. (ISRG). Boston Scientific's shares continued to benefit from increasing excitement around the emerging field of pulsed field ablation (PFA), where the company is well positioned. Traditionally, physicians have used temperature-based methods (either hot or cold) to disable heart tissue responsible for irregular heartbeats. Temperature-based methods may damage surrounding tissue, however. PFA, in comparison, relies on electricity to damage aberrant tissue, and because different types of tissue have different electrical thresholds, the surrounding tissue can be selectively spared. We remain positive about Boston Scientific because of the company's differentiated products in electrophysiology and structural heart, double-digit EPS growth profile, proven track record of cost discipline, and consistent annual operating margin expansion. Intuitive's stock performed well due to excitement about the company's new robotic surgical system, the da Vinci 5, which offers enhanced imaging, forced feedback, and other improvements. Performance in pharmaceuticals and health care distributors was bolstered by solid gains from AstraZeneca PLC (AZN) and McKesson Corporation (MCK), respectively. AstraZeneca is a global biopharmaceutical company with a focus on three main therapy areas based on its core competencies: oncology, cardiovascular and metabolic diseases, and respiratory illnesses. AstraZeneca's shares increased given incremental positive news flow (LAURA, ADRIATIC, and DESTINY-Breast06 clinical trials) surrounding the oncology franchise. The company also published long-term guidance for the first time, projecting $80 billion in revenue by 2030, or 75% higher than 2023's $45.8 billion. This projection implies an annual growth rate of 8% over seven years, compared with the 5% to 7% targets set by GSK (GSK) and Johnson & Johnson (JNJ) and the 5% target set by Novartis (NVS). McKesson is a leading distributor of pharmaceuticals and medical supplies and also provides prescription technology solutions that connect pharmacies, providers, payers, and biopharmaceutical customers. McKesson's stock reacted positively to the company's fiscal year 2025 earnings guidance, which came in ahead of investor expectations. We continue to think McKesson can generate mid-teens earnings per share growth annually through organic growth, operating leverage, and share repurchases. Our strategy is to identify competitively advantaged growth companies that we can own for years. Similar to the other Baron Funds, we remain focused on finding businesses that we believe have secular growth opportunities, durable competitive advantages, and strong management teams. We conduct independent research and take a long-term perspective. We are particularly focused on businesses that solve problems in health care, whether by reducing costs, enhancing efficiency, and/or improving patient outcomes. We continue to think the Health Care sector will offer attractive investment opportunities over the next decade and beyond. Health Care is one of the largest and most complex sectors in the U.S. economy, accounting for an estimated 17.3% of GDP in 2022 and encompassing a diverse array of sub-industries. Health Care is also a dynamic sector undergoing changes driven by legislation, regulation, and advances in science and technology. We think navigating these changes requires investment experience and sector expertise, which makes the Health Care sector particularly well suited for active management. Top contributors to Performance Table II. Top contributors to performance for the quarter ended June 30, 2024 Percent Impact Eli Lilly and Company 1.29% Intuitive Surgical, Inc. 0.59 Boston Scientific Corporation 0.58 Vertex Pharmaceuticals Incorporated (VRTX) 0.51 argenx SE (ARGX) 0.36 Click to enlarge Shares of global pharmaceutical company Eli Lilly and Company increased on continued investor enthusiasm around GLP-1 drugs for diabetes and obesity. We remain shareholders. Lilly's Mounjaro/Zepbound not only offers superb blood sugar control for diabetics but can drive 20%-plus weight loss and likely improve cardiovascular outcomes in both diabetic and non-diabetic obese patients. Lilly is developing next generation drugs, including retatrutide, which drives approximately 25% weight loss, and orforglipron, a daily pill that produces approximately 15% weight loss. In the U.S. alone, there are 32 million Type 2 diabetics and an additional 105 million obese patients who we estimate would qualify for GLP-1 drugs. Although supply and access are limited near term, we think GLP-1 drugs will become standard of care for both diabetes and obesity and will become a $150 billion-plus category. We see Lilly setting a high efficacy bar and capturing significant long-term market share. We think the adoption of GLP-1s will drive Lilly to triple total revenue by 2030. Intuitive Surgical, Inc. manufactures the da Vinci Surgical System, a robotic surgical system used for minimally invasive procedures. The stock performed well due to excitement about the company's new robotic surgical system, the da Vinci 5, which offers enhanced imaging, force feedback, and other improvements. We continue to believe Intuitive has durable competitive advantages and will remain the market leader in robotic surgery. We think the company has a long runway for growth as more procedures are performed with the company's equipment. Boston Scientific Corporation is a global manufacturer of medical devices used in a broad range of interventional medical specialties. Shares increased during the quarter. We believe Boston Scientific can grow sustainably in the high single digits, driven by differentiated products in electrophysiology and structural heart devices. In particular, there has been increasing excitement around the emerging field of PFA, where the company is well positioned. Traditionally, physicians have used temperature-based methods to disable heart tissue responsible for irregular heartbeats. Temperature-based methods may damage surrounding tissue, while PFA relies on electricity to damage aberrant tissue, and because different types of tissue have different electrical thresholds, the surrounding tissue can be selectively spared. Coupled with cost discipline and more than 50 basis points of annual operating margin expansion, we believe Boston Scientific's double-digit EPS growth profile makes it a compelling name within the medical device universe. Top Detractors from Performance Table III Top detractors from performance for the quarter ended June 30, 2024 Percent Impact Rocket Pharmaceuticals, Inc. -0.61% Arcellx, Inc. -0.61 DexCom, Inc. (DXCM) -0.46 Repligen Corporation (RGEN) -0.46 Viking Therapeutics, Inc. (VKTX) -0.43 Click to enlarge Rocket Pharmaceuticals, Inc. specializes in the development of gene therapies for rare genetic diseases outside of oncology. Currently, these include Danon disease, Fanconi anemia, lysosomal acid lipase deficiency, and pyruvate kinase deficiency. The first three drug treatments are slated for commercial launch by 2025, which should generate substantial revenue. Shares detracted from performance after the FDA extended the priority review period by three months for the Kresladi gene therapy for leukocyte adhesion deficiency, potentially influenced by sluggish competitive gene therapy launches from bluebird bio in sickle cell disease and BioMarin in hemophilia B. Given the lifesaving nature of Rocket's therapies and the high unmet need for each of these life ending diseases, we retain conviction in our investment. Arcellx, Inc. is a biotechnology company dedicated to the manufacturing of cell therapies for multiple myeloma. Shares fell on a lack of news in the quarter. There have been no fundamental new issues in the space over the past few quarters beyond the well-telegraphed dynamics around competitor programs scaling the complex manufacturing involved in cell therapy. The next significant news flow will occur later in 2024 when Arcellx releases updates with partner Kite from the pivotal Phase 3 trial of its iMMagine-3 treatment for multiple myeloma. This trial is widely expected to work and will be the penultimate event required before filing for FDA approval. DexCom, Inc. sells a continuous glucose monitoring device to help diabetics monitor their blood glucose levels. Investors reacted negatively to DexCom's first quarter earnings report, which missed revenue estimates. In addition, year-over-year comparisons will be even tougher to beat in the yet-to-be-reported second quarter, and some investors appeared to interpret management commentary as trying to manage expectations due to the tougher comparisons and potential disruption from an increase in the sales force and reconfiguration of sales territories. We think these concerns are shortsighted and believe DexCom has a long runway for growth driven by increased adoption of its continuous glucose monitoring sensors. We are also optimistic about the launch of Stelo, an over-the-counter glucose sensor for Type 2 diabetics who are not on insulin. Portfolio Structure We build the portfolio from the bottom up, one stock at a time, using the Baron investment approach. We do not try to mimic an index, and we expect the Fund to look very different than the Benchmark. We loosely group the portfolio into three categories of stocks: earnings compounders, high-growth companies, and biotechnology companies. We define earnings compounders as companies that we believe can grow revenue at least mid-single digits and compound earnings at double-digit rates over the long term. We define high-growth stocks as companies we expect to generate double-digit or better revenue growth. They may not be profitable today, but we believe they can be highly profitable in the future. We expect the portfolio to have a mix of earnings compounders, high-growth, and biotechnology companies. We may invest in stocks of any market capitalization and may hold both domestic and international stocks. As of June 30, 2024, we held 40 stocks. This compares with 510 stocks in the Benchmark. International stocks represented 9.9% of the Fund's net assets. The Fund's 10 largest holdings represented 52.3% of net assets. Compared with the Benchmark, the Fund was overweight in life sciences tools & services, health care equipment, health care facilities, and health care distributors, and underweight in pharmaceuticals, health care services, and managed health care. The market cap range of the investments in the Fund was $342 million to $860 billion with a weighted average market cap of $194.8 billion. This compared with the Benchmark's weighted average market cap of $257.3 billion. We continue to invest in multiple secular growth themes in Health Care, such as genomics/genetic testing/genetic medicine, innovative medical devices that improve outcomes and/or lower costs, minimally invasive surgery, diabetes devices and therapeutics, anti-obesity medications, picks and shovels life sciences tools providers, the shift to lower cost sites of care, and animal health, among others. To be clear, this list is not exhaustive: we own stocks in the portfolio that do not fit neatly into these themes and there are other themes not mentioned here that are in the portfolio. We evaluate each stock on its own merits. Table IV. Top 10 holdings as of June 30, 2024 Table V. Fund investments in GICS sub-industries as of June 30, 2024 Percent of Net Assets Health Care Equipment 22.7% Biotechnology 18.6 Life Sciences Tools & Services 17.3 Pharmaceuticals 16.9 Managed Health Care 10.0 Health Care Facilities 4.1 Health Care Distributors 2.7 Health Care Supplies 2.6 Health Care Services 0.9 Cash and Cash Equivalents 4.2 Total 100.0%* Click to enlarge * Individual weights may not sum to the displayed total due to rounding. Recent Activity During the first quarter, we added six new positions and exited seven positions. Below we discuss some of our top net purchases and sales. Table VI. Top net purchases for the quarter ended June 30, 2024 Quarter End Market Cap (billions) Net Amount Purchased (millions) Edwards Lifesciences Corporation (EW) $55.5 $3.6 Tempus AI, Inc. (TEM) 5.8 2.0 Glaukos Corporation (GKOS) 6.0 1.9 Tenet Healthcare Corporation (THC) 13.0 1.6 Elevance Health, Inc. (ELV) 125.9 1.4 Click to enlarge We initiated a small position in Tempus AI, Inc., an intelligent diagnostics and health care data company. Tempus has two synergistic business units: Genomics and Data & Other. Within the Genomics business, Tempus provides diagnostic tests, particularly for cancer treatment selection. Tempus' labs sequence the tumor's genome and transcriptome (gene expression) and can help oncologists select the best treatment for their patient. We think the cancer treatment selection sequencing market is underpenetrated and poised to continue to grow rapidly, and Tempus is well positioned as one of the leaders in this field. The genomics testing data also feeds into Tempus' value as a data company. Tempus has amassed a huge (over 200 petabytes) proprietary multimodal dataset that combines clinical patient data (which includes clinical records, imaging data, etc., mostly from two-way collaborations with health systems) with genomic testing data from the Genomics business. In total, the company's dataset includes approximately 7.7 million clinical records, over 1 million imaging records, over 910,000 matched clinical and molecular dataset profiles, and over 970,000 samples sequenced. In addition to using this data to empower more intelligent diagnostics, Tempus also licenses this data to biopharmaceutical companies who use it to design smarter clinical trials and identify potential new drug targets. Tempus works with 19 of the top 20 pharmaceutical companies in this capacity and has disclosed 9-figure deals with 3 biopharmaceutical companies. We think this proprietary dataset is unique with meaningful barriers to entry, and brings meaningful value to biopharmaceutical R&D. Another new addition was Glaukos Corporation, which develops and sells interventional glaucoma treatments. Glaukos is launching iDose, a new minimally invasive drug-delivery device that treats glaucoma. Glaucoma is when a patient has high pressure inside the eye, which damages the optic nerve and can lead to blindness. Most patients with glaucoma are treated with daily prostaglandin eye drops, but: 1) patients are notoriously noncompliant leading to lower efficacy (more than 90% of patients are noncompliant and around 50% discontinue their medication within six months); and 2) prostaglandin eye drops cause bothersome side effects including dry eye, red eyes, and periorbital fat loss "raccoon eyes." An iDose is implanted as a five minute procedure and delivers a highly concentrated prostaglandin formulation inside the eye that is effective for up to three plus years. Compared to prostaglandin eye drops, iDose ensures patient compliance and the intraocular dosing significantly reduces side effects. We think glaucoma is a large market (there are approximately 3 million patients in the U.S. with glaucoma and up to an additional 6 million patients with ocular hypertension that are eligible for iDose) and is ripe for new standalone interventions. We think that iDose can be a $1 billion product over time and are bullish on Glaukos shares. We established a small position in Tenet Healthcare Corporation, a leading provider of health care services. Tenet's care delivery network includes United Surgical Partners International (USPI), which operates over 600 ambulatory surgical centers (ASCs), surgical hospitals, and other outpatient facilities. Tenet also operates over 50 acute care and specialty hospitals, as well as Conifer, a leading provider of revenue cycle management services. The combination of ASCs and hospital assets in local markets gives USPI a negotiating advantage with payors and vendors, supporting industry leading ASC operating margins. Tenet management has been divesting its less competitively positioned acute care hospitals and other non-core assets to focus on its ASC business. The $90 billion outpatient surgical market is enjoying strong secular tailwinds driven by aging U.S. demographics and the shift of procedures to lower cost outpatient settings. Outpatient procedures cost roughly 50% less than those done in hospitals and are preferred by both patients and physicians. Estimates are that an incremental $60 billion worth of cases are appropriate to be done outpatient, which should drive multi-year mid-single-digit same store growth for USPI - a combination of both higher acuity and volumes - enhanced by de novo projects and M&A in a highly fragmented space. Tenet's hospital sales have been executed at attractive multiples with the proceeds used to pay down debt. As Tenet's faster growing ASC business increases as a percentage of the company's overall cash flows, we believe the company's valuation multiple has room to expand. We added to the position in Elevance Health, Inc., a leading managed care company. We think Elevance Health is well positioned to grow earnings double digits driven in part by its growing health care services business. Table VII. Top net sales for the quarter ended June 30, 2024 Net Amount Sold (millions) Shockwave Medical, Inc. (SWAV) $4.0 Veeva Systems Inc. (VEEV) 2.0 Zoetis Inc. (ZTS) 1.7 Repligen Corporation (RGEN) 1.7 UnitedHealth Group Incorporated (UNH) 1.6 Click to enlarge We sold Shockwave Medical, Inc., which was acquired by Johonson and Johnson. We sold Veeva Systems Inc. due to concerns about slowing growth. We reduced Zoetis Inc. due to safety concerns regarding Librela, a key product used to help control pain in dogs with osteoarthritis. We took a tax loss in Repligen Corporation. We trimmed UnitedHealth Group Incorporated but we maintain a positive long-term view. Outlook Health Care underperformed the broader market again in the second quarter as a small group of mega-cap technology companies drove all the gains in S&P 500 and NASDAQ Composite Indexes. In addition, certain Health Care sub-industries continued to face headwinds. Managed health care stocks continued to be weighed down by Medicare Advantage utilization and reimbursement concerns. Lack of near-term visibility on utilization trends was exacerbated by the Change Healthcare cyberattack, which disrupted payors' normal utilization review and claims adjudication processes while new CMS rules are restricting the number of lower cost hospital observation stays in favor of full inpatient admissions. We believe our managed care holdings are likely to perform better in the second half of the year as investors look to 2025. UnitedHealth Group Incorporated should see healthy MA enrollment growth as plans that bid aggressively to gain members in 2024 will be forced to cut benefits and/or raise prices to restore margins. Elevance Health, Inc., with its more balanced member mix, has its own unique and unappreciated growth drivers which include the ongoing scaling of its PBM and Specialty Pharmacy and the continued growth of its Carelon Services. We note a Republican win in the upcoming election could result in a more favorable environment for Medicare Advantage companies after two years of adverse Medicare Advantage rate updates under the Biden administration. Life sciences tools & services stocks continued to be negatively impacted by customer inventory destocking, cautious biopharmaceutical spending, and weakness in China. Although we don't know exactly when life sciences tools trends will turn positive, we note that biotechnology funding is up year-over year, destocking headwinds are temporary, and sales in China have already experienced significant declines. We remain invested in life sciences tools & services companies that we believe have good long-term growth prospects. On the health care provider side, volumes remain healthy and labor costs have moderated. We continue to like HCA Healthcare, Inc. (HCA), the best-in-class hospital operator with an attractive set of increasingly diversified assets in strong urban markets, where it is typically the #1 or #2 provider. Its strong operating cash flow and under-levered balance sheet provide flexibility to make growth investments and return capital to shareholders. In medical devices, business trends remain solid, and we remain investors in competitively advantaged growth companies with exciting new product cycles such as Intuitive Surgical, Inc. with its da Vinci 5 robotic surgical system, Boston Scientific Corporation with its Farapulse PFA system for treatment of atrial fibrillation, and Glaukos Corporation with its iDose for treatment of open-angle glaucoma. In biopharmaceuticals, we remain bullish on the market opportunity for new diabetes and obesity medicines. In June at a medical meeting, the principal investigators of the SURMOUNT-OSA trial presented the full data which demonstrated that Eli Lilly and Company's Tirzepatide reduced obstructive sleep apnea in adults with obesity by up to 62.8%, and up to 51.5% of participants met the criteria for disease resolution. This impressive data set paves the way for Tirzepatide to be used as a treatment for obstructive sleep apnea in overweight and obese individuals. At the end of June, the U.S. Supreme Court overturned the Chevron doctrine of judicial deference to an administrative agency's interpretation of ambiguous legislation. The ruling could impact regulatory actions taken by CMS and the FDA. It is too early to know what the ramifications of the Supreme Court's recent decision will be, but we expect to see a rise in legal challenges to CMS and FDA rules, which could result in a more favorable regulatory environment for the health care industry. Overall, our long-term outlook for Health Care remains bullish. Innovation in the sector and the themes in which we have been investing are very much intact. We believe the Fund holds competitively advantaged growth companies with strong management teams. As always, I would like to thank my colleague Josh Riegelhaupt, Assistant Portfolio Manager of the Fund, for his invaluable contributions. Thank you for investing in the Fund. I remain an investor in the Fund, alongside you. Sincerely, Neal Kaufman, Portfolio Manager Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectus contains this and other information about the Funds. You may obtain them from the Funds' distributor, Baron Capital, Inc., by calling 1-800-99-BARON or visiting BaronCapitalGroup.com. Please read them carefully before investing. Risks: In addition to general market conditions, the value of the Fund will be affected by investments in health care companies which are subject to a number of risks, including the adverse impact of legislative actions and government regulations. The Fund is non-diversified, which means it may have a greater percentage of its assets in a single issuer than a diversified fund. The Fund invests in 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. 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 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 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 Health Care Fund by anyone in any jurisdiction where it would be unlawful under the laws of that jurisdiction to make such offer or solicitation. BAMCO, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Baron Capital, Inc. is a broker-dealer registered with the SEC and member of the Financial Industry Regulatory Authority, Inc. (FINRA). Click to enlarge Original Post Baron is an asset management firm focused on delivering growth equity investment solutions. Founded in 1982, we have become known for our long-term, fundamental, active approach to growth investing. We were founded as an equity research firm, and research has remained at the core of our business.

Baron Funds Q2 2024 Letter From Ron Baron

We expect inflation to continue averaging 4% to 5% annually over the coming decades...not 2%... and the growth rate of our economy in both real and nominal terms due to advances in technology...especially AI...to accelerate! "The Internet's Final Frontier: Remote Amazon Tribes." The New York Times. June 2, 2024. Jack Nicas and Victor Moriyama, two The New York Times reporters, "hiked more than 50 miles through the Amazon to reach remote Marubo villages." That was to see what happened to villagers who had just received a Starlink satellite internet antenna...which "connected" the tiny, closed civilization, among the most remote indigenous villages on the planet, to the rest of us...courtesy of Elon Musk's SpaceX (SPACE). The benefits of "video chats with faraway loved ones and calls for help in emergencies" are obvious. Connecting to the outside world also has drawbacks for villagers who need to plant and harvest and hunt to survive...and whose "young people have gotten lazy...learning the ways of the white people." "But please don't take our Internet away," the female leader of one village plaintively asked the reporters. Gwynne Shotwell, SpaceX's President and Chief Operating Officer, described her recent visit to a school in one of these villages. She was repeatedly "hugged" by young students. She said, "It was one of the best days in my life." I will interview Gwynne at the Annual Baron Investment Conference on November 15. That will be her second appearance at our annual meeting. "Want to Buy SpaceX stock? You have to know someone." Wall Street Journal. May 19, 2024 Sounds almost like "Would you like to buy the Brooklyn Bridge?" doesn't it? On May 19, 2024, WSJ reporter/analyst Micah Maidenberg wrote about extraordinary investor demand to invest in Elon Musk's "privately owned" SpaceX. Since 2017, Baron has consistently purchased SpaceX shares annually on behalf of Baron mutual funds, partnerships, private clients, and proprietary accounts. Baron's approximately $1 billion investments at cost are now valued at $2.68 billion. We think those investments could increase materially in value in the next 10 to 15 years. We expect to continue adding to this investment whenever we have an opportunity to do so. SpaceX's current two most important businesses are "Starlink" and "Launch." Starlink is a satellite broadband Internet service. Starlink's satellite broadband serves the entire Planet Earth from its 6,500 low earth orbital ('LEO'), low latency satellites. Starlink's LEO constellation will ultimately consist of more than 15,000 satellites. Starlink's business is enabled by competitively advantaged SpaceX rocket ships that are "reflyable." "Reflyable" means that SpaceX rockets can be used over and over and over again...just like an airplane...and just like Star Trek spaceships. SpaceX reflyable rockets provide a dramatically "lower cost to space" than governments and commercial interests have previously achieved. We estimate SpaceX cost to orbit will soon be less than 10% the cost of traditional launch businesses! We think of SpaceX as the "railroad to space" ... and analogize SpaceX rockets to America's railroads in the late 1800s. Railroads enabled our nation to settle America's West. Railroads then were a dramatic improvement over wagon trains. Just like reflyable rockets are a dramatic improvement over expensive rockets that can be used only once. No other commercial enterprise or government has been able to refly rockets...which, when you watch SpaceX landings, you too will quickly understand why it is such an awesome feat. Since the 1960s, the United States has reached orbit with rockets mainly powered by Russian technology. Those rockets can be used only once before burning up in our atmosphere! Each launch could easily cost a lot more than $100 million. One of the unusual coincidences in my life is that from 1966-1969, when I attended George Washington Law School in the evenings, I worked during the days as a patent examiner in the U.S. Patent Office. There, I was assigned an unusual "art"... chemical coatings. In that role, I granted patents on golf ball covers...and heat resistant coatings shielding nose cones that carry astronauts returning to Earth!!!! Approximately 90% of the mass to orbit from Planet Earth is currently launched by SpaceX. Elon estimates that when SpaceX Starship, the 400-foot tall, largest rocket ever launched from our planet, has been "derisked," 99% of all mass to orbit will be flown by SpaceX! Whether for commercial interests or governments. Micah noted the growth prospects for SpaceX are so favorable that many investors seeking to purchase SpaceX shares willingly pay unusually hefty annual management fees plus "carried interest" in profits they earn. "Carried interest," most often 20% of profits, are paid to managers who do not risk their own capital but are paid a percentage of your profits. A much different model than for "active" mutual fund managers like Baron, which typically charges annual management fees of 1% or less of net assets...with no carried interest. I interviewed SpaceX's President and Chief Operating Officer Gwynne Shotwell at the 2019 Annual Baron Investment Conference at New York's Metropolitan Opera House. The theme then, "What's Next?," couldn't have been more appropriate. That is since it was only a few months before the COVID-19 pandemic. After my interview with Gwynne, she was asked by several Baron Funds' shareholders in the audience how they could invest in SpaceX? "Talk to Ron," she answered. Several Baron mutual funds have significant investments in SpaceX. The largest holdings are Baron Partners Fund (13.2% of total assets) and Baron Focused Growth Fund (10.3% of net assets). Tom Pritzker, Hyatt Hotel's Chairman, and my friend since 1979, wrote me recently. "Just saw Gwynne Shotwell interviewed at Aspen Ideas Festival. OMG!!!! What an awesome endeavor. I'm so glad to be associated. You could see on her face the joy of what she is doing. Thank you for convincing me to invest." We expect a lot more businesses to be in the path of demand created by SpaceX. Like "Starshield," a satellite network to protect our Homeland...cargo and ordinance transport anywhere on our planet in 32 minutes point-to-point... manufacturing in zero gravity... data centers in space powered by the sun which Elon calls that "giant nuclear reactor in the sky"... cooling for SpaceX's massive orbiting GPU data centers from absolute zero space temperatures...and data for AI "training" transported to and from Earth by Starlink to those data centers... to list just a few of the possibilities...in addition to Starlink's base business of connecting virtually every square inch of our planet...whether on land, including deserts and mountains...on sea...or in the air. Goldman Sachs and Morgan Stanley estimate very high annual profit margin revenues will be available to Starlink during the 2030s, which they currently approximate at $1.25 trillion...which is growing double digits annually. During the 2030s, Musk expects SpaceX to obtain a substantial percentage of the highly profitable revenues while enabling terrestrial telcos to improve and increase the services they provide to their customers. "I'm Monroe Freedman. I'm your contracts professor." That is what Professor Freedman, standing in the well of a George Washington University Law School classroom, announced to us. He then held up a thick textbook with a blue hardcover titled, Cases and Materials on Contracts by Monroe Freedman." "This is the text we will use for our Contracts case law class. Please read the first three cases. We will discuss those cases Wednesday night. Class dismissed." - Professor Monroe Freedman. George Washington University Law School. September 1966. From 1966 to 1969, I worked as a patent examiner in the United States Patent Office (USPO) by day and attended George Washington University Law School in the evenings. Being a patent examiner required what the U.S. government considered a "critical skill" ... in my case an undergraduate degree with a major in chemistry. My patent examiner position exempted me from the Vietnam War draft. The USPO also granted me a partial scholarship to attend law school in the evenings...which I did...although I left law school in the summer of 1969 after seven semesters... one semester short of graduation...mired in $15,000 debt...which is about $150,000 in present day dollars!!! My parents were not exactly pleased by my decision. Professor Freedman was my favorite law school professor. After introducing himself to my first evening law school class and giving us that homework assignment, the professor left the classroom. His teaching assistant then instructed the 100 law students in class to "Pick up a Contracts by Professor Monroe Freedman textbook from the tables by the classroom door as you are leaving. See you Wednesday." When we returned to class two evenings later, Professor Freedman asked whether we had read the cases? Everyone raised their hands signaling "yes." "How do you think the first case was decided?" the professor then asked us. "Please explain your answer." Nearly everyone raised their hand and Professor Freedman began to call on students eager to impress him. Our answers were nearly identical. "No, that is not what happened," Professor Freedman responded. "The Plaintiff won because..." The professor then asked how we thought the second case had been decided. Again, hands shot up, although, sensing a trick, this time not so many. Again, all the students gave nearly identical answers. "No, that is not what happened. This is how and why that case was decided, ..." Professor Freedman explained... exactly the opposite of what had seemed to us obvious. Finally, Professor Freedman asked us about the third case. This time fewer still raised their hands. Once again Professor Freedman explained why we were all wrong. That experience shaped my view of the rule of law. My opinion crystallized further when, as law students, we were taught, "When the facts are against you, argue the law. When the law is against you, argue the facts." Which, bottom line, made me believe that the most talented, skillful lawyers will almost always win. Regardless of facts and what seem to be plainly written rules and laws. Nothing has dissuaded me since. Baron Capital was founded by me and two others in 1982. We now have 212 employees, including 44 exceptional and mostly long-tenured analysts and managers...and outstanding performance since our inception. In the 42-year history of our business, we have never had a layoff despite periods when our economy and stock market have struggled. This is one reason we have been able to attract...train...and retain outstanding employees...who have achieved great results for our clients and fellow investors. How did we not just survive but prosper while trying to abide by rules subject to varying interpretations? When Supreme Court decisions are often 5-4 or 6-3? We operate Baron Capital with several overriding principles. "Question Everything"..."Own It"..."Anything is Possible" and "Exceptional Takes Time" are our bedrock principles. Another is "We Invest in People".... exceptional individuals at Baron who study companies and are supported by our talented staff. ...as well as in the exceptional executives whom we trust who manage our portfolio companies. So, assessing character of individuals and, of course, their innate intelligence and life stories...as well as judging growth prospects and competitive advantages of businesses are the basis for our investment decisions. "Growth + Values" was the theme of the 2018 Annual Baron Investment Conference. I have written before about a rabbi's sermon several years ago during Jewish New Year services that I often think about. "Would your younger self be proud of the life you have lived? Would he like you?" So, with that as a guidepost in a world subject to many interpretations of the same words, we want to trust the people in whom we invest to "do the right thing"... Since it would not be possible to write a rule for every possible circumstance, we need to trust their judgement and ethics... Not that we would necessarily make the same decisions. Just that the executives had carefully considered all the facts and circumstances and met their obligation to keep their word and do what is in the best interests of their employees...community...and owners of that business...even if not necessarily for their personal benefit. Warren Buffett in his folksy manner recently said, "I try to buy stocks in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." When your portfolio is as large as Berkshire's, of course, you need to place more emphasis on durable competitive advantages than on any one individual manager's talent. While Baron also focuses on businesses we believe are competitively advantaged...we give unusual weight to manager talent that can have a greater impact on smaller and mid-sized businesses' growth prospects. Baron Capital puts its trust in extraordinary individuals who manage the businesses that Baron Capital owns. We invest in those individuals on behalf of our clients and ourselves...our interests are aligned with our clients' since our personal assets are commingled with yours. "The Dow should hit 30,000 in 10 years...50 or 60,000 in 20 years." I made that remark on CNBC's Squawk Box in 2013. You can look it up on the CNBC website. The Dow Jones Industrial Average was then 14,000. Nouriel Roubini, an economist nicknamed "Dr. Doom" for his pessimistic forecasts, was skeptical during my interview. My response? "I don't believe in stock market predictions by economists. I believe in fortune cookies. Last night my fortune cookie said, "All the efforts you're making will pay off." - Ron Baron. CNBC. Squawk Box. February 5, 2013. In what seems like the blink of an eye, 11 and a half years have since passed... and the Dow Jones Industrial Average, following precedent of the past hundred years, has more than doubled and now exceeds 40,000! David Schneider, our Head Trader, has worked at Baron since 1987. He remembered that 2013 interview when so many were bearish...and my views were controversial...and forwarded the segment from the CNBC website to our fellow Baron employees. David noted that in 2013 while most "investors" were focused on the next quarter's results, few believed the stock market would double in 10 years...and double again in the following 10 years! David also enjoyed my "fortune cookie" comment, as did the CNBC anchors...although I don't think Nouriel, who takes his economics seriously, thought it humorous. My point was simply...that the stock market and our economy are inextricably linked. That nominal historic economic growth in America is approximately 7% annually, 2% real and 4% to 5% from inflation. During my entire lifetime. That means the economy has historically doubled about every 10 years. So has the stock market. Despite world wars, civil wars, recessions, depressions, financial panics, pandemics, high interest rates, low interest rates, high unemployment, low unemployment, civil unrest, and controversial judicial decisions. We expect inflation to continue averaging 4% to 5% annually over the coming decades...not 2%... and the growth rate of our economy in both real and nominal terms due to advances in technology...especially AI...to accelerate! Also, for quality of life to improve in coming years just like it has over the history of our country. In the early 1900s, for example, the average life expectancy was about 47 years. One third of all children born today will live past 100! Warren Buffett recently commented that quality of life improves about sevenfold every 100 years. My bet is that due to Elon and others...and AI...this assumption may be too conservative. Further, inflation at historic 4% to 5% annual rates means that most things like food ...homes...tuition...salaries...clothes...cars...you name it...double in price every 14-15 years. We believe investing in stocks is an attractive way for most of us to protect our savings against inflation...and to participate in the growth of our economy. Baron will continue to invest for the long term in exceptional executives who lead competitively advantaged growth companies. We believe the purchasing power of your money will continue to fall in half every 14-15 years...and stock prices will double about every 10 years. Our goal is to double the value of our investments every 5 to 6 years by investing in businesses that are doubling in size over that time horizon. Since their respective inceptions, 16 of 19 Baron mutual funds, representing 96.6% of Baron Funds' AUM, have outperformed their primary benchmarks and 12 Funds representing 94.1% of Baron Funds' AUM, rank in the top 20% of their respective Morningstar categories. 10 Funds, representing 70.1% of Baron Funds' AUM, rank in the top 10% of their categories. 8 Funds, representing 53.0% of Baron Funds' AUM, rank in the top 5% of their categories. We believe our Funds have outperformed by not being the same as the market. Baron Partners Fund is the number one performing U.S. equity fund (out of 2,059 share classes) since its conversion in 2003 from a partnership to a mutual fund.* According to a third party report commissioned by Baron Funds' independent trustees, "there were no peers that...were a reasonable style match for that fund." As of the date of this letter, Baron Capital has more than $43 billion in assets under management. We have earned more than $44 billion in realized and unrealized profits since 1992 when we managed $100 million! Thank you for joining us as fellow shareholders in Baron Funds. Respectfully, Ronald Baron, CEO P.S. The theme of the 2024 Annual Baron Investment Conference is "Building Legacy." Like Elon, we have a mission. Ours, like his, is to make a difference in people's lives. We have impacted lives due to the exceptional returns we have earned for investors. This, in our opinion, is due to Baron Capital's unique investment process...exceptional people...and outstanding performance...our legacy...that we believe will allow our business to last 100 years...at least...and still enhance the lifestyles of the families and institutions that choose to invest with us. Businesses in which Baron invests for our clients generally invest in their businesses to become larger enterprises over the long term....it is not to maximize their current profits. Baron does the same. Baron focuses on what is in the best interests of its clients...not on maximizing my family management company's current profits. We have never had a layoff in the history of our business. This, we think, is just one of the reasons...there are many...that Baron attracts and retains the most talented and awesome individuals. It's not just how we treat our fellow employees. It is also about the opportunities we provide to work with the exceptionally talented people we hire... and, due to our reputation as owners not traders, our analysts are offered chances to study incredibly interesting businesses. P.P.S., We hope to see you at the 31st Annual Baron Investment Conference on November 15, 2024. It will take place, as it has since 2005, at The Metropolitan Opera House at Lincoln Center in New York City. This fall, we will celebrate our 42nd year in business. These annual conferences are typically attended by more than 5,000 Baron Funds' shareholders and Baron clients. I promise you will learn a lot from the exceptional CEOs who manage the competitively advantaged growth companies in which your savings have been invested. We're sure you'll have a great time...and learn a lot. The entertainment at lunch and in the afternoon will be awesome, as usual. We will also continue with drawings for what have become traditional Tesla (TSLA) door prizes before lunch. Three of them, those amazingly beautiful automobiles...the safest ever made on Planet Earth...are given at our expense...not yours. Just like all the expenses incurred that day. Ours. Not yours. It is our way to "thank you" for trusting us to manage your family's hard-earned savings. We can't promise investment returns...but we can promise we will try as hard as possible to continue to achieve outstanding results. See you November 15. Oh, yeah. You'll have a better chance to win a Tesla than to win the lottery!!! That I can guarantee. One more thing. Don't forget to get an absolutely delicious ice cream cone on the Lincoln Center Plaza at the end of the day. This year, we will have six Scream Ice Cream trucks waiting for you as you leave the Lincoln Center campus. I have a small personal investment in the Scream Ice Cream business. One college summer, I drove an ice cream truck, and when I had the chance to go back to my "roots" by investing in Scream, I grabbed it. The cones are "on the house." Just tell the ice cream man, "Ron sent me." And don't forget to pick up a "swag" bag as you leave. This year, in addition to our "Building Legacy" Baron conference t-shirts made by FIGS, you'll find a big chocolate chip cookie to sustain you on your trip home. Enjoy!! Registration for the Conference begins on Monday, August 26. Register early as seating is limited. Additional Must-See Resources Baron Funds (Institutional Shares) and Benchmark Performance 6/30/2024 Baron Capital's Top 30 Holdings - As of 3/31/2024 *This is a hypothetical ranking created by Baron Capital using Morningstar data and is as of 6/30/2024. There were 2,059 share classes in the nine Morningstar Categories mentioned below for the period from 4/30/2003 to 6/30/2024. Note, the peer group used for this analysis includes all U.S. equity share classes in Morningstar Direct domiciled in the U.S., including obsolete funds, index funds, and ETFs. The individual Morningstar Categories used for this analysis are the Morningstar Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Growth, Mid-Cap Value, Small Blend, Small Growth, and Small Value Categories. As of 6/30/2024, the Morningstar Large Growth Category consisted of 1,162, 1,019, and 794 share classes for the 1-, 5-, and 10-year periods. Morningstar ranked Baron Partners Fund (Institutional Shares) in the 100th, 1st, 6th, and 1st percentiles for the 1-, 5-, 10-year, and since conversion periods, respectively. The Fund converted into a mutual Fund on 4/30/2003, and the category consisted of 728 share classes. On an absolute basis, Morningstar ranked Baron Partners Fund Institutional Share Class as the 1,160th, 2nd, 31st, and 1st best performing share class in its Category, for the 1-, 5-, 10-year, and since conversion periods, respectively. Click to enlarge Original Post Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors. Baron is an asset management firm focused on delivering growth equity investment solutions. Founded in 1982, we have become known for our long-term, fundamental, active approach to growth investing. We were founded as an equity research firm, and research has remained at the core of our business.

Davis International Fund 2024 Semi-Annual Review

Current Positioning, Long-Term Performance and Recent Results Davis International Fund (MUTF:DILAX) posted a strong return of 8.66% for the first six months of 2024, outperforming the 5.69% return of the MSCI ACWI ex US by 297 basis points (bp). In this report, we discuss factors that contributed to the fund's good performance, along with underperformers during the same period. For the first six months of 2024, consumer-facing internet holdings were major contributors to DIF's outperformance. Meituan (OTCPK:MPNGF), up 36%, was the largest contributor as its China food delivery business rebounded strongly from COVID-related disruptions a year ago, and to date its in-store advertising business has successfully fended off competitive challenges from ByteDance's (BDNCE) Douyin. Meituan's first international expansion has, within a year, captured 27% market share to become the number-two food-delivery player in Hong Kong. Other internet contributors include the South African Naspers (OTCPK:NPSNY) and its European-listed operating subsidiary Prosus (OTCPK:PROSY) -- up 14% and 20%, respectively. Tencent (OTCPK:TCEHY), which is the main value driver at Naspers and Prosus has bolstered strong advertising revenue growth with the success of its WeChat Video Accounts business, which is a short-form live-streaming video service that competes with Douyin. In addition, Tencent's latest large video game launch of Dungeon & Fighter Mobile (DnF) has been a big hit, becoming the top-grossing game app download in China. The South Korean e-commerce leader Coupang rose 29% as it continues to grow rapidly, reaching 30% share of the e-commerce market while successfully taking share from more established players in the food delivery segment. Semiconductor equipment manufacturer Tokyo Electron (OTCPK:TOELY), up 22% year to date, was also a major contributor to the fund. Tokyo Electron's business is driven by long-term secular trends in AI, the Internet of Things (IoT), electric vehicles ('EV') and clean energy, which in turn drives the demand for semiconductor chips and equipment. Tokyo Electron has also benefited from government subsidies to the semiconductor industry such as the CHIPS Act in the U.S. and a similar plan in Japan, which is driving funding for building semiconductor factories and the associated manufacturing equipment. Banks: Development Bank of Singapore (DBS), Danske Bank (OTCPK:DNSKF) and Bank of Butterfield (NTB) had returns of 18%, 16% and 13%, respectively, during the first six months of the year. Continued economic growth, good net interest margins, low loan delinquencies and attractive dividend yields resulted in high total returns. Industrials: Schneider Electric (OTCPK:SBGSF) returned 22% and has benefited from growing electrification globally -- especially at data centers, as AI uses four times as much power as systems that do not utilize AI. Running more power also increases cooling needs, which in turn demands more power. Detractors to DIF performance include Asian life insurance company AIA (aaigy), which was down 21% and Chinese wealth manager Noah Holdings (NOAH), which fell 30%. AIA's fundamentals remain strong, with double-digit new business growth in almost all of their major geographies. The main concern remains whether the company can sustain its performance in China and Hong Kong, but we think those risks are overblown. AIA is still very small in China, with a low-to-mid single-digit market share of the life insurance market. The company targets only mass affluent and high net worth clients and services them using the industry's most professional and best-trained salesforce. The Chinese insurance market has also been under pressure from declining government bond yields in China but AIA is less exposed due to the product mix they offer to their clients and their conservative balance sheet. AIA's valuation remains very attractive with the stock trading just above embedded value, which means we are not paying much for the option of future growth. Management is high quality and buybacks plus cash dividends represent 6% of the company's market capitalization -- an attractive level of cash return to shareholders, especially given how quickly AIA is growing. Noah Holdings' revenues and earnings fell in the first six months as offshore clients switched from private equity to cash-management products to take advantage of higher yielding U.S. dollar-denominated securities. In the second half of 2024, however, investors will receive $140 million in dividends equivalent to 20% of its market capitalization. Because Noah currently has net cash (net of dividends to be paid in August) equal to 130% of market capitalization and is profitable -- a rare net-net combination -- we expect the company's future cash dividend yield to exceed 10%, making Noah an attractive investment despite the weak operating results. With unemployment at a very low 3.9% and a forecast of 2.5% gross domestic product (GDP) growth in 2024, the U.S. economy has been going from strength to strength. The S&P 500 Index's (SP500, SPX) 2023 performance -- with a return of 26.3% followed by a 15.3% return in the first half of 2024 -- reflects this strong economic backdrop. The strong economic and market performance has been all the more impressive as it has occurred despite a more than 500 bp rise in interest rates starting in March 2022. Over the past two plus years the biggest change in the economy and in the markets has been this rapid rise in interest rates -- what we at Davis have dubbed "the return to normalcy." Rate normalization has had profound implications for which businesses get funding, how they are funded and how companies are valued. On a longer-term basis, the biggest change in the economy and investing environment has been the twin worries of the rising government deficit (spending more than we make) accompanied by the rising national debt (the result of years of high spending). The huge fiscal and monetary stimulus since the Great Financial Crisis has helped generate strong investor returns but we cannot assume that the economy will repeat this strong performance over the next several years. It is worrisome that the federal budget deficit was as high as 6.3% of GDP in 2023 in a year when GDP grew a robust 2.5%, unemployment was an incredibly low 3.7% and interest rates were close to zero percent. As Figure 1 shows, historically the federal budget deficit spikes in recession years as the government seeks to stimulate the economy and serves as a safety net for the unemployed but is low in years with a strong economy. In 2007, the year before the Great Financial Crisis, the federal budget deficit was only 1.1% of GDP, which enabled the government to be extremely proactive in saving the economy. In the three decades between 1994 and 2023, the federal deficit averaged 3.8%. During this period, we also sustained multiple catastrophes: in 2001, the sharp recession following the dot.com bust; between 2007 and 2009, the Great Financial Crisis; and from roughly 2019 through 2023, the COVID-19 pandemic. Should a recession or other disaster occur today, we would worry that the government's ability to address it effectively could be constrained by the size of the current budget deficit. Another constraint could be the size of the national debt, which has ballooned to 97% of GDP, a level we have not seen since World War II, except during COVID. Finally, while service of interest expense on the national debt was helped by the near-zero interest rates pre-2023, that is no longer the case. Interest expense as a percentage of federal spending was 5.2% in 2021, rising to 7.6% in 2022 when the Fed started raising rates in March, and then further growing to 10.7% in 2023. In 2023, net interest expense exceeded Medicaid spending, and in 2024 it is forecast to exceed national defense spending, too. Though it is true that the size of the federal deficit and national debt have been rising for some time, they would not necessarily cause an economic downturn in and of themselves. Rather, we are concerned that they could erode the degrees of freedom available to the government when we encounter the next national shock. Because of the risk that the U.S. government will be more constrained in its ability to support the economy in the future, it is more important than ever to ensure that our portfolio companies have the balance sheet and cash generation to survive a protracted economic downturn. Given that both cash and fixed income could see a serious erosion of purchasing power, what is the best approach for investors to maintain their purchasing power in the future? Real estate returns have also been materially affected by the higher rate and tighter credit environment and would be harmed should interest rates rise further. To us, the pricing power, resilience and adaptability of a well-run business is the wisest way to ensure that purchasing power is maintained. A durable competitive advantage leads to pricing power, while a strong balance sheet and cash generation create resiliency. Moreover, an experienced and talented management team could help the business adapt to changing circumstances. A dozen years of strong equity returns has made the market complacent about valuation. While the argument that a higher market P/E multiple was justified because interest rates were at historical lows might have been valid in the short-term, that logic can no longer be justified. Today at 5.5%, the federal funds rate is actually greater than the longterm average. By being selective and disciplined about valuation, DIF has built a collection of world-class companies that grow at levels well above the broader market, but which are priced at a significant discount to the market index. In our experience, if you start with a significantly higher earnings yield and grow at a similar rate over time, your portfolio returns will be attractive on both an absolute and a relative basis. The 46% P/E discount with significantly higher EPS growth levels as seen in Figure 2, bodes well for DIF's future returns relative to the MSCI ACWI ex US. The state of the Chinese economy has been a big focus for global investors over the last three-to-four decades and even more so since the start of the COVID pandemic in early 2020. In the years leading into the pandemic, from 2013-2019, China's GDP growth averaged an impressive 6.95% per year. In the years since the pandemic, from 2020-2023, GDP growth has averaged a lower but still very acceptable 4.72%. GDP growth was 5.2% last year; the Chinese government's official forecast is for "about 5% growth" in 2024 and economists are forecasting 4.5% growth in 2025. We do think a return to the 7% pre-pandemic growth rate is improbable because real estate, which accounts for 22% of GDP and infrastructure will grow at a slower pace. The easy credit environment for real estate developers is finished, and the view that there is strong demand for all large real estate projects in lower-tier cities no longer exists either. Nevertheless, our expectations are in line with most forecasters that the Chinese economy can grow 4-5% annually for the next several years, which is a good macro environment for our Chinese holdings. A big driver of economic growth is the progress China has made in developing innovative science and research and development (R&D) projects. One way to measure scientific progress is the number of high-impact research papers published every year. These are papers that are cited the most by other scientists worldwide in their own research. In 2003, the U.S. produced 20 times as many high-impact papers as China, according to data from Clarivate a science analytics company based in Philadelphia. By 2013, the U.S. produced about four times as many top papers and in the most recent data examining the number of papers released in 2022, China had surpassed the U.S. as well as the EU in number of papers published. Similarly, the British scientific journal Nature measured that in 2014 China contributed less than a third of America's research papers to prestigious scientific journals. By 2023, China had ascended to the top spot. The Leiden Ranking, managed by the Dutch Leiden University, calculated that 6 of the top 10 universities ranked by scientific output were Chinese and that Tsinghua University was now the number-one science and technology university. So, in addition to volume metrics such as leading the world in number of STEM graduates or issuing the most patents for many years the quality of China's science research has made a dramatic leap over the past decade. This rapid climb in the level of innovation has crucial implications for the ability of Chinese firms to be among the best in the industries of the future. In 2022, China accounted for 64% of global EV production and 70% of world's lithium-ion batteries. By the end of 2023, BYD passed Tesla to be the world's biggest manufacturer of purely battery-powered vehicles. China also accounts for 80% of solar panels manufactured globally as a result of having driven down manufacturing costs to 16-18.9 cents per watts of generating capacity compared to 24.3-30 cents per watts in the EU and 28 cents in the U.S. Even in areas that are at the leading edge of innovation such as quantum computing, China is making significant breakthroughs toward closing the gap with the global leader, the U.S. Another area where China has been making progress is in AI, where it contributes 40% of the world's research papers compared with 10% for the U.S. and 15% for the EU and Britain combined. According to Zachary Arnold, an analyst at the Georgetown Centre for Emerging Security and Technology "China's AI research is world-class. In areas like computer vision and robotics, they have a significant lead." Investor returns have also benefited from Chinese regulators pushing listed companies to use their cash-rich balance sheets to improve shareholder returns. This effort led by top securities regulator Wu Qing mimics similar regulator-led efforts in Japan and South Korea. Over the past three years, listed Chinese firms have been returning $280 billion a year in dividends and share repurchases. Figure 3 displays the cash returns to shareholders for the latest twelve months of several of DIF's largest Chinese holdings calculated as a percentage of market capitalization. These high levels of cash returns to shareholders highlight the following key points: 1) Many of our Chinese holdings have very strong balance sheets with large amounts of net cash. 2) These companies generate a lot of free cash flow, which enables very consistent levels of dividend payments. 3) Managements are taking advantage of the low share prices by buying back their stock. 4) These companies' valuations are very low (see Figure 4). Figure 4 shows the forward P/E multiples of the major stock indices. The 28-55% discount that Chinese companies are trading at relative to the global and U.S. stock indices bodes well for future returns. Our Chinese holdings are a collection of competitively advantaged businesses with good growth prospects run by talented and experienced management teams and trading at very attractive valuations. As we noted in our last letter, many view generative AI as a transformational technology that, according to Nvidia (NVDA), is poised to be "bigger than the PC, bigger than mobile and bigger than the internet, by far." While we would agree that generative AI is going to lead to major technological advances and transform numerous industries, we also expect it will lead to hyperbole, irrational exuberance and unfulfilled promises. The stock market in particular is susceptible to wishful thinking and the fear of missing out ('FOMO'). FOMO leads investors to pile into companies making the most headline-grabbing claims about the future while turning their backs on those with proven businesses with demonstrated competitive advantages. In particular, we believe many companies are rewarded for being early beneficiaries of AI demand with the expectation that their revenues and earnings will continue to grow rapidly in the future. The market for AI products and services, however, is still in its very early days and competition is fierce. We believe it is very risky to project who the long-term winners and losers will be based on their past one or two years of performance. This can be a target rich environment for value-conscious stock pickers with a long-term focus. So how has DIF positioned itself to take advantage of the growth opportunities created by the AI boom while avoiding overvalued narrative-driven stocks? We seek out attractive businesses that are both proven and profitable but which also stand to benefit from the growth in AI. Tencent, for instance, has a highly profitable growing business as the leader in China in social media, messaging and video gaming. The company is well-positioned to leverage its technical AI talent and vast amounts of proprietary data to supercharge all three aspects of its business. Within its social media platforms, we expect Tencent to see meaningful gains from AI driven ranking and recommendation improvements in areas like Video Accounts, the company's short-form video product that has become a core use case within WeChat. Ranking and recommendation improvements drive increases in user engagement as well as advertising efficiency across the platform via better targeting and personalization. In addition, generative AI will make it easier for content creators and advertisers to create engaging content and advertisements, further increasing the monetization potential of its platform. As the most popular messaging app in China, WeChat also provides Tencent a massive distribution advantage that will enable it to quickly launch and scale any breakthrough generative AI products that might develop over time. One example is with search, where we think the company has an opportunity to leverage generative AI technology to gain substantial share in the search market. Generative AI also has obvious applications in the company's video game business. We expect Tencent will utilize generative AI to create more engaging video games by, for example, making non-player characters more interactive. In addition, generative AI will help reduce the cost and timelines for creating video game art and design assets (e.g. virtual worlds) which today is still a labor-intensive process. Similarly, Tencent should see cost and development time reductions when it comes to making long-form videos in its TV and movie studio business. Finally, as one of the leaders in China's cloud computing market, the company also stands to benefit from its cloud customers building and adopting AI-based applications, which potentially could drive increased usage of Tencent's cloud infrastructure offerings dramatically over time. With plenty of opportunities to enhance its business with AI, and no major businesses that look vulnerable to AI-driven disruption, Tencent looks like a clear AI winner across the board. Samsung (OTCPK:SSNLF) is another example of a global highly profitable technology leader that is positioned to reap major rewards from the AI opportunity while still trading at a very attractive valuation. As the largest semiconductor memory manufacturer, the largest mobile handset manufacturer and the number-two foundry business, Samsung has built a number of durable competitive advantages. Moreover, high-bandwidth memory ('HBM') is proving to be a big opportunity given the memory-intensive demands of AI computing. Although SK hynix (OTCPK:HXSCF) -- the world's second-largest memory chipmaker and Samsung's resurgent rival -- has an early lead in HBM, we expect Samsung's capacity and engineering scale eventually would help the company reassert its dominance in this fast-growing market. Our investment in Tokyo Electron, the third-largest semiconductor equipment vendor, predates the investment mania surrounding GenAI, but AI's emergence has proven to be an accelerant for the company's leading-edge logic and memory tools. Expanding demand for advanced lithography has driven accelerating growth in the company's coater/developer tools, a market that Tokyo Electron dominates, with 90% overall share. In the most advanced applications that require ASML's leading-edge extreme ultraviolet lithography (EUV) the company has 100% share. New transistor structures and power-distribution systems will each draw heavily on Tokyo Electron's batch processing and patterning tools to form these new complex features. And the die size of the individual tiles that form a GPU, for instance, continues to get larger, meaning that more production tools are necessary just to produce the same number of GPUs one generation to the next. GPU volume for training alone probably needs to more than double next year to train the 10 trillion parameters anticipated for OpenAI's GPT5. Tencent, Samsung and Tokyo Electron are all beneficiaries of the AI boom but their reasonable valuations do not build in the expectation of major AI contributions. In these early days of the AI industry's development, we like these companies' combination of an established profitable growing business with the opportunity to build a meaningful AI business over time. Meituan is China's leading super app for local services with more than 700 million users annually. The company operates the go-to platform for local business search and discovery (e.g., restaurants, salons, spas, karaoke, etc.) built on user-generated reviews, ratings, photos/videos and recommendations. In addition, the company offers a range of other popular services such as food delivery, hotel booking, movie-ticket reservations and shared-bike rentals. Among its many products and services, food delivery is the most valuable because of its scale (nearly 20 billion orders amounting to about $130 billion in meals in 2023) and high user frequency (customers order 39 times per year on average). Based on its strong competitive position (about 70% market share), proven profitability and solid growth prospects, we believe Meituan owns the most attractive food-delivery business globally. Outside of food delivery, the company's local services marketplace business monetizes largely via commissions on in-store coupons, along with hotel bookings sold and advertising for increased merchant visibility in the app. Given Meituan's well-known brand in local services and the low costs associated with running the platform, this business has been a major driver of profit growth since its initial public offering. However, during the last two years, the company has had to respond aggressively to competitive encroachment into the local services space by Douyin, China's version of TikTok, which has resulted in slower profit growth for the business. We believe these profit growth headwinds will prove temporary and that both Meituan and Douyin will learn to share the market rationally over the long-term, with Meituan maintaining overall leadership and Douyin excelling in certain use cases and verticals that are better suited to its strength in livestreaming. Given the relatively low online penetration rate of local services, especially as compared to e-commerce, and the still attractive duopoly market structure going forward, we remain excited about Meituan's long-term prospects in this business. These near-term competitive concerns gave us an opportunity to substantially increase our position in Meituan at very attractive prices. Even after the 36% year-to-date stock price increase, we still find Meituan's valuation attractive at 14x 2024 and 11x 2025 normalized owner earnings, given the company's durable market position and management's track record of strong execution and value creation. Beyond the competitive threat from Douyin, key risks we are closely monitoring include the potential for increased regulatory scrutiny, particularly as it relates to courier employment and benefits, and market saturation in food delivery caused by an inability to increase penetration among lower-income consumers. One of our long-held international investments is the Development Bank of Singapore (DBS), the largest bank in Singapore and one of the largest in Asia. With about 50% of the bank's deposit base in low-cost current accounts and savings accounts, DBS has a significant advantage in the cost of funding. In addition to a retail customer base with strong brand loyalty, DBS has increased its competitive advantage and ability to attract low-cost deposits by offering sophisticated cash management services for corporate clients and by making wealth management a strategic focus for the bank. Through mergers and acquisitions (M&A) and organic growth, DBS has become one of the top-three banks in Asia for wealth management services. This business has been accretive to group return on equity (ROE) and is a natural fit to DBS' structural advantages including domicile in a AAA-rated rule of law country and having Temasek, Singapore's Sovereign Wealth Fund, as an anchor investor. Aside from its home market in Singapore, DBS is building its presence in Greater China (China, Hong Kong and Taiwan), India and Indonesia through M&A activity and measured organic growth. Management also had the foresight to see the threat from nontraditional competitors and has invested to make DBS one of the most technologically advanced banks globally. We think its approach to digital banking will maintain the company's competitive advantage in terms of efficiency and customer retention for the near future. We like their management and under the long-term CEO's nearly 15-year tenure, DBS has delivered in excess of annualized 8% revenue growth, 11% net income growth and 11% total return for the stock. Their balance sheet remains robust (most recent capital ratio of 14.7% versus operating range of 12.5-13.5%) and has allowed for meaningful dividend increases and room for accretive deals. DBS trades at around 10x estimated 2025 owner earnings, delivering a return on tangible equity in the high-teens and a 6% cash yield. Key risks would be structural weakness in regional trade flows and increased geopolitical tensions in the region. Global market returns over the past few years have been strong but often have been driven by a few large technology companies and we believe the appropriate focus now is on durability and resilience. Large government budget deficits and higher sovereign debt levels raises the risk of stubborn inflation and reduced government fiscal and monetary options in the future. Then, coupled with valuation levels well above historical averages raises the risk of market weakness. Given the current economic and market backdrop, we believe DIF's collection of competitively advantaged businesses with strong balance sheets and cash flow generation trading at a wide 46% discount relative to the MSCI ACWI ex US is well poised to generate good absolute and relative returns. The combination of market leaders in growing industries such as Samsung, Tencent (owned via Naspers/Prosus), Meituan, Sea Limited and Tokyo Electron, and attractively priced leading financial institutions like Danske Bank, Development Bank of Singapore, Julius Baer and Ping An Insurance in addition to durable industrials or mining companies such as Schneider Electric and Teck Resources creates an attractive portfolio on both a long- and shorter-term basis. We understand that in uncertain times such as these, it is more important than ever to be able to entrust your savings to an experienced and reliable investment manager with a strong longterm record. During the 50 years since our firm's founding, the Davis Investment Discipline has demonstrated an ability to generate above-average returns based on in-depth fundamental research and analysis, a long-term investment horizon and a strong value discipline. While times have changed, these fundamental principles are timeless and proven. We thank you for your continued trust and interest in Davis International Fund. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.