Baron Funds Q2 2024 Performance: Focused Growth, Real Estate, and International Growth Funds

Baron Focused Growth Fund Q2 2024 Shareholder Letter

CoStar Group, Inc. (CSGP), Krispy Kreme, Inc. (DNUT), and Vail Resorts, Inc. (MTN) detracted the most. Baron Focused Growth Fund® (the Fund) decreased 0.21% (Institutional Shares) in the second quarter. The Fund outperformed the Russell 2500 Growth Index (the Benchmark), which declined 4.22%. During the quarter, it became evident that the Federal Reserve's (the Fed) restrictive policies over the past year were beginning to have their desired effect of slowing inflation, job growth, and employment. This cooling of economic growth led investors to believe the Fed could start cutting interest rates as soon as this fall. The result was gains in our Disruptive Growth investments, the valuations of which had been negatively impacted by higher interest rates and whose growth could accelerate in a lower interest rate and moderate inflationary environment. Included in this category of investments are Spotify Technology S.A. (SPOT), Tesla, Inc. (TSLA), FIGS, Inc. (FIGS), and Iridium Communications Inc. (IRDM) Our Financials investments were also strong in the quarter. This is despite the expectation for lower future interest rates. Interactive Brokers Group, Inc. (IBKR) benefited from an acceleration in new client growth and trading revenue, while Arch Capital Group Ltd. (ACGL) saw continued growth in insurance premiums written and higher pricing due to strong demand for its property and casualty (P&C) insurance. In the near term, we continue to believe that inflation will remain at or below historic 3% to 4% annualized levels and interest rates will approximate the rate of inflation. This has been the case since World War II. We believe that is a favorable environment for businesses that are growing significantly faster than the rate of inflation and the 7% nominal annualized growth rate of our economy. The above stock price gains were offset by declines in our more economic- sensitive stocks, including FactSet Research Systems Inc. (FDS), MSCI Inc. (MSCI), CoStar Group, Inc. (CSGP), Krispy Kreme, Inc. (DNUT), and Vail Resorts, Inc. (MTN) These businesses were hurt by an elongation of the business sales cycle and concerns that their pricing power would be eroded by the decline in inflation. However, we believe as interest rates decline, business activity for these companies should accelerate. We continue to believe these businesses have strong competitive advantages with still underpenetrated growth opportunities ahead of them and robust balance sheets to fund their growth. We believe valuations are attractive at current levels, and we are starting to see an acceleration in insider buying activity, a key pillar that gives us stronger conviction in our investments. The Fund has continued to generate strong returns with less than market risk. Over the trailing 3, 5, and 10 years, the Fund has captured 101%, 132%, and 111%, respectively, of the upside when the market increased. When markets declined, the Fund lost less with 80%, 90%, and 88% downside capture, respectively. The Fund's Sharpe ratio, a measure of risk- adjusted return, was also higher than the Benchmark for each of these periods. We believe these strong returns with downside protection are due to our research-based investment process. Our research enables us to identify and understand businesses' competitive advantages, differentiation, long-term growth prospects, and exceptional people; and it allows us to invest in these businesses for the long term. As a result, the Fund has outperformed its Benchmark for the 3-, 5-, 10-, and 15-year periods, as well as since its inception on May 31, 1996. Since its inception as a private partnership 28 years ago, the Fund has increased 13.16% annually. This compares to an 8.04% annualized return for the Benchmark and a 9.64% annualized return for the Russell 3000 Index that measures the performance of the largest 3,000 U.S. companies. Performance listed in the above table is net of annual operating expenses. Annual expense ratio for the Retail Shares and Institutional Shares as of December 31, 2023 was 1.32% and 1.06%, respectively. The performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor's shares, when redeemed, may be worth more or less than their original cost. The Adviser may waive or reimburse certain Fund expenses pursuant to a contract expiring on August 29, 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)Reflects the actual fees and expenses that were charged when the Fund was a partnership. The predecessor partnership charged a 15% performance fee through 2003 after reaching a certain performance benchmark. If the annual returns for the Fund did not reflect the performance fees for the years the predecessor partnership charged a performance fee, the returns would be higher. The Fund's shareholders will not be charged a performance fee. The performance is only for the periods before the Fund's registration statement was effective, which was December 31, 2008. During those periods, the predecessor partnership was not registered under the Investment Company Act of 1940 and was not subject to its requirements or the requirements of the Internal Revenue Code relating to registered investment companies, which, if it were, might have adversely affected its performance. (2)The Russell 2500™ Growth Index measures the performance of small to medium-sized companies that are classified as growth. The Russell 3000® Index measures the performance of the largest 3,000 US companies representing approximately 96% of the investable US equity market, as of the most recent reconstitution. All rights in the FTSE Russell Index (the "Index") vest in the relevant LSE Group company which owns the Index. Russell® is a trademark of the relevant LSE Group company and is used by any other LSE Group company under license. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. The Fund includes reinvestment of dividends, net of withholding taxes, while the Russell 2500™ Growth and Russell 3000® Indexes include reinvestment of dividends before taxes. Reinvestment of dividends positively impacts the performance results. The indexes are unmanaged. Index performance is not Fund performance. Investors cannot invest directly in an index. (3)The performance data does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or redemption of Fund shares. (4)Performance for the Institutional Shares prior to May 29, 2009, is based on the performance of the Retail Shares, which have a distribution fee. Institutional Shares do not have a distribution fee. If the annual returns for the Institutional Shares prior to May 29, 2009 did not reflect this fee, the returns would be higher. (5)Not annualized. The Fund's outperformance versus the Benchmark in the second quarter was mostly driven by our Disruptive Growth investments. These businesses represented 34.9% of the Fund's net assets and gained 9.1%, helping our returns by 305 bps in the quarter. Spotify increased 18.9% in the quarter and helped performance by 98 bps. The company continues to improve its platform adding new products and making it more beneficial for the consumer. This has resulted in an increase in subscribers along with significant pricing power. The company has started to institute more regular price increases, which is accelerating its revenue and margin growth. Further, the company has been able to increase prices without increasing its churn rate. We believe the business should be able to improve gross margins from 26% to between 30% and 35% over time while continuing to add subscribers and generate strong top- and bottom-line growth. This should result in an increase in cash flow. Given strong cash flow conversion rates, we believe the company could initiate a return of capital program in the near future. We believe Spotify's valuation remains attractive despite its recent stock price increase. Founder & CEO, Daniel Eck continues to own a 15% stake in this business Tesla increased 12.6% in the quarter, adding 98 bps to performance. The company designs, manufactures, and sells electric vehicles, related software and components, and solar and energy storage products. The stock increased as the core automotive segment accelerated sequentially. We believe lower interest rates will help sell more cars and halt the company's continuous lowering of prices on its cars. In addition, the company's energy storage business continues to grow sequentially. It almost doubled in the second quarter from first quarter levels. In time, business should add significantly to revenue and gross margins and help offset any margin degradation from its auto business. Tesla continues to generate sufficient gross profit to support a robust product development plan. The refreshed Model 3 and Y are also generating strong demand with improving unit-level economics. Lastly, Tesla should benefit from its eight-year, $10 billion investment in data and compute that will allow AI to "train" cars to drive with autonomous technology. Dojo, an AI "training" compute; autobidder, an automated energy trading platform; the Optimus, a human-like robot; and energy storage, we believe also provide opportunity. We believe Tesla is well positioned for further growth given its strong balance sheet and substantial cash. The Fund's Financials investments also contributed to performance. IBKR, a global automated electronic broker, increased 10.0% in the quarter and helped performance by 40 bps. The company continues to take market share due to its strong automation and ability to operate in international markets with little competition. This is allowing the company to grow its new accounts, which have accelerated recently to almost 30% this year. The company has industry-leading margins of over 70% generating robust cash flow. It has significant cash on its balance sheet and is looking to deploy it towards acquisitions and continued growth. We continue to believe the company's focus on the most sophisticated investors who trade a range of assets across different global markets is a key differentiating factor. The vast array of markets it serves and strong growth from countries outside the U.S. where low-cost brokerage is not well penetrated are key competitive advantages for the company. This allows the company to offer its clients the lowest cost trading due to its high level of automation, while also offering highly competitive rates on margin loans and paying its customers attractive yields on their uninvested cash balances. More than 80% of IBKR's clients are non-U.S. citizens, and more than 80% of their investments are in U.S. stocks. The company has little direct competition serving this clientele. IBKR continues to hire software and computer engineers with a focus on automating many of the processes that competitors rely on employees to perform. With its low-priced offerings and leading range of capabilities, we believe IBKR is well positioned to continue its rapid pace of account growth from just under three million clients today. The company's focus on automation should enable it to continue to be a low-priced provider while earning best-in-class margins, which we believe should lead to double-digit revenue and earnings growth. P&C insurance software vendor Guidewire Software, Inc. was up 18.1% for the quarter, adding 85 bps to performance. After a multi-year transition period, we believe the company's cloud transition is substantially complete. We believe that cloud will be the sole path forward, with annual recurring revenue (ARR) benefiting from new customer wins and migrations of the existing customer base to InsuranceSuite Cloud. We also expect the company to shift R&D resources to product development from infrastructure investment, which should help drive cross-sales into its sticky installed base and potentially accelerate ARR over time. We are encouraged by Guidewire's subscription gross margin expansion, which improved by approximately 1,050 bps in its most recently reported quarter. We believe Guidewire will be the critical software vendor for the global P&C insurance industry, capturing 30% to 50% of its $15 billion to $30 billion total addressable market and generating margins above 40%. The above gains were partially offset by declines in our Real/Irreplaceable Assets investments that are more susceptible to a slowdown in the macroeconomic environment and penalized by high interest rates. These businesses represented 21.6% of the Fund and declined 9.1%, hurting performance by 237 bps. These stocks were dragged down by an expected slowdown in the domestic economy, hurting revenue and cash flow growth. However, we believe these businesses can continue to grow even faster in a declining interest rate environment. This is due to the fact they all have strong recurring revenue, fee-oriented businesses with significant pricing power. Their high client retention rates are helped by consumers' desire to spend more on experiences over goods in the current post-COVID environment. Shares of global ski resort operator Vail declined 18.2% in the second quarter and hurt performance by 93 bps. This was due to a slowdown in season pass sales and a disappointing ski season in Australia. However, we believe skiers have delayed buying season passes given poor snow conditions for the past two seasons, but still expect Vail to generate almost $950 million in season pass revenue this year. That represents s 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 cash flow generation. The company is now trading at more than a 6% free cash flow yield, all of which is being returned to shareholders through dividends and share buybacks. We see valuation as unusually attractive and regard insider purchases by senior executives as reason to be optimistic about this investment. Shares of Red Rock Resorts, Inc., an owner and operator of casinos in the Las Vegas Locals market, declined 7.7% in the second quarter and hurt performance by 35 bps. This was due to slower-than-expected growth in the Las Vegas Locals market and greater-than-expected cannibalization of its casinos from the opening of its new Durango casino late last year. The Durango casino is generating strong results that should enable Red Rock to meet its projected 20% return on invested capital, pay down debt, and return to its targeted leverage ratio of 3 times by the end of next year. We believe the new casino combined with continued market growth should generate high single-digit growth in EBITDA and double-digit free cash flow growth over the coming years. Red Rock currently has over 300 acres of gaming-entitled land to develop. Its margins remain above pre-pandemic levels, despite increasing wage costs, thanks to strong incremental margins on revenue generated from its new resort. Global hotelier Hyatt Hotels Corporation declined 4.7% in the quarter and hurt performance by 29 bps. The disappointing share price performance was due to a deceleration in growth in revenue per available room as a result of modestly slower leisure bookings. However, the company continues to increase its business transient and group bookings, which are now pacing 7% ahead of 2023 levels. These bookings are half of its business today. Robust mid-single-digit growth in units and modest margin expansion should lead to double-digit growth in EBITDA this year. In addition, Hyatt continues to sell assets in its bid to become a more asset-light business. It also has one of the strongest balance sheets in its industry today. All of the above should generate significant free cash flow that Hyatt can use to accelerate share buybacks. Hyatt has repurchased more than 80 million shares since its IPO in 2009! It now has just 100 million shares outstanding. Yet, despite 85% of Hyatt's cash flow generated by fees, its stock still trades at a discount to peers. Sources: FactSet PA, Baron Capital, and FTSE Russell. * Individual weights may not sum to displayed total due to rounding. ** Represents the blended return of all share classes of the Fund. Table III. Top contributors to performance for the quarter ended June 30, 2024 Space Exploration Technologies Corp. (SpaceX) is a high-profile private company founded by Elon Musk. Its primary focus is on developing and launching advanced rockets, satellites, and spacecrafts, with the ambitious long-term goal of enabling human colonization of Mars. SpaceX is generating significant value with the rapid expansion of its Starlink broadband service. The company is successfully deploying a vast constellation of Starlink satellites in low Earth orbit, reporting substantial growth in active users, and regularly deploying new and more efficient hardware technology. Furthermore, SpaceX has established itself as a leading launch provider by offering highly reliable and cost-effective launches. SpaceX capabilities extend to strategic services such as crewed space flights. Moreover, SpaceX is making tremendous progress on its newest rocket, Starship, which is the largest, most powerful rocket ever flown. This next-generation vehicle represents a significant leap forward in reusability and space exploration capabilities. We value SpaceX using prices of recent financing transactions. Tesla, Inc. manufactures electric vehicles, related software and components, and solar and energy storage products. The stock contributed as Tesla continued to drive vehicle manufacturing costs lower, accelerate the launch of new models, and invest heavily in its lucrative AI initiatives. Shareholders reaffirmed the CEO's compensation plan, alleviating personnel and legal uncertainties. Despite material operational complexities resulting in significant shutdowns of key manufacturing facilities and lower sales volume, Tesla presented better-than-expected margins in the quarter. It expects to launch a lower cost model as soon as late 2024, which should result in accelerated revenue growth, reduced manufacturing costs, and increased factory utilization. The company continued to advance its autonomous driving capabilities, expanding its already significant data centers and developing its humanoid robot Optimus. Spotify Technology S.A. is a leading global digital music service, offering on-demand audio streaming through paid premium subscriptions and an ad-supported model. Shares of Spotify were up, largely attributable to impressive beats in gross margin and operating margin as well as the announcement of subscription price hikes. Given the strong value proposition of the product, Spotify is beginning to exercise its pricing power following last year's initial price increases that saw minimal churn. Users continue to grow at a healthy pace despite the pricing impact. Spotify also continues to innovate on the product side, with early trials of generative AI features and the addition of new verticals like audiobooks, which have seen solid early adoption. On the cost side, Spotify is on a path to structurally increase gross margins, aided by its high-margin artist promotions marketplace, increasing contribution by its podcast division, and growth of the margin-accretive advertising business. We still view Spotify as a long- term winner in music streaming with potential to reach more than one billion monthly active users. Table IV. Top detractors from performance for the quarter ended June 30, 2024 CoStar Group, Inc. is a provider of marketing and data analytics services to the real estate industry. Shares detracted from performance in the quarter along with the broader software sector. Most software companies experienced a slowdown in new sales activity in early 2024, leading to guidance reductions and multiple compression. We believe CoStar shares were also 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 NAR 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. Doughnut chain Krispy Kreme, Inc. detracted during the quarter alongside the broader peer group, with small cap names being hit harder than their larger counterparts. Other company-specific concerns may also have pressured share prices, including the Federal Reserve's delay in the timing of rate cuts given Krispy Kreme's high leverage, weaker-than-anticipated credit card data, concerns around the strength of consumer sentiment, uncertainty around the company's ability to execute on its partnership with McDonald's, and holding company JAB's announced plans to diversifying outside of consumer. We remain investors. The expected sale of Insomnia cookies should alleviate leverage issues, the credit card data is not an accurate metric as it does not include its growing wholesale sales, and we do not believe JAB intends to sell down its position in the near future. We see a strong growth opportunity and potential for outsized shareholder returns as Krispy Kreme expands its network and prepares for the expanded McDonald's partnership. Shares of global ski resort operator Vail Resorts, Inc. declined in the second quarter due to a slowdown in season pass 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 FCF generation. The company is now trading at more than 6% FCF yield, all of which is being returned to shareholders through dividends and share buybacks. We remain steadfast in our commitment to long-term investing in competitively advantaged growth businesses. We believe these investments are an effective way to protect and increase the purchasing power of your savings. Wars, pandemics, financial panics, higher-than-normal inflation, and interest rate increases can cause significant market declines, but when these negative influences abate, interest rates stabilize and decline, stock prices in the past have increased substantially. We believe this will happen again, although the timing remains uncertain. As of June 30, 2024, The Fund owned 29 investments. The Fund's average portfolio turnover for the past three years was 22.5%. This means the Fund has an average holding period for its investments of over four years. This compares to the average mid-cap growth mutual fund that typically turns over its entire portfolio every 17 months. From a quality standpoint, the Fund's investments have stronger sales growth; higher EBITDA, operating, and free-cash-flow margins; and stronger returns on invested capital than the Benchmark. We believe these metrics help limit risk in this focused portfolio and are why the portfolio has generated strong risk-adjusted returns over time. While focused, the Fund is diversified by sector. The Fund's weightings are significantly different than those of the Benchmark. For example, we are heavily weighted to Consumer Discretionary businesses with 38.7% of net assets in this sector versus 13.5% for the Benchmark. We have no exposure to Energy, Materials, or Utilities. We believe companies in these sectors can be cyclical, linked to commodity prices, and/or have little if any competitive advantage. This compares to the Benchmark that had 9.0% exposure to these sectors. We also have lower exposure to Health Care stocks at 3.1% for the Fund versus 19.7% for the Benchmark. The performance of many stocks in the Health Care sector can change quickly due to exogenous events or binary outcomes (e.g., biotechnology and pharmaceuticals). As a result, we do not invest a large amount in these stocks in this focused portfolio. In Health Care, we invest in competitively advantaged companies that are leaders in their industries such as our positions in IDEXX Laboratories, Inc., the leading provider of diagnostics to the veterinary industry and Illumina, Inc., the leader in DNA sequencing instruments and consumables. The Fund is further diversified by investments in businesses at different stages of growth and development. Table V. Disruptive Growth Companies as of June 30, 2024 Disruptive Growth firms accounted for 34.9% of the Fund's net assets. On current metrics, these businesses may appear expensive; however, we think they will continue to grow significantly and, if we are correct, they have the potential to generate exceptional returns over time. Examples of these companies include electric vehicle leader Tesla, Inc., commercial satellite and launch company Space Exploration Technologies Corp., and audio streaming service provider Spotify Technology S.A. These companies all have large underpenetrated addressable markets, are well-financed with significant equity stakes by these founder-led companies, giving us further conviction in our investment. Core Growth investments, steady growers that continually invest in their businesses for growth and return excess free-cash-flow to shareholders, represented 23.9% of net assets. An example would be CoStar Group, Inc., a marketing and data analytics provider to the real estate industry. The company continues to add new services in commercial and residential real estate, which have grown its addressable market and enhanced services for its clients. This has improved client retention and cash flow. CoStar continues to invest its cash flow in its business to accelerate growth, which we believe should generate strong returns over time. Companies that own what we believe are Real/Irreplaceable Assets represented 21.6% of net assets. Vail Resorts, Inc., owner of the premier ski resort portfolio in the world, Hyatt Hotels Corporation, upscale lodging brand, and Red Rock Resorts, Inc., the largest player in the Las Vegas Locals casino gaming market, are examples of companies we believe possess meaningful brand equity and barriers to entry that equate to significant pricing power over time. Table VIII. Financials Investments as of June 30, 2024 Financials investments accounted for 18.1% of the Fund's net assets. These businesses generate strong recurring earnings through subscriptions and premiums that generate highly predictable earnings and cash flow. These businesses use cash flows to continue to invest in new products and services, while returning capital to shareholders through share buybacks and dividends. These companies include Arch Capital Group Ltd., FactSet Research Systems Inc., and MSCI Inc. As of June 30, 2024, the Fund's top 10 holdings represented 58.5% of net assets. Many of these investments have been successful and were purchased when they were much smaller businesses. We believe they continue to offer significant appreciation potential, although we cannot guarantee that will be the case. The top five positions in the portfolio, Space Exploration Technologies Corp., Tesla, Inc., Arch Capital Group Ltd., Spotify Technology S.A., and Hyatt Hotels Corporation all have, in our view, significant competitive advantages due to irreplaceable assets, strong brand awareness, technologically superior industry expertise, or exclusive data that is integral to their operations. We think these businesses cannot be easily duplicated and have large market opportunities to penetrate further, which enhances their potential for superior earnings growth and returns over time. In the second quarter, we increased our positions in Vail Resorts, Inc. and Shopify Inc., two companies we believe were trading at attractive valuations and should see accelerated growth in the years ahead. We increased our position in Vail as the stock declined in the quarter due to external factors that were out of the company's control. We believe assuming normal winter weather, the company should grow its earnings at a double-digit rate next year. Its season pass sales should still grow this year and help the company lock in close to a third of its revenue before the season even starts. We still believe the company has significant pricing power given no new ski supply, which enables the company to generate strong free cash flow. The company is trading over a 6% free cash flow yield, a level we deem attractive. Shopify declined in the quarter due to an increase in product and marketing investments the company is currently making to increase its already strong competitive advantages. While this will hurt current profitability, we believe it is the right decision and should result in strong returns on invested capital, especially as competitors shy away from investments in their own businesses. We believe the shares of many of our portfolio investments already reflect overly pessimistic earnings estimates for this year. Investors obviously remember operating declines during the 2008/2009 Global Financial Crisis and are pricing in similar declines today. If we do not go into a deep recession this year, or if the slowdown and expected decline in earnings are not as bad as feared, we see significant near-term upside in the portfolio. We continue to believe our stocks are cyclically depressed, not secularly challenged, and see further upside over the next 12 to 18 months. So far, most of our portfolio holdings have not experienced a slowdown in sales or earnings growth, and their outlooks remain strong. In addition, we believe that even if a downturn were to occur, our portfolio companies would still be operating above pre-pandemic levels. These businesses' balance sheets have been strengthened since COVID-19, and we believe they remain well positioned to weather a downturn should one occur. We find the current risk/reward inherent in our portfolio holdings attractive at current levels. Thank you for investing with us in Baron Focused Growth Fund. We continue to work hard to justify your confidence and trust in our stewardship of your family's hard-earned savings. We also continue to try to provide you with information we would like to have if our roles were reversed. This is so you can make an informed judgment about whether Baron Focused Growth Fund remains an appropriate investment for your family. Respectfully, Ronald Baron, CEO and Portfolio Manager | David Baron, Portfolio Manager

Baron Real Estate Fund Q2 2024 Shareholder Letter

We initiated a position in Martin Marietta Materials, Inc., a leading producer of aggregates for infrastructure and real estate construction. Following strong absolute and relative performance in the first quarter of 2024, Baron Real Estate Fund's® (MUTF:BREIX, the Fund) performance reversed course and had a challenging second quarter. In the June quarter, the Fund declined 9.20%, underperforming the MSCI US REIT Index (the REIT Index), which fell 0.22%, and the MSCI USA IMI Extended Real Estate Index (the MSCI Real Estate Index), which declined 4.03%. Several of the Fund's best performers from 2023 and the first quarter of 2024 declined in part due to concerns about slowing growth, including the shares of homebuilders, residential building product and services companies, casino and gaming operators, certain REITs, and other real estate-related companies. At this stage, we believe the Fund is populated with several attractively valued real estate companies and believe the two- to three-year prospects for the Fund are compelling. Further, we have a long track record of bouncing back strongly following periods of weakness and are energized and committed to doing so again. Despite the challenges from the most recent quarter, the Fund has maintained its industry leading performance as of June 30, 2024. According to Morningstar, the Fund has achieved the following: Table I. Performance: Annualized for periods ended June 30, 2024 At the half-way point of 2024, we have several top-of-mind thoughts: Table II. Performance from 12/31/2018 to 12/31/2023 We currently have investments in REITs, plus seven additional non-REIT real estate-related categories. Our percentage allocations to these categories vary, and they are based on our research and assessment of opportunities in each category on a bottom-up basis (See Table III below). Table III. Fund investments in real estate-related categories as of June 30, 2024 We continue to prioritize seven long-term high-conviction investment themes or real estate categories: Notable changes to the Fund's real estate category exposures since the end of the first quarter: A one paragraph synopsis that explains the case for each of the Fund's investment themes can be found below. Business fundamentals are generally solid. Limited new competitive supply is forecasted in the next few years. Most balance sheets are in good shape. Several REITs benefit from some combination of all or some of the following favorable characteristics including inflation-protection, contracted cash flows, and an ability to increase dividends. Many REITs are cheap relative to history and private market valuations. REIT share price performance has historically benefited from an accommodative pivot in central bank monetary policy. As of June 30, 2024, we had investments in six REIT categories representing 30.9% of the Fund's net assets. Please see Table IV below. Table IV. REITs as of June 30, 2024 A multi-decade structural underinvestment in the construction of residential real estate relative to the demographic needs of our country bodes well for long-term housing construction activity, sales, rentals, pricing, and repair and remodel activity. Cyclical tailwinds (pent-up demand, low inventory levels, and a still healthy consumer) and secular tailwinds (flexible work arrangements that favor suburban living, a desire to own newly built homes rather than existing homes which, on average, are more than 40 years old, and the lock-in effect for existing homeowners to remain in their homes due to the move higher in mortgage rates) should aid the new home market for several years. The strategic pivot by several homebuilders to a more land-light business model, the utilization of lower leverage, improved capital allocation, and the prioritization of scale advantages may lead to higher valuations for homebuilders over time. As of June 30, 2024, residential-related real estate companies represented 30.3% of the Fund's net assets. Please see Table V below. Table V. Residential-related real estate companies as of June 30, 2024 Several factors are likely to contribute to multi-year tailwinds for travel-related real estate companies including a favorable shift in consumer preferences (demand for experiences/services such as travel over goods), a growing middle class, and other encouraging demographic trends (more disposable income for the millennial cohort due to delays in household formation and work-from-home arrangements which allow for an increase in travel bookings); healthy balance sheets; and private equity's long history of investing in travel-related companies. As of June 30, 2024, travel-related real estate companies represented 15.1% of the Fund's net assets. Please see Table VI below. Table VI. Travel-related real estate as of June 30, 2024 Leading real estate-focused asset managers Blackstone Inc. and Brookfield Corporation (BN) have an opportunity to increase market share due to impressive investment track records and global scale advantages. They are also positioned to benefit from a secular growth opportunity for alternative assets due to long track records of generating attractive relative and absolute returns with less volatility than several other investment options. Leading commercial real estate services companies CBRE Group, Inc. (CBRE) and Jones Lang LaSalle Incorporated (JLL) should benefit from structural and secular tailwinds: the outsourcing of commercial real estate, the institutionalization of commercial real estate, and opportunities to increase market share in a highly fragmented market. The collision of real estate and technology has led to a new category within real estate-real estate technology, also referred to as proptech. The emergence of proptech and the digitization of real estate is an exciting and promising new development for real estate. We believe we are in the early innings of a technology-driven investment cycle centered on data and digitization that allows real estate-related businesses to drive incremental revenue streams and lower costs. CoStar Group, Inc. (CSGP), the leading provider of information, analytics, and marketing services to the real estate industry and a top holding in the Fund, is well positioned to capitalize on this burgeoning secular growth trend. In the most recent quarter, we acquired shares in data center operator, GDS Holdings Limited (GDS). We believe the shares are attractively valued and offer compelling long-term growth prospects. We will elaborate on our investment thesis for the company in future shareholder letters. As of June 30, 2024, other real estate-related companies (which includes the four investment themes mentioned directly above) represented 17.7% of the Fund's net assets. Please see Table VII below. Table VII.Other real estate-related companies as of June 30, 2024 *Individual weights may not sum to the displayed total due to rounding. Table VIII. Top contributors to performance for the quarter ended June 30, 2024 In the second quarter, the shares of Equity Residential (EQR), the largest U.S. multi-family REIT, appreciated due to continued strong operating updates, an improved full-year growth outlook, and faster-than-expected improvement in the company's West Coast markets. Management has assembled an excellent portfolio 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 the "Top net purchases" for further thoughts on the company. The shares of Welltower Inc. (WELL) 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, solid 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 most recent quarter, the shares of data center REIT Digital Realty Trust, Inc. (DLR) continued to appreciate due to record quarterly new leasing results, strong pricing power on new and renewal leases, an improved capital structure, and an evolving AI demand growth opportunity for its data center facilities. Digital Realty is a global provider of data center services to enterprises, cloud service providers, network providers, financial services, media, and other customers. Our team traveled to Digital Realty's headquarters in Texas earlier this year to meet with CEO Andy Power. We remain optimistic about Digital Realty's continued ability to perform well due to improving growth and pricing power, the company's existing and newly developed data center capacity in supply constrained markets, its fully secured future pipeline of power and key infrastructure components, and management's greater focus on delivering bottom-line growth while balancing investing for the future. Table IX. Top detractors from performance for the quarter ended June 30, 2024 Following strong first quarter performance, the shares of CoStar Group, Inc., the global leader in digitizing real estate, declined due to 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 residential Homes.com platform in February. We believe that 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 CoStar's residential Homes.com. We view the residential real estate market as a vast and underpenetrated opportunity for CoStar. Over time, we believe the company's emerging residential business will result in a more than doubling of the company's current revenues and cash flow. Further, expanding the residential offering to international markets would result in another major growth opportunity. Based on CoStar's current valuation and our expectation for future growth, we believe the company's shares have the potential to double in the next three to four years. The shares of Prologis, Inc. (PLD) 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 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. The shares of D.R. Horton, Inc. (DHI) underperformed during the second quarter. D.R. Horton is the largest homebuilder in the U.S., with operations in 119 markets in 33 states, and a focus on more affordable price points (70% of homes closed are below $400,000). Share prices of U.S. homebuilders more broadly were pressured over concerns that demand for new single-family homes would slow due to stretched consumer affordability (high prices, down payments and mortgage rates) and a rise in home resale inventory across several markets. D.R. Horton has been able to successfully weather these headwinds and continue to grow owing to its affordable price points, low-cost position, and scale advantages. We remain enthusiastic about the multi-year prospects for D.R. Horton. Our view remains that the U.S. will need to build new homes at an elevated rate for the foreseeable future in order to replenish a current structural deficit of housing stock while also housing a growing population. We anticipate that D.R. Horton will continue to grow faster than the broader housing industry as the company leverages its scale advantages to gain market share across its footprint. Furthermore, we believe that as the company continues to transition its operations to a more asset-light business model that emphasizes returns and cash flow generation, the company's valuation multiple may expand. Table X. Top net purchases for the quarter ended June 30, 2024 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. (AVB) Our meetings with each management team supported our view that both companies are led by astute executives that 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 shares of Equity Residential and AvalonBay 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 second quarter, we acquired shares in Martin Marietta Materials, Inc. (MLM), a leading producer of aggregates (77% of gross profit) and specialty products. The company's products are sold and utilized in infrastructure projects such as highways, as well as residential and non-residential construction. Martin Marietta has local leadership positions across its footprint. We believe aggregates are an attractive business for two main reasons: We believe the multi-year growth prospects for Martin Marietta are especially attractive for four reasons: 1. Infrastructure-related spending is accelerating and will be elevated over the next several years. The Infrastructure Investment and Jobs Act allocates significant sums towards new and existing infrastructure spending through 2026. In addition, outsized state-level infrastructure spending will drive demand across the company's footprint. 2. Private construction spending (residential and non-residential) may accelerate over the next several years. Residential construction may remain strong owing 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. 3. Pricing power has been exceptionally robust in response to inflationary cost pressures, and we expect price growth to remain strong. 4. Margin expansion opportunity. Management remains focused on improving productivity and maximizing unit-level profitability, with the goal of further expanding margins. Table XI. Top net sales for the quarter ended June 30, 2024 We trimmed our position in Toll Brothers, Inc. (TOL), America's leading luxury homebuilder, during the second quarter following exceptionally strong share price appreciation over the last year and the Fund's resulting large position size. Toll Brothers remains the largest position in the Fund, and we continue to be enthusiastic about the company's long-term prospects. Our meetings with CEO Doug Yearley and other key members of the company's management confirm our view that the long-term prospects remain compelling. We believe 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 mostly smaller private competitors who lack scale advantages, brand awareness, and access to attractively priced financing. Further, Toll Brothers has a long runway for multi-decade growth as it targets the fastest growing income demographic in the U.S. - 16 million households with annual incomes of at least $200,000. According to the U.S. Census Bureau (September 2023), households with over $200,000 in annual income have grown approximately 10 times faster than all U.S. households in the last 10 years. Currently, Toll Brothers has captured only 0.06% of this important demographic group. 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. In the second quarter, we trimmed our 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% per year over the next few years. In the most recent quarter, we chose to lower the Fund's large exposure to travel-related real estate companies and exited the Fund's position in Caesars Entertainment, Inc. (CZR), the largest casino-entertainment company in the U.S. and one of the world's most diversified casino-entertainment providers. We have near-term reservations about a possible moderation in consumer demand for some of Caesars' properties and believe the move higher in interest rates and a largely quiet transaction market also negatively impact certain highly leveraged companies such as Caesars. We are fans of CEO Tom Reeg and may revisit Caesars for purchase at a later date. 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 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. Following a sharp correction in the share prices of several real estate companies in the second quarter of 2024, we believe valuations and return prospects are attractive. We continue to believe the benefits of our flexible approach, which allows us to invest in a broad array of real estate companies including REITs and non-REIT real estate-related 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 increased, in just over two months, 28% and 24% respectively, by the end of 2023. Table XII. Top 10 holdings as of June 30, 2024 I would like to thank our core real estate team-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. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Baron International Growth Fund Q2 2024 Shareholder Letter

As part of our digitization theme, we also initiated positions in Park Systems Corporation, Indus Towers Limited, BE Semiconductor Industries N.V., and eMemory Technology Inc. Dear International Growth Fund Shareholder: Baron International Growth Fund® (MUTF:BINIX, the Fund) gained 1.25% (Institutional Shares) during the second quarter of 2024, while its primary benchmark index, the MSCI ACWI ex USA Index (the Benchmark), was up 0.96%. The MSCI ACWI ex USA IMI Growth Index (the Proxy Benchmark) gained 0.71% for the quarter. The Fund modestly outperformed the Benchmark and the Proxy Benchmark during a quarter where international equity returns lagged their U.S. and global counterparts. 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, 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 most recent pivot. Our current bias is that recent moderating economic 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 international and emerging markets ('EM') equities. Interestingly, we point out that despite the year-to-date rise in bond yields and the U.S. dollar, the MSCI Emerging Markets Index slightly 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 and capital outflows. In our view, the MSCI ACWI ex USA Index was dragged down during the quarter by the impact of the surprise outcome of the initial French election results on Eurozone equities, leading to an unusually low correlation between international and EM equities during the quarter. As seasoned international investors, we highlight that abrupt market reactions to political events and/or elections often present attractive opportunity, as political and market "breakers" tend to materially dilute extremist rhetoric, allowing elevated risk-premium to recede and normalize. We anticipate that recent international equity underperformance will be contained and subsequently mean-revert. Table I. Performance Annualized for periods ended June 30, 2024 Baron International Growth Fund Retail Shares1,2 Baron International Growth Fund Institutional Shares1,2,3 MSCI ACWI ex USA Index1 MSCI ACWI ex USA IMI Growth Index1 Three Months4 1.16% 1.25% 0.96% 0.71% Six Months4 2.48% 2.62% 5.69% 6.10% One Year 2.61% 2.88% 11.62% 9.73% Three Years (7.62)% (7.38)% 0.46% (2.86)% Five Years 4.24% 4.50% 5.55% 5.49% Ten Years 4.63% 4.89% 3.84% 4.71% Fifteen Years 8.11% 8.38% 6.21% 6.99% Since Inception (December 31, 2008) 8.55% 8.82% 6.90% 7.65% Click to enlarge 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 1.26% and 0.98%, but the net annual expense ratio was 1.20% and 0.95% (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 MSCI ACWI ex USA Index Net ('USD') is designed to measure the equity market performance of large and mid-cap securities across 22 of 23 Developed Markets countries (excluding the U.S.) and 24 Emerging Markets countries. The MSCI ACWI ex USA IMI Growth Index Net ('USD') is designed to measure the performance of large, mid and small cap growth securities exhibiting overall growth style characteristics across 22 of 23 Developed Markets countries (excluding the U.S) and 24 Emerging Markets countries. MSCI is the source and owner of the trademarks, service marks and copyrights related to the MSCI Indexes. The indexes and the Fund include reinvestment of dividends, net of foreign withholding taxes, which positively impact the performance results. The indexes are unmanaged. Index performance is not Fund performance. Investors cannot invest directly in an index.(2)The performance data does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or redemption of Fund shares.(3)Performance for the Institutional Shares prior to 5/29/2009 is based on the performance of the Retail Shares, which have a distribution fee. The Institutional Shares do not have a distribution fee. If the annual returns for the Institutional Shares prior to 5/29/2009 did not reflect this fee, the returns would be higher.(4)Not annualized. Click to enlarge As we referenced in our previous letter, a portion of the surprisingly solid showing in at least EM equities can be attributed to the broadening recognition of AI-related equities within international jurisdictions. 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 international/EM 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 international equities currently offer an attractive long-term entry point, with valuations and relative earnings expectations at multi- decade lows, high investor skepticism, and fundamental catalysts that we view as underappreciated by investors and allocators. 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. In the second quarter of 2024, we modestly outperformed the Benchmark, as well as our all-cap growth-oriented Proxy Benchmark. By sector or theme, solid stock selection across multiple themes within Industrials and Consumer Discretionary were the largest contributors to relative performance this quarter. Notable outperformers were HD Korea Shipbuilding & Offshore Engineering Co., Ltd., as part of our sustainability/ESG theme, InPost S.A. (OTCPK:INPOY) and Coupang, Inc. (CPNG) within digitization, Recruit Holdings Co., Ltd. (OTCPK:RCRRF) in Japan staffing, and Trent Limited in EM consumer. In addition, solid stock selection in the Communication Services sector, led by Bharti Airtel Limited, Tencent Music Entertainment Group (TME), and Indus Towers Limited in our digitization theme, also bolstered relative results. Broadly offsetting the above was adverse stock selection effect in the Health Care sector, primarily attributable to our biotechnology/ diagnostics related holdings (Stevanato Group S.p.A, Eurofins Scientific SE, and Genmab A/S). In addition, negative stock selection in the Materials sector, owing to a couple investments in our sustainability/ESG theme (AMG Critical Materials N.V. and Suzano S.A.), also weighed on relative results. From a country perspective, our overweight positioning together with solid stock selection in India was the largest contributor to relative performance this quarter. Favorable stock selection effect in Korea, Canada, and Poland also bolstered relative results. We remain excited about our investments in India and are encouraged by the recent re-election of Prime Minister Modi for a historic third term, which bodes well for policy continuity and a positive economic outlook. Partially offsetting the above was our overweight positioning together with poor stock selection in Brazil, and negative stock selection effect in U.K., Italy, and the Netherlands. Top contributors to Performance Table II. Top contributors to performance for the quarter ended June 30, 2024 Percent Impact Taiwan Semiconductor Manufacturing Company Limited 0.57% HD Korea Shipbuilding & Offshore Engineering Co., Ltd. 0.43 Trent Limited 0.41 Bharti Airtel Limited 0.40 AstraZeneca PLC 0.34 Click to enlarge 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. HD Korea Shipbuilding & Offshore Engineering Co., Ltd. is the holding company of Hyundai Heavy, the largest global shipbuilder based on orderbook size and the global leader in high-end vessels including liquified natural gas (LNG)-powered ships. Shares contributed on strong quarterly results at subsidiary Hyundai Samho, which delivered better-than-expected margins on higher pricing. In addition, year-to-date newbuild ship order demand and pricing for the group was better than expected. We retain conviction. Korean shipbuilders have an oligopoly in LNG carrier shipbuilding, LNG dual-fueled container ships, and tankers. The tightening regulation on carbon emission, which will be fully adopted by the International Maritime Organization ('IMO') by 2030, should drive higher demand for LNG dual-fueled ships as well as carbon-free ammonia-fueled ships. We expect a structural shortage of compliant ships to emerge as the IMO deadline nears, which should benefit HD Korea Shipbuilding given its leading position. 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. Top detractors from Performance Table III. Top detractors from performance for the quarter ended June 30, 2024 Percent Impact Stevanato Group S.p.A -0.43% Eurofins Scientific SE -0.40 Tokyo Electron Limited -0.35 AMG Critical Materials N.V. -0.34 Suzano S.A. -0.33 Click to enlarge Shares of Stevanato Group S.p.A (STVN) detracted from performance. Stevanato sells packaging for injectable drugs. During the pandemic, the significant demand created by COVID vaccines resulted in a global shortage of vials. As a result, lead times were elongated, and customers stocked injectable drug packaging above normal inventory levels. As the supply chain situation normalized and demand for COVID vaccines declined, customers have been working through this excess inventory, leading to lower near-term vial sales and underutilized vial manufacturing capacity. We still think this is an attractive industry long term and remain investors. Eurofins Scientific SE (OTCPK:ERFSF) is a global leader in bioanalytical testing in the food, environment, pharmaceutical, and clinical sectors. Shares fell after a short report from Muddy Waters Research alleged the CEO had a conflict of interest regarding real estate leasing as well as poor accounting standards. We think the allegations echo a short report from 2019 and believe any impact on fundamentals is not significant. Eurofins is still a market leader in higher-growth areas of testing, unlike its peers which operate in more commoditized inspection and certification. Semiconductor production equipment manufacturer Tokyo Electron Limited (OTCPK:TOELY) 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. Portfolio Structure Table IV. Top 10 holdings as of June 30, 2024 - Developed Countries Percent of Net Assets Linde plc 2.8% Arch Capital Group Ltd. 2.8 Constellation Software Inc. 2.7 AstraZeneca PLC 2.4 eDreams ODIGEO SA 2.2 argenx SE 2.1 Symrise AG 2.1 Novo Nordisk A/S 1.9 Experian plc 1.9 DSM-Firmenich AG 1.9 Click to enlarge Table V. Top five holdings as of June 30, 2024 - Emerging Countries Percent of Net Assets Taiwan Semiconductor Manufacturing Company Limited 3.2% InPost S.A. 2.3 HD Korea Shipbuilding & Offshore Engineering Co., Ltd. 1.9 Tencent Holdings Limited 1.8 Bharti Airtel Limited 1.7 Click to enlarge Table VI. Percentage of securities in Developed Markets as of June 30, 2024 Percent of Net Assets Japan 11.7% United Kingdom 8.4 Netherlands 8.0 France 5.7 United States 4.4 Israel 4.1 Spain 3.9 Canada 3.8 Germany 2.8 Denmark 2.6 Sweden 2.4 Switzerland 2.0 Ireland 1.4 Hong Kong 0.8 Italy 0.6 Norway 0.1 Click to enlarge Table VII. Percentage of securities in Emerging Markets as of June 30, 2024 Percent of Net Assets India 10.4% China 6.8 Korea 6.2 Taiwan 3.8 Poland 3.6 Brazil 2.7 Peru 0.9 Mexico 0.3 Click to enlarge The table above does not include the Fund's exposure to Russia (less than 0.1%) because the country falls outside of MSCI's developed/emerging/frontier framework. Exposure by Market Cap: The Fund may invest in companies of any market capitalization, and we strive to maintain broad diversification by market cap. At the end of the second quarter of 2024, the Fund's median market cap was $18.5 billion. We were invested 70.1% in large- and giant-cap companies, 19.8% in mid-cap companies, and 7.3% in small- and micro-cap companies, as defined by Morningstar, with the remainder in cash. Recent Activity During the second quarter, we added several new investments to existing themes and increased our weighting in certain positions established in prior periods. We endeavor to increase concentration in our highest conviction ideas. We initiated a position in Ajinomoto Co., Inc. (OTCPK:AJINY), a Japanese multi-national which traces its roots back to 1909 as the inventor of monosodium glutamate ('MSG'). The company has since become one of the most profitable food companies in the world and has expanded into a wide range of products and services across seasonings, pharmaceutical contract development and manufacturing, and semiconductor functional materials. We expect that Ajinomoto's core food business will maintain steady growth, supported by Southeast Asia's emerging middle class, as rising incomes drive both higher volume and the upgrade to higher-priced premium products. Most notably, we are optimistic about the growth prospects for Ajinomoto Build-up Film ('ABF'), an insulating material used within the packaging of high-performance semiconductors, including CPUs and GPUs in PCs and servers. Ajinomoto invented ABF in the late 1990s and has since maintained a near monopoly in this material, which plays a critical role in electrical isolation, signal routing, and heat dissipation. We expect Ajinomoto's high- margin ABF revenue to surge over the next five years, driven by strong AI-related demand for high performance chips, increasing ABF content per chip to support ever more complex chip designs, and an uplift in ABF pricing. We forecast that Ajinomoto can more than double its earnings over the next five years, with ABF driving most of the profit growth. As part of our digitization theme, we initiated positions in Park Systems Corporation, Indus Towers Limited, BE Semiconductor Industries N.V. (OTC:BESIY, Besi), and eMemory Technology Inc. Park Systems is a Korean manufacturer of nanoscale metrology systems and the leading global supplier of Atomic Force Microscopes ('AFM') for the semiconductor industry. Unlike electron microscopes and optical inspection tools which produce two-dimensional images, AFM uses a cantilever with a very sharp tip to produce a three-dimensional topographic map of a surface with superior, atomic-level resolution. Until recently, AFMs were mainly used in academic research. However, over the last five years, as the dimensions of chip features have become ever smaller and chip design has become increasingly vertical, legacy optical equipment has struggled to meet more stringent inspection demands. Thus, the semiconductor industry has started using AFMs for sub-angstrom measurements and defect analysis to improve manufacturing yields. We believe AFMs are still in the early stage of adoption and will see strong demand over the next five years, ultimately becoming a mainstream tool uniquely suited for the rising complexity and intensity of semiconductor inspections. We are confident that Park Systems will maintain its dominant market share in AFMs thanks to its significant technological advantages and sticky customer relationships. We also expect that Park Systems' unrivaled AFM platform will enable the company to successfully expand into new innovative products, such as a tool to repair photomasks used in EUV lithography, which is already starting to receive meaningful orders. With strong expected growth in leading edge semiconductor manufacturing capacity to meet surging AI demand, increasing penetration of AFMs, and an expanding product line, we believe Park Systems will generate over 20% compounded earnings growth over the next three to five years. Indus is a leading telecommunications tower operator in India. The telecommunications towers sector in India in currently structured as a duopoly, with Indus and a key competitor accounting for approximately 60% market share. The company has been a key beneficiary of ongoing industry consolidation and telecommunication providers' rollout of 5G services. However, its valuation has remained deeply discounted compared to global tower peers, primarily due to a key customer, Vodafone Idea (Vi), which has been experiencing share losses that triggered insolvency concerns. With its recent improvement in financial viability, Vi resumed monthly payments to Indus, which, in our view, will be a key re-rating catalyst for Indus' stock. Additionally, as Vi completes an equity raise, Indus will benefit from Vi's planned 4G expansion and 5G rollout, which will drive tower additions, tenancy ratio improvement, and consequently higher operating leverage and free cash generation. We expect Indus to deliver high single- digit revenue growth and approximately 10% compounded earnings growth over the next three to five years, with nearly all the incremental earnings enhancing distributable free cash flow. Besi is a leading supplier of semiconductor assembly equipment based in the Netherlands. The company is a pioneer in hybrid bonding equipment and will be a key beneficiary of the proliferation of "chiplets" over the next decade. Moore's Law, which observed that the number of transistors on a chip doubles every two years, has underpinned the semiconductor industry's exponential growth over the last six decades. Today, chipmakers squeeze billions of transistors onto an area the size of a fingernail. However, as these transistors are now nearing the size of a single atom, it is becoming extremely costly and complex to make them even smaller. Thus, the industry must innovate in other ways, and is now shifting towards chiplet architecture. Traditionally, multiple computing functions would be integrated on a two-dimensional, "monolithic" chip. Chiplets break apart these functions into individual blocks, such as processing, memory, and input/output communication, which can then be stacked on top of each other, using the third dimension for the first time. A system comprised of chiplets has several advantages, including higher yield, lower cost, and better performance. For example, stacking a memory chiplet directly on top of a processor can significantly improve speed and energy efficiency compared to a monolithic approach, which requires data to move longer distances horizontally around the chip. Hybrid bonding is a new technology used to integrate multiple chiplets and delivers a major bandwidth improvement over conventional chip packaging. Besi enjoys technological and first mover advantages in hybrid bonding, which we believe will enable the company to sustain strong double-digit earnings growth for many years to come. Taiwan-based eMemory is a world-leading Intellectual Property ('IP') provider of embedded non-volatile memory (eNVM) to all major semiconductor chip manufacturers. ENVM is integrated directly into a chip for the purpose of retaining data, such as code and parameter settings, even when power is turned off, and provides higher speed and performance than external memory. The company does not design nor manufacture its own chips, but rather licenses its technology to chipmakers and generates the vast majority of its revenue from royalties. We expect the penetration rate of eMemory's eNVM IP will steadily increase over the next five years, given its strong advantages in memory density, security, and re-programmability compared with the legacy "eFuse" technology. We are also optimistic about the long­ term potential for eMemory's Physical Unclonable Function ('PUF') IP. PUF is like a chip fingerprint, which is generated by the unique physical properties of every chip. While still at an early stage of adoption, we believe PUF could become a critical solution for multiple chip security issues, such as device authentication and key generation. We expect the company to maintain its dominant position in both eNVM and PUF IP, with deep competitive moats including its highly differentiated technology, decades-long customer relationships, and strong patent portfolio. We forecast that rising eNVM and PUF adoption will sustain over 20% compounded revenue growth over the next three to five years. Moreover, with industry-leading profit margins and high operating leverage thanks to its IP licensing business model, we expect eMemory's profit will grow considerably faster than its revenue. We increased our exposure to several existing positions during the quarter, including Epiroc AB (OTCPK:EPOKY), Compagnie Financiere Richemont SA (OTCPK:CFRHF), Taiwan Semiconductor Manufacturing Company Limited, EQT AB (OTCPK:EQBBF), Genmab A/S (GMAB), Full Truck Alliance Co. Ltd. (YMM), Prosus N.V. (OTCPK:PROSY), and Shenzhen Mindray Bio-Medical Electronics Co., Ltd. We exited several positions during the quarter consistent with our efforts to seek greater concentration in our higher conviction investments. Disposals included Watches of Switzerland Group PLC (OTCPK:WOSGF), B3 S.A. - Brasil, Bolsa, Balcao (OTCPK:BOLSY), Ceres Power Holdings plc (OTCPK:CPWHF), Yum China Holdings Inc. (YUMC), and Kingsoft Corporation Ltd. (OTCPK:KSFTF) Outlook 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 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 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 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 international and small/mid-cap 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. As highlighted in our previous letter, we note a broadening out of the perceived beneficiaries of the AI deployment, which collectively represent an increasing weight within the international indices. More recently, 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, 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 international jurisdictions, in addition to the well-recognized semiconductor and high-bandwidth memory leaders. 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 away from U.S. equities. 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 the 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. equities. A word on recent elections and political catalysts throughout the international markets: during the quarter, we witnessed surprising outcomes in closely watched elections in Europe/France, Mexico, and India, while in Brazil, President Lula offered disturbing rhetoric regarding fiscal balance and BCB independence. We see the recent and final outcome in France in July as tempering fears of extremism, while although closer than anticipated, the election result in India and ensuing government/ministerial makeup is supportive of a healthy and quite positive status quo. Though political developments in various jurisdictions appear more populist and potentially adverse to the interests of capital owners, extreme ideology and political rhetoric is notoriously over-discounted on the surface, while in the intermediate term, political and market "breakers" tend to materially dilute the feared impact, allowing elevated risk-premium to recede. While the process can be frustrating and volatile, we suspect this pattern is likely to prevail, and we believe patience is warranted and likely to be rewarded. We look forward to our next communication. Thank you for investing in the Baron International Growth Fund. Sincerely, Michael Kass, Portfolio Manager The performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor's shares, when redeemed, may be worth more or less than their original cost. The Adviser waives and/or reimburses or may waive or reimburse certain Funds expenses pursuant to a contract expiring on August 29, 2034, unless renewed for another 11-year term and the Funds' transfer agency expenses may be reduced by expense offsets from an unaffiliated transfer agent, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted. For performance information current to the most recent month end, visit BaronCapitalGroup.com or call 1-800-99-BARON. Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectuses contain this and other information about the Funds. You may obtain them from the Funds' distributor, Baron Capital, Inc., by calling 1-800-99-BARON or visiting BaronCapitalGroup.com. Please read them carefully before investing. Risks: All investments are subject to risk and may lose value. Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectus contain this and other information about the Funds. You may obtain them from the Funds' distributor, Baron Capital, Inc., by calling 1-800-99-BARON or visiting BaronCapitalGroup.com. Please read them carefully before investing. Risks: Non-U.S. investments may involve additional risks to those inherent in U.S. investments, including exchange-rate fluctuations, political or economic instability, the imposition of exchange controls, expropriation, limited disclosure and illiquid markets. This may result in greater share price volatility. Securities of small and medium-sized companies may be thinly traded and more difficult to sell. Even though the Fund is diversified, it may establish significant positions where the Adviser has the greatest conviction. This could increase volatility of the Fund's returns. 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 International Growth Fund by anyone in any jurisdiction where it would be unlawful under the laws of that jurisdiction to make such offer or solicitation. Free cash flow ('FCF') represents the cash that a company generates after accounting for cash outflows to support operations and maintain its capital assets. 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 Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors. Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. 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.