Baron Durable Advantage Fund Q2 2024 Shareholder Letter

William_Potter/iStock via Getty Images Dear Baron Durable Advantage Fund Shareholder We had another good quarter. Baron Durable Advantage Fund® (MUTF:BDAIX, the Fund) gained 5.2% (Institutional Shares) during the second quarter which compared favorably with the 4.3% gain for the S&P 500 Index (SP500, SPX, the Index), the Fund’s benchmark. Year to date, the Fund is up 16.6% compared to a 15.3% gain for the Index. Table I. Performance Annualized for periods ended June 30, 2024 Baron Durable Advantage Fund Retail Shares1,2 Baron Durable Advantage Fund Institutional Shares1,2 S&P 500 Index1 Three Months3 5.15% 5.20% 4.28% Six Months3 16.53% 16.62% 15.29% One Year 31.81% 32.15% 24.56% Three Years 12.83% 13.11% 10.01% Five Years 17.94% 18.22% 15.05% Since Inception (December 29, 2017) 15.94% 16.21% 13.55%
Click to enlarge Performance listed in the table above is net of annual operating expenses. The gross annual expense ratio for the Retail and Institutional Shares as of September 30, 2023 was 1.40% and 1.00%, respectively, but the net annual expense ratio was 0.95% and 0.70% (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 S&P 500 Index measures the performance of 500 widely held large cap U.S. companies. The Fund includes reinvestment of dividends, net of withholding taxes, while the S&P 500 Index includes reinvestment of dividends before taxes. Reinvestment of dividends positively impacts the performance results. The index is 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 redemption of Fund shares.(3)Not annualized.
Click to enlarge U.S large-cap was once again the place to be in the second quarter of 2024. After a modest 4.0% pullback in the month of April, the Fund gained 4.2% in May, and an additional 5.2% in June. The theory behind last year’s 26.3% gain for the Index (and 45.5% gain for the Fund) was the Federal Reserve’s gearing up for significant reductions in interest rates with the consensus pricing in seven rate cuts in 2024. How many would have expected the Index to appreciate an additional 15.3% 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%, 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 115.7% of the Index’s 4.3% gain. No math skills are required to realize that the remaining members of the Index combined to generate a negative return. What do these Semiconductor, Consumer Discretionary/Retailer, Software, Hardware, Communication Services, Automobile Manufacturer, and Interactive Media companies have in common? A credible GenAI story! Not owning Apple and Tesla cost us 116bps in relative returns and not owning enough Nvidia (NVDA, compared to its rapidly ballooning weight in the Index) cost us another 35bps. In that context, outperforming the Index by 92bps seems like a good outcome, indeed. From a performance attribution perspective, stock selection contributed 101bps while sector allocation detracted 10bps. Our best three sectors were Industrials (thanks to our aerospace and defense holding, HEICO), Consumer Discretionary (thanks to Amazon), and Consumer Staples (Costco), which together contributed 182bps to the Fund’s relative results. We also benefited from not holding any Energy or Materials stocks, as those sectors declined in the quarter, and from our overweight to Communication Services, which was the second-best sector in the Index. These positive results were partially offset by our holdings in Financials, where our significant overweight detracted 117bps, even though we owned the better stocks, which added 44bps from stock selection. From a company specific perspective, we had 22 gainers and 10 decliners. The stock prices of Nvidia, Taiwan Semiconductor (TSM), Broadcom (AVGO), Monolithic Power Systems (MPWR), Alphabet (GOOG,GOOGL), Costco (COST), HEICO (HEI), and Texas Instruments (TXN) all posted double-digit quarterly gains, while Nvidia, Alphabet, Broadcom, Taiwan Semiconductor, Microsoft (MSFT), Amazon (AMZN), HEICO, Monolithic, Adobe (ADBE), and Costco contributed 25bps or more each, to absolute returns. Of course, Nvidia and the Magnificent Seven are not the only beneficiaries of GenAI. Broadcom recently guided to $11 billion of AI revenues in 2024 (around 20% of total revenues), while Taiwan Semiconductor expects GenAI to drive long-term industry revenue growth double digits underpinned by a 50% growth rate for datacenter AI chips. On the other side of the ledger, CoStar Group (CSGP), MSCI (MSCI), Accenture (ACN), and Agilent Technologies (A) posted double-digit quarterly declines, while CoStar, MSCI, Accenture, and Mastercard (MA) each cost the Fund 25bps or more and accounted for a loss of 150bps combined. We analyzed the Fund’s performance by breaking down returns into two key components: changes in valuation multiples1 and changes in company fundamentals2. This quarter, the Fund’s weighted average multiple declined 0.1%, 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 0.9%, operating income expectations increased by 2.5%, and operating margin rose 24bps. These trends broadly resemble the ones we observed during the first quarter. Moreover, this solid fundamental performance was broad-based with revenue expectations up across all of our sectors, and operating income expectations up in all sectors except Financials and Health Care. Not surprisingly, we saw particular strength in the fundamentals of semiconductors and semiconductor materials & equipment companies, which saw revenue expectations for 2024 rise by 5.6% and operating income expectations rise by 6.3%, largely due to the strong demand for GenAI. Also, for the Communication Services businesses – revenue expectations for 2024 increased by 2.9% and operating income expectations increased by 7.1%. This was driven by the continued strength in Meta (META) and Alphabet that are benefiting from the recovery in ad spend, the adoption of AI, and better expense control, which is a tailwind to margins. We think that rolling monthly returns can be a useful way to measure whether we are achieving our goals. Over the very short term, our strategy has outperformed in just over half of the observations. But as the time period lengthens, our win percentage improves markedly. On a rolling monthly basis, we have outperformed the Index 60% of the time over 1-year, 67% of the time over 3-years, and 95% of the time over 5-years. The numbers are even more impressive when compared to our universe of peers. We continue to believe that we have put together the right collection of competitively advantaged companies with durable growth characteristics and great management teams. We have a lot of confidence in our process. If we continue to execute well, we should be able to outperform the Index over the long term, while minimizing the risk of permanent loss of capital. Rolling Return Period 1 Month 3 Months 1 Year 3 Years 5 Years Outperformance vs. S&P 500 Index 56% 61% 60% 67% 95% Outperformance vs. Morningstar Large Growth Category Average 51% 58% 70% 81% 100% Sources: BaronCapital, S&P Global Inc., and Morningstar Direct
Click to enlarge Top Contributors to Performance Table III. Top contributors to performance for the quarter ended June 30, 2024 Quarter End Market Cap (billions) Percent Impact Nvidia Corporation $3,039.1 1.48% Alphabet Inc. 2,258.7 0.95 Broadcom Inc. 747.4 0.74 Taiwan Semiconductor Manufacturing Company Limited 901.6 0.74 Microsoft Corporation 3,321.9 0.55
Click to enlarge Nvidia Corporation sells semiconductors, systems, and software for accelerated computing, gaming, and GenAI. Nvidia’s stock continued its run, rising 37.0% in the second quarter and finishing the first half of 2024 up 150.5%. 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 architecture going into production in the second half of the year. Blackwell will offer 4 times better performance in training and… 30 times better performance in inferencing. This underscores the urgency of demand for GPUs as customers are not waiting for the next generation architecture despite a significant improvement in 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.” Alphabet Inc. is the parent company of Google, the world’s largest search and online advertising company. Shares of Alphabet were up 20.6% this quarter, reflecting solid financial results as well as continued product innovation in GenAI. The company reported 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 regards to GenAI, while we are cognizant of the potential risks to the dominance of search, we believe that on the range of possible outcomes, Alphabet remains well positioned through its massive user distribution (9 products with over 1 billion users each), long-standing AI research labs (Google DeepMind), 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; the new TPU6 AI chips have shown a 4.7 times improvement in compute performance compared to the prior generation; and early data on Gemini for workspace is showing 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 equation for long- term owners of the business. Broadcom Inc. is a global technology leader with a broad range of semiconductor and infrastructure software solutions. Its semiconductor solutions focus on digital, mixed signal, and analog products across a variety of end markets, while its software products help customers plan, develop, automate, manage, and secure applications. The stock rose 21.5% on strong quarterly results on the back of two key growth drivers – AI semiconductors and good early results from integrating VMWare. The company once again increased its outlook for AI-related revenue, now expecting $11 billion or more this year, up from a prior estimated $10 billion. VMWare remains on track for rapid sequential growth while reducing operating expenses, driving faster-than-expected margin expansion and accretion. We believe Broadcom is a key beneficiary of AI infrastructure investment, with its industry-leading switching silicon and other networking chips and its custom silicon business supporting hyperscale customers with their own custom accelerators. Top Detractors from Performance Table IV. Top detractors from performance for the quarter ended June 30, 2024 Quarter End Market Cap (billions) Percent Impact CoStar Group, Inc. $ 30.3 -0.55% MSCI Inc. 38.2 -0.33 Accenture plc 191.0 -0.33 Mastercard Incorporated 410.1 -0.28 Visa Inc. 538.9 -0.24
Click to enlarge CoStar Group, Inc. is a provider of marketing and data analytics services to the real estate industry. Shares declined 23.1% in the quarter driven by weakness in the broader software sector with many companies experiencing 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. Apart from the optionality embedded with CoStar’s entry into the residential market, we believe that the company’s core non-residential business continues to be highly attractive, generating $2 billion of recurring revenues with over 40% EBITDA margins and believe it can continue compounding at double-digit rates. Shares of MSCI Inc., a leading provider of investment decision support tools, declined 13.9% during the quarter with more than 100% of the decline driven by multiple contraction. The company reported mixed first quarter 2024 earnings as its end market remained choppy, leading to elevated client cancelations and a more muted new sales environment. Despite this near- term macro uncertainty, first quarter revenues grew 15% year-over-year (10% organic), adjusted EBITDA grew 11%, and adjusted EPS grew 12%, and the company reiterated its 2024 guidance. We retain long-term conviction as MSCI owns strong, “all weather” franchises and remains well positioned to benefit from numerous secular tailwinds in the investment community. Accenture plc provides consulting and technology services to corporate clients around the world. Shares fell 12.1% together with the broader weakness in IT consulting and software names. Performance was driven entirely by multiple contraction, which declined 12.5% during the quarter3. While the company continues seeing underwhelming client demand trends given macroeconomic uncertainty, moderation in IT spending following a pandemic-related surge, and budget reallocations toward cloud and AI infrastructure away from services and software, it also saw some early positive green shoots with $900 million GenAI bookings and a book-to-bill ratio of 1.3 times. We expect the cyclical headwinds to abate over time, leading to faster growth in a large global market for IT services with the company benefiting from its strong competitive positioning as a leading partner helping companies with their digitization efforts. Portfolio Structure The portfolio is constructed on a bottom-up basis with the quality of ideas and conviction level, rather than benchmark composition and weights, determining the size of each individual investment. Sector weights tend to be an outcome of the stock selection process and are not meant to indicate a positive or a negative view. As of June 30, 2024, our top 10 positions represented 52.0% of the Fund, the top 20 represented 79.4%, and we exited the quarter with 32 investments, unchanged from the end of the first quarter. IT and Financials represented 63.3% of the Fund, while Communication Services, Health Care, and Consumer Discretionary represented another 29.1%, while the remaining 7.7% was invested in Industrials, Real Estate, and Consumer Staples as well as in cash. Table V. Top 10 holdings as of June 30, 2024 Quarter End Market Cap (billions) Quarter End Investment Value (millions) Percent of Net Assets Microsoft Corporation $3,321.9 $39.3 9.3% Amazon.com, Inc. 2,011.1 29.4 6.9 Meta Platforms, Inc. 1,279.1 28.8 6.8 Nvidia Corporation 3,039.1 20.8 4.9 Alphabet Inc. 2,258.7 20.3 4.8 Taiwan Semiconductor Manufacturing Company Limited 901.6 18.6 4.4 Broadcom Inc. 747.4 17.3 4.1 S&P Global Inc. 142.8 16.7 3.9 Visa Inc. 538.9 15.5 3.6 Adobe Inc. 246.3 13.8 3.2
Click to enlarge Recent Activity The Fund continues to benefit from significant inflows. During the quarter, we added to 25 out of the 32 existing holdings. We have increased the size of our positions in the semiconductor and infrastructure software provider, Broadcom, the leading manufacturer of integrated circuits and wafer semiconductor devices, Taiwan Semiconductor, and the real estate data company, CoStar. Table VI. Top net purchases for the quarter ended June 30, 2024 Quarter End Market Cap (billions) Net Amount Purchased (millions) Broadcom Inc. $ 747.4 $10.3 Taiwan Semiconductor Manufacturing Company Limited 901.6 8.9 Microsoft Corporation 3,321.9 6.6 CoStar Group, Inc. 30.3 6.5 Texas Instruments Incorporated 177.1 3.5
Click to enlarge Broadcom Inc. is a global technology leader that designs, develops and supplies a broad range of semiconductor and infrastructure software solutions. The company reported strong quarterly results and increased its outlook for the full year on strength from its AI-related semiconductor products for networking and Custom Compute. In networking, Broadcom remains the market leader and expects all hyperscale customers to use its Ethernet solutions in the coming years as they grow AI training clusters from 100,000 accelerators today to over 1 million in the future. In Custom Compute, Broadcom remains well positioned with three key consumer internet hyperscale customers and believes it has a more than $100 billion cumulative opportunity in the coming years compared to the $11 billion guided revenue for this fiscal year. The VMWare acquisition is performing better than expected, with rapid sequential growth expected to continue as the company simplifies the product offerings and converts customers from a perpetual license/maintenance model to a true SaaS model. We believe that the combination of Broadcom’s strong competitive positioning, AI-related growth, VMWare accretion, and reasonable valuation set up a favorable mid- and long-term outlook for the stock and have therefore increased our position during the quarter. Taiwan Semiconductor Manufacturing Company Limited (TSMC) is the world’s leading semiconductor foundry. The company reported solid quarterly results, driven by continued strong data center AI accelerator demand, optimism on a potential edge AI replacement cycle for smartphones and PCs, and expectations for price hikes next year (“selling our value”, in the words of C.C. Wei, TSMC’s CEO). In contrast with the sluggish broader semiconductor foundry market, TSMC is enjoying a record- breaking year, with management guiding for revenue to grow in the low to mid-20% range year-over-year in 2024, thanks to the company’s near- monopoly in manufacturing the world’s most advanced chips. According to C.C. Wei, “almost all the AI innovators are working with TSMC to address the insatiable AI-related demand for energy-efficient computing.” This strong AI demand, coupled with TSMC’s unrivaled competitive position, is driving “a high level of customer interest and engagement at N2” (TSMC new process node which will start production in 2H 2025), with N2 revenue expected to “certainly be larger” and with a “better margin profile” than N3 (TSMC’s most advanced node today). We believe TSMC will sustain strong double- digit earnings growth for years to come, driven by rapidly growing demand for advanced chips and continued market share gains enabled by its superior technology, reliability, and customer service. We also continued adding to our position in Microsoft Corporation to prevent dilution as the company continues to report strong financial results, while making progress in AI: 7% of Azure’s revenue growth (cloud computing) was driven by AI, about two-thirds of Fortune 500 companies are now using the Azure OpenAI service, 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 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 software platform and its relationship with OpenAI. We took advantage of the sell-off in the shares of CoStar Group, Inc. as a result of the broader sell-off in software and due to rumors over a potential slowdown in the company’s newly introduced residential offering (Homes.com). Being a new entrant to a consolidated market, we don’t expect the progress in residential to be up and to the right without hiccups and believe CoStar’s management team will adjust their offering and go-to-market strategy based on the results they see. Moreover, even excluding any value from the residential offering, we believe that the risk- reward equation for CoStar remains positively skewed over the long term and have therefore decided to further add to our position. Lastly, we increased our position in the leading analog and embedded semiconductor company, Texas Instruments Incorporated (TI). While TI continues to operate in a cyclical downturn, with revenues down 16% and adjusted EPS down 36% year-on-year, the company is seeing early signs of improvement especially in end markets where inventory corrections started earlier, such as personal electronics and some pockets of industrial. Near- term cash flow is also negatively impacted by TI’s heavy investments through 2026 in domestic, 300 million production fab. While the range of outcomes over the business’ near-term dynamics remains wide, we believe the company is making the right decisions for long-term owners of the business – the added fabrication capacity would prove valuable when the industry recovers from its cyclical downturn, enabling TI to gain market share at high incremental margins, with high ROI on the invested capex thanks to TI’s participation in the CHIPS act and its diverse and long-lived products, which would enable it to generate a return from the incremental capacity for decades into the future. Longer term, TI also remains well positioned to benefit from increasing semiconductor content in key industrial and automotive end markets and its U.S.-based capacity has increasing strategic importance given global geopolitical tensions. Table VII. Top net sales for the quarter ended June 30, 2024 Quarter End Market Cap or Market Cap When Sold (billions) Net Amount Sold (millions) None
Click to enlarge Outlook 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 durable competitive advantages, strong balance sheets, and exceptional management teams with a proven track record of operational excellence and successful capital allocation. 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 macroeconomic 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, without taking any significant risk of permanent loss of capital. 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 confident that our process is the right one, and we believe that it will enable us to make good investment decisions over time. Our goal is to invest in large-cap companies with, in our view, strong and durable competitive advantages, proven track records of successful capital allocation, high returns on invested capital, and high free-cash-flow generation, a significant portion of which is regularly returned to shareholders in the form of dividends or share repurchases. It is our belief that investing in great businesses at attractive valuations will enable us to earn excess risk-adjusted returns for our shareholders over the long term. We are optimistic about the prospects of the companies in which we are invested and continue to search for new ideas and investment opportunities. Sincerely, Alex Umansky, 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. 1We calculate the change in P/E multiple on consensus EPS as collected by FactSet for the next 12 months for each of our holdings. We then calculate a weighted average based on the weights at the end of the second quarter. We use a price/FRE (fee-related earnings) multiple for Apollo and Blackstone. We excluded Brookfield as this stock trades on a SOTP (sum of the parts) basis.2We calculate the change in consensus expectations for 2024 between March 31, 2024 and June 30, 2024 for revenues, operating income, and operating margins for each of our stocks and then calculate a weighted average. We use fee-related earnings (FRE) for Apollo and Blackstone, and we excluded Brookfield as this stock trades on a SOTP (sum of the parts) basis.3Accenture’s P/E multiple as measured by FactSet on the consensus estimate for next-12-months EPS. 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: The Fund invests primarily in equity securities, which are subject to price fluctuations in the stock market. In addition, because the Fund invests primarily in large-cap company securities, it may underperform other funds during periods when the Fund’s securities are out of favor. The Fund may not achieve its objectives. Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk. The discussions of the companies herein are not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed in this report reflect those of the respective portfolio managers only through the end of the period stated in this report. The portfolio manager’s views are not intended as recommendations or investment advice to any person reading this report and are subject to change at any time based on market and other conditions and Baron has no obligation to update them. This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Durable Advantage Fund by anyone in any jurisdiction where it would be unlawful under the laws of that jurisdiction to make such offer or solicitation. Price/Earnings Ratio or P/E (next 12-months): is a valuation ratio of a company’s current share price compared to its mean forecasted 4 quarter sum earnings per share over the next twelve months. If a company’s EPS estimate is negative, it is excluded from the portfolio-level calculation. 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.

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