Baron Asset Fund Q3 2025 Shareholder Letter

Market Overview - U.S. equities experienced broad gains in Q3, driven primarily by the Federal Reserve's decision to cut interest rates by 25 basis points, alongside healthy corporate earnings and reduced trade tensions [2][3] - The "Magnificent Seven" stocks contributed significantly, accounting for 62% of the S&P 500 Index's quarterly gains, with Information Technology, Communication Services, and Consumer Discretionary sectors outperforming the broader market [3] Fund Performance - The Baron Asset Fund underperformed, with Institutional Shares declining 4.23% in Q3, trailing the Russell Midcap Growth Index's gain of 2.78% [9] - The Fund's performance was negatively impacted by underexposure to Momentum, Beta, and Residual Volatility factors, which led the market higher during the quarter [9][10] Sector Analysis - Stock selection in Information Technology and Communication Services was a major contributor to underperformance, particularly due to declines in holdings like Gartner, Inc. and StubHub Holdings, Inc. [11] - Consumer Discretionary sector faced challenges, with notable declines from Choice Hotels International, Inc. and On Holding AG, despite On's strong revenue growth of 38% [12][13] - Financials were hindered by performance issues at FactSet Research Systems Inc. and Morningstar, Inc., while Verisk Analytics, Inc. faced challenges in the Industrials sector [14] Top Contributors and Detractors - IDEXX Laboratories, Inc. was a top contributor, with a 1.13% contribution to return, driven by better-than-expected financial results and improved foot traffic to veterinary clinics [16] - Gartner, Inc. and StubHub Holdings, Inc. were significant detractors, with contributions of -2.31% and -1.39% respectively, due to disappointing earnings and challenging market conditions [19][23] Portfolio Structure - As of September 30, 2025, the Fund held 55 positions, with the top 10 holdings representing 47.2% of net assets, and the largest sector being Information Technology at 24.9% [25][26] - The Fund's investment strategy focuses on long-term holdings in companies with competitive advantages and strong management teams [26] Recent Activity - The Fund initiated a position in Loar Holdings Inc., a niche aerospace parts manufacturer, highlighting the attractiveness of the aerospace industry due to strong growth and pricing power [29][30] - Investments were also made in Skyryse, Inc., which is developing a universal flight operating system aimed at improving aviation safety and accessibility [32] Outlook - The Fund's management remains optimistic about the growth opportunities and competitive positions of its portfolio companies, despite the challenging market environment for high-quality stocks [34][36]