NU - Baron Emerging Markets Fund Q4 2023 Shareholder Letter

2024-02-17 06:05:00 ET

Summary

• Baron is an asset management firm focused on delivering growth equity investment solutions known for a long-term, fundamental, active approach to growth investing.
• Baron Emerging Markets Fund gained 6.81% (Institutional Shares) during the final quarter of 2023, while its primary benchmark index appreciated 7.86%.
• During the fourth quarter, we added two new investments to existing themes while also increasing exposure to several positions that we established in earlier periods.
• We reiterate our view that India, our largest overweight exposure by a margin, has reached escape velocity after years of implementing a series of productivity-enhancing reforms, and further stands out as a material beneficiary in the evolving global geopolitical environment.

Dear Baron Emerging Markets Fund Shareholder:

Performance

Baron Emerging Markets Fund® (the Fund) gained 6.81% (Institutional Shares) during the final quarter of 2023, while its primary benchmark index, the MSCI EM Index (the Benchmark), appreciated 7.86%. The MSCI EM IMI Growth Index (the Proxy Benchmark) gained 7.72% for the quarter. For the full-year 2023, the Fund appreciated 8.29% while the Benchmark rallied 9.83% and the all-cap growth Proxy Benchmark gained 8.09%. The Fund modestly underperformed the Benchmark and the Proxy Benchmark during a quarter of strong returns, while for the full year, the Fund modestly trailed the Benchmark while performing essentially in line with the Proxy Benchmark. In recent quarters, we have highlighted that we were likely passing through peak hawkishness , with better days ahead for the relative performance of non-U.S. equities. Early in the fourth quarter, an increasingly restrictive rise in real yields and slowing U.S. employment and inflation momentum triggered a re-evaluation of likely U.S. Federal Reserve (the Fed) policy, which the Fed soon confirmed by suggesting its hiking cycle was complete. The Fed also surprised markets by communicating that rate cuts would likely occur sooner and in greater magnitude than investors expected. While we previously believed that the Fed would be too backward-looking and too patient to meaningfully pivot, thereby raising the likelihood of global recession, we were impressed with its more flexible and forward-looking reaction. In short, bond yields and financial conditions reacted swiftly, pricing in rate cuts and easing liquidity conditions. While markets cheered the pivot, evidenced by the largest quarterly gain in global equities in the past 3 years, we believe this event also likely foreshadows the end of the 14-year U.S. dollar bull market, and will usher in a cycle of relative outperformance by non-U.S. equities. While we suspect financial markets may have moved a bit too far, too fast, and some consolidation of gains and market volatility will follow, we believe the time has come for investors to rebalance portfolios in favor of emerging markets ('EM') and international equities. Of course, we remain confident that our diversified portfolio of well-positioned and well-managed companies will capitalize on their attractive growth potential over the coming years regardless of the macro environment....

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