Baron Funds Q4 2022 Report - Letter From Linda

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Year ends are clip for reappraisal and reflection… but, pursuing nan reliable markets of 2022, I uncertainty location are galore maturation equity investors who want to look backmost astatine nan past 12 months. Such periods of extended marketplace declines and volatility are an unpleasant but basal reminder that occurrence does not travel successful a consecutive way and that markets move successful cycles.

The twelvemonth was challenging for our business too, peculiarly for nan Baron Funds invested successful higher-growth and technology-driven companies. Those of you who person publication our caller quarterly letters, aliases listened to Ron and our investigation squad speak, would cognize that nan mediocre marketplace capacity of nan past twelvemonth has not affected our semipermanent outlook. We stay optimistic astir nan early of nan U.S. system and nan semipermanent opportunities for equity investors and our shareholders.

Last year, Baron celebrated its 40-year anniversary. Our 4 decades successful business person been filled pinch memorable experiences, successes, and occasional stumbles, each of which person taught america thing – not conscionable arsenic investors but besides arsenic stakeholders successful a continuously increasing business. During difficult times, nan lessons we person learned person fixed america assurance and reassurance to instrumentality to our values and finance approach. At nan Baron Conference this past November, I shared pinch nan assemblage immoderate valuable lessons we person learned astir our business, and beneath is an edited type of my speech.

The past 4 decades person been rather eventful. As nan floor plan beneath shows, we person witnessed aggregate recessions, marketplace crashes, wars, a pandemic, grounds ostentation and unemployment, and crazy elections, among different things. But we person besides seen immense technological progress, aesculapian advancements, amended accusation and marketplace accessibility for investors, and nan longest bull marketplace ever. Since nan inception of Baron Capital connected 3/16/1982, nan S&P 500 Index has returned a staggering 9,413% (including dividends).

The Past 40 Years Have Been Eventful12/31/1979 - 12/31/2022S&P 500 Index and Various Events

S&P 500 Index and Various Events (12/31/1979 - 12/31/2022)

Sources: FactSet, The National Bureau of Economic Research, Baron Capital.

Since I person been astatine Baron for 4 decades, I person a unsocial perspective, and I besides asked immoderate of our labor what they person learned. The communal denominator down each instruction is people.

People are nan halfway of our business, accordant pinch our motto “we put successful people:” our investors, partners, guidance teams of nan companies successful which we put and, astir importantly, our employees. Here are 5 of nan lessons that we person learned.

Lesson #1: Build nan Right Team and Cultivate a Healthy Work Culture

When you build nan correct team, 1 + 1 is greater than 2. We person built a squad that is much than nan sum of its individuals. And, conscionable for illustration nan measurement we conception portfolios, we person built nan Baron squad 1 personification astatine a time. Finding nan correct group and training them takes time, but we person learned to beryllium diligent and return a semipermanent view. It is important for america to prosecute smart, intelligent, and funny individuals, pinch divers backgrounds and shared values. It is besides important that they complement nan squad we person built. We judge these fundamentals person helped america execute success. We ever look for much than conscionable bully workers. As Jim Barrett, our caput of organization income said, doing business successful our manufacture pinch humanity makes a difference. So we besides look for characteristic traits for illustration honesty, empathy, and moreover humor; and we judge this has helped america combine an exceptional team. We don’t ever get it right, but we do ever learn.

To person nan correct team, you request nan correct culture. Teamwork is astatine nan bosom of Baron’s culture, and teamwork starts pinch trust. I work together pinch Alison Bray, our head of investor information, that “Trust is nan astir important rate astatine activity – meaning – you’ll do what you say, you’re paying attention, and you attraction astir what different group are trying to accomplish.” Trust allows our labor to beryllium open-minded and to perceive to what others person to say. Creating an situation that encourages speech of ideas builds morale and growth, and fosters innovation.

Our mean retention complaint complete nan past 15 years has been complete 90%, which attests that we must beryllium doing thing right. We person galore long-tenured employees, and our first squad is still here: Peggy Wong (CFO), Susan Robbins (a long-time elder investigation analyst), David Schneider (Head of Trading), Ron (of course), and me.

As nan array shows, arsenic of 12/31/2022 much than half of Baron’s full labor and much than two-thirds of our investigation unit person been astatine nan Firm for 5 years aliases more. Over a 3rd of each labor person been present for astatine slightest a decade, and 17 person been present for complete 20 years. For context, 20 years agone Baron’s squad consisted of conscionable 49 employees.

Baron’s Employees Have Been astatine The Firm for a Long Time

Source: Baron Capital.

In addition, nan immense mostly (12 retired of 15) of Baron’s non-research group heads person been astatine nan Firm for astatine slightest 7 years. Something I americium peculiarly proud of is that 8 retired of nan 15 groups are headed by women (myself not included) and astir half (19 retired of 40) of Baron’s managerial roles are held by women. In addition, Baron’s Director of Research is simply a woman, and 4 retired of nan 10 Board members of nan Baron Funds are women.

Lesson #2: Learn to Make Tough Decisions

We strive to supply exceptional investor work and finance results. Particularly successful our industry, achieving this requires a delicate equilibrium of opportunity and risk, and often location are immoderate reliable choices to beryllium made.

During nan Financial Crisis successful 2008, our assets had dropped from $23 cardinal to nether $10 cardinal and nan financial world was collapsing. We had 3 options:

A) do thing – and dream for nan best;

B) trim costs, including laying disconnected employees; or

C) put successful increasing our business.

Notwithstanding our constricted resources, we picked action C. Here is why: if you build nan champion widget successful nan world and it sits successful your factory, group aren’t going to bargain it unless it gets marketed and distributed. While everyone successful nan plus guidance manufacture was picking action B, we saw an opportunity to grow our income effort – a difficult determination that has paid disconnected handsomely.

But this wasn’t nan first aliases nan past clip we made a difficult choice. The adjacent floor plan shows that we person launched caller products during bully and bad economical conditions, and correct earlier – aliases aft – aliases successful nan mediate of marketplace declines. Our decisions to turn Baron’s business person ever been driven by our semipermanent views and conviction. The bars connected nan floor plan show that our squad has expanded gradually and consistently pinch our business.

Baron’s Team and Business Have Grown Steadily

Baron Capital – Employees and Assets Under Management (3/31/1987 – 12/31/2022)

New Asia

When it comes to making decisions – whether astir increasing our operations, launching caller products, aliases optimizing our statement – we person learned that it pays disconnected to trust connected our semipermanent position and large image focus, and instrumentality to our values.

Lesson #3: Time is On nan Side of Long-Term Thinkers

Achieving challenging goals requires time. Achieving maturation besides requires time. But clip unsocial is not capable – patience, discipline, and condemnation are besides essential, arsenic they let for imaginable to materialize and nan powerfulness of compounding to activity its magic.

Time and compounding sound for illustration elemental concepts, yet fewer plus managers person been capable to harness them to their advantage. During times of marketplace volatility – for illustration correct now – it becomes difficult to support subject and conviction, which often leads to myopic finance choices, for illustration marketplace timing. As our caput of trading, David Schneider says, during specified moments we for illustration to put connected our Baron goggles, which thief america spot done nan shortterm sound and support attraction connected nan agelong term.

The information successful nan floor plan connected nan correct visualizes David’s constituent well. Over nan past 40 years, 83% of nan one-year rolling periods for nan S&P 500 Index person resulted successful affirmative returns. While nan median return was 14.5%, nan imaginable scope of one-year returns was anyplace betwixt -43.3% and 61.2%, a immense scope of uncertainty.

Expanding nan finance sky to 3 years resulted successful a higher percent of clip pinch affirmative returns (88%) and an ostensibly tighter scope of outcomes. Having an finance sky of 10 years aliases much importantly minimized nan imaginable for antagonistic returns and resulted successful an moreover tighter scope of outcomes. In short, nan longer nan finance horizon, nan higher nan certainty astir nan result – aliases astatine slightest this has been nan lawsuit successful nan past.

Long-Term Investors Have Had Better Chances of Positive Returns

S&P 500 Index – Minimum, Maximum, and Median annualized full returns complete various periods (Based connected monthly rolling periods, 12/31/1982 – 12/31/2022)

Sources: FactSet, Baron Capital.

Notes: The capacity information quoted represents past performance. Past capacity is nary guarantee of early results. It is not imaginable to put successful an index.

Long-term perspective, patience, and subject are astatine nan halfway of our approach. We judge nan powerfulness of compounding applies to accumulating knowledge and acquisition conscionable arsenic powerfully arsenic it applies to finance returns. To paraphrase Warren Buffet, you cannot get 9 years of acquisition by hiring 9 first-year associates. This is why we continuously put successful our labor and do our champion to thief them grow, unlock their imaginable and, hopefully, support them arsenic Baron employees. As a Firm, this has allowed america to accumulate generational knowledge, which we see 1 of our strongest competitory advantages.

The scorecard beneath attests to our semipermanent success. Almost each of nan Baron Funds person outperformed their applicable benchmarks nan mostly of nan time, delivering important excess returns. Similar to nan floor plan above, nan likelihood of outperformance of nan Baron Funds has accrued erstwhile nan holding play has been longer. Our Funds person generated beardown excess returns since their respective inception dates.

The Baron Funds Have Generated Impressive Results

Baron Funds Scorecard (Based connected monthly rolling returns since inception arsenic of 12/31/2022)

Source: Baron Capital.

Lesson #4: Building Trust is Critical

Honesty and transparency gain trust, and spot is basal to semipermanent relationships. We deliberation of our clients and investors arsenic semipermanent partners pinch whom we want to person lasting relationships. This starts pinch providing clear, timely, and high-quality communications. We spare nary resources to present what is important to our investors, and we person committed to supply accusation good beyond what our competitors do. As our caput of RIA sales, Frank Maiorano put it, “We activity successful an manufacture wherever sometimes you want to hide from nan truth, particularly successful years for illustration this. But arsenic difficult arsenic it is, delivering honorable truth and connection some successful bully and bad times earns spot which leads to semipermanent relationships.”

Like knowledge, spot takes clip to build. And, for illustration British Prime Ministers, it tin vanish successful an instant. We are proud of nan estimation we person established, and we do not return it for granted. We are perpetually moving to beryllium ourselves arsenic a trustworthy semipermanent partner to our clients, our business relationships, and nan companies successful which we invest.

And, finally, #5: Lessons from Ron

Having spent 40 years moving pinch Ron, location is simply a point aliases 2 that I person learned from him.

For example, I person learned “It is apparently good to telephone group astatine 6am aliases 11pm, arsenic agelong arsenic you inquire “Is this a bully time?” erstwhile they reply nan phone.”

Or, “It’s good to show nan aforesaid stories complete and complete again – possibly nary 1 paid attraction nan first 10 times.”

I’ve besides realized location is simply a point aliases 2 Ron should person learned.

Such as, “Nothing happens astatine nan push of a button.”

And “No, nan machine did not suffer nan draught of your shareholder missive – again. You did. Again.”

And “You can’t ever get what you want.”

On a much superior note, 1 of nan astir valuable lessons I person learned from Ron is astir nan value of group successful a business. It is simply a elemental conception – that only group tin make a business successful. At Baron, our business is our people. Finding nan correct group and investing successful them – time, resources, emotions – is difficult and takes time. If it were easy, everyone would tally successful businesses. But it is nan difficult things that adhd existent worth successful nan agelong term. And this is why We Invest successful People.

Sincerely,

Chairman, President, and COO

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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