Printmgr File
Total Page:16
File Type:pdf, Size:1020Kb
Baron Funds® June 30, 2021 Quarterly Report “Texans would be without electricity for longer maintain that building. Champlain Towers you won’t need to spend your depreciation than three days to keep the federal government homeowners’ inability to commit to making reserve. Since depreciation is a cost, it should out of their business.” Former Texas Governor timely property investments was likely due to not have a multiple attached to it and be added and Former United States Energy Secretary sticker shock from increasingly costly repair to the value of a property. If you don’t spend Rick Perry. February 18, 2021. projections. Shockingly, an engineering report by depreciation in a given year, it is just deferred outside consultants in 2018 indicated maintenance. It is not eliminated maintenance,” President Trump’s former Energy Secretary Rick deterioration of that seaside building required an Jay continued. Perry made that remark during the severe immediate investment of at least $9 million by February 2021 winter storm that crippled Texas’ Baron has significantly outperformed markets and its middle class and retiree residents. This was to electric power grid. Due to that catastrophic most competitor funds over the long term. We repair the building’s crumbling concrete and electric utility failure, large segments of Texas’ believe one important reason is that Baron chooses rebar foundation that had been damaged by populace were without heat, power, and fresh to invest in businesses that make continual and water for several days. substantial investments in their businesses to make them durable. This is rather than trying The proximate cause of that outage was to maximize their businesses’ earnings in a Texas utilities’ under investment in current period. In fact, we believe we often “weatherizing” their grids. “Weatherizing” have an opportunity to make long-term investments were necessary to protect investments in competitively advantaged those grids during infrequent instances of growth businesses at attractive prices since extreme weather. ERCOT, the Electric their share prices are lower than we think Reliability Council of Texas, at the time, appropriate…because they are making such unlike regulators in other regions at similar investments that penalize their earnings in or higher latitudes, did not allow utilities to the short term! include “weatherizing” investments in their rate bases. Texas utilities, as a result, were One more thing. About 15 years ago my not able to recover the cost of such family and I were building a beach house investments; earn a return on those on Long Island. When our home was under investments; and charge their customers construction, I became worried that its for the higher operating costs of those “…every little thing gonna be all right…” Bob Marley, 1977. capital investments. Therefore, few Texas Ron, David and Michael are excited about returning to our office with utilities made “weatherizing” investments. their colleagues this fall. Baron Capital is a family business that has TABLE OF CONTENTS been putting clients and employees first since March 12, 1982. Letter from Ron 1 It is estimated monthly customer electric Letter from Linda 7 water incursion from the sea and hurricanes over Baron Funds Performance 15 utility bills would have been at least 5% higher Baron Asset Fund 22 had that state’s utilities “weatherized” their 40 years! In 2021, when the estimated costs of Baron Growth Fund 26 systems. The cost of Texas utilities’ failure to the postponed repairs for the 136-unit building Baron Small Cap Fund 33 invest was estimated to be several billion dollars had risen to at least $15 million, its homeowners Baron Opportunity Fund 38 last winter…in addition to dozens of lost lives! association continued to debate and delay Baron Partners Fund 43 investing. Had those repairs not been neglected, Baron Fifth Avenue Growth Fund 49 Members of ERCOT viewed their primary role as the calamity that resulted in at least Baron Focused Growth Fund 55 providing the cheapest energy to markets. This Baron International Growth Fund 62 $100 million in property losses and, even worse, Baron Real Estate Fund 67 was obviously accomplished at the expense of the loss of more than 120 lives…might have building a more durable and resilient utility Baron Emerging Markets Fund 77 been averted. Baron Global Advantage Fund 81 infrastructure. Several ERCOT members have Baron Discovery Fund 88 since lost their jobs. In the mid-1970s, Hyatt Hotels Corp.’s CEO Baron Durable Advantage Fund 94 Jay Pritzker scoffed at the idea that the most Baron Real Estate Income Fund 99 Board Squabbles at Condominium Delayed important metric to use in valuing hotels was Baron WealthBuilder Fund 108 Repairs. The New York Times. July 4, 2021. EBITDA (earnings before interest, taxes, Baron Health Care Fund 115 Baron FinTech Fund 121 Just like Texas utilities’ choices not to invest in depreciation, and amortization). “Depreciation is Portfolio Holdings 127 “weatherizing” power grids resulted in a cost even if you don’t spend it every year,” Jay catastrophic failure last winter, the tragic and told me. “Things wear out and you must provide nearly unimaginable collapse of the beachside capital to replace and maintain those assets if Champlain Towers condo in Surfside, Florida on you expect them to increase in value.” That is June 24th, was also the result of a failure to the case for hotels, condos, utilities, homes, and BARON invest for several years…in this instance, to other real assets. “It is not realistic to think that FUNDS Letter from Ron costs seemed much higher than we had appeal to the most talented young engineers as What’s so special about SpaceX? Figuring out anticipated. When I expressed my concerns to an enormous competitive advantage for both how to make space rockets reusable is the short the builders, they told me, “You are the problem. Tesla and SpaceX in their races against time answer. Since the 1960s, our government had Whenever we ask you to choose between two and competitors. been charged hundreds of millions of dollars for options, you choose what is more expensive. We every rocket launched only to watch that rocket We think Elon’s desire to solve really hard can save you money by spending less inside your burn up in the atmosphere after being used only problems for the betterment of humanity is one walls and on the building envelope infrastructure once! “Insane!” “Impossible!” was the reaction of of the things that makes working with him and that no one will ever see.” I responded in accord the cost/plus aerospace industry to Elon’s efforts the thousands of brilliant people he has chosen with the lesson Jay had taught me all those to create a reusable rocket! China’s government to surround himself with so appealing as well as years ago. “That is exactly where we do not want complimented Elon in a Wall Street Journal Tesla’s goal of keeping Planet Earth habitable, to save money. That is where we want to spend editorial after a SpaceX rocket’s successful SpaceX’s goal of making the human species more. A site near the ocean may be a beautiful landing, chiding its own government’s engineers. multiplanetary…just in case, and Neuralink’s goal place to live, but it is an unusually hostile “You have been beaten to accomplish this of improving humankind knowledge and lives. environment to buildings. Please make sure that incredible feat not by a nation state but by an we invest sufficiently to make our home Elon is all about solving problems that are so individual! Congratulations, Elon Musk. China, last…and that you tell us every year what we difficult most don’t even try or give up soon we are 10 years behind.” need to do before repairs and maintenance are after they start. Like building autonomous In 2021, SpaceX will provide 80% of the launches necessary.” driving systems for Tesla’s cars and trucks that from Planet Earth to space. China will provide rely upon software based on visual cues, “Why does it need to be like that?” 12%! SpaceX’ competitive advantage? machine learning, and artificial intelligence Elon Musk. CEO. Tesla. CEO SpaceX. 2021. Reusability! Elon calls it “RRR.” Rapidly reusable rather than lidar and radar hardware. Tesla’s rockets. In a recent industry forum, Elon spoke Elon Musk is the CEO of two leading “disruptive” autonomous driving system is less expensive about problematic tasks SpaceX was resolving. technology businesses in which Baron Funds has than hardware intensive services. It will therefore Like reducing the cost of its SpaceX user interface. significant long-term investments. The first is be available for virtually all cars regardless of Like creating intersatellite communications with electric vehicle, extended range battery, price as a cloud software subscription. Tesla’s no noticeable increase in latency between alternative energy and software business Tesla, autonomous driving solutions will ultimately thousands of SpaceX satellites and Earth. This is Inc. The second is the privately owned rocket provide similar functionality to hardware despite those satellites orbiting at 17,000 miles ship, launch, and satellite broadband provider focused services and dramatically reduce the per hour 300 miles above Earth! Getting landing Space Exploration Technologies Corp. 40,000 auto casualties per year in our country. rights for satellite broadband in countries (“SpaceX”). We purchased our shares in Tesla worldwide! And, of course, producing enough from 2014 through 2016 and have since earned Tesla is also the leading developer of inexpensive rockets fast enough to get humankind to Mars. realized and unrealized profits of about 14 times car batteries that last more than 500 miles on a the cost of our investment. We have been single charge.