Baron Funds® December 31, 2020 Quarterly Report “Ron, when I first met you 35 years ago, you business in 1982. Our Firm now manages that only 1 of 19 analysts who had published a were investing in wireless telephones. $50 billion of assets. Further, since 1992, we research report with a sell recommendation on ‘Wow! That’s a pretty far out idea,’ have earned more than $47 billion realized and Tesla had met Elon Musk; only 3 had visited its I thought.” After beginning a recent phone call unrealized profits for our clients. Baron Capital Fremont factory; none had visited its huge to me with that comment, Chuck no longer has an insignificant book value. facility in Reno...which we visited 3 times!...and Mathewsontoldmehewascallingto no one I knew had read either Elon’s biography Although Chuck called to congratulate us on congratulate us on our Tesla investment. or “The Last Days of Night,” an historical fiction Tesla, he had previously been skeptical about Chuck Mathewson. Chairman Emeritus book about Nikola Tesla that was a really fun Tesla’s prospects. That was also the case for International Game Technology and Chairman read. The last was a book my wife, Judy, insisted most of my friends, clients and my contacts in Emeritus Baron Funds. December 2020. I read. I finished it in two nights. After extensive the media. To say nothing of the executives of diligence...that is ongoing nine years later...we In 1970, I began my career as a Wall Street businesses that manufacture cars with internal invested $372 million in Tesla shares, securities analyst. I was 26, and at the about 1.5% of our assets under beginning of the Summer of ‘69, I had management in 2016. We have since resigned from my “critical skills” job as a “earned” about $5.5 billion realized and Chemistry Patent Examiner in the United unrealized profits on our Tesla investment! States Patent Office. While patent We are hopeful we will triple our money examining by day, I had been attending again by 2030. Of course, there can be no George Washington University Law School assurance that will be the case. in the evenings. Short of money, despite a partial tuition scholarship, I also “dropped On a recent zoom call to David Schneider, out” of law school...just one semester our Firm’s head trader, I spoke about how before graduation. I changed my life path excited I was about the BioNTech/Pfizer to live rent free and food insecure in the mRNA vaccines. Their technology seems to basement of one of my best high school offer the potential to treat cancers and friend’s home in Maplewood, New other presently untreatable diseases, I Jersey. This was while I commuted daily to remarked. Only about 600 of 5,000 known Wall Street trying to find a job as an 22-year-old Amanda Gorman, the youngest poet ever to perform at a diseases are now treatable. I think analyst. My net worth was a negative Presidential inauguration and the first-ever National Youth Poet BioNTech’s management team is super $15,000. My parents were beside Laureate, inspires America with poem, “The Hill We Climb.” “For there is and its messenger RNA modality protected themselves. always light. If only we’re brave enough to see it. If only we’re brave by hundreds of patents is innovative and enough to be it.” I landed my first analyst job after an unpleasant three-month unemployment stint combustion engines (“ICEs”). Those businesses’ TABLE OF CONTENTS Letter from Ron 1 and, in 1982, founded Baron Capital with two investments of billions in factories that make Letter from Linda 7 other individuals, Linda Martinson and Susan motors would become “stranded assets” if Baron Funds Performance 16 Baron Asset Fund 23 Robbins. Both still work with me. My steadily electric cars replaced ICE cars. Dealers who make Baron Growth Fund 28 growing family business is now comprised of 172 money servicing ICE cars not selling them also Baron Small Cap Fund 34 employees, who are our most important assets. believed Tesla’s prospects were dubious. Electric Baron Opportunity Fund 40 Baron Partners Fund 45 Among them are 40 incredibly talented analysts Vehicle (“EV”) cars require little service since Baron Fifth Avenue Growth Fund 51 and portfolio managers...many of whom are they have a lot fewer parts than ICE cars. Also, Baron Focused Growth Fund 58 Baron International Growth Fund 65 extremely long tenured... who have worked among the Tesla skeptics were nearly all Baron Real Estate Fund 70 together for 10 and 15 and 20 plus years automotive investment analysts, whose expertise Baron Emerging Markets Fund 80 actually. on engine manufacturing would become obsolete Baron Global Advantage Fund 85 Baron Discovery Fund 91 if EVs became prevalent... and short sellers who Thirty-eight years ago, Baron Capital was Baron Durable Advantage Fund 96 would profit if Tesla were not successful. Baron Real Estate Income Fund 100 principally an institutional brokerage firm. Our Baron WealthBuilder Fund 109 clients paid us brokerage commissions in return When we began to research Tesla in 2012, we Baron Health Care Fund 116 Baron FinTech Fund 122 for our research investment ideas. Since we had met and spoke with Elon Musk numerous times; Portfolio Holdings 141 just $10 million in assets under management in visited Tesla’s factories in Fremont and Reno 1982, we relied upon our clients’ brokerage regularly; and met with and spoke to his commissions to “pay the rent.” When our assets operations, finance, and senior executives under management reached $100 million in frequently. We also visited and spoke with ICE 1992, we stopped selling our ideas to car manufacturing executives, and car dealers. In others. Baron Capital was a truly “capital-light” the course of our due diligence, I was surprised Letter from Ron disruptive. “Messenger RNA teaches the body’s investors. Further, since the start of the new our currency’s purchasing power. To prove this, immune system to manufacture antibodies to Millennium, our nation has endured 9/11; the Google the prices of anything back in 1999 and attack viruses. BioNTech’s mRNA technology bursting of the internet bubble; the 2009 compare them to present prices. Most prices and years of research and clinical test data could financial panic; a once-in-100-years pandemic have since about doubled! Stock prices of be as significant to health care as small chemical that is presently claiming 4,000 American lives indexes are nearly three times what they were in pills and large molecule biotech monoclonal per day; and, an insurrectionist attack on 2000...and more than four times as much when antibodies that are ingested!” Congress on January 6, 2021 that threatened our you include dividends. democracy. David’s response surprised me. “Ron, I joined “Teach your children well...you must have a Baron Capital in 1987. All you could talk about Regardless, our economy and stock market have code you can live by.” Crosby, Stills, Nash & then were cellular telephones. You were grown significantly since March 1999. The Dow Young. 1969. investing in your friend George Lindemann’s Jones Industrial Average is now above 30,000. In the summer of 2001, we had become Metro Mobile CTS, U.S. Cellular, McCaw Cellular, This represents a 6.61% annualized rate of interested in investing in a well-managed and Lin Broadcasting. You had just returned from return investors could have earned since property and casualty (“P&C”) insurance a brief vacation to Italy with Judy and had seen December 1999 by hypothetically investing in a business. That was since P&C industry reserves fisherman using cell phones! You said, low fee, index fund that mirrors the S&P 500 had fallen 30% during the prior several years and ‘Everyone’s going to have them! Whether you’re Index. $10,000 hypothetically invested in such premium rates had not yet increased. The rich or poor!!’ You were convinced of that. Just an index fund then would now be worth more reserves had fallen due to unusually large like you were convinced about electric cars 10 than $38,000! This is despite returns in this insured catastrophic losses from hurricanes, fires, years ago! You’ve always invested like that.” I period below historic 10% annual rates of return floods, and earthquakes. Large insured losses asked David: “Did my executive assistant Alice on U.S. equity investments since World War II. from malfeasance and misfeasance awards tell you what I was writing about in this letter?” Further, those 6.61% annualized passive returns magnified the negative impact on those He told me she had not. were far better than the returns that most reserves. We believed that if one more “In the 20th century, the United States pension funds, endowments, foundations, and unexpected loss occurred, premium rates would endured two world wars, and other traumatic institutional investors earned during the period increase significantly...and profits in this cyclical and expensive military conflicts; the despite their sophisticated investment industry would increase substantially. We had Depression; a dozen or so recessions; strategies. never previously invested in P&C businesses. financial panics; oil shocks; the 1918 Spanish So, the question we think investors should ask is, When an investment banker cold called flu epidemic; and the resignation of a “Why?” Why have stocks done well amid fortuitously and offered a meeting with Dinos disgraced president. Yet the Dow rose from turmoil? Why haven’t many of the “best and Iordanu, an entrepreneur founder of P&C insurer 66 to 11,497.” Warren Buffett.