March 31, 2021 Baron Durable Advantage Fund DEAR BARON DURABLE ADVANTAGE FUND SHAREHOLDER: PERFORMANCE After two years of strong absolute and relative returns, Baron Durable Advantage Fund (the “Fund”) gained 3.0% (Institutional Shares) during the first quarter, which trailed the 6.2% gain for the S&P 500 Index (the “Index”), the Fund’s benchmark. Table I. Performance Annualized for periods ended March 31, 2021 Baron Baron Durable Durable Advantage Advantage Fund Fund S&P Retail Institutional 500 Shares1,2 Shares1,2 Index1 Three Months3 2.89% 3.00% 6.17% One Year 47.16% 47.45% 56.35% Three Years 16.69% 16.98% 16.78% ALEX UMANSKY Retail Shares: BDAFX Since Inception Institutional Shares: BDAIX (December 29, 2017) 15.77% 16.04% 15.12% PORTFOLIO MANAGER R6 Shares: BDAUX The first quarter was characterized by a pronounced rotation from growth into value and a corresponding “trade” away from the beneficiaries of work- and CME Group, up 11.1% were our only other double-digit gainers. All in from-home (“WFH”) into the beneficiaries of the economy reopening. all, that resulted in a 3.0% gain for the Fund. Though we do not consider the Fund particularly “growthy” nor did we hunt or invest specifically into WFH stocks, the resulting environment was clearly More broadly, we think our recent struggles in keeping up with the market’s unfavorable to the kinds of stocks that we tend to favor. From that relentless march higher can be attributed to two factors: perspective, we are not too unhappy with the results. • During the latter half of 2020, the market was led higher by rapidly From a performance attribution standpoint, most of the shortfall was due to growing, digital enablers, which tend to be businesses in the earlier stock selection with our holdings in Financials, Real Estate, Information stages of their growth life cycles, and hence not a good fit for this Technology (“IT”), and Industrials not keeping up with the Index’s returns in strategy (think of Tesla, Zoom Video, and Twilio). In this Fund, we those sectors. In terms of sector allocation, our lack of exposure to some of focus on companies with durable competitive moats in the later stages the best performing sectors also hurt our results: Energy–the sector was up of their growth life cycles. 30.9% and we had no exposure, Industrials–the sector was up 11.4% and we • During the last few quarters, there has been a perceptible change in were 3.8% underweight. At the same time, our 5.7% overweight to the 2nd market leadership with value indexes of all market capitalizations worst performing sector, IT, did not help either. outperforming their growth counterparts. At the same time, as At the company-specific level, it was an uneventful quarter. Winners vaccinations have started to take hold the “reopening trade” has picked outnumbered losers 3 to 2, and while none of our decliners were down more up steam. Index returns have been driven by energy, banks, airlines, than 7.2%, we did not have enough meaningful winners to keep up with the cruise lines and hotel businesses–areas that we typically do not invest Index. Alphabet, our largest investment, gained 17.5% during the quarter, in, since we do not believe those types of businesses have durable but is also a sizable weight in the Index, and Texas Instruments, up 15.5%, competitive moats that will guard against disruption, which is a Performance listed in the table above is net of annual operating expenses. Annual expense ratio for the Retail and Institutional Shares as of September 30, 2020 was 2.80% and 2.40%, respectively, but the net annual expense ratio was 0.95% and 0.70% (net of the Adviser’s fee waivers), respectively. The performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor’s shares, when redeemed, may be worth more or less than their original cost. The Adviser reimburses certain Baron Fund expenses pursuant to a contract expiring on August 29, 2031, unless renewed for another 11-year term and the Fund’s transfer agency expenses may be reduced by expense offsets from an unaffiliated transfer agent, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted. For performance information current to the most recent month end, visit www.BaronFunds.com or call 1-800-99BARON. 1 The S&P 500 Index measures the performance of 500 widely held large cap U.S. companies. The index and the Fund include reinvestment of dividends, net of withholding taxes, which positively impact the performance results.. The index is unmanaged. Index performance is not Fund performance; one cannot invest directly into an index. 2 The performance data in the table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or redemption of Fund shares. BARON FUNDS 3 Not annualized. Baron Durable Advantage Fund necessary component in enabling intrinsic values to compound while up 6.0% during the quarter as Microsoft reported an acceleration in its earning high rates of return on invested capital over extended periods business with revenues growing 15% year-over-year and commercial cloud of time. revenues growing 32%, driven by a robust demand for digital transformation. We also believe that Microsoft’s competitive advantages are We believe it would be beneficial for shareholders to know that we are not strong and durable as it benefits from the long reach of its sales channel, its looking to outperform every quarter or every year. In fact, we are not broad product set, differentiated hybrid cloud offering, and its large installed “looking to outperform” at all. Instead, we focus on executing our base of enterprise customers. (Guy Tartakovsky) investment process. We know that it works, and if we execute it well, it will enable us to make good investment decisions over longer periods of time. If S&P Global Inc. provides credit ratings, indices, data, and analytics to the we focus on taking only good “shots” and avoid taking bad ones, the financial and commodities markets. Shares outperformed and were up 7.6% winning (or outperforming) will take care of itself. The main goal of this during the quarter, after the company reported strong financial results and strategy is to compound investment returns with a maniacal focus on 2021 guidance that exceeded expectations with revenues up 8% in the minimizing (or avoiding if at all possible) permanent loss of capital, which fourth quarter, driven by strong performance in the ratings business. Bond means we are intentionally taking lower risk “shots.” We believe that issuance is expected to moderate after two years of exceptional growth, but investing in market leaders with sustainable competitive advantages at management still expects revenue to grow mid-single digits in 2021. Also, attractive prices, that present a margin of safety relative to our estimate of shareholders overwhelmingly voted to approve the merger with IHS Markit. their intrinsic values, will enable us to outperform the Index over time, while We continue to own the stock due to S&P Global’s long runway for growth taking on less risk. We are okay with not keeping up during periods of time as it benefits from the secular trends of increasing bond issuance, growth in when the market goes straight up, or when the Index is led by companies passive investing, and demand for data and analytics, while enjoying which do not fit our strategy. We expect to do better than the Index over meaningful and durable competitive advantages that, in our view, are only full-market cycles, although of course there can be no assurance that we will strengthening following the merger with IHS Markit. (Josh Saltman) achieve our goals. Semiconductor bellwether Texas Instruments Incorporated (“TI”) is a leader in analog and embedded processing, selling to over 100,000 Table II. customers across industrial, automotive, personal electronics, Top contributors to performance for the quarter ended March 31, 2021 communications, and enterprise end-markets. Shares appreciated 15.5% Quarter End Market Cap Percent during the first quarter as part of the broader upcycle in the semiconductor (billions) Impact industry driven by demand bounce back and supply constraints and thanks Alphabet Inc. $1,392.6 1.28% to TI management’s long-term ownership mindset, which drove them to not Facebook, Inc. 838.7 0.54 cut on production during the depths of the cycle, even though peers had, Microsoft Corporation 1,778.2 0.49 enabling TI to outperform during the recovery. We believe TI will continue S&P Global Inc. 85.0 0.25 to outperform over the long term as it is focused on the best end-markets Texas Instruments Incorporated 174.4 0.24 (industrial and auto), markets that are characterized by longevity of design wins and diversity of demand, and as it is led by a management team of Alphabet Inc. is the parent company of Google, the world’s largest search skilled and experienced operators who are also excellent capital allocators. engine and online advertising company. Shares rose 17.5% in the quarter on (Guy Tartakovsky) strong fourth quarter results that saw continued recovery in ad spending and accelerating cloud revenue growth, which was up 47% year-over-year Table III. with a backlog that nearly tripled. We remain excited about Alphabet’s Top detractors from performance for the quarter ended March 31, 2021 merits as it continues to benefit from growth in mobile and online video Quarter End advertising, which accrues to its core assets of search, YouTube, and the Market Cap Percent (billions) Impact Google ad network.