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Baron Funds

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Baron

Baron Asset Fund consolidation a less attractive alternative. Further, we believe that SBA will continue to benefit from significant equipment additions and share repurchases, in the event that additional acquisition opportunities do not present themselves. Portfolio Structure At December 31, 2016, Baron Asset Fund held 55 positions. The Fund’s 10 largest holdings represented 43.1% of assets, and the 20 largest represented 64.5% of assets. The Fund’s largest weighting was in the Information Technology (IT) sector at 22.6% of assets. This sector includes software companies, IT consulting firms, and data processing firms. The Fund held 22.0% of its assets in the Health Care sector, which includes investments in life sciences companies, health care equipment and supplies companies, and health care technology companies. The Fund held 17.9% of its assets in the Financials sector, which includes investments in insurance companies, investment brokers and financial exchanges. The Fund also had significant weightings in Industrials at 14.6% of assets and Consumer Discretionary at 13.5% of assets. Table IV. Top 10 holdings as of December 31, 2016 Year Acquired Market Cap When Acquired (billions) Quarter End Market Cap (billions) Amount (millions) Percent of Net Assets IDEXX Laboratories, Inc. 2006 $2.5 $10.5 $161.4 6.5% Gartner, Inc. 2007 2.9 8.3 156.7 6.3 Vail Resorts, Inc. 1997 0.2 6.4 123.4 5.0 Arch Capital Group Ltd. 2003 0.9 10.6 110.0 4.4 Verisk Analytics, Inc. 2009 4.0 13.6 105.5 4.3 Mettler-Toledo International, Inc. 2008 2.4 11.0 104.6 4.2 The Charles Schwab Corp. 1992 1.0 52.3 100.6 4.1 FactSet Research Systems, Inc. 2006 2.5 6.5 74.4 3.0 SBA Communications Corp. 2007 3.8 12.6 67.1 2.7 FleetCor Technologies, Inc. 2012 2.9 13.1 63.7 2.6 Recent Activity During the past quarter, the Fund established two new positions and added to five others. The Fund also sold two positions and reduced its holdings in 13 others. Table V. Top net purchases for the quarter ended December 31, 2016 Quarter End Market Cap (billions) Amount Purchased (millions) Advance Auto Parts, Inc. $12.5 $15.9 A.O. Smith Corporation 8.2 8.4 Expedia, Inc. 17.0 7.8 CoStar Group, Inc. 6.1 5.6 Vantiv, Inc. 11.7 2.4 Headquartered in Milwaukee, where it was founded over 140 years ago, A.O. Smith Corporation is a leading manufacturer of residential and commercial water heaters, boilers, and water treatment products. The company derives about 60% of its sales from water heaters in North America. This is an attractive market, with only three major players that have demonstrated a history of rational pricing policies. A.O. Smith is the largest participant with more than a 40% share in residential heaters and a 55% share in commercial heaters. Few homeowners or businesses consider hot water to be a discretionary item; generally a heater is replaced as soon as it breaks, and price is often a secondary consideration. As a result, the bulk of the company’s heater sales are comprised of steady replacement revenue (85% to 90% of residential sales). Additional growth comes from new housing starts, commercial construction, and customers’ desire for new products with increased energy efficiency. An additional 10% of A.O. Smith’s sales come from its North American boiler business, Lochinvar, which is expected to grow 8% per year, driven by the increased adoption of more energy efficient products. The remaining 30% of A.O. Smith’s sales come from China, where the company has established a dominant presence over the past 20 years. Sales in China are anticipated to grow 15% per year, anchored by its 26% market share in the Chinese water heater market. In China, water heaters are a considered a consumer appliance and A.O. Smith has built a premium brand, along with impressive distribution and manufacturing capabilities. The company is also entering nascent, faster growing product categories such as water treatment and air purification to expand its growth there. The company expects to achieve 8% top-line growth over the next several years. We believe that earnings growth should be faster, as a result of margin expansion from price increases, operating leverage, and the accretive use of its substantial free cash flow. Table VI. Top net sales for the quarter ended December 31, 2016 Amount Sold (millions) IDEXX Laboratories, Inc. $33.3 Illumina, Inc. 13.5 Quintiles IMS Holdings, Inc. 12.3 FleetCor Technologies, Inc. 7.2 SS&C Technologies Holdings, Inc. 5.8 After the company reached an all-time high (resulting in an approximate six-fold return on our initial investment 10 years ago), we trimmed our position in veterinary diagnostic company IDEXX Laboratories, Inc. The company remains one of our largest investments. We reduced our investment in DNA sequencing firm Illumina, Inc. after the company reported a shortfall in its business. We continued to reduce our investment in contract research organization and health care data firm Quintiles IMS Holdings, Inc. on concerns about the wisdom of its recent merger. We reduced our position in FleetCor Technologies, Inc. on caution surrounding its slowing growth rate. We further reduced our holdings of SS&C Technologies Holdings, Inc. on concerns about negative business trends impacting its hedge fund clients. 20

December 31, 2016 Baron Asset Fund Outlook We are optimistic that the economic policies of the incoming presidential administration will continue to provide a beneficial backdrop for equities. The administration’s likely focus on lower corporate tax rates, increased infrastructure spending, and reduced regulatory burdens will hopefully lead to accelerated corporate earnings growth. We are encouraged that equity markets have moved up in tandem with interest rates since the election. We believe this should quell what has perhaps been investors’ greatest recent concern – that higher rates would inevitably lead to lower equity prices. In addition, employment and housing trends improved throughout 2016, and there are signs that the industrial economy is now following suit. We think that our portfolio of what we believe are well-managed, competitively advantaged, fast growing companies will continue to perform well in this environment, although we cannot guarantee that they will. Furthermore, we continue to believe that high quality, mid-sized growth stocks represent a compelling long-term investment opportunity. During the past 30 years, mid-cap growth stocks, as a category, have outperformed small-cap and large-cap growth stocks. However, mid-caps have underperformed these asset classes during the past five years. We are hopeful that this trend will reverse, presenting an attractive opportunity for the mid-cap growth asset class in the future. Thank you for investing in Baron Asset Fund. Our entire Firm and our research department, in particular, are committed to justifying your ongoing confidence and support. I remain a significant investor in the Fund alongside you. Sincerely, Andrew Peck Portfolio Manager Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectus contains this and other information about the Funds. You may obtain them from its distributor, Baron Capital, Inc., by calling 1-800-99BARON or visiting www.BaronFunds.com. Please read them carefully before investing. The Adviser believes that there is more potential for capital appreciation in mid-sized companies, but there also may be more risk. Specific risks associated with investing in mid-sized companies include that the securities may be thinly traded and they may be more difficult to sell during market downturns. The Fund may not achieve its objectives. Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk. The discussions of the companies herein are not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed in this report reflect those of the respective portfolio managers only through the end of the period stated in this report. The portfolio manager’s views are not intended as recommendations or investment advice to any person reading this report and are subject to change at any time based on market and other conditions and Baron has no obligation to update them. This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Asset Fund by anyone in any jurisdiction where it would be unlawful under the laws of that jurisdiction to make such offer or solicitation. 21

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