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Baron Funds

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Baron Small Cap Fund Table VI. Top net sales for the quarter ended December 31, 2016 Year Acquired Market Cap When Acquired (billions) Quarter End Market Cap or Market Cap When Sold (billions) Amount Sold (millions) Press Ganey Holdings, Inc. 2015 $1.4 $ 2.1 $50.6 IDEXX Laboratories, Inc. 2008 2.0 10.5 27.8 The Cheesecake Factory, Inc. 2001 1.3 2.8 23.5 Monro Muffler Brake, Inc. 2014 1.7 1.9 20.3 Bright Horizons Family Solutions, Inc. 2013 1.8 4.2 17.7 During the quarter, we sold out of Press Ganey Holdings, Inc., which was acquired by private equity. We trimmed some long-term holdings: IDEXX Laboratories, Inc., The Cheesecake Factory, Inc., and Bright Horizons Family Solutions, Inc. as they rose and valuations got extended in the near term, mostly on the back of strong operating results. We also trimmed some other industrial and financial holdings as those were in vogue with the postelection rotation. We sold out of some losing positions, Diplomat Pharmacy, Inc. and Brookdale Senior Living, Inc., after some unforeseen negative developments. Outlook Optimism for stronger economic growth continues as Trump takes office. Though we are not sure about what policies will get passed, it does seem likely that corporate tax rates will be lowered, which will result in higher corporate profits. Proposals to reduce regulations, repatriate capital, and increase fiscal spending are likely to pass and would stimulate growth. In our discussion with the executives who manage our investments, we hear, especially from our industrial and infrastructure-oriented holdings, that business conditions are improving and an improving sentiment and confidence should lead to a better economy. On the other hand, we aren’t hearing improvement in consumer spending. We believe rising interest rates would actually be good for consumer spending as savers would earn more. So it’s reasonable to think profits will rise and growth rates will improve, justifying the upward move in the market. The market reacted rewarding the presumptive beneficiaries, somewhat at the expense of the previous leaders who were either fast growers or steady compounders. We sense that that rotation has now played out. Still, if the economy does accelerate and taxes are cut, growth will be easier to find and the broader market leadership may continue, something we are cognizant of in portfolio construction. There are risks however: • The dollar has appreciated, making exports less competitive and foreign earned profits lower in translation. This hurt many stocks in 2015. • Interest rates have risen. Though we think they need to go much higher before negatively affecting growth, the rise in borrowing cost will be a drag on earnings. If the deficit increases because of Trump policies, the Fed might be forced to raise rates faster, which could choke off the recovery. • Inflation is picking up. If GDP grows faster in a tight labor market, wage inflation would accelerate as would the price of other inputs. And then there are the risks of uncertainty and tumult that we expect from the new administration, which are hard to quantify, but we are sure will be a factor affecting the future direction of the market. We are following the politics closely to assess economic ramifications, but our primary focus continues to be on our portfolio companies and looking for the next great businesses that fit our approach of investing in what we consider to be superior growth businesses with strong management, that are competitively advantaged, and that trade at reasonable prices. Thank you for your investment in Baron Small Cap Fund. We are dedicated to executing our investment approach, which we believe will provide good returns going forward. Cliff Greenberg 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 smaller companies, but there also may be more risk. Specific risks associated with investing in smaller 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 manager 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 Small Cap Fund by anyone in any jurisdiction where it would be unlawful under the laws of that jurisdiction to make such offer or solicitation. 32

December 31, 2016 Baron Opportunity Fund Dear Baron Opportunity Fund Shareholder: Performance Baron Opportunity Fund (the “Fund”) had a poor fourth quarter, falling 6.05% (Institutional Shares). The Fund underperformed both the Russell 3000 Growth Index, which advanced 1.20%, and the S&P 500 Index, which rose 3.82%. Table I. Performance † Annualized for periods ended December 31, 2016 Baron Opportunity Fund Retail Shares 1,2 Baron Opportunity Fund Institutional Shares 1,2,3 Russell 3000 Growth Index 1 S&P 500 Index 1 Three Months 4 (6.14)% (6.05)% 1.20% 3.82% One Year (4.84)% (4.56)% 7.39% 11.96% Three Years (1.80)% (1.54)% 8.27% 8.87% Five Years 8.17% 8.47% 14.44% 14.66% Ten Years 6.30% 6.52% 8.28% 6.95% Since Inception (February 29, 2000) 4.25% 4.38% 2.75% 5.00% MICHAEL A. LIPPERT PORTFOLIO MANAGER Retail Shares: BIOPX Institutional Shares: BIOIX R6 Shares: BIOUX Review & Outlook After this poor end to 2016, the Fund has had a strong start to 2017. The mere act of putting up the new calendar seemingly ushered in another flip in market sentiment and leadership. As I write (reflecting the close of January 25), the Fund is up just under 9% to start the year, leading the Russell 3000 Growth Index by over 450 basis points (and about 600 ahead of the S&P 500 Index). I provide this real-time data neither to dismiss the Fund’s disappointing fourth quarter performance nor to make any promise about how it will continue to perform in 2017, but to underscore the following points: 1. Why did the Fund underachieve in the fourth quarter? Not to be flip in the least, but the explanation is rather straightforward. In our opinion, the market shift post-election was due to speculation and sentiment, not changes in fundamentals for the vast majority of our investments or the underlying innovation themes we stress. Sector rotations were sudden and significant as the market strove to speculate on which industries might gain from the country’s new leadership. Internet, cloud, software-as-a-service and many Information Technology (IT) stocks–which we emphasize because of secular trends–were sold. Just by way of example, in November and December, while the Russell 3000 Growth Index was up almost 4%, bellwethers like Amazon.com, Inc. sold off 5.1%, Alphabet, Inc. (aka Google) 1.9%, salesforce.com, inc. 8.9%, and Visa, Inc. 5.4% (GICS classifies them in the IT sector). Traders piled into and chased sectors like Financials, because of a belief that Dodd-Frank would be rolled back; Industrials, because as a candidate Donald Trump talked about spending over a billion dollars on infrastructure projects; sectors that would benefit from higher interest rates (and selling those that would be hurt); and sectors or businesses that would benefit from lower corporate tax rates. Speculation was rampant–as the new administration had very few well-articulated policy proposals and people tried, instead, to interpret Donald Trump’s off-hand comments or tweets, or the policy proposals of Congressional leaders like Paul Ryan. Already much of this speculation has either reversed, been called into question or hit a ceiling. And market leadership has shifted back, in many ways, to what prevailed before the election. During November and December, we faced the choice of engaging in speculation and shifting Performance listed in the above table is net of annual operating expenses. Annual expense ratio for the Retail Shares and Institutional Shares as of September 30, 2016 was 1.41% and 1.13%, 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 has reimbursed certain Fund expenses (by contract as long as BAMCO, Inc. is the adviser to the Fund) 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. † The Fund’s historical performance was impacted by gains from IPOs and/or secondary offerings. There is no guarantee that these results can be repeated or that the Fund’s level of participation in IPOs and secondary offerings will be the same in the future. 1 The indexes are unmanaged. The Russell 3000 ® Growth Index measures the performance of those companies classified as growth among the largest 3,000 U.S. companies and the S&P 500 Index of 500 widely held large cap U.S. companies. The indexes and the Fund are with dividends, which positively impact the performance results. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell is a trademark of Russell Investment Group. 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 3 Performance for the Institutional Shares prior to May 29, 2009 is based on the performance of the Retail Shares, which have a distribution fee. The Institutional Shares do not have a distribution fee. If the annual returns for the Institutional Shares prior to May 29, 2009 did not reflect this fee, the returns would be higher. 4 Not annualized. 33

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