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Baron Funds

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Baron

Baron Partners Fund Portfolio Structure The objective of Baron Partners Fund is to double its per share value in less than five years by investing for the long term in a focused portfolio of wellmanaged growth businesses at attractive prices. The Fund uses leverage, when appropriate, to more effectively manage its holdings and enhance returns. Leverage, however, increases portfolio beta, or volatility. We define volatility as “risk.” The Fund’s beta from inception is 1.04. This means it has been 1.04 times as volatile as its benchmark. We accept this risk since the Fund has significantly outperformed the benchmark over the past 25 years. We think the well-managed businesses in which Baron Partners invests have sustainable competitive advantages and strong, long-term growth opportunities. While the Fund has an all-cap mandate, it principally owns mid-cap growth companies. We attempt to create a portfolio of less than 30 securities diversified by GICS sectors. As of December 31, 2016, Baron Partners Fund held 27 investments. The median market capitalization of these growth companies was $6.4 billion. The top 10 positions of this highly focused fund represent 71.7% of total investments. While the Fund is “focused,” it is diversified by sector. Its weightings, however, are significantly different than those of the Russell Midcap Growth Index. As important as sector diversification, is our portfolio diversification by business characteristics. The metrics we use to value businesses vary significantly. They include a multiple of revenues for fast growing high incremental margin technology and service businesses, a multiple of book value for financial services businesses, a percentage of replacement cost for real estate businesses, a multiple of after-tax earnings for service businesses, and a multiple of EBITDA for media businesses that amortize costs that increase in value. What is even more challenging is that some businesses need to be valued using more than one metric! The common element in all of our investments is growth. We believe that all the businesses we own have opportunities to increase in value at double-digit annual rates. At the time of initial purchase, we believe the businesses generally have an opportunity to increase at more than a 15% CAGR. Our portfolio weightings change over time depending upon our assessment of businesses’ prospects, their performance, and their perceived investment opportunities. The Fund currently has a greater weight in the Consumer Discretionary and Financials sectors than its benchmark index. It is less exposed to Health Care and Industrials. The Fund does not have any Energy or Materials investments. Those businesses, in our opinion, are reliant on commodity prices and regulations over which their managements have no control…in theory. Table VI. Top 10 holdings as of December 31, 2016 Year Acquired Market Cap When Acquired (billions) Quarter End Market Cap (billions) Amount (millions) Percent of Total Investments Tesla Motors, Inc. 2014 $21.9 $34.4 $237.2 11.6% CoStar Group, Inc. 2005 0.7 6.1 207.3 10.2 Arch Capital Group Ltd. 2002 0.6 10.6 207.1 10.1 Vail Resorts, Inc. 2008 1.6 6.4 149.3 7.3 Hyatt Hotels Corp. 2009 4.2 7.2 143.7 7.0 FactSet Research Systems, Inc. 2007 2.5 6.5 125.8 6.2 IDEXX Laboratories, Inc. 2013 4.7 10.5 117.3 5.7 The Charles Schwab Corp. 1992 1.0 52.3 110.5 5.4 Zillow Group, Inc. 2014 4.3 6.6 91.1 4.5 Manchester United plc 2014 2.8 2.3 76.2 3.7 Respectfully, Ronald Baron CEO and 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 using non-diversification and leverage, but there also is more risk. Specific risks associated with non-diversification and leverage include increased volatility of the Fund’s returns and exposure of the Fund to greater loss in any given period. The Fund invests in companies of all sizes, including small and medium sized companies whose securities may be thinly traded and made difficult to sell during market downturns. Leverage is the degree to which an investor or business is utilizing borrowed money. 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 Partners Fund by anyone in any jurisdiction where it would be unlawful under the laws of that jurisdiction to make such offer or solicitation. Beta: measures a fund’s sensitivity to market movements. The beta of the market (Russell Midcap Growth Index) is 1.00 by definition. 42

December 31, 2016 Baron Fifth Avenue Growth Fund Dear Baron Fifth Avenue Growth Fund Shareholder: Performance The Baron Fifth Avenue Growth Fund (the “Fund”) declined 6.3% (Institutional Shares) during the fourth quarter and 1.8% for the year, which compared to gains of 1.0% and 7.1% for the Russell 1000 Growth Index and 3.8% and 12.0% for the S&P 500 Index, respectively. The portfolio performed particularly poorly during the quarter which led to a disappointing year. Table I. Performance Annualized for periods ended December 31, 2016 Baron Fifth Avenue Growth Fund Retail Shares 1,2 Baron Fifth Avenue Growth Fund Institutional Shares 1,2,3 Russell 1000 Growth Index 1 S&P 500 Index 1 Three Months 4 (6.41)% (6.32)% 1.01% 3.82% One Year (2.06)% (1.76)% 7.08% 11.96% Three Years 4.02% 4.30% 8.55% 8.87% Five Years 13.00% 13.29% 14.50% 14.66% Ten Years 5.32% 5.52% 8.33% 6.95% Since Inception (April 30, 2004) 6.43% 6.59% 8.25% 7.95% The quarter began predictably enough with most of our investments “muddling” along, digesting the double-digit gains of the prior three months. Illumina, Under Armour, and FireEye (again) reported disappointing quarterly results and their stocks were hit hard, but the damage was contained with Facebook, Alibaba, and Priceline Group reporting excellent numbers and offsetting most of the losses. Headwinds from assets continuing to flood to passive investments (a record $375 billion into ETFs, while active managers saw outflows of $288 billion) and propping up index returns made it difficult for us to keep up, but we emerged from the fourth quarter reporting season trailing the benchmarks modestly, which is not unusual for us after a period of strong outperformance. The unexpected results of the U.S. presidential election caused a significant shift in market sentiment and a powerful rotation from global growth businesses, which are the companies in which we primarily invest, into domestic companies that were likely going to benefit from U.S. corporate tax cuts, infrastructure investments, military build-up, and trade protectionism. It was bad enough that stocks of the investment banks, industrials, materials, and defense companies were suddenly surging, their run up was being funded by ALEX UMANSKY PORTFOLIO MANAGER Retail Shares: BFTHX Institutional Shares: BFTIX R6 Shares: BFTUX investors selling Amazon, Facebook, Google, and other global growth companies. A challenging environment for our portfolio and for the way we invest–to say the least. The top four contributors to performance this quarter–Charles Schwab, First Republic Bank, CME Group, and Synchrony Financial, were all Financials. They went up for the right reasons as they are full U.S. taxpayers, will benefit from significantly lower regulatory hurdles and the likely persistent rise in interest rates that seems even more inevitable now, given expected fiscal stimulus, wage inflation, and the plainly inflationary policies of the incoming administration. However, these were medium to small size positions, and the gains were not nearly enough to offset the “carnage” (to borrow a term from our new leader’s inauguration speech) that we saw in our Information Technology and Consumer Discretionary investments which comprise almost 70% of the Fund. Amazon, Facebook, FireEye, Red Hat, and Mobileye sold off because of perceived dependence on foreign workers (H-1B visas, which now will be more difficult to obtain); Alibaba, Naspers (think Tencent), and Ctrip–on fears of a trade war with China. Illumina, Allergan, Biogen, and Regeneron were hit over angry presidential tweets Performance listed in the table above is net of annual operating expenses. Annual expense ratio for the Retail Shares as of September 30, 2016 (restated to reflect current fees) was 1.12% but the net annual expense ratio was 1.10% (net of the Adviser’s fee waivers) and Institutional Shares was 0.84%. 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. 1 The indexes are unmanaged. The Russell 1000 ® Growth Index measures the performance of large-sized U.S. companies that are classified as growth 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. 43

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