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Baron Funds

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Baron

Baron International Growth Fund Dear Baron International Growth Fund Shareholder: Performance Baron International Growth Fund (the “Fund”) retreated 6.23% (Institutional Shares) for the fourth quarter of 2016, while its principal benchmark index, the MSCI ACWI ex USA IMI Growth Index, declined 5.77% for the quarter. International equities reversed last quarter’s solid gains and underperformed U.S. equities, in our view largely as a result of Donald Trump’s surprise election victory. For the full year 2016, the Fund gained 1.35%, outperforming its principal benchmark index, which was roughly flat, gaining 0.06%. Prior to the U.S. election in early November, sovereign interest rates had already begun to rise as policymakers from Japan and the U.S. signaled a likely shift towards greater fiscal stimulus and an accommodation of moderately higher inflation, in our view, in response to a widening wealth gap and associated rise in global populism. The Trump victory added fuel to the fire, as his policies suggest an emphasis on fiscal stimulus, higher inflation and interest rates, and a strong U.S. dollar. Particularly noteworthy with regard to the international and emerging markets, Trump appears poised to take an aggressive position on trade, marked by a willingness to revisit NAFTA and a tax reform proposal that may institute a broad tax on imported goods. A key question looking forward is whether the significant market repricing that has already occurred is appropriate or overdone. We suspect the move may be directionally appropriate, but excessive in magnitude, reflecting investor positioning that was unprepared for the outcome of the election, and the decline in market liquidity across many markets since the advent of Dodd-Frank legislation. On a positive note, at least in the developed world markets, it appears a shift of capital flows from fixed income into equities may have begun coincident with bond yields passing through secular lows. While emerging market equities have underperformed with an abrupt sell-off subsequent to the election of Trump, we believe they are reasonably positioned to absorb tighter conditions given the longer-term productivity enhancing reforms underway in many countries. We remain optimistic about the prospects for the high quality growth businesses in which we have invested throughout both the developed international and emerging markets. MICHAEL KASS PORTFOLIO MANAGER Table I. Performance † Annualized for periods ended December 31, 2016 Baron International Growth Fund Retail Shares 1,2 Baron International Growth Fund Institutional Shares 1,2,3 Retail Shares: BIGFX Institutional Shares: BINIX R6 Shares: BIGUX MSCI ACWI ex USA IMI Growth Index 1 MSCI ACWI ex USA Index 1 Three Months 4 (6.23)% (6.23)% (5.77)% (1.25)% One Year 1.14% 1.35% 0.06% 4.50% Three Years 0.00% 0.24% (1.00)% (1.78)% Five Years 7.46% 7.73% 5.58% 5.00% Since Inception (December 31, 2008) 10.07% 10.33% 7.83% 7.11% Performance listed in the above table is net of annual operating expenses. Annual expense ratio for the Retail Shares and Institutional Shares as of December 31, 2015 was 1.59% and 1.31%, but the net annual expense ratio was 1.50% and 1.25% (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 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 MSCI ACWI ex USA indexes cited are unmanaged, free float-adjusted market capitalization weighted indexes. The MSCI ACWI ex USA IMI Growth Index Net USD measures the equity market performance of large, mid and small cap growth securities across developed and emerging markets, excluding the United States. The MSCI ACWI ex USA Index Net USD measures the equity market performance of large and mid cap securities across developed and emerging markets, excluding the United States. The indexes and Baron International Growth Fund include reinvestment of dividends, net of foreign withholding taxes, which positively impact the performance results. 2 The performance data 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. 54

December 31, 2016 Baron International Growth Fund For the fourth quarter of 2016, we modestly underperformed our key international benchmark growth index. For the full year we outperformed, while our long-term performance remains comfortably ahead of our benchmark. The recent quarter was dominated by a swift reaction to the U.S. election, leading to material underperformance by emerging market equities and higher quality growth stocks worldwide, while commodity and cyclicalbiased shares outperformed. During the quarter, the largest driver of adverse relative performance was stock selection effect in the Consumer Discretionary sector, largely the result of a broad sell-off in emerging market positions such as PT Matahari Department Store Tbk, Zee Entertainment Enterprises Ltd., Smiles SA, China Distance Education Holdings Limited, and BYD Company Ltd. Additionally within this sector, Rakuten, Inc., a leading e-commerce platform in Japan, and Domino’s Pizza Enterprises Ltd. of the U.K., drove adverse relative performance in concert with the noted weakness in quality growth stocks. On the positive side, stock selection and allocation effect in the Energy sector stood out, driven by strong performance in Suncor Energy Inc. andEncana Corp. of Canada, as well as Lekoil, Ltd., a U.K.-domiciled oil producer that approached “first oil” in Nigeria. Table II. Top contributors to performance for the quarter ended December 31, 2016 Percent Impact Arch Capital Group Ltd. 0.23% Suncor Energy Inc. 0.21 Encana Corp. 0.18 Golar LNG Ltd. 0.18 Julius Baer Group Ltd. 0.16 Arch Capital Group Ltd. is a specialty insurance and reinsurance company based in Bermuda. Shares were up in the fourth quarter on good financial results with profitable underwriting, modest catastrophe losses, and favorable reserve development. Arch Capital also benefited from increasing optimism toward its acquisition of United Guaranty which makes Arch the largest provider of mortgage insurance, a market we think has attractive profitability and growth prospects. We continue to own the stock due to Arch’s strong management team and underwriting discipline. (Josh Saltman) Suncor Energy Inc. is an integrated oil & gas company focused on developing oil sands in Alberta, Canada. Shares grew in the fourth quarter following the rise in oil prices after OPEC’s decision to cut output. The company delivered solid quarterly results with lower operating costs and production that beat Street expectations. We continue to like Suncor due to its improving oil sands cost structure and ramp-up of production at its major projects Fort Hills and Hebron, which could potentially result in significant free cash flow growth. (Chingiz Gadimov) Encana Corp. is an exploration and production (E&P) company with operations in Western Canada and Texas. The stock rose in the fourth quarter after Encana reported production guidance that beat Street expectations, a solid multi-year growth outlook, and lower cash costs. Encana has strong positions in two of the more attractive oil plays in the Permian and Eagle Ford basins and two of the lowest cost natural gas basins in Western Canada. We believe Encana is one of the most attractively valued E&P companies with strong long-term growth and returns potential. (Chingiz Gadimov) Shares of liquified natural gas company Golar LNG Ltd. rose in the fourth quarter, driven by progress in its joint ventures and improving fleet utilization and day rates due to higher commodity prices. It refinanced and restructured its GP structure, providing a sightline into its ability to meet short-term liquidity needs. Golar trades as a shipping company, with a high correlation to day rates and oil prices. We think its plan to “high-grade” the business into midstream services will result in higher, more sustainable valuation multiples over the long term. (Gilad Shany) Shares of Swiss private bank Julius Baer Group Ltd. were up during the fourth quarter due to higher net interest income expectations following a sharp increase in forward yield curves in the U.S. and Europe. The company’s 10-month trading update showed net new money growth and capital levels that exceeded analyst estimates, which boosted confidence in the company’s ability to reach its mid-term targets. We retain conviction based on its exposure to fast growing regions (Asia and EM), operating leverage in the business model, and utilization of excess capital. (Jose Barria) Table III. Top detractors from performance for the quarter ended December 31, 2016 Percent Impact Bellamy’s Australia Limited –0.58% Bharat Financial Inclusion Limited –0.48 Alibaba Group Holding Limited –0.45 Rakuten, Inc. –0.44 Domino’s Pizza Enterprises Ltd. –0.39 Shares of leading Australian infant nutrition company Bellamy’s Australia Limited declined in the fourth quarter. The stock fell after management announced fiscal year guidance that missed Street expectations. The company is losing market share in China to other imported brands from Australia and Europe. We decided to exit our position owing to deteriorating company fundamentals amidst intensifying competition. (Anuj Aggarwal) Shares of Bharat Financial Inclusion Limited, India’s leading microfinance institution, declined in the fourth quarter due to growing concerns over an increase in non-performing loans in the microfinance industry (MFI). MFI operations have also been impacted by post-demonetization political interference in states such as Maharashtra and Uttar Pradesh, adding to industry stress. (Anuj Aggarwal) Shares of Alibaba Group Holding Limited, the largest e-commerce company in China, fell in the fourth quarter as a result of weakness in the Chinese currency relative to the U.S. dollar and increased spending by the company on original video programming. We continue to believe that Alibaba represents a unique opportunity to invest in the dominant provider of e-commerce and cloud-related services in the growing Chinese market. (Ashim Mehra) Rakuten, Inc. is a Japanese e-commerce company that operates Rakuten Ichiba, the largest online shopping mall in Japan. Shares fell in the fourth quarter due to slower growth in its e-commerce gross merchandise value. We retain conviction given Rakuten’s solid position in the Japanese e- commerce market. (Shu Bai) Domino’s Pizza Enterprises Ltd. is the largest master franchiser of Domino’s Pizza, operating in Australia, New Zealand, select European countries, and Japan. While its share price rose in the first nine months of 2016, it gave more than half of those gains back in the fourth quarter. We believe this fourth quarter correction is largely driven by macro events and politics, not company fundamentals. The company’s exceptional execution has been consistent, and we believe its plans for geographic expansion, productivity improvement, and technology integration are sound. (Kyuhey August) 55

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