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Baron Funds

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Baron

Baron Real Estate Fund 2. The Fund is comprised of best-in-class companies. We believe the quality of the Fund’s holdings is as strong as it has ever been. The businesses that we continue to emphasize: (a) are well managed; (b) are market leaders; (c) generally possess quality balance sheets; (d) own well-located real estate; and (e) grow cash flow at a faster rate than most peers. We believe that these special best-in-class companies should generate superior returns over the long term. A sampling of the Fund’s best-in-class companies includes: • Mohawk Industries, Inc.: The world’s largest flooring manufacturer – carpets, wood, sheet vinyl, and laminates • Equinix, Inc.: The world’s leading owner and operator of real estate data centers • American Tower Corp.: A leading owner, operator, and developer of communications real estate (i.e., wireless towers) • Hilton Worldwide Holdings, Inc.: One of the largest hotel companies in the world with premier hotel brands including: Hilton, Waldorf Astoria, Double Tree, Embassy Suites, Hampton, Canopy, Conrad, and others • Home Depot, Inc.: The largest and leading home improvement center company in the world • Macquarie Infrastructure Corporation: Owner and operator of high quality real estate-like infrastructure assets • CBRE Group, Inc.: The world’s largest and leading commercial real estate services company • Brookfield Asset Management, Inc.: A premier global investor, operator, and asset manager of high quality real estate and infrastructure-related assets • Alexandria Real Estate Equities, Inc.: A REIT that is the premier landlord and developer to the life science industry 3. The Fund’s holdings are attractively valued. We believe the Fund is chock full of companies that offer a rare combination of high quality that are “on sale.” Many of these companies are currently priced at discounts to our assessment of intrinsic value. Some concluding thoughts on our seven-year anniversary and prospects for the future In this letter, we have spent considerable time reflecting on the seven-year period since we launched the Baron Real Estate Fund, and contemplating the future. It is our sincere hope that you have found the content of this letter to be informative. Now, on our seven-year anniversary of the Fund, we are energized about the next several years. We are hard at work to meet our goal of producing strong results for you, our shareholders. As always, we remain highly focused on researching, assembling, and monitoring a high quality portfolio of companies with, in our view, excellent management teams, strong growth prospects, leading competitive positions, liquid balance sheets, and attractive valuations. We are enthusiastic about our investments, and are optimistic about the prospects for the portfolio. On this, our seventh anniversary, we express our gratitude for your past and continuing support. I remain a major shareholder of the Baron Real Estate Fund, alongside you. Sincerely, • The Sherwin-Williams Company: Global leader in the manufacture, development, distribution, and sale of paint, coatings, and related products • Marriott International, Inc.: The largest hotel company in the world with several leading hotel brands including The Ritz Carlton, Westin, St. Regis, W Hotels, Le Meridien, Sheraton, JW Marriott, and others • Toll Brothers, Inc.: The leading luxury homebuilder in the U.S. Jeffrey Kolitch 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. Baron Real Estate Fund is non-diversified, which means it may invest a greater percentage of its assets in fewer issues, and which increases the volatility of its returns and exposes it to potentially greater losses in a given period. In addition to general market conditions, the value of the Fund will be affected by the strength of the real estate markets. Factors that could affect the value of the Fund’s holdings include the following: overbuilding and increased competition; increases in property taxes and operating expenses; declines in the value of real estate; lack of availability of equity and debt financing to refinance maturing debt; vacancies due to economic conditions and tenant bankruptcies; losses due to costs resulting from environmental contamination and its related cleanup; changes in interest rates; changes in zoning laws, casualty or condemnation losses; variations in rental income; changes in neighborhood values; and functional obsolescence and appeal of properties to tenants. The Fund may not achieve its objectives. Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk. 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 Real Estate Fund by anyone in any jurisdiction where it would be unlawful under the laws of that jurisdiction to make such an offer or solicitation. 66

December 31, 2016 Baron Emerging Markets Fund Dear Baron Emerging Markets Fund Shareholder: Performance Baron Emerging Markets Fund (the “Fund”) retreated 8.23% (Institutional Shares) for the fourth quarter of 2016, while its principal benchmark index, the MSCI EM IMI Growth Index, declined 7.32% for the quarter. Emerging market equities reversed last quarter’s solid gains and underperformed developed world equities, in our view, largely as a result of Donald Trump’s surprise election victory. For the full year 2016, the Fund gained 4.08%, while its primary benchmark index rose 5.84%. 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 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 election outcome, 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 longerterm productivity enhancing reforms underway in many countries, and we remain optimistic about the high quality growth businesses in which we have invested. Table I. Performance Annualized for periods ended December 31, 2016 Baron Emerging Markets Fund Retail Shares 1,2 Baron Emerging Markets Fund Institutional Shares 1,2 MSCI EM IMI Growth Index 1 MSCI EM IMI Index 1 Three Months 3 (8.31)% (8.23)% (7.32)% (4.45)% One Year 3.75% 4.08% 5.84% 9.90% Three Years (1.57)% (1.31)% (1.85)% (2.40)% Five Years 6.11% 6.38% 2.70% 1.54% Since Inception (December 31, 2010) 1.82% 2.07% (1.49)% (2.32)% MICHAEL KASS PORTFOLIO MANAGER Retail Shares: BEXFX Institutional Shares: BEXIX R6 Shares: BEXUX For the fourth quarter of 2016, we modestly underperformed our key EM benchmark growth index. The quarter was dominated by a swift reaction to the U.S. election, leading to material underperformance by higher quality growth stocks worldwide, while commodity and cyclical-biased shares outperformed. During the quarter, the largest driver of adverse relative performance was stock selection effect in the Health Care sector, principally driven by a significant decline in Divi’s Laboratories Ltd., an India-based pharmaceutical manufacturer that received unexpected and negative U.S. FDA inspection observations. In addition, our underweight position in Samsung Electronics Co., Ltd., one of the largest index weightings within the Information Technology sector, drove poor relative performance in that sector as it appreciated in a down market for technology shares. On the positive side, our cash position helped relative performance as emerging market equities broadly retreated, while we also generated positive relative performance within the Industrials sector, as Copa Holdings, S.A., the Panama-based airline, and Bidvest Group Ltd. of South Africa both appreciated in absolute terms. From a country-specific perspective, India stood out as a drag on our relative performance, as the Modi administration’s surprise demonetization movement led to poor short-term earnings visibility, particularly in the Consumer Discretionary and Financials sectors, driving adverse selection and allocation effect for the Fund. 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 1.45% and 1.20%, 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. 1 The MSCI EM (Emerging Markets) IMI indexes cited are unmanaged, free float adjusted market capitalization weighted indexes reflected in U.S. dollars. The MSCI EM (Emerging Markets) IMI Growth Index Net USD and the MSCI EM (Emerging Markets) IMI Index Net USD are designed to measure equity market performance of large, mid and small cap securities in the emerging markets. The MSCI EM (Emerging Markets) IMI Growth Index Net USD screens for growth-style securities. The indexes and Baron Emerging Markets 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 Not annualized. 67

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