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Baron Funds

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Letter from Ron We seek

Letter from Ron We seek to invest in businesses with attributes that make it difficult for their competitors to succeed. Competitive advantages provide pricing power. SLIDE: Company Logos Advantages include brands like Under Armour; licenses like MSCI; franchises like Manchester United; content, distribution, and proprietary data like CoStar and Zillow; physical locations like Vail; switching costs like Benefitfocus; and technology like Tesla. SLIDE: Company Logos Douglas Emmett, a Los Angeles-based commercial real estate firm, owns buildings that are irreplaceable due to zoning restrictions; IDEXX Labs has unsurpassed research and unique distribution for its veterinary diagnostic tests; Iridium’s satellites will soon be mission-critical to the airline industry and our defense department; Charles Schwab’s client assets, services and distribution have been achieved because of its reputation for ethical practices and services; and research firm Gartner is the standard for IT intelligence due to its strong brand, scale, and analytical advantages. Act II: Scene 3. Invest in People One of the things I love about my job is meeting every day with executives of businesses that are changing our nation. We try to learn from these individuals. The curiosity and interest we express in their businesses is obvious from the questions we ask. We are also careful to listen for what isn’t being said. As we spoke about last year, we question everything. SLIDE: Question Everything We are supportive of executives who manage their businesses for long-term growth at the expense of short-term profits. You heard from four of them this morning. SLIDE: Executives Managements often tell us that our investment philosophy is different than that of most others. That’s because we invest in businesses not stocks. Most investors are concerned with the negative impact expenditures have on a company’s profits and share price in the near term. We are flattered when companies in which we have had long-term successful investments, thank us for investing with them! Act III. 6 Baron Capital. “Not throwing away my shot.” Alexander Hamilton. 1776. Baron Capital is celebrating its 34 th anniversary this year. And we still feel young, scrappy, and hungry. Act III: Scene 1. The Cast Hamilton was principled, honorable, ethical, and hardworking. At age 14, he wrote in a letter to a friend, “I would willingly risk my life, though not my character, to exalt my station.” SLIDE: Epitaph His Trinity Church gravestone’s epitaph reads: “Patriot of incorruptible integrity.” It has been our approach to build Baron Capital with individuals who share those values. SLIDE: Baron Castle Logo “In New York you can be a new man.” Baron Capital started with three of us. Linda, Susan Robbins, our health care analyst, and me. We are all still here. We now have 148 employees. SLIDE: Cast Many of them, like Hamilton, are immigrants. SLIDE: Flag 13% of Americans were not born in this country. Our firm has a greater percentage. We estimate 51 of our 148 employees were either not born in this country or are the children of immigrants. Hamilton’s biographer, Ron Chernow, explained the unusual success of Hamilton and other first and second generation Americans: “Ambitious orphaned boys do not enjoy the option of idleness.” SLIDE: Yorktown After leading the Continental troops at Yorktown, the decisive battle of the Revolutionary War, Hamilton high fives his friend Marquis de Lafayette. CLIP: “We get the job done!” “Immigrants! They DO get the job done.” Our firm’s executives are encouraged to hire talented, hardworking, “hungry” individuals…many with unusual stories…whether they were born here or elsewhere. It is particularly satisfying for me to come to my office every day to work with the great cast at Baron Capital which includes my two sons, David and Michael, who have increasingly important roles in our business. Act III: Scene 2. The Producer SLIDE: Exceptional Takes Time In 1790, America’s 13 states passed Hamilton’s Assumption Bill, which obligated our Federal government to assume Revolutionary War debts of the colonies. Hamilton argued, “Public credit is earned by good faith. States, like individuals, which live up to their obligations are respected and trusted–those that do not are not trusted.” America’s sovereign credit 13 years later was the highest rated in the world. SLIDE: Louisiana Purchase Were it not for America’s strong credit in 1803, Thomas Jefferson, the most determined opponent of the Assumption bill, could not have accomplished his crowning achievement as President, the Louisiana Purchase, which for $15 million doubled the size of the United States! By the way, those states are still red. Like Hamilton, Baron is obsessed with our reputation, keeping our word, and…doubling the size of our business! Act III: Scene 3. The Coda. Exceptional Takes Time – Wait for It Persistence is the common element in success. SLIDE: Sandy Koufax Before becoming one of the greatest pitchers ever, Sandy Koufax nearly quit baseball because he couldn’t control his fastball. After six years on the Dodger bench, backup catcher, Norm Sherry, advised him to “just try to throw the ball over the plate, Sandy. You’ve got enough swift to get hitters out.” When Sandy was 25-5 in 1963, Yankee catcher Yogi Berra said, “I can see how he won 25. I don’t understand how he lost 5.” SLIDE: Lincoln Abraham Lincoln was defeated in election after election, including three U.S. senate bids, before becoming one of our nation’s greatest Presidents. SLIDE: Picture of Jerry and Larry Jerry Seinfeld and Larry David could not even get television executives to read their pilot for “Seinfeld,” which became one of the biggest hits ever. “It was too Jewish,” was the early verdict. Jason Alexander who played a thinly veiled Larry David told Jerry, “No way will this be a hit. The number one show in America is ALF. If that’s number one, who’s going to watch this?” CLIP: Alf

December 31, 2016 Letter from Ron Businesses in which Baron invests generally take time to become exceptional. SLIDE: Exceptional Takes Time 73% of Baron Growth Fund’s assets have been held more than five years. The average annualized return of those stocks has been 17.1%! 42% of Baron Small Cap Fund’s assets have been held more than five years. The average annualized return of those stocks has been 19.6%! The Russell 2000 Growth Index has returned less than half that amount during those periods. We consider stocks we have owned for less than five years as early stage investments. We expect market returns during those periods and exceptional growth thereafter. Slow growth in the beginning can be a good thing. AUDIO: 2000-Year-Old Man I wonder if there is any footage of that. The 2000-year-old man proves the point. Exceptional takes time. There are no short cuts to becoming exceptional. Not as a person. Not as a nation. Not as a business. It took Lin-Manuel Miranda two years to write the first two songs of Hamilton! Exceptional just takes time. To close today, I want to share my favorite line from the play’s first song as rapped by Alexander Hamilton. “There’s a million things I haven’t done…Just you wait.” That’s exactly how I feel about America and Baron Capital. SLIDE: Bust of Hamilton Thank you, Alexander Hamilton. One more thing before Linda and I answer questions. There have been many humorous SNL political skits this year that I could have included in my speech. I did not since I don’t regard this election as funny. So instead, I’d like to leave you with one message…Please vote. Respectfully, Ronald Baron CEO and Chief Investment Officer The discussion of market trends and companies are not intended as advice to any person regarding the advisability of investing in any particular security. Some of our comments are based on current management expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from our expectations. Our views are a reflection of our best judgment at the time and are subject to change any time based on market and other conditions, and we have no obligation toupdatethem. Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectuses contain this and other information about the Funds. You may obtain them from the Funds’ distributor, Baron Capital, Inc., by calling 1-800-99BARON or visiting www.BaronFunds.com. Please read them carefully before investing. Portfolio holdings as a percentage of net assets as of December 31, 2016 for securities mentioned are as follows: Baron Asset Fund Baron Growth Fund Baron Small Cap Fund Baron Opportunity Fund Baron Partners Fund Baron Fifth Avenue Growth Fund Baron Focused Growth Fund Baron Real Estate Fund Baron Energy and Resources Fund Baron Global Advantage Fund Benefitfocus, Inc. 1.2 3.1 0.6* 3.8 1.3 0.9 The Charles Schwab Corp. 4.1 2.3 5.4* 2.4 CoStar Group, Inc. 1.3 3.4 6.1 10.2* 8.1 1.9 Douglas Emmett, Inc. 2.4 1.8* 1.8 Gartner, Inc. 6.3 4.9 5.0 5.6 3.2* IDEXX Laboratories, Inc. 6.5 3.4 3.6 5.7* Iridium Communications Inc. 1.6 4.4 Manchester United plc 1.4 2.4 3.7* 4.5 0.1 MSCI, Inc. 2.8 Tesla Motors, Inc. 4.4 11.6* 11.0 2.9 Under Armour, Inc. 3.3 0.9 3.0* 1.1 Vail Resorts, Inc. 5.0 6.3 7.3* 12.5 Zillow Group, Inc. 1.3 1.9 4.5* Baron Discovery Fund * % of Long Positions. At December 31, 2016, Baron International Growth Fund and Baron Emerging Markets Fund did not own any of the securities listed above. Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk. 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. 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. 7

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