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Baron Funds

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Baron

Baron Emerging Markets Fund proposed policies be endorsed by Congress or pursued by executive order, we believe that a further marked rise in interest rates and the dollar could ensue, which at some point may result in a choke point on the global economy. In fact, we are becoming increasingly concerned that enthusiasm over the U.S. and global growth outlook may already have peaked as a result of Fed tightening, market-based tightening implied by the reversal in post- Brexit yield declines, and the beginning of tightening measures in China. Such a phenomenon would be consistent with the established post-crisis pattern, where expectations regarding economic and interest rate normalization rise, leading ultimately to disappointment and concern over the efficacy of policymakers. While our broad conclusion is that it will take time for the policy outlook and implications to crystallize, and that therefore a wide range of potential outcomes remains possible, we are confident that new themes and investment opportunities will emerge. Should Trump’s ultimate policy path remainachallengefortheemergingmarkets,webelievethesemarketsare far better prepared to weather such a development than they were just a few years ago. First, we continue to believe that emerging market corporate earnings have begun a cyclical recovery. Second, we do not believe oil, other commodity prices and/or emerging market currencies will return to the lows of early 2016, and we are confident that the longer-term structural reforms and political redirection now underway in countries such as India, Indonesia, Brazil, Argentina, Chile, China, and Mexico will provide support and ultimately restore productivity and value creation. China, always a key barometer of emerging market health, remains stable in the face of widespread negative sentiment, with various signs of improving economic activity. We recognize, however, that Chinese authorities have begun to unwind some stimulus measures and we are monitoring key variables including trade tensions and capital flows as well as financial sector funding costs. We remain optimistic regarding the long-term potential for the high quality growth businesses in whichweinvest,andwelookforwardtoournextupdate. Sincerely, Michael Kass 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. In addition to the general stock market risk that securities may fluctuate in value, investments in developing countries may have increased risks due to a greater possibility of: settlement delays; currency and capital controls; interest rate sensitivity; corruption and crime; exchange rate volatility; and inflation or deflation. The Fund invests in companies of all sizes, including small and medium sized companies whose securities may be thinly traded and 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 Emerging Markets Fund by anyone in any jurisdiction where it would be unlawful under the laws of that jurisdiction to make such offer or solicitation. 70

December 31, 2016 Baron Energy and Resources Fund Dear Baron Energy And Resources Fund Shareholder: Performance In our 2014 year-end letter we characterized the year with the Dickens quote, “It was the best of times, it was the worst of times.” As we look back at 2016, we would rework that quote and say that 2016 was “the worst of times and it was the BETTER of times.” We do not think 2016 was the best of times because we believe that even better times are ahead for our energy and resource-related companies over the next several years. It is our view that in 2016 we saw the bottom of the energy recession that began in 2014, as well as the beginning of a potential multi-year cyclical recovery. Oil prices and equity prices bottomed in February 2016 and oilfield activity, investment, and earnings bottomed in the middle of the year. In addition, we also saw price bottoms in industrial and precious metals and a variety of other commodities during 2016, which coupled with the recovery in oil and natural gas prices, led to robust stock performance across much of the energy and resource-related landscape in 2016. We will cover our outlook in more detail later in this letter but in short: as we look into 2017, we are seeing more bullish signs for accelerating economic growth, which combined with the major policy shift enacted by OPEC in the fourth quarter, will lead to an oil market in which demand exceeds supply and inventory draw-downs create tailwinds for higher prices than we have experienced in recent years. This bullish backdrop is expected to lead to rising cash flows for energy companies and rising levels of capital investment for the first time since 2014. Investment will be most pronounced in North America, where short-cycle unconventional oil development projects will garner the lion’s share of incremental investment; while international and offshore oil & gas-related investments remain challenged. This should create a more fertile operating environment for nearly any company operating in the energy value chain in North America including exploration & production companies; oilfield service, equipment and drilling companies; midstream service providers; and refining & marketing companies. JAMES STONE PORTFOLIO MANAGER Table I. Performance † Annualized for periods ended December 31, 2016 Baron Energy and Resources Fund Retail Shares 1,2 Baron Energy and Resources Fund Institutional Shares 1,2 Retail Shares: BENFX Institutional Shares: BENIX R6 Shares: BENUX S&P North American Natural Resources Sector Index 1 S&P 500 Index 1 Three Months 3 3.69% 3.76% 5.02% 3.82% One Year 28.02% 28.31% 30.87% 11.96% Three Years (8.71)% (8.52)% (3.66)% 8.87% Five Years and Since Inception (December 30, 2011) (2.04)% (1.83)% 1.26% 14.66% Our performance in 2016 can be characterized as good, but not great, and that is tough to say in a year in which Baron Energy and Resources Fund (the “Fund”) increased in value by 28.31% (Institutional Shares). Our enthusiasm is tempered by the fact that the Fund underperformed its 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 1.58% and 1.29%, respectively, but the net annual expense ratio was 1.35% and 1.10% (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 indexes are unmanaged. The S&P North American Natural Resources Sector Index measures the performance of U.S.-traded natural resources related stocks 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. 2 The performance data in the table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or redemptions of Fund shares. 3 Not annualized. 71

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