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1 year ago

Baron Funds

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Baron

Baron Energy and Resources Fund U.S. Energy renaissance is alive and well: As we look at 2017 and beyond, we continue to believe that the best opportunities to profit from the recovery lie with U.S.-based E&P companies that have leading positions in shale plays where oil is the dominant commodity being sought and produced, such as those in the Permian and Anadarko Basins, for example. We think there is still considerable opportunity for these companies to benefit from growth in the ultimate size of the recoverable resource as more zones are delineated, spacing patterns are optimized, and completion techniques are fine-tuned. As a consequence, companies in these plays should post leading production and cash flow growth over the next several years and also see increases in net asset value. There has also been significant M&A activity in the domestic oil market in the past year with a combination of asset and corporate transactions that have improved the competitive positions of many of the companies in the Fund and helped to highlight their values as well. We expect that this will continue in 2017. The improved fortunes of U.S. shale oil and natural gas producers in 2017 will also have positive knock-on effects for those companies that benefit from the growth in E&P capital investment (oil service, drilling, and equipment companies) and those companies that also stand to benefit from the reversal of U.S. production volume from the downward trend of the past year or more to a renewed upward trend (midstream gathering, processing, and transportation companies). We foresee that the recovery in the U.S. rig count that began last summer will continue in 2017 as a result of higher industry cash flows and increased access to capital markets. The improvement in drilling and subsequent completion activity will lead to an earnings rebound for oil service, drilling, and equipment companies with exposure to the U.S., while those with businesses that are more focused offshore or overseas will likely experience a slower recovery or none at all in the next 12 months. Oil and gas gathering, processing, and transportation companies should also experience higher throughput volumes and a demand for more investments in such capacity. The growth in volume and the renewed opportunity to invest capital should boost midstream earnings and distributions and set the stage for additional growth beyond 2017. These three areas of the energy industry (E&P, oil service, and midstream) are the dominant areas for investment in our Fund and are likely to stay that way in 2017 as the expected industry recovery unfolds. Equity investors remain significantly underweight in their exposures to the Energy sector and, to a lesser extent, resource-related businesses: Investor surveys continue to show that while institutional investors are less skeptical about the outlook for energy and resource-related stocks, and are less underweight than last year, they are still cautiously positioned toward these areas and remain underweight relative to historical norms. We think this means that there is still a significant amount of capital remaining on the sidelines that could be put to work in the areas in which the Fund invests. Furthermore, it is possible that index weightings will get revised upward over time, adding more pressure for both active and passive investors to get involved. The Energy sector has been one of the least correlated of the major sub-sectors of the S&P 500 Index to the overall performance of the S&P 500 Index over the past five years, so an allocation to a dedicated energy and resource fund may provide a differentiated return and diversification for investors. I am pleased to have had the opportunity to share my thoughts with you in this letter. Thank you for having the confidence to join me in investing in Baron Energy and Resources Fund. Sincerely, James Stone 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 Fund is non-diversified, which means the volatility of the Fund’s returns may increase and expose the Fund to greater risk of loss in any given period. Energy companies can be affected by fluctuations in energy prices and supply and demand of energy fuels. Resources industries can be affected by international political and economic developments, the success of exploration projects, and meteorological events. 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 Energy and Resources Fund by anyone in any jurisdiction where it would be unlawful under the laws of that jurisdiction to make such offer or solicitation. 76

December 31, 2016 Baron Global Advantage Fund Dear Baron Global Advantage Fund Shareholder: Performance The Baron Global Advantage Fund (the “Fund”) declined 7.2% (Institutional Shares) during the December quarter and 0.9% in 2016, which compared to a loss of 2.3% and a gain of 3.3% for the MSCI ACWI Growth Index, respectively. The portfolio performed particularly poorly during the quarter which led to a disappointing year. There was nothing terribly unusual or exciting going on in the first five weeks of the quarter. Illumina and FireEye missed earnings again and their shares declined, while Facebook and JUST EAT had excellent results and our newer investments in BlackLine, First Republic Bank, and Noble Midstream (described later in this letter) were paying immediate dividends. As we approached the U.S elections, we trailed the index modestly for the quarter, but were well ahead over every time frame that mattered and thought we were on our way to a good year. 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 predominantly domestic cyclical and “value” 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 investors selling Amazon, Facebook, Google, and other global growth companies. In the first nine trading days after the election, the S&P 500 index climbed 2.9%, while the MSCI EM IMI Index declined 5.9% (we are heavily overweight the emerging markets and have been since the inception of this Fund). China was a special target of President Trump during his election campaign. Pointing to China’s trade surplus with the U.S., he said he would raise tariffs to 45% on Chinese-made goods. Alibaba Group, Naspers (though based in South Africa, it is heavily correlated to the fate of its largest asset–shares of China-based Tencent), and Ctrip all declined double digits and were amongst our top detractors, despite the fact, that none of them make goods or export any goods into the U.S. We have no particular insight into what the current administration will attempt to accomplish, much less into what it will actually be able to achieve. Investors are bombarded with information and are overstimulated with news, real and fake, and, combined with low commissions and the ease of moving in and out of index funds and ETFs, they have long ago developed an itchy finger. And now we welcome a “tweeting president.” We think the market is in for a lot of volatility, but in fairness, this is hardly a new development and the overall investment backdrop remains favorable in our view. We are off to a good start in 2017, having erased all of the fourth quarter losses and most of the relative performance shortfall in the first 17 trading days of the year. ALEX UMANSKY PORTFOLIO MANAGER Retail Shares: BGAFX Institutional Shares: BGAIX R6 Shares: BGLUX We try to find what we believe are unique, well-managed, competitively advantaged platform businesses with network effects and proven ability to re-invest capital at high rates of return. We invest for the long term and do not try to figure out the timing of interest rate hikes, foreign exchange fluctuations, or to position the Fund tactically for the periods when value does better than growth, much less for election outcomes. We believe this is the best way to create value for our shareholders. Table I. Performance † Annualized for periods ended December 31, 2016 Baron Global Advantage Fund Retail Shares 1,2 Baron Global Advantage Fund Institutional Shares 1,2 MSCI ACWI Growth Index 1 MSCI ACWI Index 1 Three Months 3 (7.22)% (7.16)% (2.34)% 1.19% One Year (1.15)% (0.93)% 3.27% 7.86% Three Years 0.70% 0.91% 3.40% 3.13% Since Inception (April 30, 2012) 7.14% 7.37% 7.64% 7.71% Performance listed in the table above is net of annual operating expenses. Annual expense ratio for the Retail Shares and Institutional Shares as of December 31, 2015 was 3.19% and 2.89%, but the net annual expense ratio is 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 indexes are unmanaged. The MSCI ACWI indexes cited are unmanaged, free float-adjusted market capitalization weighted indexes reflected in US dollars. The MSCI ACWI Growth Index Net USD measures the equity market performance of large and mid cap growth securities across developed and emerging markets. The MSCI ACWI Index Net USD measures the equity market performance of large and mid cap securities across developed and emerging markets. The indexes and the Baron Global Advantage Fund include reinvestment of dividends, net of foreign withholding taxes, 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 redemption of Fund shares. 3 Not annualized. 77