| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| 9.7% | -1.6% | -0.9% |
| 2025 | 2024 |
|---|---|
| -0.9% | 13.3% |
Baron Small Cap Fund declined 1.56% in Q4 2025 and 0.66% for the full year, underperforming the Russell 2000 Growth Index by 278 basis points in the quarter and 1367 basis points for the year. The Fund's underperformance was primarily driven by style factors, with the market favoring non-profitable companies, low ROE businesses, and retail concept stocks while Quality Growth stocks remained out of favor. Top contributors included AI infrastructure plays like Vertiv Holdings and data center services company Legence, along with aerospace and defense names. Health Care underperformance due to lack of biotech exposure cost nearly 300 basis points of relative performance. The manager maintains conviction in the portfolio's high-quality holdings, noting that two-thirds of Fund assets are invested in stocks that have doubled since purchase. Looking ahead to 2026, the manager expects a solid setup with GDP growth acceleration, tame inflation, continued Fed easing, and AI-driven productivity gains providing a favorable backdrop for small-cap outperformance and multiple expansion.
Baron Small Cap Fund focuses on investing in high-quality, well-managed small-cap companies with strong competitive advantages and long-term growth potential, holding them for extended periods to benefit from business compounding and earnings growth.
The setup for 2026 is solid with expected GDP growth acceleration, tame inflation, continued Fed easing, and corporate productivity gains from AI adoption. This provides a very good backdrop for strong earnings growth and multiple expansion, especially for small caps. Small-cap companies are expected to grow faster than large caps going forward, which could lead to market broadening and leadership change.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Feb 5 2026 | 2025 Q4 | CGNX, CWA, FROG, GWRE, HLI, ICLR, IT, JBT, KNSL, KTOS, MTD, NEPT, NOVT, ODD, PLNT, RBC, RRR, SITE, TDG, VRT | AI, Data centers, defense, growth, Quality, small caps, technology | - | AI infrastructure buildout drove strong performance in holdings like Vertiv and Legence. JFrog benefited as customers leveraged generative AI to improve developer productivity, driving increased… |
| Nov 5 2025 | 2025 Q3 | BWIN, IT, KNSL, KTOS, LGN, NOVT, PAR, RRR, VRT | AI Infrastructure, Data centers, defense, quality growth, small caps | - | The fund highlights the tension between speculative rallies in unprofitable microcaps and its disciplined focus on quality small-cap compounders. Its holdings in industrial and AI-infrastructure… |
| Aug 5 2025 | 2025 Q2 | - | earnings, Founders, growth, innovation, small caps | - | The letter highlights small-cap growth companies benefiting from innovation, founder-led management, and long reinvestment runways. Near-term underperformance is attributed to market concentration in mega-caps rather… |
| Mar 31 2025 | 2025 Q1 | AZPN, BRP, GWRE, IT, KNSL, PAR, RDNT, TTD, VRT | - | - | - |
| Dec 31 2024 | 2024 Q4 | BWIN, FROG, GTLS, IBP, ICLR, INTA, NPO, VRT | - | - | - |
| Sep 30 2024 | 2024 Q3 | BRP, DAVA, DXCM, EWCZ, GCMG, GTLS, GWRE, IBTA, ICON, LOAR, VRT | - | - | - |
| Jul 27 2024 | 2024 Q2 | BWIN, GWRE, IBP, IBTA, KNSL, LOAR, PLNT, SITE, VRT | - | - | - |
| Apr 15 2024 | 2024 Q1 | DAVA, EXPO, FOXF, IBP, INTA, KNSL, NEOG, VRT | - | - | - |
| Jan 27 2024 | 2023 Q4 | FF0 GR, GTLS, IBP, IT, KNSL, NCNO, SKIN | - | - | - |
| Sep 30 2023 | 2023 Q3 | AZPN, CGNX, DRVN, FFO GR, GWRE, INDI, KNSL, LBRDA, VRT | - | - | - |
| Jul 30 2023 | 2023 Q2 | AZPN, KNSL, MRCY, SITE, SKIN, VRT | - | - | - |
| Mar 31 2023 | 2023 Q1 | ALTR, AXNX, CLVT, DAVA, FND, GWRE, IBP, IT, RPAY, SITE | - | - | - |
| Dec 31 2022 | 2022 Q4 | ASGN, DXCM, EWCZ, GDYN, GTLS, INSP, IT, NEOG, PLNT, TTD, VRT | - | - | - |
| Sep 30 2022 | 2022 Q3 | AVNT, AXNX, AZPN, CAKE, CLVT, GDYN, HLLY, ICLR, IT, KNSL, MRCY, RPAY, TTD | - | - | - |
| Jun 30 2022 | 2022 Q2 | ASGN, CGNX, COLD, DRVN, GDYN, GTLS, IT, SHLS, SPT | - | - | - |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2025 Q4 |
AIAI has been integrated into RGA's research process through tools like NotebookLM, Gems in Gemini, and Claude Code. The firm views AI as a force multiplier for human judgment rather than a replacement, emphasizing the Kasparov Law principle. They believe the market narrative around AI displacement is swinging to unhelpful extremes, creating investment opportunities. |
Machine Learning Automation Software Productivity Innovation |
Data CentersSupply constraints curtailing infrastructure buildout rate, but compute capacity is being used immediately upon coming online. This differs from dot-com bubble when dark fiber was installed ahead of need. Labor, power and land shortages creating bottlenecks. |
Supply Constraints Utilization Bottlenecks Infrastructure | |
Defense SpendingThe entire world is rapidly rearming off an extremely low base of defense spending. This exposure focuses on companies that make armaments for nation state security and materially outperformed for the year. |
Defense Armaments Rheinmetall Palantir RTX | |
Small CapsSmall caps getting strong start in 2026 supported by easing monetary conditions and constructive fiscal backdrop. Small caps more sensitive to economic cyclicality which is overdue for expansion. Expected to grow at better pace than large caps in 2026 after long period of underperformance. |
Value Growth Cyclical Monetary Policy Fiscal Policy | |
| 2025 Q3 |
AIAI has been integrated into RGA's research process through tools like NotebookLM, Gems in Gemini, and Claude Code. The firm views AI as a force multiplier for human judgment rather than a replacement, emphasizing the Kasparov Law principle. They believe the market narrative around AI displacement is swinging to unhelpful extremes, creating investment opportunities. |
Machine Learning Automation Software Productivity Innovation |
| 2025 Q2 |
SmallCaps |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
|---|---|---|---|---|---|---|---|---|---|---|
| No Elevator Pitches found | ||||||||||
| TICKER | COMMENTARY |
|---|---|
| CGNX | Cognex, a US listed machine visions systems supplier, had a steady set of results but issued relatively cautious guidance. The company's business is linked to capital investment cycles in its end markets, and while some are buoyant, others, like the automotive industry, remain subdued. We see a compelling long-term growth opportunity as machine vision proliferates across industries and AI based vision algorithms democratise this technology, making it accessible and feasible for more and smaller industrial users. We think that when capital investment recovers many more industrial machines will be equipped with vision, and Cognex will be a leading vendor. We added to our position in the quarter. |
| CWA | Clearwater Analytics Holdings, Inc., a provider of portfolio accounting and reporting software, reported solid third quarter 2025 earnings and raised full year guidance. Clearwater also announced that a consortium of private equity investors struck a deal to acquire the company for $24.55 per share, a 55% premium from the lows in early November, and 10% lift from the prior day closing price. We are disappointed in the sale price and decision to sell the company as we strongly believe Clearwater has a meaningful competitive advantage which can lead to several years of compounding revenues at very attractive margins, resulting in a significantly higher stock price over time, even applying a conservative multiple. |
| FROG | Lastly was JFrog Ltd., the portfolio's strongest performer this quarter. JFrog manages the software supply chain and enables organizations to securely deliver software updates across their enterprises. Demand for security increased following the recent NPM supply chain attack. JFrog's security add-on—which secures open-source packages before organizations onboard them—has seen significant pipeline growth, driving a 32% rally in its shares. |
| GWRE | Shares of P&C insurance software vendor Guidewire Software, Inc. declined during the quarter following strong gains earlier in the year, as the broader software sector came under pressure. After a multi-year transition period, we think Guidewire's cloud migration is largely complete. We believe cloud will be the sole path forward, with annual recurring revenue benefiting from new customer wins and migrations of existing customers to InsuranceSuite Cloud. |
| HLI | global investment bank Houlihan Lokey, Inc. presented a drag in Financials. |
| ICLR | We also decided to exit our relatively small position in ICON plc. We remain optimistic about Icon's long-term prospects but growth for the company in the short to intermediate term still appears challenged to us. Without the conviction to add to our existing weight we feel it is better to reallocate to other opportunities where the business momentum is stronger. |
| IT | Gartner is a global leader in research services, with a long history of delivering valuable insights and data to business and technology leaders. In our view, the company has the best brand in IT research, supported by its scale and a compelling customer value proposition. These advantages have driven a long history of strong organic growth and robust free-cash-flow conversion. The stock price has declined meaningfully from recent highs due to investor concerns surrounding AI-related disruption. We believe these concerns are overstated. In our view, Gartner is well-positioned to reaccelerate organic growth due to continued high customer engagement and the large opportunity to sell to new and existing customers. We took advantage of the opportunity to buy shares in this well-managed company at a bargain price. |
| KNSL | Shares of specialty insurer Kinsale Capital Group, Inc. fell during the quarter due to concerns about moderating growth amid a cyclical slowdown for the property and casualty insurance industry. While third-quarter revenue growth improved sequentially, the pace of improvement was more modest than suggested by monthly data from state insurance commissioners. |
| KTOS | Kratos Defense & Security Solutions is a defense technology company focused on affordable unmanned systems, hypersonics and rocket systems, and satellite command-and-control, which we believe are increasingly aligned with U.S. and allied priorities around rapid fielding and scalable production. Kratos has invested deliberately in parts of the defense supply chain that we believe are increasingly critical to modern warfare and are now reaching an inflection point. Funding is beginning to flow into drone programs, demand for turbojet and turbofan engines is rising across unmanned aircraft and missile systems, and the company's C5ISR and space businesses continue to grow rapidly. While the company reported strong fiscal third-quarter operating results, shares detracted after management's fiscal fourth-quarter revenue outlook and free-cash-flow expectations came in below analyst estimates. Sentiment was further pressured by management commentary that cash receipts were being delayed due to the U.S. government shutdown, as well as ongoing cost headwinds tied to certain legacy unmanned contracts, which weighed on confidence in near-term margins and cash conversion. |
| MTD | Mettler-Toledo's stock rebounded in the fourth quarter reflecting the company's ability to successfully navigate substantial tariff and research budget pressures while maintaining strong growth and margin expansion in key segments. We believe Mettler should be well positioned to capitalize on global trends in automation, digitalization, and nearshoring which should drive mid-single digit revenue and low teens EPS growth through 2030. |
| NEPT | One such IPO was Neptune Insurance Holdings Inc., an underwriter of private flood insurance. Neptune is the leader in private flood insurance and utilizes a proprietary underwriting model combined with easy-to-use technology, which enables insurance agents to offer flood insurance. Flood insurance in the U.S. is largely dominated by the government-run National Flood Insurance Program (NFIP). Neptune offers a private market option. Compared to the NFIP, Neptune is faster and easier for insurance agents to quote, which leads to agents quoting and pricing more business through Neptune. Accurate data-based pricing allows Neptune to win business outside of flood zones where insurance is not mandatory, but now reasonably priced for the risk. In the third quarter, over 80% of new business sales came from non-mandatory purchases. Neptune is an MGA (Managing General Agent), meaning that it doesn't bear the risk of losses, which makes the business very capital efficient. Instead, the company writes business on behalf of seven capacity providers, who in turn pay Neptune commissions for sourcing and underwriting the business. Because of Neptune's speed of quoting, ease-of-use, and competitive pricing, the company has been able to sign up over 80,000 insurance agencies to use its product and has grown to 260,000 policies. Neptune has a large opportunity to penetrate the 25 million properties that the company considers high risk and take share from the NFIP, which is raising its rates following years of underpricing. We think this can support 15% to 20% EBITDA growth, with the potential for additional upside should the government take action to reform the NFIP and reduce its role in the flood insurance market, since the program has lost $36 billion since 2005 and relies on borrowing from the U.S. Treasury to remain solvent. |
| NOVT | Novanta (NOVT) supplies proprietary precision components and systems used in mission-critical medical and advanced industrial applications. |
| ODD | ODD is a consumer technology platform built to transform the global beauty and wellness industry. ODD builds and scales digital-first brands with artificial intelligence, molecular discovery, computer vision, and a data science-based online platform. The company monetizes all products on a direct-to-consumer basis and has no wholesale exposure. ODD has scaled their business quickly, achieving greater than 20% operating margins while still growing their revenue base by greater than 20% to an estimated $800 million in 2025. |
| RBC | RBC Bearings, Inc. (RBC) manufactures engineered precision bearings and related products for customers in the aerospace, defense, and industrial markets. It is a market leader with a strong reputation for technical capabilities, product quality, and on-time delivery. RBC outperformed in 4Q as its quarterly results beat consensus estimates on both revenue and EPS. Its Aerospace and Defense business (A&D, 44% of total revenue) was particularly strong, essentially 'firing on all cylinders.' Management expects strong growth in its A&D backlog and is in the process of adding capacity to meet demand. Growth in its Industrial business (56% of total revenue) remains sluggish, but management has significantly improved the profit margins of this business and is now in the process of implementing growth initiatives. We continue to like RBC's leadership team, well-established strategic playbook, as well as its opportunities for growth and capital deployment. |
| RRR | Red Rock Resorts, Inc., a casino owner and operator focused on the Las Vegas Locals market, spent over $800 million developing a new elite property, Durango, for this market. It successfully completed Durango and is now generating robust returns alongside strengthening performance across six core Las Vegas Locals casinos. The company continues to report strong visitation and robust slot and table game play, along with improving activity from uncarded and non-rewards customers. The company's initiative of opening its Durango property is generating robust returns, and performance across the company's six core casinos has strengthened as the Las Vegas Locals market absorbs Durango's extra supply. Given the strength of the market, management continues to ramp up capital investment, which we believe should support ongoing revenue and EBITDA growth over the next several years. The stock appreciated 39.4% in 2025. |
| TDG | TransDigm is a leading aerospace parts supplier that designs and produces highly engineered components for almost every commercial and military aircraft in service today. TransDigm has spent the last 30 years building a portfolio of hundreds of thousands of parts with these characteristics. And while each part breaks unpredictably and infrequently, by assembling this vast portfolio, they have essentially created a collection of near monopolies that create an incredibly smooth and high pricing power annuity stream. |
| VRT | I was short what I think are low quality names that have benefited from a huge Capex run up in datacenters but offer services that will get commoditized and are trading on very high earnings multiples on top of really above historical margins (TSSI STRL CLS ORCL VRT TGEN). |
| Ticker | Put/Call | Amount Bought | Shares Bought | % Change | Weight % |
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| No Recent Buys Data | |||||
| Ticker | Put/Call | Amount Sold | Shares Sold | % Change | Weight % | Status |
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| No Recent Sells Data | ||||||
| Industry | Prev Quarter % | Current Quarter % | Change |
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| No industry data available | |||
