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| # | Fund | Strategy | Style | Geography | AUM | Latest Letter |
|---|---|---|---|---|---|---|
As of Oct 27, 2026
In the third quarter of 2026, Baron Discovery Fund declined 4.16% net of fees for its Institutional Shares, outperforming the Russell 2000 Growth Index Benchmark by 5.23%. Year-to-date, the Fund gained 1.96% net of fees, trailing the Benchmark's 10.71% return. Relative year-to-date underperformance was primarily driven by industry and style factor headwinds, including underexposure to the Momentum factor (-3.59% impact) and crowded AI infrastructure winners (-1.72% impact), alongside overexposure to software and other industries perceived as AI losers (-2.89% impact). Conversely, bottom-up stock selection remained strong, contributing 2.02% in positive alpha year-to-date as the AI momentum trade unwound and fundamentals reasserted themselves across beaten-down sectors. The investment team emphasized a structural inflection point in market regime, arguing that peak exuberance in first-half AI picks-and-shovels plays mirrors late-1990s tech bubble dynamics. The Fund maintains a disciplined posture toward long-term secular compounders, avoiding cyclical infrastructure trades vulnerable to capacity overbuild and tightening credit financing spreads. Performance leadership was driven by a powerful rebound in enterprise software and idiosyncratic healthcare turnarounds, which collectively contributed 4.33% to quarterly performance, reinforcing the manager's core thesis on overlooked business models holding durable competitive advantages. Key portfolio actions during the quarter included initiating new core equity positions in high-return franchisor Jersey Mike's Subs, digitally native apparel innovator Reformation, and proprietary defense merchant supplier Lyntris at its IPO. The Fund also added to aerospace manufacturer Karman Holdings and Accelevation Holdings. Capital was recycled from fully valued names, including an outright liquidation of Wingstop and opportunistic profit-taking trims in high-performing core holdings CareDx and Rubrik following exceptional share price appreciation.
Outperformance across full market cycles is achieved by investing in small-cap secular growth companies with sustainable competitive advantages, exceptional management, and durable unit economics while actively managing downside risk and avoiding crowded, cyclical momentum trades.
The managers anticipate that the rotation out of crowded AI infrastructure momentum stocks into high-quality software, healthcare, and defense will continue to drive fund performance. They expect sustained fundamental outperformance from secular growth compounders operating with clear competitive advantages and pricing power.
Moderate Conviction Bullish
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