Baron Discovery Fund Fact Sheet

Transcription

1 Institutional Shares (BDFIX) Baron Discovery Fund Fact Sheet BAMCO, Inc., Registered Investment Adviser

2 Fund may not achieve its objectives. Portfolio holdings may change over time. The Fund s historical performance was impacted by gains from IPOs and/or secondary offerings, and 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. Definitions (provided by BAMCO, Inc.): The indexes are unmanaged. The Russell 2000 Growth Index measures the performance of small-sized U.S. companies that are classified as growth 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. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell is a trademark of Russell Investment Group. The Morningstar US Fund Small Growth Category Average is not weighted and represents the straight average of annualized returns of each of the funds in the Small Growth category. The Fund has been included in the category since inception. As of 6/30/2017, the category consisted of 720, 702, 678, and 599 funds for the 3-month, year-to-date, 1-, and 3- year periods Morningstar, Inc. All Rights Reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Standard Deviation (Std. Dev.): measures the degree to which a fund s performance has varied from its average performance over a particular time period. The greater the standard deviation, the greater a fund s volatility (risk). Sharpe Ratio: is a risk-adjusted performance statistic that measures reward per unit of risk. The higher the Sharpe ratio, the better a fund s risk adjusted performance. Alpha: measures the difference between a fund s actual returns and its expected performance, given its level of risk as measured by beta. Beta: measures a fund s sensitivity to market movements. The beta of the market is 1.00 by definition. R-Squared: measures how closely a fund s performance correlates to the performance of the benchmark index, and thus is a measurement of what portion of its performance can be explained by the performance of the index. Values for R-Squared range from 0 to 100, where 0 indicates no correlation and 100 indicates perfect correlation. Tracking Error: measures how closely a fund s return follows the benchmark index returns. It is calculated as the annualized standard deviation of the difference between the fund and the index returns. Information Ratio: measures the excess return of a fund divided by the amount of risk the fund takes relative to the benchmark index. The higher the information ratio, the higher the excess return expected of the fund, given the amount of risk involved. Upside Capture: explains how well a fund performs in time periods where the benchmark s returns are greater than zero. Downside Capture: explains how well a fund performs in time periods where the benchmark s returns are less than zero. EPS Growth Rate (3-5 year forecast): indicates the long-term forecasted EPS growth of the companies in the portfolio, calculated using the weighted average of the available 3-to-5 year forecasted growth rates for each of the stocks in the portfolio provided by FactSet Estimates. The EPS Growth rate does not forecast the Fund s performance. Price/ Earnings Ratio (trailing 12-months): is a valuation ratio of a company s current share price compared to its actual earnings per share over the last twelve months. Price/Book Ratio: is a ratio used to compare a company s stock price to its tangible assets, and it is calculated by dividing the current closing price of the stock by the latest quarter s book value per share. Price/Sales Ratio: is a valuation ratio of a stock s price relative to its past performance. It represents the amount an investor is willing to pay for a dollar generated from a particular company s operations. Price/Sales is calculated by dividing a stock s current price by its revenue per share for the last 12 months. Historical portfolio characteristics are provided by Compustat and FactSet Fundamentals. Weighted Harmonic Average: is a calculation that reduces the impact of extreme observations on the aggregate calculation by weighting them based on their size in the fund. This information does not constitute an offer to sell or a solicitation of any offer to buy securities by anyone in any jurisdiction where it would be unlawful under the laws of that jurisdiction to make such offer or solicitation. This information is only for the intended recipient and may not be distributed to any third party. Not bank guaranteed, may lose value, not FDIC insured.

3 Portfolio Facts and Characteristics Russell 2000 Fund Growth Index # of Equity Securities / % of Net Assets 61 / 92.9% - Turnover (3 Year Average) 81.95% - Median Market Cap $1.42 billion $0.93 billion Weighted Average Market Cap $1.70 billion $2.22 billion EPS Growth (3-5 year forecast) 19.0% 14.2% Price/Earnings Ratio (trailing 12-month)* Price/Book Ratio* Price/Sales Ratio* * Weighted Harmonic Average Source: FactSet PA Compustat, FactSet and BAMCO. Internal valuations metrics may differ. R6 Shares are also available for this Fund. Performance Based Characteristics² 3 Years Since Inception Std. Dev. (%) - Annualized Sharpe Ratio Alpha (%) - Annualized Beta R-Squared (%) Tracking Error (%) Information Ratio Upside Capture (%) Downside Capture (%) Top 10 Holdings % of Net Assets MACOM Technology Solutions Holdings, Inc. 4.1 Qualys, Inc. 3.2 General Communication, Inc. 3.1 Teladoc, Inc. 2.9 Novanta Inc. 2.9 Myriad Genetics, Inc. 2.7 The Trade Desk 2.7 Mercury Systems, Inc. 2.6 Liberty Expedia Holdings, Inc. 2.4 Red Rock Resorts, Inc. 2.3 Total 28.9 GICS Sector Breakdown¹ Top 15 GICS Sub-Industry Breakdown¹ Colors of Sub-Industry bars correspond to sector chart above. Investment Strategy The Fund invests primarily in small-sized U.S. companies. It invests in a select number of high growth businesses that tend to be in an early phase of their lifecycles. Diversified. Portfolio Managers Laird Bieger and Randy Gwirtzman have been portfolio managers of the Fund since inception. Laird joined Baron in 2000, and Randy joined Baron two years later, in Laird and Randy each have 20 years of research experience. Please visit our website, for a complete description of Laird s and Randy s experience and education. Investment Principles Long-term perspective allows us to think like an owner of a business Independent and exhaustive research is essential to understanding the long-term fundamental growth prospects of a business We seek appropriately capitalized open-ended growth opportunities, exceptional leadership, and sustainable competitive advantages Purchase price and risk management are integral to our investment process Fund Facts Inception Date September 30, 2013 Net Assets $ million Institutional Shares CUSIP Gross Expense Ratio (as of FYE 09/16) 1.49% Less: Reimbursement of Expenses by Adviser (as of FYE 09/16) (0.39)% Net Expense Ratio (as of FYE 09/16) 1.10% Risk/Return Comparison² Specific risks associated with investing in smaller companies include that the securities may be thinly traded and more difficult to sell during market downturns. Even though the Fund is diversified, it may establish significant positions where the Adviser has the greatest conviction. This could increase volatility of the Fund s returns. 1 - Industry sector or sub-industry group levels are provided from the Global Industry Classification Standard ( GICS ), developed and exclusively owned by MSCI, Inc. ( MSCI ) and Standard & Poor s Financial Services LLC ( S&P ). All GICS data is provided as is with no warranties. The Adviser may have reclassified/classified certain securities in or out of a sub-industry. Such reclassifications are not supported by S&P or MSCI. 2 - Source: FactSet SPAR. Except for Standard Deviation and Sharpe Ratio, the performance based characteristics above were calculated relative to the Fund's benchmark.

4 Performance as of 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 or call BARON. You should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. The prospectus and summary prospectus contain this and other information about the Fund and can be obtained from the Fund's distributor, Baron Capital, Inc., by calling BARON or visiting Please read them carefully before investing. Total Returns(%) Annualized Returns(%) 2nd Q 2017 Year to Date 1 Year 3 Years 5 Years 10 Years Since Inception 9/30/2013 Return + Return + Return + Return + Return + Return + Return + BDFIX - Institutional Shares N/A N/A Russell 2000 Growth Index N/A N/A S&P 500 Index N/A N/A Morningstar Small Growth Category Average N/A N/A N/A The blue shading represents Fund outperformance vs. the corresponding benchmark. The yellow shading represents underperformance. Historical Performance Calendar Year %¹ 1 - Performance information for 2013 is from its inception date 9/30/2013 to 12/31/ BDFIX - Institutional Shares Russell 2000 Growth Index S&P 500 Index

5 Review and Outlook Innovation distinguishes between a leader and a follower - Steve Jobs We believe that this quote by the iconic leader of Apple encapsulates the qualities we look for in the management teams in which we invest, and in the business strategies they pursue. We believe Mr. Jobs constant search for excellence is a good analogy to our investment process for Baron Discovery Fund, which values not only the products and services provided by the companies we own, but also the honesty, integrity and competence of the managers who run them. For our long-term investment process, it is not enough to find a business that we believe meets all of our requirements (large market opportunities, a strong operational plan, real competitive advantages, a solid balance sheet, etc.), we also must be able to build a trust-based relationship with the managers of those businesses. We mention this concept because we believe it helps to understand the current nature of the markets, where we might be headed, and how we intend to manage the Fund in the near, medium, and long term. The Fund had a strong second quarter, appreciating 11.60% during the period. Investments in Information Technology (IT), Consumer Discretionary, and Health Care contributed the most to performance. Materials, Energy, and Telecommunication Services holdings detracted. IT s contribution was largely attributable to semiconductor holdings Everspin Technologies, Inc., Impinj, Inc., and MACOM Technology Solutions Holdings, Inc. Everspin and Impinj were the two largest contributors to Fund performance, while MACOM s stock price was buoyed by strong earnings results. Performance of the Consumer Discretionary sector was led by Nord Anglia Education, Inc., which was sold late in the quarter after the company agreed to be acquired. Despite mixed results among the Fund s Health Care holdings, contributors outweighed detractors. Strong performers included two more acquisition targets, Novadaq Technologies Inc. and The Spectranectics Corporation. The Fund s one Materials holding, a company that services the oil industry, and two Energy holdings all suffered from lower oil prices in the quarter. Since we do not believe we can time the markets, we strive to lessen return volatility to the extent we can by adhering to a strict valuation discipline. This is how we respond to the inevitable what do you think about the valuation of the market? inquiry. We trim or sell investments when the market has bid their prices beyond our medium-term expectations. We then use proceeds from these sales to buy new investments in what we believe are underappreciated growth businesses that are undervalued by the market. Because we are always dynamically evaluating our investments, we believe there are few periods where our overall portfolio is overvalued. Top Contributors/Detractors to Performance for the Quarter Ended Contributors Everspin Technologies, Inc. designs and manufactures STT- MRAM, a new memory storage method based on magnetic resistance. Shares of Everspin rose in the quarter after several of the company s designs were sold to solid-state drive manufacturers that produce electronic devices for data storage. MRAM has the potential to replace DRAM, which uses capacitors instead of magnetic properties and has grown into a multi-billion dollar market. We retain our long-term investment thesis due to Everspin s disruptive technology and, in our view, significant market opportunity. Impinj, Inc. is the global leader in passive ultra-high-frequency radio frequency identification, with over 60% global market share. Its chips are used to connect physical items to the digital world. Impinj had a strong quarter based on continued adoption of its products across industries. With six billion out of one trillion potential items connected, we believe Impinj has a long runway of growth opportunity ahead. The company benefits from accelerating adoption and significant barriers to entry as designing and building a comparable chip is costly and complex. The Trade Desk is the leading internet advertising Demand Side Platform. The company enables advertising agencies to more efficiently purchase online advertising through PC, mobile, and online video channels. Shares were up based on strong first quarter results and a positive outlook for We remain positive on shares of The Trade Desk as the company has only an estimated 10% share in the $10 billion programmatic advertising market, which is a small but growing subset of the $640 billion spent on global advertising annually. Detractors Cerus Corporation is a developer of an FDA- and EU-approved device that deactivates pathogens such as viruses and bacteria in donated blood. Current regulatory approvals cover use of the Cerus device for platelets and plasma from donated blood. Shares slipped in Q2 as Cerus had a component supply issue. We retain conviction. We believe growth prospects for Cerus are significant for 2018 and beyond, as expected approval for usage with red blood cells would introduce an additional $2.5 billion in potential revenue. Shares of TherapeuticsMD, Inc., a pharmaceutical company specializing in hormone replacement therapy, dropped after a labeling issue delayed approval of the company s first drug. We believe that this issue can be resolved with the FDA, and that the drug will be approved by year end. We also anticipate approval of its second drug for menopause in We retain conviction in TherapeuticsMD because its drugs are unique and target multi-billion dollar market opportunities. Flexion Therapeutics Inc. is a specialty pharmaceutical company that has developed steroid drug Zilretta for relieving osteoarthritic pain. Shares fell in the quarter as investors lost confidence in a rumored takeover by pharmaceutical giant Sanofi. However, acquisition speculations seemed to subside after Flexion issued a convertible note offering. We retain conviction. Flexion is anticipating FDA approval for Zilretta in October, after which the drug could introduce a $5 billion market opportunity in the U.S., in our view. Contribution to Return¹ By Sub-Industry By Holdings Top Contributors Average Weight(%) Contribution(%) Everspin Technologies, Inc Impinj, Inc The Trade Desk MACOM Technology Solutions Holdings, Inc Teladoc, Inc Top Detractors Average Weight(%) Contribution(%) Cerus Corporation TherapeuticsMD, Inc Flexion Therapeutics Inc Flotek Industries, Inc Glaukos Corporation Source: FactSet PA.

6 Quarterly Performance Attribution¹ When reviewing performance attribution on our portfolio, please be aware that we construct the portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio if it meets our rigorous investment criteria. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to achieve a target sector allocation or to approximate an index. Our exposure to any given sector is purely a result of our stock selection process. Quarterly Analysis Sector Average Weights(%) Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Real Estate Baron Discovery Fund Russell 2000 Growth Index Over/Underweight Total Return(%) Baron Discovery Fund Russell 2000 Growth Index Relative Return One-Year Performance Attribution¹ Sector Average Weights(%) Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Real Estate³ Baron Discovery Fund Russell 2000 Growth Index Over/Underweight Total Return(%) Baron Discovery Fund Russell 2000 Growth Index Relative Return Return calculations for the Portfolio are transaction based and are calculated from the underlying security-level data; they may not correspond with published performance information based on NAV per share. 1 - Attribution analysis for other periods or versus another index will be provided upon request. Source: FactSet PA. 2 - Fund total returns include cash, fees and unassigned securities. 3 - As of 9/1/2016 GICS added Real Estate as a new sector. The performance attribution figures above assume that the Real Estate sector existed during the entire time period presented. Telecom Services Telecom Services Utilities Utilities Baron Discovery Fund was up 11.60% in the second quarter, outperforming the Russell 2000 Growth Index by 721 basis points, primarily due to stock selection. Style biases also aided relative results, driven by higher exposure to smaller cap stocks, which outperformed larger caps in the index during the quarter, and overexposure to the strong performing growth factor. Stock selection in Information Technology (IT) contributed over 550 basis points to relative performance, largely due to outperformance of semiconductor holdings Everspin Technologies, Inc., Impinj, Inc., and MACOM Technology Solutions Holdings, Inc. Everspin and Impinj were the two largest contributors to absolute results, while MACOM s stock price was bolstered by strong earnings results. In addition, outperformance of the Fund s internet software & services investments, led by The Trade Desk and JUST EAT plc, and higher exposure to this better performing sub-industry added value. Trade Desk was the third largest contributor on an absolute basis, while JUST EAT s shares moved higher after the IPO of the company s primary competitor was well received by investors. Lastly, a new addition to the Fund, Okta, Inc., contributed to relative performance following the company s successful IPO in early April. Investments in the Consumer Discretionary, Industrials, and Financials sectors also contributed to relative results. Within Consumer Discretionary, outperformance of Nord Anglia Education, Inc., the leading operator in the global K-12 English language market, and Liberty Expedia Holdings, Inc., a holding company with stakes in Expedia, Inc. and Bodybuilding. com, added the most value. Nord Anglia s shares rose sharply after the company agreed to be acquired, while Liberty Expedia s shares performed well based on the outperformance of its largest holding, Expedia, Inc. Strength in Industrials and Financials was driven by the outperformance of Sun Hydraulics Corporation and Kinsale Capital Group, Inc., respectively. These companies benefited from accelerating earnings momentum during the quarter. Stock selection in Health Care and Materials weighed the most on relative performance. Weakness in Health Care was mostly attributable to the underperformance of Cerus Corp., Flexion Therapeutics Inc., and TherapeuticsMD, Inc. These holdings were the three largest detractors from absolute results after their stock prices fell sharply in the quarter. Within Materials, underperformance of the Fund s only holding in the sector, Flotek Industries, Inc., hurt relative results. Shares of Flotek, a manufacturer of specialty chemicals targeted to oil and gas producers, declined after investors became concerned about the potential slowdown of activities due to lower oil prices.

7 Top 10 Holdings as of Company Investment Premise Company Investment Premise MACOM Technology Solutions Holdings, Inc. (MTSI) is a high performance analog semiconductor company. It sells semiconductors, components, and subsystems to the communications (data transmission and data centers), aerospace/ defense (radar, electronic warfare), and industrial (including medical) markets. MACOM s engineered analog chips are valuable IP-protected products. Their value is borne out by high operating margins of 23%. If the company executes its business plan, we think it could address markets representing $9.5 billion, and could grow at a rate two to three times faster than its competitors. It plans to potentially quadruple its revenues to $2 billion over the next five years, and grow profits even faster. We think operating margins could increase to 30-40%, with profit margins expanding % at the same time. Myriad Genetics, Inc. (MYGN) operates labs in Utah and Germany. Its labs perform sophisticated genetic tests, mainly for various forms of cancer. In our view, Myriad Genetics has undisputedly superior tests in at least four categories. While it is losing market share in its breast and ovarian hereditary cancer testing business as a result of a 2013 court decision striking down its patents on the so-called BRCA genes, we believe Myriad Genetics will more than compensate for this with new products, including through its recent acquisition of genetics tester Assurex. We believe Myriad Genetics can potentially grow revenues from $750 million to $1.2 billion over the next five years and double earnings. Qualys, Inc. (QLYS) provides information technology security risk and compliance management solutions. The company offers cloud-based software products for vulnerability management, policy compliance, web application scanning, malware detection, and associated security products. Qualys delivers cloud-based network security services. It has over 9,000 accounts, including most of the Fortune 100, which generate recurring subscription revenues. Revenue renewal rates are consistently high. It is leveraging its trusted position in Vulnerability Management to introduce new products, including cloud agents, Web Application Scanning, Web Application Firewall, malware protection, and mobile device security. We believe new products will accelerate top-line growth and expand the company's total addressable market from $700 million to the multi-billions. The Trade Desk (TTD) is a software company that enables advertising agencies to purchase advertising more efficiently and effectively. It provides the leading self-serve platform to enable data-driven digital advertising. We think the company benefits from visionary founder and CEO Jeff Green, who has built a unique culture of excellence and customer focus. As increasing amounts of advertising becomes digital and automated, we expect The Trade Desk to remain the key vendor to advertising agencies engaged in such efforts. We estimate the company has 10% market share in what the advertising industry calls programmatic buying. Programmatic buying today represents only $10 billion out of $640 billion in global advertising. General Communication, Inc. (GNCMA) is a cable operator in Alaska. It announced in April it was being acquired by Liberty Venture Group in a deal that will give General Communication shareholders a stake in a new company called GCI Liberty. Liberty Venture s purchase of General Communication allows the latter s shareholders the opportunity to own stock in Charter Communications at a roughly 20% discount. Charter Communications owns an underpenetrated cable network, increasingly valuable in a world of growing data speed requirements. We believe Charter Communications likely has the best EBITDA growth trajectory in U.S. telecom. Liberty Ventures also allows small cap portfolios the chance to invest in Charter Communications, which is a large cap stock. Mercury Systems, Inc. (MRCY) designs, manufactures, and markets high-performance, embedded, real-time digital signal and image processing systems and software. Its customers are tier 1 defense contractors worldwide. We believe Mercury is uniquely positioned to sell high-speed computing and storage subsystems to nearly all large U.S. defense contractors. Its products, which allow customers to more rapidly and cheaply develop their own solutions, are used to acquire sensor data, digitize and process the data, and then deliver it for analysis and interpretation. We think at least $10 billion of internal business can be outsourced in addition to the current market for outsourced defense electronics of about $2 to $2.5 billion, providing Mercury with a multi-year growth opportunity. Teledoc, Inc. (TDOC) is the U.S. s first and largest tele-health company, providing on-demand remote medical care using telephone and videoconferencing. Tele-medicine s low cost, convenience, and broad accessibility are a powerful secular growth story, facilitated by an increase of insurers and large employers. Penetration of the $30 billion addressable tele-health market is only about 1%. Teladoc plans to build on its highly scalable platform and commanding 75% market share, driving over 30% top-line growth. We expect growth to come from new customers, higher utilization (currently 5%, but 30-50% with mature customers), and additional services such as behavioral health and a shift to more per-member-per-month contracts. Liberty Expedia Holdings, Inc. (LEXEA) is a controlled entity of Liberty Media. Liberty Expedia consists of a 10% equity stake in Expedia, Inc. and 100% ownership in Bodybuilding.com. The vast majority of Liberty Expedia's value is in Expedia. We believe Expedia, as the largest global online travel agency in the U.S. and the second largest in the world, will benefit from the shift to online travel bookings, currently at 45% global penetration. We also expect the company to benefit from improved performance of Homeaway, which Expedia acquired in November 2015, additions of hotel properties driving higher conversion rates, and margin improvement over time. Novanta Inc. (NOVT) sells highly engineered photonics, vision, and precision motion control solutions to original equipment manufacturers in the medical and advanced industrial markets. Novanta has undergone a transformation. Through a series of divestitures and acquisitions, the company has shifted its focus from the highly cyclical semiconductor industry to the more stable medical and advanced industrial industries. A new management team aims to double the company's revenue from 2016 to 2020 and achieve over 50% of revenue from medical markets, versus 45% today and less than 10% in The company has proprietary technology and offers sticky, highly engineered solutions. The company generates attractive profit margins and returns on invested capital. Red Rock Resorts, Inc, (RRR) owns 20 locals casinos in Las Vegas, manages two tribal casinos in Detroit and California, and is in the planning stages of developing a tribal casino in California. It also controls seven gamingentitled sites consisting of 300 acres in Las Vegas and 100 acres in Reno. The company operates in the improving Las Vegas locals gaming market, which is still down 15% from its 2007 peak. We think the locals market is attractive given favorable fundamentals, including population growth that is 2.7 times the national average and $14 billion of developments that are either in the planning stages or under development. The market also offers the lowest tax rate in the U.S., with limitations on the development of other casinos in the region. It also has the option to develop 400 acres of land for gaming in Las Vegas and Reno if demand warrants.

8 We invest in people not just buildings Long-Term Investors Research Driven