Baron Asset Fund Q3 2025 Performance Review

The following segment was excerpted from the Baron Asset Fund Q3 2025 Shareholder Letter.

Baron Asset Fund® (the Fund) underperformed for a second consecutive quarter as U.S. equities continued their strong rally from the market lows reached on April 8. The Fund declined 4.23% (Institutional Shares) in the third quarter, trailing the Index’s gain of 2.78%. Similar to the prior quarter, the relative shortfall was mostly related to the Fund’s underexposure to the styles described in the chart above. The Fund’s underexposure to Momentum, Beta, and Residual Volatility proved especially costly, as stocks with elevated exposure to these factors continued to lead the market higher in the period. The Fund’s overexposure to Earnings Quality also hampered performance given the ongoing rally in lower quality stocks during the quarter. The Earnings Quality factor suffered its worst three-month performance in history during the quarter, exemplifying how challenging the market environment was given the Fund’s higher quality profile.

From a sector perspective, stock selection in IT and Communication Services was responsible for about three-quarters of the underperformance in the period, with much of the weakness attributable to sharp declines from syndicated research provider Gartner, Inc. and global ticket marketplace StubHub Holdings, Inc. Both holdings are discussed in detail below.

Stock selection in Consumer Discretionary, Financials, and Industrials also hampered relative results. Weakness in Consumer Discretionary was broad based, led by double-digit declines from lodging franchisor Choice Hotels International, Inc. (CHH) and premium footwear and apparel brand On Holding AG. Choice shares fell amid investor concerns over continued revenue per available room (RevPAR) weakness at the company’s lower-end economy and midscale brands. While the slowdown in RevPAR is disappointing and bears monitoring, Choice continues to grow its more revenue-intensive units at a strong pace, helping offset the softness. The company is also increasing royalty rates, particularly across its Radisson brands, further supporting revenue and margin expansion. Choice generates strong cash flow and maintains a solid balance sheet, providing flexibility to pursue acquisitions, reinvest in the business, and repurchase shares. We believe the stock’s valuation continues to reflect a significant discount to intrinsic value, and management’s disciplined capital allocation and commitment to returning capital to shareholders position the company for upside as growth reaccelerates following the recent economic slowdown.

On Holding’s (ONON) stock price was pressured by macroeconomic uncertainty and concerns about rising competition in the global sportswear industry. Despite these headwinds, the company delivered strong quarterly results, with revenue up 38% and broad-based growth across regions and categories. Management also raised its revenue and profitability expectations for the year. We maintain conviction in On’s ability to gain market share in the attractive global sportswear segment through its premium brand positioning and innovative product offerings, and we believe shares remain undervalued at current levels.

Performance in Financials was hindered by financial data businesses FactSet Research Systems Inc. (FDS) and Morningstar, Inc. (MORN), whose share prices were hurt by a combination of industry-wide concerns about the potential impacts of AI, cautious commentary from several financial data and software peers, and factor rotation as investors shifted from high-quality, defensive names to higher-growth stocks. We remain investors in these high-quality businesses. Data and analytics vendor Verisk Analytics, Inc. was mostly responsible for the relative shortfall in Industrials, which is discussed further below.

Somewhat offsetting the above was solid stock selection in Health Care along with higher exposure to Real Estate, which was the second-best performing sector in the Index. Solid stock selection in Health Care was driven by strong performance from veterinary diagnostics leader IDEXX Laboratories, Inc., whose share price was lifted by better-than-expected financial results, as discussed below.

Top contributors to performance for the quarter

Veterinary diagnostics leader IDEXX Laboratories, Inc. (IDXX) contributed to performance after reporting better-than-expected financial results. Foot traffic to veterinary clinics in the U.S. continued to improve modestly from depressed levels, contributing to roughly 10% constant currency revenue growth in its core Companion Animal segment – its best result in two years. In addition, the company installed 2,400 of its inVue Dx cellular analyzers, exceeding investor expectations, and boding well for the associated future consumable revenue stream. IDEXX also continued aggressively to repurchase its shares, signaling management’s confidence that favorable dynamics should continue. We see increasing evidence that long-term secular trends around pet ownership and pet care spending have structurally accelerated, and we expect IDEXX’s long-term growth rate and margin profile to improve.

Amphenol Corporation (APH), a leading global supplier of advanced interconnect systems for data centers, gained during the quarter. Its shares rallied as expectations for data center capital spending continued to rise with the accelerating adoption of AI. In addition, Amphenol announced its largest-ever acquisition—CommScope’s Connectivity and Cable Solutions business for $10.5 billion—which was well received by investors. Amphenol has demonstrated consistent shareholder value creation through prudent capital deployment and disciplined acquisitions. We remain shareholders given the company’s durable competitive advantages, favorable tailwinds from AI-driven data center construction, and its proven long-term track record of both organic and inorganic growth.

Space Exploration Technologies Corp. (SpaceX) (SPACE) is a high-profile private company founded by Elon Musk. The company’s primary focus is on developing and launching advanced rockets, satellites, and spacecrafts, with the ambitious long-term goal of making life multi-planetary. SpaceX is generating significant value through the rapid expansion of its Starlink broadband service. The company continues to successfully deploy a vast constellation of Starlink satellites in Earth’s orbit, reporting substantial growth in active users, and regularly deploying new and more efficient hardware technology. Furthermore, SpaceX has established itself as a leading launch provider by offering highly reliable and cost-effective launches, leveraging the company’s reusable launch technology. SpaceX capabilities extend to strategic services such as human spaceflight missions. Moreover, SpaceX is making tremendous progress on its newest rocket, Starship – the largest, most powerful rocket ever flown. This next-generation vehicle represents a significant leap forward in reusability and space exploration capabilities. We value SpaceX using the prices of recent stock transactions.

Top detractors from performance for the quarter

Gartner, Inc. (IT), a provider of syndicated research primarily related to the IT sector, detracted from performance after reporting disappointing second quarter earnings. Contract value growth, a leading indicator of the company’s future revenue, decelerated from 6.7% to 4.9% in the prior quarter, and this figure was below investor expectations of around 6%. We attribute most of the slowdown to ongoing cost-cutting in the U.S. public sector, which represents around 5% of revenue, as well as more challenging business conditions in industries dependent on public sector funding, such as education. We also believe companies with meaningful exposure to tariffs tightened cost controls, resulting in longer sales cycles and slightly higher attrition.

While the market expressed concern about the impact of AI on Gartner’s business, we see no evidence that this is negatively impacting its value proposition. We believe that Gartner has a vast and growing set of proprietary data, generated by hundreds of thousands of interactions with buyers, sellers, and consumers of technology. Gartner’s proprietary insight extends to corporate technological roadmaps, enabling the company to assess future trends. Gartner also delivers tangible ROI (Return on Investment) for its customers through its contract review program; we estimate that for every dollar spent with Gartner, a customer can save up to $10 in lower procurement costs. In addition, we estimate that almost 95% of Gartner’s research business comes from customers that want to talk with or meet with an analyst or former CIO to have a partner help guide their decisions. We believe that AI should provide a tailwind for Gartner at this point, as every company in the world seeks help and insight to understand the risks and opportunities poised by AI. As a result, we believe growth trends should improve next year as U.S. public sector headwinds abate and sales force productivity strengthens. We believe that the looming, uncertain impact of AI on most businesses should lead to additional interest in Gartner’s proprietary research, insights, and analysis.

We also expect the company to be aggressive in repurchasing stock to capitalize on its discounted valuation. We estimate that Gartner repurchased approximately $800 million in July and August, and it then added $1 billion to its outstanding share repurchase authorization in early September. Given the roughly $2 billion of cash on its balance sheet, ample debt capacity, and its significant ongoing free cash flow generation, we believe the company could potentially repurchase nearly 20% of its market cap over the next 18 months. We believe the current valuation is attractive for this largely subscription-based business with substantial recurring revenue.

StubHub Holdings, Inc. (STUB), the leading marketplace for the resale of live event tickets, detracted from performance following its September IPO. The company has been investing heavily both to expand its market share and to develop its capabilities to sell tickets in the primary market – tickets sold directly by sports teams to fans. Its near-term results were also affected by challenging annual revenue comparisons after the outsized success of Taylor Swift tour ticket sales last year. Despite these temporary headwinds, we remain optimistic that StubHub’s revenue growth and profitability are poised to accelerate meaningfully.

Verisk Analytics, Inc. (VRSK) is a leading data and analytics vendor focused primarily on providing critical information to the property and casualty insurance industry. The stock detracted from performance after management issued a conservative outlook for the second half of 2025. Verisk also announced the $2.35 billion acquisition of AccuLynx, cloud-based construction management software for the roofing industry, which is expected to be modestly dilutive to earnings in the first year. Lastly, shares suffered from concerns about a slowing property and casualty insurance pricing backdrop and broader industry-wide uncertainty about the impact of AI. Nonetheless, Verisk reported strong quarterly earnings and CEO Lee Shavel sounded upbeat on the company’s growth potential moving forward. We maintain conviction in the competitive positioning, long-term growth, margin expansion, and capital deployment prospects for the business.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.