Via Baron Emerging Markets Fund shareholder letter

Three years ago, we launched the Baron Emerging Markets Fund with Michael Kass as Portfolio Manager, with the objective of applying our research-intensive, long-term investment approach to companies in the developing world. We are pleased to report that the Fund has significantly outperformed its bench- mark on an annualized basis, both since inception and over the last year, and as of 12/31/13, based on total returns, is ranked in the third percentile among its Morningstar peers, at below average risk. Morningstar awarded the Fund its highest 5-star rating for the Fund’s full three-year performance and risk profile ended 12/31/13.

emerging markets

The Fund recently passed the three-year mark, and we thought it would be an ideal time to provide an update on the portfolio, our strategy, and the emerging markets.

EM Companies with a Baron Flavor

Investing in emerging markets may seem like a formidable undertaking. With thousands of companies operating across a variety of countries and regions to choose from, where do we begin? Moreover, how does the evolving matrix of political, economic, regu- latory and cultural factors at the local, national and global levels play into our investment decisions? Baron finds opportunities in emerging markets

through a differentiated strategy that combines fundamental, bottom-up research with compelling investable themes. Our in-depth, integrated approach allows us to navigate the emerging markets investment landscape and uncover opportunities that we believe have a high likelihood of attractive growth and value creation.

Investable Themes

Our strategy for the Emerging Markets Fund often starts with identifying defined, long-term investment themes which, in turn, helps us identify long term, sustainable growth opportunites. A theme is a fundamental change that we believe will drive predictable demand and/or rising profit- ability over a long period of time, increasing the likelihood of higher earnings growth and return on capital for related compa- nies. Investment themes can be driven by developments such as regulatory, political or technological changes; vertical integra- tion in an industry; or changes in the financial or economic environment. They may be industry-specific, country-specific, regional or global in scope. Themes allow us to nar- row down our universe of stocks while also focusing our research process and concen- trating our invested capital on promising investment opportunities.

Bottom-up Research

While themes may serve to focus our re- sources, ultimately, we add value through fundamental, bottom-up stock selection. We look for entrepreneurial companies that fit the Baron investment criteria and that we believe are best positioned to take advantage of an opportunity. We develop and confirm an investment thesis for the company, and validate key criteria by per- forming due diligence, including meeting with management; consulting with indus- try experts; speaking with local contacts in key markets such as vendors, suppliers and competitors; and reviewing the company’s track record and public filings. We verify our thesis through analysis of past performance and external checks with business partners, current and/or former employees, and industry participants. If we then decide to add a company to the portfolio, we main- tain ongoing conviction through qualitative and quantitative analysis and continued monitoring of key variables. In every company in which we invest, we look for key Baron investment criteria, such as (1) a significant opportunity for growth, (2) sustainable competitive advantages, (3) strong, visionary management, and (4) risk-adjusted return potential over a four to five year horizon. Within the emerging markets, we emphasize the following three attributes, given the particular nuances of these markets:

Entrepreneurial management

• Founders with significant ownership stakes

• Strategic vision and financial sophistication

Capital efficiency

• High return on invested capital

• Asset-light business models

• Private, non-government controlled companies Shareholder-friendly governance

• Alignment of interests between man – agement and minority shareholders

• Independent directors

• Minimal related party transactions and/or conflicts of interest

We believe these attributes, which serve to align our interests as minority sharehold- ers with those who control and manage the business, are critical to successful investing in emerging markets. Further, we believe that our disciplined approach in empha- sizing these attributes, which we believe represent scarcity value in these markets, differentiates us from a broad index and many other emerging market strategies. Below are three examples of our integrated thematic and bottom-up invest- ment approach. Economic and financial reform in China After months of anticipation, in November, China’s new leadership revealed plans to im- plement sweeping economic, financial and social reforms in a bid to de-emphasize cap- ital-intensive investments while stimulat- ing and supporting domestic consumption and expansion of the Chinese middle class. Highlights of the 60-point plan include lib eralization of interest and deposit rates, relaxation of the one-child policy, and reforms to benefit migrant workers settling in urban areas. We believe the reforms could substan- tially improve the country’s longer-term in- vestment potential – even if causing some short-term pain. In recent years, China has suffered a noticeable decline in capital pro- ductivity as a result of the near monopoly on credit issuance by state-controlled, political- ly motivated bank bureaucrats. The reforms are aimed at transitioning China to a more market-driven and credit sensitive system, while reducing inefficiency and corruption.

Securities firms such as Haitong Securities Co Ltd (HKG:6837) are poised to gain a substantial share of the country’s credit issuance from the traditional bank sector via the equity, corporate bond, and asset securitization markets. We believe Haitong is the highest quality pure play company to participate and is well positioned to benefit from financial reform. Financial reform should also improve capital access for many productive small and medium-sized busi- nesses, since credit issuance will be based increasingly on financial merit, rather than political connections. We have also identified companies in Consumer Discretionary and other sectors in China that we think are both directly and indirectly positioned for strong reform- driven growth. One example: Biostime International Holdings Limited (HKG:1112), a premium pediatric nutrition and baby care products provider that stands to gain from the loosening of China’s one-child policy. The company has excellent brand recognition, superior distribution and customer rela tionship management protocols and strong corporate governance measures. Another example is Sihuan Pharmaceutical Holdings Group Ltd (HKG:0460), China’s third biggest research-driven pharmaceutical company, which we think should benefit from increas- ing government investment in a stronger social safety net, of which healthcare is a major focus. Sihuan is a leader in cardiovas cular disease treatments and is building a pipeline of innovative drugs.

Since we look to invest in what we believe are capital efficient and entrepreneur- ial private-sector companies, we believe reform will benefit our current holdings as well as provide ongoing opportunity for our investors going forward.

Digitization in India’s cable & media sector

The Telecom Regulatory Authority of India recently mandated the conversion of ana- log to digital cable services through the deployment of set-top boxes in households throughout India, in order to capture more tax revenue and lay the groundwork for improved broadband Internet access. We think this move will result in a significant increase in profitability for India’s major cable distribution and programming providers that can make the significant capital investment required to execute on this digitization strategy. Until recently, local cable operators, which the major cable providers depend on for last mile infrastructure and collecion of revenues, officially disclosed only an estimated 15% of total subscribers. With

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