Ron Baron’s Baron Growth Fund performance report for the third quarter 2014.

Dear Baron Growth Fund Shareholder:

Ron Baron’s Baron Growth Fund Performance

Baron Growth Fund declined 3.33% during the third quarter of 2014, outperforming the Russell 2000 Growth Index, the small cap benchmark against which we compete, which fell 6.13%. By contrast, the broader S&P 500 Index increased by 1.13% over the same period, illustrating the significant outperformance of large cap stocks over smaller companies during the quarter. Large cap stocks have outperformed small cap peers throughout 2014 by more than 1200 basis points, an unusually large disparity.

We believe there are two reasons for this divergence. The first is a “rotation” of interest into larger companies whose stocks lagged in 2013 and thus appeared less expensive than faster growing, small businesses. Second, large cap stocks represent a perceived “flight to safety” that, we believe, reflects investor fear during times of instability.

The third quarter was marked by a barrage of negative headlines that contributed to investor anxiety, from war in the Middle East to tensions between Russia and Ukraine to ISIS to Hong Kong protests to, most recently, an Ebola panic. During these periods of inevitable volatility, we stay focused on the fundamental prospects for our businesses. While we do not try to predict short-term “macro” developments or current events, we believe conditions remain favorable for the U.S. economy and stocks. In our frequent meetings with management teams, we observe that business trends are improving. This is consistent with our view that the broader U.S. economy is strengthening, helped by lower interest rates, and evidenced by robust auto sales, improving housing data, declining unemployment and abundant, low cost domestic energy. Finally, we believe stocks remain attractively valued, trading around 15.2X earnings, roughly in line with the market’s 100-year median P/E multiple.

Ron Baron

Baron Growth Fund does not change its investment approach because certain types of stocks are in or out of favor in the short term. We invest for the long term in businesses with large growth opportunities, sustainable competitive advantages and talented, visionary management. Following the year-to-date underperformance of small cap growth businesses, we believe Baron Growth Fund’s portfolio is unusually well-positioned and attractively valued. The businesses in which Baron Growth Fund has invested have
grown significantly this year. Since the Fund’s shares have not, we believe the Fund is well positioned to soon again outperform.

Over the long term, the Fund has outperformed its benchmark by 608 basis points per year on average since its inception on December 31, 1994. It has also outperformed the large cap S&P 500 Index by 378 basis points per year over the same time frame. Since inception, Baron Growth Fund has earned an average compound annual return of 13.49%. This compares to 7.41% for the Russell 2000 Growth Index and 9.71% for the S&P 500 Index.

Ron Baron’s Baron Growth Fund Portfolio

During the quarter, we took advantage of market volatility to add or increase our positions in several new and existing investments that had fallen sharply in price. Since the beginning of the year, Baron Growth Fund has invested nearly $600 million in 11 new companies with average market caps of $1.7 billion. These included Masonite International Corp (NYSE:DOOR), a low-cost manufacturer of premium residential doors and entryways, as well as two energy services companies, Badger Daylighting Ltd (TSE:BAD) and Atlas Energy LP (NYSE:ATLS). Badger is a specialized provider of excavation services to the oil and gas industry that is benefiting from significant shale exploration throughout North America. Atlas is a leading natural gas pipeline operator in the Midwest.

We also invested in Financial Engines Inc (NASDAQ:FNGN) and ClubCorp Holdings Inc (NYSE:MYCC) during the quarter, two companies that we have owned in other Funds previously and have gotten to know well. Financial Engines is a technologyenabled service provider that offers personalized investment management and advice to small investors in 401(k) plans, while ClubCorp is the largest owner and consolidator of private golf and country clubs in the U.S.

Ron Baron

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