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

Dear Baron Partners Fund Shareholder:

Ron Baron’s Baron Partners Fund Performance

Baron Partners Fund declined 4.86% during the third quarter of 2014, underperforming the Russell Midcap Growth Index, the benchmark against which we compare the performance of this Fund, by 413 basis points. Baron Partners Fund also underperformed the better known S&P 500 Index, which measures the performance of large cap companies, by 599 basis points in the period. Large cap value stocks generally outperformed mid-sized growth stocks in the period. Year-to-date through September 30, 2014, the Fund underperformed its benchmark by 105 basis points and the S&P 500 Index by 366 basis points. Although the Fund has underperformed year-to-date, the Fund has outperformed both its benchmark index and the S&P 500 Index on an annualized basis in all relevant periods other than this year since its conversion from a partnership to a mutual fund on April 30, 2003, as well as over the last 3 years, 5 years, 10 years, 15 years, 20 years, and since its inception on January 31, 1992. The businesses in which the 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.

Ron Baron

In the September quarter, large cap stocks generally outperformed both mid cap and small cap stocks. The S&P 500 Index ended the quarter up 1.13%, while the Russell Midcap Growth Index fell 0.73%, and the Russell 2000 Growth Index fell 6.13%. Our approach is to invest for the long term in businesses with large market opportunities, sustainable competitive advantages and talented, visionary management teams. We do not try to predict short-term “macro” developments or shift our investment approach because certain types of stocks are in or out of favor.

Ron Baron’s Baron Partners Fund: Initiated positions

We took advantage of the decline in certain growth stocks by initiating or adding to positions in high quality businesses that we know well. We initiated positions in Manchester United PLC (NYSE:MANU), an English Premier League professional sports team and a holding in several other Baron Funds, and Mobileye NV (NYSE:MBLY), a provider of automated driver assistance technologies. We added to positions in Tesla Motors Inc (NASDAQ:TSLA), CoStar Group Inc (NASDAQ:CSGP), The Carlyle Group LP (NASDAQ:CG), Gaming and Gaming and Leisure Properties Inc (NASDAQ:GLPI), The Middleby Corporation (NASDAQ:MIDD). and Charles Schwab Corp (NYSE:SCHW). We summarize the investment theses for many of these companies in the Recent Portfolio Additions section below.

Ron Baron

The Fund’s investments within the Industrials, Health Care, Energy, and Financials sectors were the largest detractors from relative performance. 5.11% of the Fund’s average gross assets produced double digit returns and 27.10% advanced single digits, while 67.79% declined. On average 32.21% of the Fund’s holdings outperformed the benchmark.

We try to explain the reasons certain stocks outperformed or underperformed during the period in the “Top Contributors” and “Top Detractors” sections. In many instances, we regard gains and losses in the short term as random. We continue to believe all the businesses in which we have invested have the potential to double in size in four to five years. As a result, we believe stocks that have recently underperformed will achieve above average returns and contribute positively to the Fund’s performance in coming quarters, although we cannot guarantee it.

Managing risk is a key part of our investment process. We manage risk from a company perspective by investing in businesses that are conservatively financed with high barriers to entry and wide moats. Our proprietary research regarding business’ long-term growth opportunities, competitive advantages, management teams and risks determines how much we allocate to individual securities. We invest in different industries that are affected by different factors to attempt to achieve a portfolio of investments with risks that are not correlated. This is part of our effort to reduce the volatility of a focused portfolio. Further, the underlying businesses in which the Fund has invested historically have less volatile earnings than the its benchmark index.

We believe that the barrage of negative news from abroad was a large reason for the ongoing flight to safety, with investors continuing to reallocate assets out of smaller cap companies and into larger cap companies and money market funds.

At the same time, geopolitical events are having little to no impact on the U.S. economy. Economic data continues to show broad signs of improvement, including gains in housing prices, starts and existing sales; increased industrial production; strong auto sales; rising consumer confidence; and lower unemployment claims. Second quarter earnings hit a record high in S&P500 operating earnings per share, with growth of 12.6% year over year and a 130% increase over the past five years. Interest rates remain at historically low levels. Lower energy prices, a result of massive new domestic shale energy discoveries, are also having a positive effect on businesses (lower input costs) and consumers (lower gas and home heating prices).

Our outlook for stocks remains favorable. In our opinion, stocks remain attractively valued, trading at 15.2 times earnings, approximating their median valuation for the past century, while business activity is accelerating. Historically, stocks have provided protection against inflation, as well as better returns than other asset classes. We think that will continue to be the case, but we can’t guarantee it.

Ron Baron

Ron Baron

Mobileye N.V. (MBLY) is a software and systems design leader for camera-based advanced driver assistance systems (ADAS). The share price increased after we participated in Mobileye’s IPO in the quarter. We believe the company has the potential to become a multi-decade leader in the race to autonomous driving, a trend that we believe will improve transportation safety and efficiencies. (Gilad Shany)

Shares of brokerage firm The Charles Schwab Corp. (SCHW) increased in the third quarter. The company indicated at its biannual investor meeting that earnings should approach the high end of initial guidance. Additionally, the company announced plans to return more cash to shareholders through dividends and buybacks. We believe Schwab is well positioned from a regulatory standpoint and has less exposure to trading commissions than its peers. It has been experiencing consistent and sustained growth in accounts as brokers leave traditional wirehouses. (Michael Baron)

Shares of Vail Resorts, Inc. (MTN), the largest ski resort operator in the U.S., increased in the third quarter as the company resolved its litigation with the owners of Park City and bought the resort from them at what we believe is an attractive price. The resort gives Vail access to two adjacent resorts in Utah which, when combined, will make it the largest ski resort in the U.S. The company believes that by adding Park City to its season pass, it should be able to increase sales, which should help to insulate it from weather abnormalities. (David Baron)

Air Lease Corp. (AL) is an aircraft leasing company with a young, fuel-efficient fleet, addressing demand for replacement of older aircraft and more lift in emerging markets, namely Asia. It has strong growth and predictable cash flows, as evidenced by a 23% rise in sales and 42% rise in earnings-per- share in the second quarter. Deliveries are 100% booked through 2015 and 50% placed for 2016.We believe the stock fell in the third quarter due more to general market weakness than reported results, and that Air Lease is well positioned for a long “runway” of profitable growth. (David Goldsmith)

Concho Resources, Inc. (CXO), is an exploration and production (E&P) company focused on the Permian Basin in West Texas. Shares fell in the third quarter, in line with the decline in oil prices. Concho remains on track to deliver on its “three by two” plan, designed to double production in three years. Even at lower oil prices, we believe Concho has the wherewithal to deliver on the program. In addition, drilling results from Concho and other E&P companies in the region are pointing to the potential for significantly more value creation from Concho’s resource base. (Jamie Stone)

Helmerich & Payne, Inc. (HP) is the leading land drilling contractor in the U.S. Shares fell in the quarter despite the fact that rising demand for its new rigs spurred clients to continue to add to the company’s record backlog of new rig contracts. The company’s fiscal third quarter earnings were a bit below expectations, which contributed to the stock weakness, but it appears that most of the weakness was related to concerns that lower oil prices would short-circuit the upturn in U.S. drilling. (Jamie Stone)

Manchester United plc (MANU) is an English Premier League professional sports team. The business had three principal segments: Commercial, Broadcasting and Matchday. The team has a global brand, with a proven history of success, having won 11 of the last 20 Premier League Titles. Soccer is now the second most popular sport among the 12-24 age group in the U.S., and Manchester United is among the most popular soccer teams globally. Manchester United has over 500 million fans worldwide and is positioned to benefit from greater broadcast fees and higher sponsorship and merchandising revenue over the next several years. The increase in broadcast, licensing and merchandising related revenues should generate substantially more cash flow and drive greater value to shareholders over the next several years. (Ashim Mehra)

The Fund opportunistically added to its position in CoStar Group, Inc. (CSGP), the leading provider of information and marketing services to the $50 trillion commercial real estate (CRE) industry. The company has spent 25 years building a proprietary CRE database, which has grown to include information on over four million properties and nine billion square feet of listings. The company monetizes its data through subscriptions to analytical tools that are deeply integrated into clients’ workflows. Ongoing investments in R&D and a doubling of the sales force should allow CoStar to sell an expanded array of tools to new and existing customers. Additionally, the acquisitions of LoopNet and Apartments.com extend CoStar’s reach into marketing services and multi-family lead generation, creating vast new opportunities and offering the company dramatic revenue and cost synergies. Finally, the company’s high fixed cost base creates significant operating leverage, which should help drive significant margin expansion. (Neal Rosenberg)

The Carlyle Group (CG), a leading alternative asset management firm, has been under pressure in the most recent quarter with the stock declining approximately 10%. We took advantage of the weak share price to add to our position. Carlyle manages approximately $200 billion for its clients in diverse strategies and numerous products. Its history of providing solid risk adjusted returns to its clients has enabled it to build sticky relationships with clients who invest in multiple funds. The current decline in its share price is the result of concerns regarding increased regulation and higher rates impacting fund performance. While these factors may affect the company in the near term, they do not alter the long term thesis that we believe Carlyle Group can continue to broaden its product offering and manage considerably more assets. Carlyle Group is a dominant firm in the alternative space, which is growing at twice the rate of traditional managers. Additionally, we feel that Carlyle could grow faster than the industry as limited partners (clients) consolidate their manager selection. While Carlyle’s earnings are more volatile than the earnings of traditional asset management firms, the company’s diverse product lineup should bring some stability to its high margin profits. We believe Carlyle will continue to broaden its product offerings and expand its distribution channels and can significantly increase its assets under management and earnings power over the next few years. (Michael Baron)

Ron Baron’s Baron Partners Fund: Investment Strategy

We invest for the long term in a non-diversified portfolio of competitively advantaged, well-managed, growing businesses at what we think are attractive prices. Often, we have opportunities to purchase stocks of businesses we have researched extensively and that we believe are mispriced or have fallen in price due to what we perceive to be temporary issues. For example, as mentioned above, in the September quarter, the Fund increased its investment in CoStar Group, Inc. (CSGP), a long-time holding in the Fund as well as other Baron Funds. The stock declined due to a broader correction in high growth stocks and some company specific investor concerns. Early in the year, the company bought a multifamily marketing business called Apartments.com, a business that investors viewed as lower quality than CoStar’s core business and that investors believed deserved a lower valuation. Investors were concerned that Apartments.com faced strong competition from Trulia and Zillow. In addition, a company called RealPage, Inc. made some negative comments about the health of the multifamily marketing end market that spooked investors. Finally, CoStar’s aggressive hiring in the core information services business led to short-term declines in productivity. We believe investor concerns were overblown and the decline in the stock price allowed us to add to our position at attractive prices. We also initiated a position in Manchester United plc, a holding in other Baron Funds, when the stock declined due to disappointing results to start the season and when existing holders sold stock in a secondary offering. We also added opportunistically to our positions in Tesla Motors, Inc. and The Carlyle Group. We believe all are mid-sized, well-established, appropriately capitalized, growing companies, with strong positions in markets where there is stable demand for their products and services. The Fund may use leverage to invest in stable and well-capitalized growth companies, with the goal of enhancing its investments’ returns.

Another common theme for Baron Partners Fund’s investments is one of businesses investing for growth, often at the expense of short-term profits. These businesses are investing in order to become much larger, more profitable businesses in the future. Virtually all the businesses in which we have invested are making such capital commitments. Verisk Analytics, Inc. (NASDAQ:VRSK)’s startup investments in health care and real estate data services; CarMax, Inc. (KMX)’s line of new stores coupled with efforts to grow sales in existing stores; and Hyatt Hotels Corp. (H)’s investment in hotel renovations and improved guest services, as well as its ongoing expansion in Asia, are noteworthy in this regard. As long-term investors who hold stocks for an average of about five years, we expect to benefit from these expenditures. In contrast, most other mid cap mutual funds are more trading oriented, turning over their entire portfolios on average every nine months. Since these funds, in general, will not care about or benefit from such long-term, strategic investments by businesses, they accord them little or no value, allowing us to take positions in these companies at prices we feel are especially attractive.

Baron Partners Fund also has significant investments in growing “C” corporations like Vail Resorts, Inc. (NYSE:MTN), and ITC Holdings Corp. (NYSE:ITC), whose shares we believe are undervalued when compared to similar businesses structured as REITs or master limited partnerships. The Fund’s investments in alternative investment money manager The Carlyle Group (CG), and financial intermediary Charles Schwab Corp (NYSE:SCHW), are benefiting from strong performance of equities since the financial panic, which had resulted in increased investor interest in that asset class.

Ron Baron’s Baron Partners Fund: Portfolio Structure

The Fund’s non-diversified portfolio is currently invested in 26 businesses, principally mid cap companies. As of September 30, the weighted average market capitalization of the Fund’s portfolio investments was $10.98 billion compared with $12.98 billion for the benchmark. The Fund currently has significantly larger investments in Financials, Utilities, Consumer Discretionary and Energy sectors than the Russell Midcap Growth Index. The Fund’s investments in Information Technology and Health Care are weighted less than the index. The Fund does not have investments in Materials, Telecommunication Services or Consumer Staples. The Fund also has no investments in biotech businesses. Those businesses performed strongly in 2013, often increasing in price 50-100%. The Fund, to date, has avoided significant investments in businesses with volatile earnings or when it believes it is not apparent whether or not a business will be successful. We are not attempting to mirror any index with the Fund’s portfolio.

We think the businesses in which the Fund has invested have the potential to double in size within four to five years. We think because of the unusual competitive advantages of those businesses, it would take many years or cost a lot of money, and, therefore, not be economically feasible, for new entrants to compete against them. We think these barriers enable our companies to generate strong returns on capital and provide them with the ability to grow consistently over the long term.

Thank you for investing in Baron Partners Fund.

Thank you for joining us as fellow shareholders in Baron Partners Fund. We believe the growth prospects for the businesses in which Baron Partners Fund has invested are favorable and improving. Since, in our opinion, the share prices of our businesses do not reflect their prospects, we believe their stocks’ prospects remain attractive. Of course, there can be no guarantee this will be the case.

We are continuing to work hard to justify your confidence and trust in our stewardship of your family’s hard-earned savings. We also remain dedicated to continuing to provide you with the information I would like to have about your investments in Baron Partners Fund if our roles were reversed. This is so you will be able to make an informed decision about whether this Fund remains an appropriate investment for you and your family.

Respectfully,

Ron Baron

CEO and Portfolio Manager

October 20, 2014

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