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

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