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Dear International Growth Fund Shareholder:
Baron International Growth Fund® (MUTF:BINIX, the Fund) gained 1.25% (Institutional Shares) during the second quarter of 2024, while its primary benchmark index, the MSCI ACWI ex USA Index (the Benchmark), was up 0.96%. The MSCI ACWI ex USA IMI Growth Index (the Proxy Benchmark) gained 0.71% for the quarter. The Fund modestly outperformed the Benchmark and the Proxy Benchmark during a quarter where international equity returns lagged their U.S. and global counterparts.
During the second quarter, inflation readings failed to slow sufficiently to clearly warrant the initiation of a Federal Reserve (the Fed) easing cycle, while global growth and employment conditions offered mixed signals. As a result, equity market breadth and leadership continued to narrow as the uncertain macro environment, contrasted by strong near-term fundamentals for the so-called Magnificent Seven and associated AI proxies and beneficiaries worldwide, ensured that such AI proxies drove the lion’s share of second quarter returns. Beneath this surface level, we note that in contrast to the first quarter, the momentum of U.S. and global growth and employment conditions seemed to peak early in the quarter and moderate, with consumption clearly weakening late in the quarter. This allowed bond yields, and more importantly real yields, to moderate through the quarter, ending notably below the April highs and well below the recent peak levels of October 2023, which preceded the Fed’s most recent pivot. Our current bias is that recent moderating economic trends will trigger a Fed easing cycle sooner rather than later, a development which would likely warrant a mean- reverting inflection point for many market underperformers, including international and emerging markets (‘EM’) equities. Interestingly, we point out that despite the year-to-date rise in bond yields and the U.S. dollar, the MSCI Emerging Markets Index slightly outperformed the S&P 500 Index (SP500, SPX) during the second quarter, while strongly outperforming the Dow Jones Industrial Average (DJIA), the equal-weighted S&P 500 Index, and the Russell 2000 Index (RTY). We find this performance particularly admirable and perhaps a foreshadowing in the face of widespread skepticism and capital outflows. In our view, the MSCI ACWI ex USA Index was dragged down during the quarter by the impact of the surprise outcome of the initial French election results on Eurozone equities, leading to an unusually low correlation between international and EM equities during the quarter. As seasoned international investors, we highlight that abrupt market reactions to political events and/or elections often present attractive opportunity, as political and market “breakers” tend to materially dilute extremist rhetoric, allowing elevated risk-premium to recede and normalize. We anticipate that recent international equity underperformance will be contained and subsequently mean-revert.
Table I. Performance Annualized for periods ended June 30, 2024
| Baron International Growth Fund Retail Shares1,2 | Baron International Growth Fund Institutional Shares1,2,3 | MSCI ACWI ex USA Index1 | MSCI ACWI ex USA IMI Growth Index1 | |
|---|---|---|---|---|
| Three Months4 | 1.16% | 1.25% | 0.96% | 0.71% |
| Six Months4 | 2.48% | 2.62% | 5.69% | 6.10% |
| One Year | 2.61% | 2.88% | 11.62% | 9.73% |
| Three Years | (7.62)% | (7.38)% | 0.46% | (2.86)% |
| Five Years | 4.24% | 4.50% | 5.55% | 5.49% |
| Ten Years | 4.63% | 4.89% | 3.84% | 4.71% |
| Fifteen Years | 8.11% | 8.38% | 6.21% | 6.99% |
| Since Inception (December 31, 2008) | 8.55% | 8.82% | 6.90% | 7.65% |
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Performance listed in the above table is net of annual operating expenses. The gross annual expense ratio for the Retail Shares and Institutional Shares as of December 31, 2023 was 1.26% and 0.98%, but the net annual expense ratio was 1.20% and 0.95% (net of the Adviser’s fee waivers), respectively. The performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor’s shares, when redeemed, may be worth more or less than their original cost. The Adviser waives and/or reimburses certain Fund expenses pursuant to a contract expiring on August 29, 2034, unless renewed for another 11-year term and the Fund’s transfer agency expenses may be reduced by expense offsets from an unaffiliated transfer agent, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted. For performance information current to the most recent month end, visit BaronCapitalGroup.com or call 1-800-99-BARON (1)The MSCI ACWI ex USA Index Net (‘USD’) is designed to measure the equity market performance of large and mid-cap… |
Read More: Baron International Growth Fund Q2 2024 Shareholder Letter