Baron small-cap funds have beaten the market for decades

Small-cap stocks could be on the verge of a renaissance as attractive valuations and secular trends bring about sharp gains, according to portfolio managers at Baron Capital. Baron Capital, known for being an early and big investor in Tesla, has a sizable exposure to small caps, especially those with a growth tilt. The Baron Growth Fund (BGRFX) , Baron Small Cap Fund (BSCFX) and Baron Discovery Fund (BDFFX) all invest in the small-cap universe, and they have produced double-digit annualized returns since inception and outperformed their respective benchmarks, according to Morningstar. “Small cap stocks are the cheapest they have been in the last 25 years,” portfolio manager Laird Bieger said at the firm’s annual investment conference in New York on Friday. “Small caps are under-owned by investors. Total small-cap growth exposure recently hit a 10-year low when investors are shunning the asset class. This could be a contrarian indicator and a positive predictor of performance in the future.” The Baron Growth and Small Cap funds were created in the 1990s, while the Baron Discovery Fund was launched in 2013. The three funds all charge around 1.3% in fees, Morningstar data shows. Small companies, which are more domestic-oriented and cyclical, are seen as beneficiaries from President-elect Donald Trump’s tax cuts and protectionist policies. The Russell 2000 benchmark has gained more than 5% in November, outperforming the S & P 500 ‘s 3.4% gain during the same period. .RUT mountain 2024-10-31 Russell 2000 in November “We find these stocks are under-followed and they’re under-researched,” Randolph Gwirtzman, another portfolio manager, said at the conference. “We do an incredible amount of research on these companies, which allows us to find small companies that can have great competitive advantage. So, we find hidden gems in this market.” AI plays Artificial intelligence has been the hottest investing theme over the past two years, and Baron found a few companies in the small-cap space that practically use the technology to improve their products. The managers highlighted SentinelOne , which uses AI to enhance its cybersecurity software that protects client networks. Another pick from Baron is Kratos Defense & Security Solutions , which uses AI to fly unmanned military jets. The managers also like Tempus AI , a biotech firm that incorporates AI to enhance its cancer diagnostic tests, as well as mine its database of cancer information to help pharmaceutical companies develop drugs that fight cancer. S YTD mountain SentinelOne Data firms and sports betting Companies in the proprietary data business, such as MSCI , Gartner and CoStar , are also worth taking a closer look at, according to Baron’s managers. “We think AI is going to let them drive human insights from their growing data … it will also help them raise prices to reflect the greater value they deliver,” Gwirtzman said. The asset manager is also bullish on DraftKings , as the gambling platform could benefit from new states legalizing sports betting. Baron sees DraftKings’ revenue growing to $3 billion over the next five years, a 10–fold increase from current levels, prompting the stock to more than double during the timeframe. DKNG YTD mountain DraftKings