VO LU M E 4 / N O. 3 • S U M M E R 2 0 07

On the Avenue

premium brands have been gaining on value brands, we believe from shifting demographics and consumer preferences. The result is a growth rate in the mid teens that we believe can be sustained for years to come.” Group Danone (1.0%) is a French company well known in the U.S. for its Dannon and Stoneyfield yogurt brands and Evian water. The company currently sells its products in just 30 coun- Randy Haase tries, where it enjoys a 36% market share. “Group Danone has benefited from consumer interest in health and wellness products, which is one of our themes when selecting companies,” says Randy. “In the entire food and beverage category, the fastest growing segment is organic foods.” Sales of organic products grew from $4 billion in 1997 to $17 billion in 2006 and are projected to double to $34 billion in 2011, according to industry sources. “Not only is organic the fastest-growing segment in the food and beverage industry,” says Randy, “the fastest-growing
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Baron 5th Ave. Growth Fund Seeks Global Growth
ave you had a cocktail lately? A stick of gum or a candy bar? How about a bowl of yogurt? Or perhaps you’ve sent an overnight delivery or stayed in a hotel. If so, you may well have purchased the product or service of one of the companies in which Baron Fifth Avenue Growth Fund has invested for their global growth prospects. “Much more than with smaller companies,” says Randy Haase, portfolio manager of the large-cap growth Fund, “larger companies are likely to be multinational, doing business both in the U.S. and overseas. Whether it’s a U.S. company that’s expanding globally or an internationally based company that also markets in the U.S., we’re taking a close look to see if its growth prospects warrant an investment. “Global growth business investments,” says Randy, “allow us to participate in country economies growing faster than America’s … as well as to diversify our risks by earning nondollar currencies. Multi-national companies represent about 44% of Baron Fifth Avenue Growth Fund’s portfolio. We think these businesses have strong and sustainable long-term growth opportunities. Like our large-cap U.S. growth company investments they are market-share leaders with strong franchises and well-known brand names. Within Baron Fifth Avenue Growth Fund, we believe that a lot of the companies have strong growth potential not only in the U.S., but outside the U.S. as well.” Of the 50 companies currently held by Fifth Avenue Growth, three are domiciled outside the U.S. Together they represent about 6.2% of the portfolio’s assets. While their names may not all be familiar, their brands are. Diageo (3.7% of the portfolio as of June 30), based in the U.K., is the world’s largest spirits company, producing and marketing premium brand spirits including Smirnoff, Tanqueray, Captain Morgan, Johnnie Walker, J&B, Baileys and Jose Cuervo. Its brands, Randy says, account for 29% of spirit sales in the U.S. and 21% of spirit sales worldwide. Diageo, says Randy, is benefiting from several trends. “Spirits are taking market share from wine and beer. And



INVESTOR What’s Inside
Baron 5th Ave. Seeks Global Growth . . . . . . . . . .page 1 Baron Fifth Ave. Growth Portfolio Holdings . . . . .page 2 Inside iOpportunity: No More Books . . . . . . . . . .page 3 Performance as of December 31, 2006 . . . . . . . . .page 4 Baron Investment Conference . . . . . . . . . . . . . . . .page 4 How to Contact Baron Funds . . . . . . . . . . . . . . . .page 4

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Baron Fifth Avenue Growth Fund Portfolio Holdings
(As of June 30, 2007)

segment within organic is yogurt. And Group Company Industry % of Portfolio Danone has 20% of the worldwide market share Procter & Gamble Co. Consumer Products 4.0% for yogurt.” American Express Corp. Financial Services – Miscellaneous 3.9% U.K. confectionary and beverage marketer Wells Fargo & Co. Financial Services – Community Banks 3.8% Cadbury Schweppes is the third international company held in the portfolio (1.5%). With brands that Comcast Corp. Media 3.8% include Cadbury, Halls, Trident, Dentyne, Chiclets Diageo PLC Consumer Products 3.7% and Clorets, Cadbury is the worldwide confecDiamond Offshore Drilling, Inc. Energy & Energy Services 3.7% tionary market leader with a 10% share. Beverage Transocean, Inc. Energy & Energy Services 3.6% brands include Schweppes, Dr. Pepper, 7-Up, Microsoft Corp. Computer Technology 3.3% Mott’s, Snapple and Hawaiian Punch. Macy’s, Inc. Retail – Consumer Staples 3.2% Randy says the company’s growth has been PepsiCo, Inc. Consumer Products 3.2% strong, and the stock’s price has increased. He anticipates a split of the company into its confecTotal 36.2% tionary and beverage components, which should Portfolio holdings are subject to change yield positive results over time. Companies based overseas are not the only ones that says. Marriott currently has six hotels in India, with 10 more Randy has targeted for Baron Fifth Avenue Growth Fund. set to open by 2009 and 15 more in the pipeline beyond. U.S.-based hotel operator Marriott Corp. (1.5%) has strong Similarly, China’s market is also under-developed, says growth prospects, Randy says, both at home and overseas. The R a n d y. I n C h i n a , Marriott currently operates 32 hotels company currently has a 9% market share in North America with 15 more in the pipeline. and it drives about 20% of its income from outside the U.S. “These two countries, with their emerging middle class “We own the and developing business, INDUSTRY BREAKDOWN (% of Portfolio) stock mainly because p re s e n t s i g n i f i c a n t (As of June 30, 2007) within the U.S., there growth opportunities for Retail – is a demand/supply the hotel industry,” says Specialty Stores Business Services Cash 6.2 5.1 1.1 imbalance in its faRandy, “and we believe Retail – Computer Technology vor,” Randy says. that Marriott is well posiConsumer Staples 5.4 9.0 “There has been little tioned to benefit from Recreation Consumer Products new capacity in the that growth.” & Resorts 13.4 5.2 last few years while Federal Express Energy & demand has grown, (1.8%) is another U.S.Energy Services Other 8.4 pushing occupancy based company that has 13.8 Financial Services – rates and prices up. taken advantage of Brokerages & Exchanges Media At the same time supgrowth opportunities 8.5 10.3 ply has dropped in both here and abroad. Financial Services – Health Services – Financial Services – Community Banks some markets as ho“Integration of the Insurance Miscellaneous 4.6 5.1 3.9 tels are converted world’s economies is one into condos. of four trends that has “We also see a huge opportunity in Europe,” Randy says. benefited Federal Express,” says Randy. “As businesses “In the U.S., 78% of all hotels are branded. But in Europe, just around the globe work closer together, we think FedEx ben30% of the hotels are branded; the rest are independent. That efits because it literally physically links the world.” has begun to change, which we think will give Marriott a A second factor is that businesses taking advantage of significant opportunity.” faster supply chains and just-in-time inventory control are Randy also sees opportunities for Marriott in China and more dependent on companies like Federal Express, says India. Today, there are just 110,000 hotel rooms in all of Randy. Third, he says, is the increasing use of transportation continued on page 3 India, says Randy. “That’s less than Orlando, Florida,” he



With Michael Lippert
No More Books If, like so many people these days, you find yourself turning to the Internet for news and information, you’ll understand why Baron iOpportunity Fund has been investing more in online information services. Costar Group (1.9% of the portfolio as of June 30) is the creator and provider of an online database covering the commercial real estate market. The service provides pictures and maps along with detailed information on tenants, space, rents and sales data. The subscription-based business enjoys a high renewal rate and has plans to expand into retail real estate. Costar currently has no competitors and, in our opinion, presents a high barrier to entry for others. Gartner Group (1.8%) is another example of a company generating information for online sale and distribution. Its 650 analysts produce comprehensive reports and consult for information technology executives. Gartner is also a subscription-based business with a high renewal rate. The company provides guidance on trends and technologies that will influence purchasing, security and gen-


eral decision-making throughout the IT field. Although Gartner does have competitors, its long-standing reputation has made it the market leader, enabling it to leverage its business into other areas such as events. IHS (1.0%) is a leading provider of analytic tools and information for the oil and gas industry. Not unlike Costar’s real-estate database, IHS provides online information about oil and gas wells, including exploration, development and production. The company can produce customized data sets for specific customers. IHS, too, is a subscription-based business with a 90% renewal rate. In the financial services area, we’ve taken a position in FactSet Research Systems (0.8%). In addition to providing financial news and data where it has significant competitors, FactSet also delivers a set of investment and portfolio analytical tools that set it apart. We think the company is run by a focused and talented management staff and is taking market share away from some of its competition. These companies demonstrate the powerful effect of the Internet on distribution and related costs. Where information providers such as these companies would once have relied on the frequent and expensive publishing of books and directories, they now take advantage of online distribution, which we think enhances the value of their products and services, while greatly reducing costs.
(Baron iOpportunity Fund invests in companies that we believe will benefit from growth opportunities resulting from the Internet and information technology. In this column, Portfolio Manager Michael Lippert presents his views on technologies and developments that he believes will influence the market in the months to come.)

services by manufacturers of technology. And last is the expanding e-commerce market. Companies like FedEx, says Randy, are the last link in online purchases. As for growth prospects, both in the U.S. and beyond, Randy notes that while 25% of the company’s revenue now comes from outside the U.S., 95% of consumers live outside the U.S. “Given those numbers,” says Randy, “we believe FedEx will experience substantial growth in overseas markets.” As is the case with Marriott, Randy says, FedEx also has significant growth opportunities in China and India. FedEx has just begun overnight delivery service to 19 cities in China. Within China, overnight service for 60 cities is set to launch soon. As for India, there are now 16 weekly flights from the U.S.

to India, making FedEx the largest carrier currently serving that market. Another example of a U.S. company with growth prospects both here and abroad, says Randy, is Pepsi (3.2%). Its five major brands are Pepsi, Tropicana, Frito-Lay, Gatorade and Quaker Oats. In 2002, Randy says, Pepsi achieved more than $200 million in revenue from each of 7 international markets. Last year, it exceeded $200 million in 15 international markets. Last year, he says, Pepsi’s operating earnings outside the U.S. were 20% of the total. In 2009, Pepsi projects operating earnings outside the U.S. will reach 30%. In the last quarter, overall earnings were up 17%, while operating earnings from outside the U.S. were up 29%, Randy says.

“When it comes to selecting companies for Fifth Avenue Growth Fund,” says Randy, “clearly one of the themes is global growth. Whether it’s picking a U.S. company like Marriott, FedEx or Pepsi for its potential to benefit from overseas markets or a company overseas like Diageo, Group Danone or Cadbury for its potential to also grow in the U.S. market, we’re looking for quality companies that are well known and respected.” (Baron Fifth Avenue Growth Fund invests in large companies that we believe have significant growth potential over the next five years. This is the first installment of a column in which Portfolio Manager Randy Haase presents his views on the companies, industries and developments that he believes will be important in the months to come.)




Performance as of June 30, 2007
Baron Asset Fund Baron Growth Fund Baron Small Cap Fund Baron iOpportunity Fund Baron Partners Fund** Baron 5th Ave.Growth Fund YTD 8.63% 6.94% 10.21% 12.20% 6.68% 3.51% Average Annualized Returns Since Inception Inception Expense 1-Year 5-Years 10-Years Annualized Cumulative Date Ratio* 16.96% 13.22% 8.71% 13.43% 1151.08% 6/12/87 1.33% 15.52% 14.00% 13.02% 17.61% 659.53% 12/31/94 1.31% 19.57% 13.74% N/A 12.65% 219.37% 9/30/97 1.33% 24.80% 23.89% N/A 2.83% 22.74% 2/29/00 1.45% 18.07% 19.23% 13.58% 18.15% 1207.98% 1/31/92 1.77% 14.32% N/A N/A 10.12% 35.70% 4/30/04 1.39%

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. Current performance may be lower or higher than the performance data quoted above. For performance information current to the most recent month end, visit www.BaronFunds.com/performance or call 800-99-BARON. Performance data does not reflect imposition of a short-term trading fee of 1% on redemptions of Baron iOpportunity Fund shares held for less than six months. Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The Baron Family of Funds is described in prospectuses that contain this and other information about the Funds. You should carefully read the prospectus before investing. You can read, print, or download a prospectus at www.BaronFunds.com/prospectus. Or call 800-99-BARON to receive a prospectus in the mail. Baron Capital, Inc. is the distributor of the Baron Funds. Baron Growth and Small Cap Funds invest primarily in small-cap securities. Baron Asset Fund invests in mid-cap securities. Specific risks associated with investing in smaller and medium sized companies include that the securities may be thinly traded and they may be more difficult to sell during market downturns. Specific risk associated with Baron iOpportunity Fund: Internet-related companies and companies propelled by new technologies may present the risk of rapid change and product obsolescence and their successes may be difficult to predict for the long term. Specific risks associated with Baron Partners Fund involve the use of non-diversification, leverage, and short selling, which increase volatility of the Fund’s returns and expose it to greater loss in any given period. The Fifth Avenue Growth Fund invests in large-cap securities, which like all equities are subject to price fluctuations in the stock market. The Funds may not achieve their objectives. Portfolio holdings are subject to change.
*As of September 30, 2006 for Baron Asset, Baron Growth, Baron Small Cap, Baron iOpportunity and Baron Fifth Avenue Growth Funds. As of December 31, 2006 for Baron Partners Fund. Expense ratio shown for Baron Partners Fund comprises total operating expenses of 1.32% and interest expense of 0.45%. **Since inception, February 1, 1992, Baron Partners Fund’s predecessor was a limited investment partnership, which imposed different advisory fees, operating expenses, and no dividend or capital-gain distributions. The restated performance information reflects the imposition of the same advisory fees and expenses that would have been applied historically if the Fund had had its current structure since inception in accordance with SEC guidelines. The performance data include the predecessor partnership’s performance for the periods before the Fund’s registration statement became effective on April 30, 2003. The predecessor partnership was not registered under the 1940 Act. Hence it was not subject to certain investment restrictions imposed by the 1940 Act and by the Internal Revenue Code of 1986, which if applicable, might have adversely affected the performance of the Fund.

Baron Investment Conference
Our 16th Annual Baron Investment conference will be held Friday, November 2, in New York City at the Metropolitan Opera House at Lincoln Center. Advance registration is required and seating is first come, first served. For your free registration, visit www.BaronFunds.com/register. Or call 800-99-BARON, option 4. Our conference features guest speakers from the companies in which we invest, our own portfolio managers and, as always, dazzling entertainment. Tickets are free, but space is limited. Please reserve your place now.

How to Contact Baron Funds
Web site: For daily NAVs, portfolio details and performance data current to the most recent month end, or to open an account, please visit www.BaronFunds.com. Shareholder Services: Call 800-99-BARON (800-992-2766) and select option 1 to request literature or select option 3 to speak with a representative.

If you have any questions or comments, please feel free to contact us at 800-99-BARON or via email at info@BaronFunds.com. If you send an email, we will reply to you via email within two business days letting you know that we have received your email. We look forward to hearing from you.