The Baron Emerging Markets Fund navigated a dynamic landscape in the fourth quarter of 2025, recording a 1.26% decline in its Institutional Shares, in contrast to the MSCI Emerging Markets Index's 4.73% growth. This period saw a reversal of earlier outperformance, primarily due to market corrections in China-related equities and less favorable stock selections within India. However, the fund concluded the full year 2025 with a commendable 30.14% gain, showcasing its ability to generate significant returns despite quarterly fluctuations. The fund managers expressed satisfaction with the annual results, particularly given a substantial, long-term overweighting in the Indian market, which remained largely stable throughout the year and is anticipated to contribute positively in the future. The overall performance suggests a robust, theme-driven investment approach capable of adapting to a rapidly evolving global financial and geopolitical environment.
Emerging Markets Fund Navigates Geopolitical Shifts and Market Corrections in Late 2025
In the final quarter of 2025, the Baron Emerging Markets Fund, managed by Michael Kass, encountered headwinds that led to a 1.26% decrease in its Institutional Shares, contrasting with the MSCI Emerging Markets Index's 4.73% increase. This period marked a significant shift, as the fund had outperformed in the preceding three quarters. Key factors contributing to this underperformance included a correction in China-related equities, notably following an anticipated meeting between Presidents Trump and Xi that failed to deliver expected outcomes regarding semiconductor trade. Additionally, Indian holdings faced pressure as a bilateral trade deal with the U.S. did not materialize as hoped in November.
Despite these challenges, the fund posted a strong 30.14% return for the entire year 2025, slightly trailing the Benchmark's 33.57% gain. The fund's substantial long-term allocation to India, which remained flat during 2025 after several years of strong growth, was a notable detractor from relative performance. However, fund managers believe India is poised for an earnings recovery driven by increased government infrastructure spending, tax relief measures, favorable inflation trends, a normal monsoon, and the implementation of "GST 2.0"—a significant tax overhaul aimed at boosting consumption and economic activity.
Sector-wise, adverse stock selection in Consumer Discretionary, Real Estate, Health Care, and Communication Services sectors negatively impacted performance. Conversely, strong performance in the Industrials sector, particularly within sustainability, global security, and China value-added themes, provided a partial offset. Favorable allocation and strong stock selection in the Energy sector also bolstered returns.
Strategically, the fund initiated new positions in Absa Group Limited and FirstRand Limited, citing an anticipated favorable banking cycle in South Africa due to accelerating loan growth, stable asset quality, and easing monetary conditions. It also re-established a position in Nu Holdings Ltd., a leading digital bank in Latin America, recognizing its strong competitive advantages and significant growth potential in underserved financial markets. The fund also increased exposure to existing positions such as Samsung Electronics Co., Ltd., Kuaishou Technology, HDFC Bank Limited, Bharat Electronics Limited, Alibaba Group Holding Limited, Tata Communications Limited, and InPost S.A. Positions in Gold Fields Limited, KE Holdings Inc., and Dino Polska S.A. were exited due to high valuations or uncertainties regarding future earnings growth.
The outlook for 2026 remains optimistic, with fund managers anticipating a multi-year upcycle for emerging market equities. The sustained global economic growth and emerging signs of robust liquidity are seen as constructive conditions. The U.S. Federal Reserve's easing cycle and global monetary and fiscal stimuli, initially implemented as a buffer against aggressive U.S. trade policies, are expected to continue supporting market momentum. The report also highlights the potential for Chinese equities to rebound, especially those linked to AI and advanced manufacturing, and points to the potential for significant gains in Latin American bonds, equities, and currencies should a "rightward shift" occur in the region's political landscape.
This quarter's letter from Baron Emerging Markets Fund provides a fascinating glimpse into the intricate world of global investment. It highlights the constant balancing act fund managers face between long-term strategic convictions and short-term market volatility. The fund's resilience in achieving a substantial annual gain despite a challenging final quarter underscores the importance of a fundamental, theme-driven approach. It's particularly insightful to see how geopolitical events, such as the U.S.-China trade dynamics and the "America First" policy, directly influence investment decisions and market performance. The emphasis on India's potential, despite recent consolidation, and the strategic entry into South African and Latin American financial sectors, reflects a proactive stance in identifying nascent growth opportunities. This report serves as a reminder that understanding the broader economic and political context is just as crucial as analyzing individual company fundamentals in navigating the complexities of emerging markets.