Baron New Asia Fund: Latest Insights and Commentary

CONTRIBUTORS

• Semiconductor giant Taiwan Semiconductor Manufacturing Company Limited (TSMC) contributed in the second quarter due to expectations for a continued strong cyclical recovery in semiconductors and significant incremental demand for AI chips. We retain conviction that TSMC’s technological leadership, pricing power, and exposure to secular growth markets, including high-performance computing, automotive, 5G, and IoT, will allow the company to sustain strong double-digit earnings growth over the next several years.
• Bharti Airtel Limited contributed during the quarter, driven by steady earnings performance and visibility into strong future free cash flow generation as the company is likely at its peak capex intensity. As India’s dominant mobile operator, the company is benefiting from ongoing industry consolidation. In particular, Vodafone Idea, a key player and competitor, is on the verge of bankruptcy amid severe pricing pressure and an unsustainable balance sheet. We retain conviction as Bharti transforms into a digital services company and benefits from rising mobile tariffs.
• Shares of Trent Limited contributed to performance during the quarter. Trent is a leading retailer in India that sells private label apparel direct-to-consumer through its proprietary retail network. Shares were up this quarter on better-than-expected quarterly sales performance as well as continued footprint expansion of its Zudio value fashion franchise. We remain investors, as we believe the company will generate over 25% revenue growth in the near-to-medium term, driven by same-store-sales growth and outlet expansion. In addition, we believe operating leverage and a growing franchisee mix will lead to better profitability and return on capital, driving more than 30% EBITDA CAGR over the next three to five years.

DETRACTORS

• PT Bank Rakyat Indonesia (Persero) Tbk is a lender serving Indonesia’s micro, consumer, and small-to-medium-enterprise segments. Shares declined after the company reported higher-than-expected credit costs driven by the impact of rising inflation on clients’ repayment capacity. Management decided to tighten underwriting standards to prioritize asset quality over loan growth. While this decision is having a negative impact on near-term earnings expectations, it does not alter our thesis of increasing credit penetration within the segments Bank Rakyat serves. We expect Bank Rakyat to deliver above-industry returns in a growing segment for credit in Indonesia.
• Semiconductor production equipment manufacturer Tokyo Electron Limited detracted in the second quarter, driven by investor concerns about a slower-than-expected near-term revenue growth recovery. We remain optimistic about Tokyo Electron's long-term prospects. We expect semiconductor production equipment spend will grow robustly for years to come, as chipmakers expand capacity to meet rising demand, with AI as a key long-term catalyst. We believe the company will remain a critical enabler of major chipmakers’ technological advancements.
• Shares of Titan Company Limited, India’s largest organized jewelry retailer, detracted from performance due to a weak margin outlook amid rising competitive pressure. We retain conviction in Titan, as we believe the company will benefit from the continued formalization of the jewelry retail market in India and will gain market share from unorganized players. In addition, we think Titan is uniquely positioned with best-in-class brand equity and access to financing enabled by its Tata Group parentage. We continue to believe Titan can sustain 15% to 20% earnings growth in the next three to five years.

When reviewing performance attribution on our portfolio, please be aware that we construct the portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio if it meets our rigorous investment criteria. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to achieve a target sector allocation or to approximate an index. Our exposure to any given sector is purely a result of our stock selection process.

Baron New Asia Fund (the Fund) appreciated 10.77% (Institutional Shares) in the second quarter, outperforming the MSCI AC Asia ex Japan Index by 357 basis points due to stock selection and, to a lesser extent, differences in country weights.

On a country level, strong stock selection in India combined with significantly higher exposure to this better performing country contributed approximately 485 basis points of relative gains, accounting for the vast majority of outperformance in the period. Indian equities were up double digits as investors cheered Modi’s reelection to a historic third term as Prime Minister. This favorable election outcome ensures economic policy continuity and portents a likely increase in private sector capital expenditure/economic growth. Solid stock selection in Korea together with lower exposure to this lagging country were other sources of relative strength. Partially offsetting the above were adverse impacts from the Fund’s meaningfully lower exposure to strong performing Taiwanese equities and unique exposure to Japan, where shares of Tokyo Electron Limited, Hoya Corporation, and Keyence Corporation were down in the period. Disappointing stock selection in China and Indonesia also weighed on performance.

From a sector or theme perspective, robust stock selection in Consumer Discretionary, Communication Services, and Industrials was responsible for much of the outperformance in the period, driven by sharp gains from several of the Fund’s holdings in the global security/supply chain diversification, digitization, and Asia consumer themes. Strength in Consumer Discretionary came from an assortment of holdings in the Asia consumer (Trent Limited and Mahindra & Mahindra Limited), global security/supply chain diversification (Dixon Technologies Ltd. and Amber Enterprises India Limited), and digitization (Coupang, Inc., Zomato Limited, and PDD Holdings Inc.) themes. Within Communication Services, notable gains from Indian digitization holdings Bharti Airtel Limited and Indus Towers Limited coupled with higher exposure to this better performing sector added the most value. Some of the Fund’s largest positions in Industrials fared well in the period, notably Indian global security/supply chain diversification companies Kirloskar Oil Engines Limited, GMR Power and Urban Infra Limited, and Thermax Limited. Premier shipbuilding complex HD Korea Shipbuilding & Offshore Engineering Co., Ltd./HD Hyundai Heavy Industries Co., Ltd. (sustainability/ESG) was another source of relative strength in the sector.

Somewhat offsetting the above was disappointing stock selection in Financials, where performance was hindered by PT Bank Rakyat Indonesia (Persero) Tbk and a few of the Fund’s India wealth management/consumer finance holdings (Jio Financial Services Limited, Bajaj Finance Limited, SBI Life Insurance Company Limited, and Nuvama Wealth Management Limited).