They Beat All US Stock Funds Since 2003 | Michael Baron on the AI Winners Investors Miss

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Matt Zeigler (1:02)

You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use for better questions, lead to better decisions. I'm Matt Zeigler. Justin Carbonneau is in the co-host seat with me today. And our guest, he's the co-president and portfolio manager at Baron Capital, $69 billion in client assets, and some incredible stories about investing in AI that go back more years than most of you out there, myself included, have been talking about it. We've been really excited to get them on the show to actually go through some of these cases and arguments. Welcome to Excess Returns, Michael Baron.

Michael Baron (1:36)

Well, great. Thank you for having me.

Matt Zeigler (1:38)

So before we jumped into this and pressed the record button, you were talking about how giddy you are in general about some of the stuff you're writing and talking about. The last several investor letters, they've been must reads as far as I'm concerned. You've got a fascinating perspective on this. Why are you giddy today?

What does that mean to you?

Michael Baron (1:56)

There's so much going on. Exactly as you just said, we were talking a little bit off-camera beforehand and I'm just super excited about all the opportunities we're seeing in the market, both from an AI perspective. Obviously, we'll probably get into that later. It's on everyone's mind in terms of how to invest in AI, what are they going to be the winners and the losers.

But I think it's much broader than that. It's not just singularly focused on one area of the economy, one trend, even though this is going to be a multi-year, probably even multi-generational trend. But there's going to be so many winners that stem from it, and I think that we are finding many of them.

What we do at Baron Capital is a little bit different. You know, so we're growth investors, that's all we do. Over the past 40 some odd years, we're growth equity investors. And I think that when you have that terminology, that you're growth equity, everyone wants to talk about what's the exciting thing of the day. And that's obviously AI. But interestingly, we're not just AI investors, we're not just tech investors. And when you look at our entire portfolio, people are usually pretty surprised that we tend to be underweight, something like technology. We still have a pretty big share of our funds and our portfolios in technology, but we really try to create a balanced portfolio. We find growth in the areas that most other growth managers don't even look for growth. Something like financial, something as real estate, consumer areas, some of that would tend to be overweight, where other people tend to avoid. And the reason for that is you need balance in portfolios. That if you're just singularly focused, if you're just focused on AI and just focused on technology, they tend to trade together. They tend to go up together and tend to go down together. And it's much too volatile for the average investor to stomach. So we try to create, we're trying to find investments that are less correlated with each other, that have different inputs and outputs, that work with different environments. Not that we're saying we're predicting the environment, but we need to create portfolios that can weather different environments. And that's what's been able to result in our long-term performance. And that's why we're able to beat over the long term.

We don't say we're going to try to beat in one given quarter or in one given year.

And we can't predict when we will be out of favor, but we try to be very consistent. And over the long term, showing that we've been able to have very strong performance. I think some of the best performance out there for growth equity managers to get the quick plug-in there, it's obviously very hard to beat the index, but yet something like 97%, 98% of our strategies, of our assets and strategies or of our funds beat their index since inception. Not just by a little bit, but 92% of our funds are in the top quartile of their categories and over half in the top 5% or 1% of their categories. I'm checking numbers as I look inside because the changes on a monthly basis, over half in the top 1% of their various categories. So it's a track record that we're extraordinarily proud of.