Baron Emerging Markets Fund Delivers Solid Q2 Growth Amid Sector Disparities
The Baron Emerging Markets Fund recorded a 19.61% increase in its institutional share value during the second quarter of 2026. This performance, while robust, lagged behind the MSCI Emerging Markets Index's 24.05% gain and the MSCI Emerging Markets IMI Growth Index's 24.80% rise over the same period. The quarter was notably influenced by strong rallies in semiconductor and artificial intelligence (AI) stocks. The fund’s relatively limited exposure to traditional semiconductor and IT hardware sectors—areas that saw significant appreciation—contributed to its performance gap, reflecting its focus on high-quality growth investments.
Meanwhile, geopolitics played a stabilizing role as the US and Iran finalized a ceasefire agreement and signed a memorandum of understanding, leading to the reopening of the strategic Strait of Hormuz and promoting energy market stability. On the technological front, advancements introduced by industry leaders Anthropic and OpenAI accelerated the shift toward autonomous intelligent agents, fostering fresh growth opportunities.
Over the past 18 months, the fund has amassed over 55% in gains, outperforming many peers in emerging markets. The fund’s management team remains committed to a fundamentals-driven, thematic bottom-up approach aimed at achieving consistent returns amid evolving market conditions.
Performance Breakdown and Sector Analysis
| Metric | Retail Shares (%) | Institutional Shares (%) | MSCI Emerging Markets (%) | MSCI EM IMI Growth (%) |
|---|---|---|---|---|
| Q2 2026 | 19.54 | 19.61 | 24.05 | 24.80 |
| Year-to-Date | 20.04 | 20.18 | 23.85 | 22.99 |
| Last 12 Months | 31.31 | 31.59 | 43.51 | 41.22 |
| Last 3 Years | 19.37 | 19.68 | 23.03 | 22.50 |
| Last 5 Years | 3.73 | 4.00 | 7.20 | 5.34 |
| Last 10 Years | 7.97 | 8.24 | 10.07 | 10.32 |
| Since Inception (End 2010) | 5.92 | 6.19 | 5.13 | 5.83 |
The fund’s underperformance relative to benchmarks was primarily due to less exposure in key information technology segments, particularly traditional semiconductor and IT hardware stocks. Notably, stock selection in industrials also challenged returns. However, positions within financials, materials, and consumer discretionary sectors provided some offset through solid stock picking and allocation decisions.
Geographically, subpar stock selection in South Korea weighed on results, with Taiwan and Brazil allocations also contributing negatively. Conversely, underweight positioning combined with effective stock selection in China became the largest driver of relative outperformance. Allocations in Saudi Arabia and South Africa, alongside strong picks in India, further supported returns. India’s portfolio companies benefitted from easing Middle Eastern tensions and government reforms, including fiscal measures and monetary stimulus, propelling the economy toward accelerated recovery.
Top Contributors to Performance
- SK Hynix Inc. (5.05% contribution): As a leading supplier of high-bandwidth memory (HBM) for AI applications, SK Hynix experienced supply constraints amid robust demand. Customer backlog exceeds three years of production capacity, aiding record profit levels, with management noting a structural shift in this cycle.
- Taiwan Semiconductor Manufacturing Company (TSMC) (4.75% contribution): The world’s largest contract chipmaker remains at the forefront in manufacturing AI accelerators, with increased capacity at leading semiconductor nodes, prompting management to raise full-year guidance.
- Samsung Electronics (4.36% contribution): Leader in memory chips, Samsung successfully ramped up next-generation HBM4 production, fueling significant profit growth.
- **Wanji Technology and Delta Electronics also contributed 1.8% and 0.91%, respectively.
Factors Weighing on Returns
- Alibaba Group (-0.52% contribution): The company’s quarterly results revealed declines in overall profitability and negative free cash flow due to elevated investments in AI infrastructure and its Qwen ecosystem. Consumer weakness and losses in new business lines added pressure. Nonetheless, accelerated cloud revenue growth and initial scale in AI activities signal long-term potential.
- ISC (-0.43% contribution): A semiconductor test equipment provider that beat earnings expectations but saw market rotation away from certain semiconductor segments.
- BYD Co. (-0.42% contribution): Domestic electric vehicle sales faced intense price competition and reduced policy subsidies, though overseas deliveries surged over 80% year-over-year, accounting for around 40% of total sales. Future growth is expected from premium models and innovative battery technologies.
- Other tech holdings including Tencent and GDS also detracted from performance.
Portfolio Composition and Geographic Exposure
The fund’s ten largest holdings include TSMC (15.7%), Samsung (7.7%), SK Hynix (7.1%), Tencent (2.7%), Wanji Technology (2.3%), Delta Electronics (2.2%), Mexico’s Grupo Mexico (1.9%), Bajaj Finance of India (1.7%), Alibaba (1.6%), and CATL (1.5%). In terms of country allocation, South Korea, Taiwan, and India collectively represent over 64%, while China holdings stand at 18%. The portfolio also maintains positions in Brazil, Mexico, and other emerging markets.
Recent Portfolio Adjustments
During Q2, the fund increased exposure to companies aligned with global security and supply chain diversification themes, notably adding shares in Divi’s Laboratories and Acutaas Chemicals. Divi’s, a leading Indian active pharmaceutical ingredient manufacturer, benefits from the global pharmaceutical sector’s move to diversify production away from China. The company is a key supplier of complex intermediates and custom peptides for multiple innovative GLP-1 drug developers, with visible growth prospects in revenue and profitability.
The fund management emphasizes ongoing portfolio optimization focused on high-confidence themes, targeting companies with sustainable competitive advantages and growth potential to balance risk and return amid evolving market dynamics.