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THE BARON FUNDS
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BARON ASSET FUND page 1
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LOGO BARON GROWTH &
INCOME FUND page 8
767 Fifth Avenue, New York, New York 10153, 1-800-99-BARON, 212-583-2100
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ANNUAL REPORT SEPTEMBER 30, 1996
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| BARON ASSET FUND PERFORMANCE UPDATE |
| |
| ONE YEAR SINCE INCEPTION(CUMULATIVE) |
| PERFORMANCE FOR YEAR PERFORMANCE FROM JUNE 12, 1987 |
| ENDED SEPTEMBER 30, 1996 THROUGH SEPTEMBER 30, 1996 |
| |
| Baron Asset Fund 21.3% Baron Asset Fund 361% |
| S & P 500* 20.3% S & P 500* 197% |
| Russell 2000* 13.2% Russell 2000* 149% |
| |
| * The S&P 500 and Russell 2000 are unmanaged indexes. The S&P measures the |
| performance of the stock market in general, the Russell 2000 of small and |
| mid-sized companies. |
| |
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Dear Baron Asset Fund
Shareholder:
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PERFORMANCE
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On a long term basis, as well as for the twelve months ending September 30,
1996, Baron Asset Fund's returns have been satisfactory and strong. This can
be seen from the charts above. As you can see from the tables below, our
returns since May have been inconsistent. Our stocks surged in the spring and
early summer, fell sharply in July and, to date, have not recovered to their
spring peak prices. This is despite the very strong recent gains in the Dow
Jones Industrial Average and other large cap stock indices. The losses we
incurred in the September quarter were the first we experienced in two years
(see chart below).
<TABLE>
<CAPTION>
QTR1 QTR2 QTR3 QTR4 YEAR
<S> <C> <C> <C> <C> <C>
BAF ......... 1.6% 14.8% 7.4% -3.1% 21.3%
S+P 500 ..... 6.0 5.4 4.4 3.1 20.3
Russell 2000.. 2.0 5.1 5.3 0.3 13.2
</TABLE>
The share price declines we experienced this past summer were unrelated to
business fundamentals. There were no fewer students in DeVry's colleges;
there were no fewer residents in Manor Care's nursing homes; there were no
fewer businesses employing Robert Half's accountants; and there were no fewer
listeners to American Radio's stations. There were only fewer purchasers of
their stocks.
In October, health care stocks fell, again anticipating adverse changes in
government reimbursement practices; radio stocks fell in response to
Department of Justice challenges to several pending station mergers; and
communications stocks fell as investors feared more competition.
We have tried to take advantage of these price declines. We have added to our
existing holdings and established new ones during the past six months at what
we believe to be attractive prices. Our purchases have been made based upon
our independent fundamental analyses. For example, although Manor Care
announced this spring it would give its shareholders a tax free dividend of
Choice Hotels, Manor Care's share price fell from $39 to $31.50 in July. We
felt the split up would make the two companies more valuable, not less, and
added to our holdings. We think we can double our money in Manor Care and
Choice Hotels within three years. (We have already made more than four times
our original investment since 1989.) We expect Manor Care to increase its
earnings 17-18% per year, Choice 25-30% per year, for the next several years.
When
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THE BARON FUNDS
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American Radio's share price fell from $43 this summer to $25 after The
Department of Justice required the company to divest two stations in
Rochester, one of its least important markets, we added to our holdings.
American owns and operates 70 stations in 13 markets currently. After its
proposed merger with E Z is consummated early next year, American will
own/operate 93 stations in 18 markets across the United States. With no
further acquisitions, American Radio could increase its station cash flow
17-18% per year for the next four years. This rapid growth is partly due to
its significant ownership of "sticks," development stations with rapidly
increasing cash flows. American Radio should, at the same time, be able to
substantially reduce its debt. It could boost its growth rate with further
acquisitions or if it is successful in developing its communications tower
business. About half its current market capitalization is represented by
debt. We think we can nearly quadruple our money in this investment by the
year 2000. When Charles Schwab's shares traded 20-30% below the level they
had reached in September 1995, although its business had grown 40-50% since
then, we added to our holdings. Schwab's stock price has recently jumped, but
it remains only modestly above the levels it reached 14 months ago. We think
we will double our money again in Schwab within three years. (We have made
nearly five times our money since 1992.) Schwab's earnings, based upon our
projected growth of customer assets held at Schwab, should at least double
over that time period. When Corrections Corporation of America's share price
fell more than 40% from the level it had reached earlier this year, despite
the fact that the company has 40% more prison beds under management
contracts, we added to our holdings. We think we can make three to four times
on our investment in this company during the next four to five years. Prison
beds are likely to expand by 50% over the next five years. Privately managed
beds, which represent a little more than 4% of the 1.6 million prison beds
now in operation, could increase to 20-25% of the total. Corrections
Corporation is the leading operator of privatized prisons, with an
approximate 50% share of this business. In the current year, the company has
won 56% of the beds awarded for privatization, In five years we expect
Corrections operating profit to approximate $1 billion per year. The market
value of their business could then approximate $6-7 billion. The company's
current market value is $1.8 billion.
Smaller stocks have dramatically under-performed stocks of larger companies
during the past five months. This under-performance has really been ongoing
since the fall of 1993 with few brief interruptions. This can be readily
observed by comparing the performance of the small-cap Russell 2000 index to
the large-cap S & P 500 index during that time period. Since we operate on
the premise that stock prices over a reasonable time period reflect business
fundamentals, we expect Baron Asset Fund to perform well whether large
company stocks or small company stocks are in vogue with investors. This is
because we always attempt to invest at attractive prices in well managed,
growing businesses with strong fundamental prospects. Since the median market
capitalization of companies owned by our Fund is only about $600 million,
Baron Asset Fund should do especially well when stocks of smaller companies
again begin to perform better than larger ones.
We remain focused on our goal of doubling, through performance, your
investment in Baron Asset Fund before the end of the year 2000. Of course,
there can be no assurance that we will be able to achieve our objectives.
Baron Asset Fund's performance ranks among the top 2% of mutual funds since
the Fund's inception in June 1987. The Fund is ranked five stars by
Morningstar, that company's highest investment rating. Baron Asset Fund is
included in Schwab's Mutual Fund Select List, a group consisting of fifteen
top performing, OneSource mutual funds. There are more than 500 mutual funds
available through OneSource.
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INVESTMENT THEMES
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We have often written of our intent to focus the Baron Funds' investments in
fast growing, job creating "sunrise" industries. Our "sunrise" industries are
likely to benefit from current demographic trends as well as changing
government programs, policies and priorities. We find of great interest
industries and segments of our economy in which our children are likely to
find opportunities and employment. We have no interest in investing in
"sunset" industries such as steel, autos, tobacco and railroads in which our
parents and grandparents earned their livelihoods and which now must fire
employees and cut costs in order to maintain profits and achieve growth.
Investment themes of current interest are (1) education, because the
government says that 80% of the jobs available in the year 2000 will need
training beyond high school and high school graduates will increase 25% in
the next five years (DeVry, Learning Tree, Education Management); (2)
privatization of government services, due to the general proposition that
private industry can nearly always provide services that are at least
equivalent to those provided by the government but at lower cost (Corrections
Corporation of America, Youth Services); (3) financial services, because the
country's largest population segment, the baby boomers, are now approaching
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retirement and have not saved enough to be able to maintain their current
life styles (Charles Schwab, Franklin Resources); (4) government deregulation
of industry, because there are almost always significant costs involved,
direct and indirect, when government attempts to dictate to private companies
how to operate their businesses in areas that may be of no consequence to the
broad public interest (American Radio, Saga Communications, Cox Radio, Heftel
Broadcasting); (5) health care, since the population is aging and persons
over age 85 are growing three times as rapidly as the general populace,
requiring greater use of healthcare services as the population ages (Manor
Care, Genesis Health, Pediatric Services, Quorum Health, Vitalink Pharmacy);
(6) media and entertainment and gaming, because that's what people like to do
and as we become more prosperous as a nation, we have more money available to
do what we want (Circus Circus, Sun International, Mirage Resorts, Choice
Hotels); and (7) communications and space, because huge investments are now
being made in infrastructure and businesses require advanced communications
services to be competitive (American Mobile Satellite, International
CableTel, Globalstar, Palmer Wireless).
The changing demographic composition of our nation's populace is the driving
force behind many of the investment themes we listed, e.g., education, health
care, media and entertainment and financial services. Changing demographic
characteristics and population composition create long lasting demand for
certain products and services. Demand for business services is an important
component in determining long term business profitability. For example,
another rapidly changing demographic is the Hispanic portion of our
population. The United States' Hispanic population is currently growing at
nearly five times the rate of the country's Caucasian population.
Beneficiaries include media, retail and finance businesses that cater to
Hispanics (Heftel Broadcasting, Smart & Final, Mercury Finance).
Other important investment themes, economic trends, in which we have made
important investments include temporary help businesses and human resource
outsourcing (Robert Half International), and business services outsourcing,
services that are beyond core competencies of businesses and are able to be
performed better and more effectively by others (Flextronics International,
Metro Networks).
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RECENT PORTFOLIO ADDITIONS
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EDUCATION
Investing in education businesses has been very profitable for Baron Asset
Fund. The Fund has earned about five times its money on DeVry since 1991 and
has about tripled its money on Learning Tree International since 1995. DeVry
offers its students an accredited college degree and practical, career
oriented education. Students are trained as, for example, computer
programmers, electrical engineers or software analysts. It costs a lot less
to obtain a DeVry education than a degree from a private four year college,
state school or community college. DeVry places about 95% of its graduates in
jobs within six months of graduation. Learning Tree is the leading provider
of classroom instruction for information technology professionals. Learning
Tree is a beneficiary of rapid change in technology. When EDS or Perot
Systems, for example, needs 20 of their systems analysts to become expert in
Microsoft's Windows NT yesterday, Learning Tree is responsive and provides
classroom instruction either on site or in Learning Tree's regional
classrooms. Learning Tree is adding more classrooms, more course titles and,
for the first time, using its existing library of course material to develop
computer based training (CBT) instruction. CBT instruction should broaden the
market for Learning Tree's course material and boost that company's profits
further.
Our most recent investment in education is Education Management
Corporation. Education Management has been a leading provider of post
secondary, career oriented education for about 35 years. Education Management
currently operates 13 schools, including 11 Art Institutes and the recently
acquired New York Restaurant School. School curriculum is designed to provide
students with the knowledge and skills necessary for entry level employment
in computer animation, multimedia, advertising design, graphic design and
culinary arts. Completion of the assigned program generally takes 18 to 27
months and usually results in the award of an associates degree. Four of the
Art Institutes offer bachelors degrees. More than 100,000 students have
graduated from Education Management's schools. In the fall 1995 quarter,
14,000 students were enrolled in its schools. An estimated 16,000 students
are enrolled this year.
Education Management plans to open or acquire two new schools per year for
the next several years. Education expects to earn, on average, a 38% internal
rate of return on its investment in new facilities. This high level of
profitability indicates the very attractive niche in which the company
operates. Education also plans to add new courses each year to its existing
schools to better serve its students and increase demand for its services. In
the past fiscal year, the company's schools have received
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a 23% increase in admissions applications. Due to its relatively large size
and well established reputation, Education Management is able to spend about
half the amount, as a percentage of revenues, that would be spent by smaller
schools to recruit students. During the past several years, referrals from
students or graduates have increased from 23% to 38% of applications received.
The company has focused on improving outcomes for its students. About 40%
of its students are enrolled in remediation programs. This compares to 15%
only three years ago. Persistency, the number of students continuing
enrollment semester to semester, has improved 4 percentage points during this
period, a very significant result. The job placement rate for graduates has
improved in the past three years to 87.4% from 82.3% while starting salaries
for its graduates have risen 21%. Education Management's revenues could
increase from an estimated $180 million in the current fiscal year to $400
million in four years. Pretax margins could increase from 10.6% to 13% over
the same time period, earnings per share from an estimated $.71 to $2.00.
Baron Asset Fund owns 518,500 shares of Education Management purchased for
about $15.96 per share.
MEDIA AND ENTERTAINMENT
Metro Networks, Inc. is the largest provider of traffic reporting services
to radio and television stations. Metro supplies traffic reporting using its
own fleet of helicopters, fixed wing small aircraft and fixed site cameras.
Metro's services are more comprehensive than any competitor's. Metro has
recently become a leading supplier of local content, e.g. local news, sports
and weather, to the radio and television broadcast industries. Metro offers
both radio and television stations the opportunity to outsource their
traffic, news, sports and weather services in return for 10 second "avails."
These 10 second sponsorships of traffic, news and sports reports are not
considered ads when determining the percentage of time a broadcaster spends
on ads as compared to content. Local stations are therefore able to eliminate
the cost of operating a news gathering service while continuing to offer
local content of at least the quality previously provided.
Metro Networks was started in Baltimore 18 years ago. It currently
services 1,311 radio stations in 47 of 50 major markets with its traffic
reporting services. These 1,311 stations represent only about 49% of the
stations in Metro's markets. Metro has ample opportunity for further growth
by adding stations in existing markets. In addition, Metro now believes it
can offer its services in the top 75 markets, not just the top 50. Of the
1,311 radio stations that subscribe to the Metro traffic service, only 225
take its expanded news, sports and weather services. Among the station groups
purchasing the expanded package are Cap Cities, American Radio and Clear
Channel. Metro has doubled its sales force in an attempt to increase the
number of stations which purchase its recently expanded services.
In 1991, only 31% of Metro's inventory of 10 second ads were sold. Last
year it was 75%. The opportunity is probably 90%. As a greater percentage of
its ads are sold, rates will likely rise. With greater penetration of its
existing traffic reporting markets, expansion into new markets, increased
sales of its expanded news, sports and weather services, and higher
sellthrough of its ads at higher rates, Metro could about double its radio
business in the next four or five years. Revenues, at very high cash flow
margins, could jump from about $100 million per year to $200 million per year.
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Metro's opportunity in television is at least as large as that in radio.
It now provides its traffic reports to just 111 television stations. Of these
stations, only 17 currently subscribe to Metro's expanded Video News service.
In the current year, Metro will increase the number of markets where Video
News is available to 25 from 12. This service provides generic local news to
stations which can be readily customized to individual station formats.
Television now represents only 7-8% of Metro's revenues. In four to five
years, television services could contribute at least as much to Metro's
revenues as radio. Metro Networks is currently valued by investors for less
than 10 times 1997 cash flow. We expect the company's cash flow to grow at
least 25-30% per year for the next several years. Baron Asset Fund owns
1,070,000 shares of Metro Networks purchased for approximately $20.42 per share.
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COMPANY NEWS
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AMUSEMENT & RECREATION
We have been investing in Las Vegas' gaming companies for more than 20
years, long before it was fashionable to do so. Tourists visit most
destination resorts to see the sights. Visitors to Las Vegas, the adult
Disneyland, travel there to see the enormous mega-themed hotels and to
experience, as Mirage Resorts' Steve Wynn proclaims, "the excitement of a
carnival and the fun of a 24-hour-a-day party." New hotels, each seemingly
more fantastic than the last with their exploding volcanos, live pirate
battles, indoor roller coasters, white tigers and sharks, indoor rainforests,
Egyptian pyramids, New York City skyline, medieval castles and, opening in
two years, the recreation of a northern Italian town on a huge lake (in the
desert, of course), draw ever larger crowds.
We had been a shareholder of Circus Circus for several years until
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we sold our stock in 1993. Its shares were then about 40% more expensive than
they are today. Nearly the entire senior management team left Circus en masse
in 1993. This was the result of a dispute with the company's founder. Circus
languished following the executives' departures. The company's Board
dismissed its founder in mid-1995 and the management team which had built
Circus in the 1980's, rejoined the company. We have since been purchasing
Circus' shares whenever we have had the opportunity to do so at an attractive
price.
During May, Circus reached an agreement with Mirage Resorts to jointly
develop a large tract of land in Atlantic City, New Jersey, as a destination
resort. The H-Tract property will include three themed casinos. Circus will
spend about $600 million on its New Jersey casino hotel. It could open in
about four years. Existing New Jersey casino hotels are boringly similar and
ten to twenty years old. We think the new Circus and Mirage properties are
likely to be well received and unusually profitable, i.e., we think they'll
earn at least 25-30% EBITDA returns per year on their investments.
On June 12, Circus and Mirage opened a new, jointly owned, $350 million
Las Vegas casino, Monte Carlo. It has been an enormous success. Monte Carlo
has been 100% occupied since opening and will probably earn $100 million cash
flow per year. Circus also announced this summer a worldwide development
agreement with Four Seasons Regent Hotels. The first property to be developed
under this agreement is a 400 room hotel in Las Vegas that will be owned by
Circus and managed by Four Seasons. It will be the first five star hotel in
Las Vegas. In December, Circus will open a new 1,000 room hotel tower for its
Circus property and two new 1,000 room hotel towers for Luxor. Both Luxor and
Circus are presently being refurbished. Circus will spend about $2 billion in
the next four years on new hotels, most importantly the development of its
120 acre parcel on the Las Vegas strip. Circus has a $1.5 billion line of
credit that will soon be increased. During November, Circus issued $150
million 40 year bonds and $150 million 100 year bonds. This long duration
debt issuance is highly unusual for any company. It is especially so for a
casino hotel. It was not long ago that casinos were considered unsavory by
most investors.
When Circus concludes its current capital spending programs in the year
2000, Circus' cash flow could about double to $900 million per year; its
earnings per share could reach $4; and its stock price should reflect this
growth. Operations at its Las Vegas casinos were disrupted by construction
this summer and, as a result, the company earned less this year than last
year. When Circus' share price fell from nearly $45 this spring to a little
more than $30, Baron Asset Fund added to its shareholdings. We estimate
Circus repurchased about six million of its shares during the same time
period. Business Week recently reported a rumor that ITT was interested in
acquiring Circus. Baron Asset Fund currently owns 660,000 shares of Circus
purchased for about $30.72 per share.
FOOD & AGRICULTURE
Delta & Pine Land Company is the largest producer of varietal cotton seed
in the United States. Its recently introduced, genetically altered, pest
resistant, Bt cotton seed has reduced farmers' insecticide costs and improved
their crop yields. On November 20, Delta & Pine announced it will participate
in a joint venture in China to begin to sell Bt cotton seed in that country.
The seed will initially be sold in Hibei Province. Broad commercial sales in
Hibei Province will begin in spring 1998. Sufficient seed will be available
at that time to plant about 500,000 of the province's 1.5 million acres.
Insect problems in China are severe. Farmers have treated their fields
with nearly all available pesticides and, in the process, have created insect
strains unable to be controlled with topically applied chemicals. Delta &
Pine's Bt cotton should be suitable for planting on virtually all of China's
11.5 million acres planted with cotton. Delta & Pine could
earn a pre-tax profit of about $4.20 per acre planted with its Bt seed.
Sales of Delta & Pine's Bt cotton seed varieties with the insect resistant
Bollgard gene accounted for 1.8 million of the 14 million acres of cotton
planted to cotton in the United States during 1996. This was the first year
Bt seed was widely available. Farmers justify planting the higher priced Bt
cotton seed by avoided pesticide costs. Yields from most farms using Bt seed
have been 10-15% higher than results achieved in fields using conventional
seed. Historically high prices for alternative crops, e.g., corn, sorghum and
wheat, caused acreage planted to cotton to decline 18% in 1996. Crop price
relationships appear to be returning to normal. This should boost demand for
cotton seed next year. In addition, Delta & Pine will introduce more Bt
varieties next year and have more seed available for sale. We estimate U.S.
cotton acreage planted with Bt seed could increase 30-40% in fiscal 1997.
This should cause the company's profits to jump more than 50%. As Delta &
Pine increases sales of its genetically altered NuCOTN Bt seed in the United
States; introduces Bt varieties in China, Mexico, India, Pakistan, Mexico and
Egypt; and begins to sell Roundup resistant cotton seed, the company's
earnings could more than triple within the next four
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years. Baron Asset Fund owns 565,000 shares of Delta & Pine acquired for
about $16.92 per share.
MANUFACTURING-OUTSOURCING
Original equipment (OEM) suppliers for telecommunications equipment, medical
equipment and computer equipment are increasingly outsourcing product
manufacturing. Outsourced manufacturing allows OEM companies to concentrate on
higher margin and more profitable equipment design and marketing efforts, their
core competencies. Flextronics International contract manufactures home medical
equipment such as thermometers, telecommunications equipment such as telephones
and modems, and computer peripheral equipment such as the mouses and keyboards.
Important clients include Johnson & Johnson, U.S. Robotics and Microsoft.
On November 19, Flextronics announced it had signed a letter of intent to
acquire Ericsson Business Networks AB's manufacturing operations. The agreed
upon price is book value, an estimated $120 million. First year annual
revenues could exceed $350 million. Flextronics should be able to
significantly reduce the effective acquisition cost for this business by
inventory reductions. Improved manufacturing techniques should allow the
company to reduce product manufacturing times and inventory investment. Plant
capacity in Sweden also will be significantly expanded, allowing Flextronics
to increase its sales to Ericsson and add other customers. The operation is
now capacity constrained. Ericsson's recently introduced local loop radio
telephone, DECT, a cordless phone with a range of five miles from its base
station, is manufactured in this plant. Ericsson is currently experiencing
very strong demand from remote villages for this cheap alternative to
cellular. Initially, Flextronics will meet Ericsson's excess demands from its
own Far East factories.
This is the first time Ericsson has ever outsourced its manufacturing.
Flextronics' purchasing systems and factories were studied and its large
customers interviewed. Flextronics' operations were evaluated superior.
Flextronics' annual revenues could jump from about $540 million in the year
ending March 1997 to more than $1.1 billion next year. Flextronics may sell
an additional two million shares, increasing its shares outstanding by
15-20%, to finance this purchase. Flextronics is now the third largest
contract manufacturer. This fast growing company should soon have the
opportunity to purchase additional manufacturing operations, both from
Ericsson and others. Flextronics could earn $2.25-2.50 per share next year
and continue to grow in excess of 30% per year for several years. Baron Asset
Fund owns 1,270,000 shares of Flextronics purchased for about $28.75 per share.
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OTHER DEVELOPMENTS
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THE BARON FUNDS RECEIVE FAVORABLE MEDIA COVERAGE
Warren Boroson of The Bergen County Record attended The Baron Funds' Fifth
Annual Investment Conference this year (see below) and wrote about it in a
column October 22nd titled, "Buying when others sell. Independence pays for
Baron." In September, Dow Jones Newswire featured, "Ron Baron 'Eats His Own
Cooking' and Runs Thriving Funds." Inc.'s September issue included Baron
Asset Fund as one of "20 Best Mutual Funds: The perfect choices for company
owners only--and how to profit from them." Following Money's October article,
"Inside the Mind of a Manager,"an in-depth study of how we conduct extensive
research of companies, Money included us in an article on investing for
retirement, "How to be sure you never go broke." In November, Money included
our Fund in an article on women and investing, "Why more women say . . .
I don't need your money, honey." Individual Investor featured Baron Asset
Fund in a November article "New World Investing" about mutual funds that
"concentrate on riding the trends that have changed the way we live."
While most interviewers to whom we speak are principally interested in our
Funds' investment philosophy and process, i.e., how do we find businesses in
which to invest profitably, Barron's is different. Barron's wants to know
about stocks. What are we investing in and why. And, their questions are
tough . . . and cynical. Preparing for an interview with Kate Welling or Alan
Abelson is like getting ready for a final in college or law school. During
the past fifteen years, I have been the subject of numerous
"q. and a." interviews in that magazine. I was also a member of their annual
year end Investment Roundtable for five of those years. On November 18, I
again was the subject of an interview with Kate, "Sunrise Industries," in
which we spoke a little about what we do and mostly about six companies in
which we have recently invested. Reprints of this article and some of the
others mentioned are available if you would like a copy. Please call or
write. Of course, there will be no charge.
FIFTH ANNUAL BARON INVESTMENT CONFERENCE HELD OCTOBER 18,1996 IN NEW YORK
CITY; WELL ATTENDED
On October 18, chief executives of five companies in which we are
shareholders presented at The Baron Funds' Fifth Annual Investment
Conference. The executives who spoke described their companies' prospects and
the strategies they are employing to realize those prospects.
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An important element in our investment strategy is our attempt to invest in
companies managed by talented, honest, hardworking, entrepreneurial
executives. As I have often said, "we invest in people, not in buildings."
Our annual conferences give The Baron Funds' shareholders an opportunity to
meet and question executives who manage the companies in which they are part
owners, to "kick the tires" of their investments. We believe these meetings
should help our shareholders better understand the prospects of the companies
in which their savings are invested. I also believe it is useful for me
report annually, in person, to our shareholders. Following my presentation, I
try to answer any questions our shareholders may have about our investments,
our results and our investment strategy.
Chief executives of American Radio, Boston, Massachusetts; Choice Hotels,
Silver Spring, Maryland; Corrections Corporation, Nashville, Tennessee;
Dollar Tree Stores, Norfolk, Virginia; and Learning Tree International, Los
Angeles, California were the speakers. Many of our shareholders traveled a
long way to attend: Honolulu, Houston, Dallas, Minneapolis, Las Vegas, Little
Rock and Boca Raton were a few of the distant cities represented. In all,
more than 500 shareholders and financial planners attended. We are
appreciative of your interest and the time and effort you spent to be with us
that morning, whether you traveled a long distance or came from nearby.
We gave our conference guests "party favor" Baron Funds' Conference
T-shirts. Shareholders who were unable to attend but who would like a T-shirt
should call us at 1-800-99-BARON. Of course, there will be no charge. Many of
our conference attendees asked afterwards if my formal remarks and slides
could be made available. We have made copies of my speech. Any shareholder
who would like a copy should call us. We'd be happy to furnish it.
BARON ASSET FUND'S ANNUAL DIVIDEND
Baron Asset Fund's fiscal year ended September 30,1996. On December 30,
1996, Baron Asset Fund will distribute to its shareholders a long term
capital gain dividend estimated to approximate $.04 per share. As a self
described "long term investor in businesses, not a short term trader of
stocks," Baron Asset Fund has usually paid a relatively small dividend when
compared to its investment performance. Baron Asset Fund often holds stocks
for many years, e.g., we have been shareholders of Charles Schwab since 1992,
Manor Care since 1989, Mirage since 1987, DeVry since 1991, Robert Half since
1991 and Smart & Final since 1993. Our Fund benefits as a long term investor
first by incurring reduced transactions costs. As a long term investor, the
Fund is also able to defer taxes for our shareholders. The Baron Funds sell
stocks when either there has been an adverse, long term change in a company's
business fundamentals, or its stock price has risen so high as to no longer
offer attractive long term returns. Fortune magazine has ranked Baron Asset
Fund as providing one of the highest after tax returns to its shareholders
for each of the past three years.
THANK YOU FOR INVESTING IN BARON ASSET FUND
We recognize that investors have many choices if they decide to invest in
mutual funds. In fact, there are now nearly as many mutual funds as there are
stocks. We are appreciative that you have joined us as shareholders in Baron
Asset Fund. We will remain disciplined and will continue to work hard to
justify your confidence in our Fund.
Sincerely,
/s/ Ronald Baron
- -------------------------------
Ronald Baron
President
November 26, 1996
- -------------------------------------------------------------------------------
7
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
-----------------------------------------------------------------------------
| BARON GROWTH & INCOME FUND PERFORMANCE UPDATE |
| ONE YEAR SINCE INCEPTION(COMULATIVE) |
| PERFORMANCE FOR THE YEAR PERFORMANCE FROM JANUARY 8, 1995 |
| ENDED SEPTEMBER 30, 1996 THROUGH SEPTEMBER 30, 1996 |
| |
| Baron G&I Fund 25.8% Baron G&I Fund 86% |
| S & P 500* 20.3% S & P 500* 56% |
| Russell 2000* 13.2% Russell 2000* 42% |
| |
| |
| * The S&P 500 and Russell 2000 are unmanaged indexes. The S&P measures the |
| performance of the stock market in general, the Russell 2000 of small and |
| mid-sized companies. |
| |
-----------------------------------------------------------------------------
Dear Baron Growth & Income Shareholder:
- -------------------------------------------------------------------------------
PERFORMANCE REVIEW
- -------------------------------------------------------------------------------
Baron Growth & Income Fund continues to perform well, both on an absolute and
relative basis.
This can be seen from a glance at the charts above. However, the quarterly
returns Baron Growth & Income Fund have achieved this year are anything but
smooth. This can be readily observed from a cursory look at the table below.
Many of the Baron Growth & Income Fund's investments in well managed, fast
growing, small and mid-sized companies fell sharply in price in July, and
once again in October after our fiscal year had ended. As of the date of this
letter, many of their share prices remain depressed.
<TABLE>
<CAPTION>
QTR1 QTR2 QTR3 QTR4 YEAR
<S> <C> <C> <C> <C> <C>
BGI ......... 3.3% 11.9% 7.7% 1.1% 25.8%
S+P 500 ..... 6.0 5.4 4.4 3.1 20.3
Russell 2000.. 2.0 5.1 5.3 0.3 13.2
</TABLE>
We have tried to take advantage of the current years' stock market volatility
to purchase shares of businesses with strong fundamental prospects at very
attractive prices. Among the most important purchases we made during the past
five months are the leading provider of privatized prison management
Corrections Corporation of America; two leading casino hotels Circus Circus
and Sun International Resorts; the leading provider of private pay, skilled
nursing care Manor Care; the third largest U.S. radio station owner/operator
American Radio; the leading provider of genetically engineered cotton seed
Delta & Pine Land; the leading discount broker and no-load mutual fund
distributor Charles Schwab; and a leading, regional, natural gas, local
distribution company Southern Union. The Baron Growth & Income Fund also
continued to maintain approximately 25% of its assets invested in REITs. The
Fund established holdings in Arden Realty and Crescent Real Estate Equities
while adding significantly to our holdings of Redwood Trust and Beacon
Properties. We continue to focus our new and our incremental investments in
companies we expect to at least double in value before the end of the year
2000. Of course, there can be no assurance our investments will achieve this
objective.
<PAGE>
Although, as noted, many of our small and mid-sized company investments have
not yet recovered to the peak prices they achieved this past spring, Baron
Growth & Income Fund's portfolio in its entirety has surpassed its early
calendar year strong performance. This is due to the very strong performance
of our real estate investment trust investments which we discuss in the next
segment of this report. During fiscal 1997, we expect to continue to maintain
20-25% of our Fund's investment portfolio in income producing real estate
investment trusts. We are also trying to hold at least 10% of our assets in
other income producing securities, i.e., non-rated convertible debt,
convertible preferred shares and special situation securities with high
current yields and equity characteristics.
Baron Growth & Income Fund's performance is ranked number 1 of 437 growth and
income funds from its inception on January 3, 1995 through September 30,
1996, the end of our fiscal year. This ranking is based upon information
furnished to us by Lipper Analytical Services. Also based upon Lipper's
information, Baron Growth & Income Fund ranks number 9 of 527 similar funds
for the nine months ended September.
- -------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUST NEWS
- -------------------------------------------------------------------------------
PERFORMANCE
The REIT segment of our investment portfolio continues to provide very
strong returns, both on an absolute and relative basis. For the nine months
ended September 30, 1996 Baron Growth & Income's REIT investment portfolio
achieved a 21.5% total return, including
- -------------------------------------------------------------------------------
8
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
dividends. Through November 25, this portfolio segment achieved 1996
calendar-year-to-date total return of more than 30%. The returns achieved
from this portfolio segment, the segment we had anticipated would provide us
with stable, annual returns in the low to mid-teens, have been unexpectedly
growth-stock-like. The returns on our Fund's real estate portfolio have
surpassed the strong returns achieved this year by the NAREIT index. The
returns of our Fund's real estate investments this year have also been better
than the returns achieved by all but one of the dedicated mutual funds that
invest only in real estate and REITs. Last year, Baron Growth & Income Fund's
inaugural year, our REIT portfolio return was 20.5%. This was significantly
below the return achieved on Baron Growth & Income Fund's entire investment
portfolio, as we had planned. But, the returns on Baron Growth & Income
Fund's real estate portfolio were better last year than any other mutual fund
investing only in REITs.
So, how did this happen? We attribute a large part to our good luck, the
balance to our stock selection methodology. The real estate market is not
monolithic, and all types of real estate stocks did not perform equally well,
either this year or last. During our fiscal year 1995, we concentrated our
real estate investments in two categories, storage facilities and community
shopping centers. Storage facilities, in our opinion, had the most attractive
economics of publicly traded real estate securities. These returns caught our
attention, especially when they were coupled with widespread investor
disinterest. We invested in community shopping centers because we felt this
real estate asset class offered important opportunities for strong managers
to improve property returns. Both storage and community shopping centers were
among the top performing real estate asset classes last year. In the current
year, we have concentrated our new real estate investments in REITs that own
office buildings. We have made important investments in other REITS,
including Arden Realty Group, Beacon Properties, Cali Realty, Crescent Real
Estate Equities and Highwoods Properties. We have also made significant
investments in two non-office building REIT special situations.
We chose to invest in office REITS because there had been little new
office construction for the past several years, vacancy rates had been
falling due to a steadily expanding economy, and rents had finally begun to
rise. We were able to purchase office REITs in the stock market at
significant discounts to the replacement costs of their owned buildings.
Office REITs, in general, have been the strongest performing REIT asset class
this year.
We have also been lucky enough to make significant investments in two
additional REITs, both of which have outperformed even the office REITs
category. Starwood Lodging Trust is a hotel REIT with a unique paired
operating and property ownership structure. Redwood Trust, a unique mortgage
REIT that, although it seems to be a bank without bricks and mortar, is
legally chartered as a REIT. We wrote about Redwood Trust in our June
quarterly letter. Starwood Lodging's unique paired operating/ownership
structure is grandfathered under the law and is extremely valuable. Starwood
has used its tax efficient structure to employ an aggressive acquisition
strategy focused on complicated transactions. Starwood has acquired nearly $1
billion of hotel assets during the past twelve months. Initial property level
yields on its acquisition approximates a very attractive 10-12%. Further, the
initial yields on these properties have the opportunity for significant
improvement over time. Starwood has quickly become the leading REIT
owner/operator of upscale U.S. hotel properties. As such, it has benefitted
from the continuing improvement in hotel industry fundamentals this year. The
hotel industry is in the mid-stages of a significant cyclical recovery.
Immediately after the overbuilding of the 1980's and the recession of
1990-91, many hotel properties experienced deteriorating operations at the
same time their capital structures were over-leveraged. Bankruptcies,
workouts and little new construction followed. The improved economy of the
past several years, when coupled with little new hotel room construction, has
helped this real estate asset class enjoy a significant recovery in rates and
occupancies that is continuing.
We invest in REITs using the same investment approach we use in non-real
estate common stocks. We choose segments in which we would like to invest;
visit companies and managements in those segments to try to learn as much
about their businesses, prospects and strategies as possible; and invest only
in those managements in whom we have confidence. The managers in whom we
invest must be hard working, honest, entrepreneurial and smart. Of course,
our approach to growth stock investing is value oriented and we won't
purchase a stock unless we think we have the opportunity to earn an
acceptable rate of return. In REITs that is generally about 30% over two
years. We are willing to accept a lower rate of return on our real estate
investments than we expect to earn on common stocks because, with their
relatively high dividends, we consider REITs less risky investments.
- -------------------------------------------------------------------------------
OTHER DEVELOPMENTS
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND RECEIVES FAVORABLE PUBLICITY
The November Retire With Money newsletter features Baron Growth &
- -------------------------------------------------------------------------------
9
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
Income Fund in the story "Three Top New Funds with Veteran Managers." The
premise of this article is that new funds tend to outperform older, more
conservative and larger funds. But, the article notes, you assume more risk
by investing in new funds and these funds often have a difficult time
sustaining their initial strong performance. You can temper the risk of
investing in new funds by "investing in new funds run by managers with
successful long term track records at other funds." The author calls Baron
Growth & Income Fund "essentially a throttled back version of Ron Baron's
small-cap growth fund, Baron Asset." The Wall Street Journal mentioned Baron
Growth & Income Fund favorably in an article, "REITs Grow Popular as a Way to
Diversify, But it Can Be Hard to Pick the Right Ones." I was quoted as a fund
portfolio manager in an article that appeared in the Chicago Tribune, "A Hot
Property; Popular REITs Put Investors in Real Estate Game." Some of these
articles are available in reprints; if you would like copies please call or
write.
SECTIONS OF THE BARON ASSET FUND ANNUAL REPORT IMMEDIATELY PRECEDING THIS
LETTER ARE RELEVANT TO YOUR INVESTMENT IN BARON GROWTH & INCOME FUND
There are several topics addressed in the Baron Asset Fund letter
immediately preceding this to which we would like to direct your attention.
The securities discussed in the RECENT PORTFOLIO ADDITIONS and COMPANY NEWS
are also owned by Baron Growth & Income Fund. We think you will find our
discussion of INVESTMENT THEMES relevant as well. The Baron Asset Fund
performance review section is also relevant since both funds have purchased
the same securities during the past several months, albeit in different
properties. The segment OTHER DEVELOPMENTS discusses our annual investment
conference as well as recent articles that have appeared regarding our two
Funds in the financial press.
BARON GROWTH & INCOME FUND'S ANNUAL DIVIDEND
Baron Growth & Income Fund's fiscal year ended September 30,1996. Its
annual dividend will be paid on December 30. We estimate it will approximate
$.27 per share. As we discussed in the Baron Asset Fund annual report, we
attempt to limit our portfolio turnover and our trading expenses. We also, as
a result of our long term investment orientation, attempt to defer taxable
gains for our shareholders. We expect our annual dividend, in most years, to
represent a relatively small portion of our Fund's appreciation.
THANK YOU FOR CHOOSING TO INVEST IN BARON GROWTH & INCOME FUND
Baron Growth & Income Fund has significant investments in small and
mid-sized companies, as well as non-rated debt issued by many of the same
companies. Therefore, our Fund must be considered significantly more risky
than the conventional growth and income fund. However, with 30-40% of our
portfolio income oriented, Baron Growth & Income Fund should be considered a
great deal more conservative than most small cap mutual funds.
With this unconventional mix of fast growing small and mid-sized companies
as well as income producing securities issued by many of the same companies,
we are attempting to achieve 15-20% annual returns for our shareholders.
There may be a substantial income component to our returns. As a result, our
returns may be achieved with relatively less price variability than is
normally the case with small cap mutual funds. Of course, there can be no
assurance that this will be true.
We have been very fortunate during the first 23 months of our Fund's
operations. Our returns have been significantly above our targeted levels for
rates of return. We have not changed our targeted levels of return.
There are more than 500 growth and income mutual funds from which investors may
choose if they decide to invest in this more conservative, growth oriented,
mutual fund category. We are appreciative for the early and strong support
provided by our fellow shareholders in Baron Growth & Income Fund. We will
remain disciplined and will continue to work hard to justify your confidence and
continued interest.
Sincerely,
/s/ Ronald Baron
- --------------------------------
Ronald Baron
President
November 26, 1996
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
TABLE I
- -------------------------------------------------------------------------------
PORTFOLIO MARKET CAPITALIZATION
- -------------------------------------------------------------------------------
The Funds invest primarily in small and medium size companies. Table I
ranks the Funds' investments by market capitalization and displays the
percentage of the Funds' portfolios invested in each market capitalization
category. At times the Funds will invest in companies with market
capitalizations greater than $1.5 billion. These investments are companies
that have increased in value since the Funds first invested in them and still
offer attractive opportunities for further appreciation.
BARON ASSET FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Equity % of
Company Market Cap Portfolio
- -------------------------------------------------------------------------------
('000s)
<S> <C> <C>
Large Capitalization
- -------------------------------------------------------------------------------
Mirage Resorts, Inc. ........... 4,730,144 0.5%
Charles Schwab Corp. ........... 4,027,116 4.7
Circus Circus Enterprises, Inc. 3,676,853 1.8
Globalstar Telecomm., Ltd ...... 2,884,000 0.3
Manor Care, Inc. ............... 2,408,063 11.2
Corrections Corp. of America ... 2,329,781 1.1
Robert Half Intl., Inc. ........ 2,165,818 4.0
Mercury Finance Co. ............ 2,080,884 2.0
-----------
25.6%
Medium Capitalization
- -------------------------------------------------------------------------------
Nine West Group, Inc. .......... 1,929,618 0.9%
Public Storage, Inc. ........... 1,741,785 0.4
Olsten Corp. ................... 1,644,877 1.8
La Quinta Inns, Inc. ........... 1,518,407 0.7
Promus Hotel Corp. ............. 1,451,739 0.2
Noble Drilling Corp. ........... 1,431,426 0.1
Stewart Enterprises, Inc. CL A . 1,344,263 2.7
Industrie Natuzzi SPA .......... 1,322,414 1.2
Quorum Health Group, Inc. ...... 1,203,989 2.6
Kimco Realty Corp. ............. 1,073,916 0.7
Dollar Tree Stores, Inc. ....... 994,994 2.8
Vornado Realty Trust ........... 983,988 0.4
Highwoods Properties, Inc. ..... 957,688 0.3
Proffitt's Inc. ................ 947,526 0.6
Genesis Health Ventures, Inc. .. 898,040 2.2
Intl. CableTel, Inc. ........... 783,767 5.0
Heilig Meyers Co. .............. 759,491 1.1
DeVry, Inc. .................... 756,301 1.6
-----------
25.3%
Small Capitalization
- -------------------------------------------------------------------------------
American Radio Systems Corp. ... 714,306 2.8%
Starwood Lodging Trust ......... 661,504 0.8
Storage USA, Inc. .............. 650,204 0.4
Delta and Pine Land Co. ........ 612,992 1.5
Equity Corp. Intl. ............. 609,092 0.3
Cox Radio, Inc. ................ 598,180 0.7
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Equity % of
Company Market Cap Portfolio
- -------------------------------------------------------------------------------
('000s)
<S> <C> <C>
Small Capitalization (continued)
- -------------------------------------------------------------------------------
Sylvan Learning Systems, Inc. ...... 583,523 0.2%
Learning Tree Intl., Inc. .......... 527,731 1.1
Heftel Broadcasting Corp. .......... 503,680 2.3
Palmer Wireless, Inc. .............. 502,325 1.4
Seacor Holdings, Inc. .............. 501,207 0.9
Stein Mart, Inc. ................... 490,445 0.3
Smart and Final, Inc. .............. 487,680 4.0
Wackenhut Corrections Corp. ........ 486,118 0.4
OM Group, Inc. ..................... 471,580 1.9
Petco Animal Supplies, Inc. ........ 444,638 1.1
Bristol Hotel Co. .................. 440,987 1.0
Cross Timbers Oil Co. .............. 429,696 2.7
Sun Communities, Inc. .............. 424,992 0.6
Flextronics Intl. Ltd. ............. 364,943 3.0
American Mobile Satellite Corp. .... 362,718 2.1
Alexander's, Inc. .................. 346,319 0.8
Cellular Comm. of P.R., Inc. ....... 337,569 1.9
Vitalink Pharmacy Svcs, Inc. ....... 332,025 0.7
American Homepatient, Inc. ......... 316,106 0.5
Scandinavian Broadcasting Systems .. 303,255 1.0
Avatar Holdings, Inc. .............. 284,219 1.3
American Freightways Corp. ......... 276,070 0.1
Redwood Trust, Inc. ................ 272,640 0.3
Marcus Corp. ....................... 259,584 0.9
Saga Communications, Inc. .......... 158,559 3.0
Summit Care Corp. .................. 149,006 0.9
DVI, Inc. .......................... 148,328 1.6
Team Rental Group, Inc. ............ 141,170 0.5
Youth Services Intl. Inc. .......... 116,064 1.2
Pediatric Services of America, Inc. 115,089 1.0
Spacehab, Inc. ..................... 94,087 0.2
USA Truck, Inc. .................... 84,256 0.2
-----------
45.6%
</TABLE>
- -------------------------------------------------------------------------------
11
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
TABLE I (CONTINUED)
- -------------------------------------------------------------------------------
PORTFOLIO MARKET CAPITALIZATION
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Equity % of
Company Market Cap Portfolio
- -------------------------------------------------------------------------------
('000s)
<S> <C> <C>
Large Capitalization
- -------------------------------------------------------------------------------
Franklin Resources, Inc. .......... 5,332,498 1.6%
Mirage Resorts, Inc. .............. 4,730,144 0.4
Charles Schwab Corp. .............. 4,027,116 4.6
Circus Circus Enterprises, Inc. ... 3,676,853 2.4
Manor Care, Inc. .................. 2,408,063 7.1
Corrections Corp. of America ...... 2,329,781 1.0
Robert Half Intl., Inc. ........... 2,165,818 2.0
Mercury Finance Co. ............... 2,080,884 2.2
-----------
21.3%
Medium Capitalization
- -------------------------------------------------------------------------------
Public Storage, Inc. .............. 1,741,785 1.9%
Olsten Corp. ...................... 1,644,877 0.9
Leucadia National Corp. ........... 1,447,608 1.0
Simon Debartolo Group, Inc. ....... 1,411,680 1.1
Univision Communications, Inc. .... 1,386,465 0.4
Stewart Enterprises, Inc. CL A .... 1,344,263 1.6
Industrie Natuzzi SPA ............. 1,322,414 1.4
Sun Intl. Hotels Ltd. ............. 1,273,614 2.1
Quorum Health Group, Inc. ......... 1,203,989 1.5
Kimco Realty Corp. ................ 1,073,916 1.7
Dollar Tree Stores, Inc. .......... 994,994 2.2
Vornado Realty Trust .............. 983,988 1.3
Crescent Real Estate Equities, Inc. 969,939 0.5
Highwoods Properties, Inc. ........ 957,688 1.8
Genesis Health Ventures, Inc. ..... 898,040 1.1
Beacon Properties Corp. ........... 793,672 1.0
Intl. CableTel, Inc. .............. 783,767 3.9
Heilig Meyers Co. ................. 759,491 0.8
DeVry, Inc. ....................... 756,301 0.8
-----------
27.0%
Small Capitalization
- -------------------------------------------------------------------------------
American Radio Systems Corp. ...... 714,306 3.8%
Starwood Lodging Trust ............ 661,504 2.8
Storage USA, Inc. ................. 650,204 2.4
PMT Services, Inc. ................ 634,068 0.4
Delta and Pine Land Co. ........... 612,992 1.6
Multicare Companies, Inc. ......... 577,289 0.8
Learning Tree Intl., Inc. ......... 527,731 0.6
Heftel Broadcasting Corp. ......... 503,680 2.5
Palmer Wireless, Inc. ............. 502,325 1.1
Smart and Final, Inc. ............. 487,680 1.4
CBL & Associates Properties, Inc. . 480,608 1.0
OM Group, Inc. .................... 471,580 1.6
Petco Animal Supplies, Inc. ....... 444,638 0.6
Sun Communities, Inc. ............. 424,992 2.3
Cali Realty Corp. ................. 412,387 0.8
Southern Union Co. ................ 377,208 2.5
Flextronics Intl. Ltd. ............ 367,236 2.2
American Mobile Satellite Corp. ... 362,718 1.6
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Equity % of
Company Market Cap Portfolio
- -------------------------------------------------------------------------------
('000s)
<S> <C> <C>
Small Capitalization (continued)
- -------------------------------------------------------------------------------
Cellular Comm. Intl. Units ......... 356,407 0.5%
Alexander's, Inc. .................. 346,319 0.5
Cellular Comm. of P.R., Inc. ....... 337,569 1.0
PHP Healthcare Corp. ............... 313,847 1.0
Healthcare Realty Trust, Inc. ...... 306,517 0.9
Scandinavian Broadcasting Systems .. 303,255 1.0
Avatar Holdings, Inc. .............. 284,219 0.5
Redwood Trust, Inc. ................ 272,640 1.9
Marcus Corp. ....................... 259,584 0.8
Columbus Realty Trust .............. 237,555 1.6
Counsel Corp. ...................... 209,595 0.5
Studio Plus Hotels, Inc. ........... 206,712 0.7
Saga Communications, Inc. .......... 158,559 2.3
Western Staffing Services, Inc. .... 156,825 0.4
Summit Care Corp. .................. 149,006 0.5
DVI, Inc. .......................... 148,328 1.1
Youth Services Intl., Inc. ......... 116,064 1.0
Pediatric Services of America, Inc. 115,089 0.9
Medallion Financial Corp. .......... 108,750 2.0
Golden Bear Golf, Inc. ............. 108,230 0.2
Spacehab, Inc. ..................... 94,087 0.2
Rockford Industries, Inc. .......... 70,760 0.2
-----------
49.7%
</TABLE>
TABLE II
- -------------------------------------------------------------------------------
PORTFOLIO RISK CHARACTERISTICS
- -------------------------------------------------------------------------------
The Funds are diversified not only by industry, but also by external
factors that might impact the companies in which they invest. Table II
displays some of the risk factors that are currently being monitored and the
percentage of portfolio considered exposed to these factors. Some companies
may fall into more than one category. The Funds use this tool to balance the
portfolios by risk factors with the aim of below-average volatility.
<TABLE>
<CAPTION>
Baron Asset Baron Growth
Fund & Income Fund
- -------------------------------------------------------------------------------
% of % of
Portfolio Portfolio
- -------------------------------------------------------------------------------
<S> <C> <C>
Oil Price Sensitivity .......... 28.4% 26.6%
Leverage (Debt (greater than)
40% of Market Cap) ............ 18.9 22.7
Foreign Sales Dependent (Sales
(greater than) 10%) ........... 10.0 8.4
Volatility (Beta (greater than)
1.2) ......................... 5.6 6.6
Over-the-Counter Securities .... 41.2 35.1
Newly-Issued Securities
(Publicly owned for (less than)
3 years) ..................... 30.1 44.5
(Publicly owned for (less than)
1 year)....................... 3.0 3.8
Turnarounds .................... 2.3 1.3
Development Companies .......... 9.2 7.0
</TABLE>
- -------------------------------------------------------------------------------
12
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
TABLE III
- -------------------------------------------------------------------------------
HISTORICAL INFORMATION
- -------------------------------------------------------------------------------
Table III displays on a quarterly basis the Funds' closing net assets and
net asset value per share, dividend distributions and the value of $10,000
invested in a Fund at the time of its inception.
- -------------------------------------------------------------------------------
Baron Asset Fund
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value of Shares
Net Asset Owned, if Initial
Value Investment
Date Fund Net Assets Per Share Dividends was $10,000*
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
06/12/87 $ 108,728 $10.00 $10,000
- -------------------------------------------------------------------------------
06/30/87 1,437,521 10.71 10,710
- -------------------------------------------------------------------------------
09/30/87 3,905,221 11.95 11,950
- -------------------------------------------------------------------------------
12/31/87 4,406,972 10.10 $0.197 10,298
- -------------------------------------------------------------------------------
03/31/88 6,939,435 11.56 11,786
- -------------------------------------------------------------------------------
06/30/88 9,801,677 12.68 12,928
- -------------------------------------------------------------------------------
09/30/88 11,734,509 12.98 13,234
- -------------------------------------------------------------------------------
12/31/88 15,112,031 12.87 0.701 13,843
- -------------------------------------------------------------------------------
03/31/89 22,269,578 14.75 15,864
- -------------------------------------------------------------------------------
06/30/89 31,397,929 16.06 17,273
- -------------------------------------------------------------------------------
09/30/89 47,658,616 17.22 18,521
- -------------------------------------------------------------------------------
12/31/89 49,007,084 14.66 1.409 17,299
- -------------------------------------------------------------------------------
03/31/90 50,837,946 13.87 16,367
- -------------------------------------------------------------------------------
06/30/90 54,413,786 14.32 16,898
- -------------------------------------------------------------------------------
09/30/90 40,002,612 10.88 12,838
- -------------------------------------------------------------------------------
12/31/90 42,376,625 11.75 0.198 14,100
- -------------------------------------------------------------------------------
03/31/91 47,104,889 13.88 16,656
- -------------------------------------------------------------------------------
06/30/91 45,600,730 13.81 16,572
- -------------------------------------------------------------------------------
09/30/91 47,409,180 14.80 17,760
- -------------------------------------------------------------------------------
12/31/91 46,305,042 15.71 0.035 18,895
- -------------------------------------------------------------------------------
03/31/92 48,011,634 16.72 20,109
- -------------------------------------------------------------------------------
06/30/92 42,289,409 15.28 18,377
- -------------------------------------------------------------------------------
09/30/92 43,816,305 16.20 19,484
- -------------------------------------------------------------------------------
12/31/92 47,955,530 17.73 0.162 21,522
- -------------------------------------------------------------------------------
03/31/93 50,015,244 18.82 22,845
- -------------------------------------------------------------------------------
06/30/93 52,432,090 19.70 23,912
- -------------------------------------------------------------------------------
09/30/93 59,916,570 21.91 26,595
- -------------------------------------------------------------------------------
12/31/93 64,069,114 21.11 0.774 26,576
- -------------------------------------------------------------------------------
03/31/94 63,099,109 20.69 26,047
- -------------------------------------------------------------------------------
06/30/94 68,880,300 20.40 25,682
- -------------------------------------------------------------------------------
09/30/94 80,258,542 22.82 28,728
- -------------------------------------------------------------------------------
12/31/94 87,058,228 22.01 0.656 28,547
- -------------------------------------------------------------------------------
03/31/95 160,603,528 24.29 31,505
- -------------------------------------------------------------------------------
06/30/95 202,259,502 25.79 33,450
- -------------------------------------------------------------------------------
09/30/95 289,973,331 29.30 38,003
- -------------------------------------------------------------------------------
12/31/95 353,095,409 29.74 0.034 38,618
- -------------------------------------------------------------------------------
03/31/96 638,297,904 34.14 44,332
- -------------------------------------------------------------------------------
06/30/96 1,124,647,802 36.65 47,591
- -------------------------------------------------------------------------------
09/30/96 1,166,057,654 35.50 46,098
- -------------------------------------------------------------------------------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
<PAGE>
- -------------------------------------------------------------------------------
Baron Growth & Income Fund
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value of Shares
Net Asset Owned, if Initial
Value Investment
Date Fund Net Assets Per Share Dividends was $10,000*
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
01/03/95 $ 741,000 $10.00 $10,000
- -------------------------------------------------------------------------------
03/31/95 3,425,507 11.78 11,780
- -------------------------------------------------------------------------------
06/30/95 7,231,619 13.18 13,180
- -------------------------------------------------------------------------------
09/30/95 28,632,467 14.77 14,770
- -------------------------------------------------------------------------------
12/31/95 41,043,705 15.11 0.142 15,254
- -------------------------------------------------------------------------------
03/31/96 77,337,831 16.90 17,061
- -------------------------------------------------------------------------------
06/30/96 172,070,435 18.20 18,373
- -------------------------------------------------------------------------------
09/30/96 207,234,494 18.40 18,575
- -------------------------------------------------------------------------------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
- -------------------------------------------------------------------------------
Performance Information
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
BARON ASSET FUND'S AVERAGE ANNUAL RETURN
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period ended September 30, 1996
<S> <C>
One year 21.3%
- -------------------------------------------------------------------------------
Two years 26.7%
- -------------------------------------------------------------------------------
Three years 20.1%
- -------------------------------------------------------------------------------
Four years 24.0%
- -------------------------------------------------------------------------------
Five years 21.0%
- -------------------------------------------------------------------------------
Since inception June 12, 1987 17.8%
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND'S AVERAGE ANNUAL RETURN
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period ended September 30, 1996
<S> <C>
One year 25.8%
- -------------------------------------------------------------------------------
Since inception January 3, 1995 42.5%
- -------------------------------------------------------------------------------
</TABLE>
The performance data represents past performance. Investment returns and
principal value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their cost. For more complete information
about The Baron Funds including charges and expenses, call or write for a
prospectus. Read it carefully before you invest or send money. This report is
not authorized for use as an offer of sale or a solicitation of an offer to
buy shares of The Baron Funds unless accompanied or preceded by the Funds'
current prospectus.
- -------------------------------------------------------------------------------
13
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------------------
September 30, 1996
<TABLE>
<CAPTION>
Shares or Market
Principal Amount Value %(1)
- -------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------
Common Stocks
- -------------------------------------------------------------------------------
Amusement and Recreation Services
420,000 Bristol Hotel Co.* ............... $ 11,182,500 1.0%
600,000 Circus Circus Enterprises, Inc.* . 21,225,000 1.8
400,000 La Quinta Inns, Inc. ............. 7,800,000 0.7
432,500 Marcus Corp. ..................... 10,380,000 0.9
250,000 Mirage Resorts, Inc.* ............ 6,406,250 0.5
80,000 Promus Hotel Corp.* .............. 2,260,000 0.2
------------- ------
59,253,750 5.1
Business Services
112,000 Equity Corp. Intl.* .............. 3,556,000 0.3
837,000 Olsten Corp. ..................... 20,820,375 1.8
1,250,000 Robert Half Intl., Inc.* ......... 46,093,750 4.0
944,250 Stewart Enterprises, Inc. CL A ... 31,868,437 2.7
305,000 Team Rental Group, Inc.* ......... 5,795,000 0.5
------------- ------
108,133,562 9.3
Chemical
572,000 OM Group, Inc. ................... 21,736,000 1.9
Communications
1,660,000 American Mobile Satellite Corp.* . 24,070,000 2.1
870,000 Cellular Comm. of P.R., Inc.* .... 22,185,000 1.9
80,000 Globalstar Telecomm., Ltd* ....... 4,120,000 0.3
900,000 Intl. CableTel, Inc.* ............ 23,062,500 2.0
935,000 Palmer Wireless, Inc.* ........... 16,537,812 1.4
------------- ------
89,975,312 7.7
Education
400,000 DeVry, Inc.* ..................... 18,200,000 1.6
350,000 Learning Tree Intl., Inc.* ....... 12,950,000 1.1
55,000 Sylvan Learning Systems, Inc.* ... 2,255,000 0.2
------------- ------
33,405,000 2.9
Energy
1,325,000 Cross Timbers Oil Co. ............ 31,800,000 2.7
100,000 Noble Drilling Corp.* ............ 1,512,500 0.1
195,000 Seacor Holdings, Inc.* ........... 9,896,250 0.9
------------- ------
43,208,750 3.7
Financial
2,395,000 Charles Schwab Corp. ............. 55,085,000 4.7
1,305,000 DVI, Inc.* ....................... 18,596,250 1.6
1,950,200 Mercury Finance Co. .............. 23,402,400 2.0
------------- ------
97,083,650 8.3
Food and Agriculture
580,000 Delta and Pine Land Co. .......... 16,965,000 1.5
Government Services
421,000 Corrections Corp. of America* .... 13,156,250 1.1
200,000 Spacehab, Inc.* .................. 1,700,000 0.2
213,000 Wackenhut Corrections Corp.* ..... 4,739,250 0.4
588,750 Youth Services Intl., Inc.* ...... 8,168,906 0.7
------------- ------
27,764,406 2.4
Health Services
252,500 American Homepatient, Inc.* ...... 5,618,125 0.5
895,000 Genesis Health Ventures, Inc.* ... 25,171,875 2.2
3,400,000 Manor Care, Inc. ................. 130,475,000 11.2
634,000 Pediatric Services of America,
Inc.* . ................................... 11,729,000 1.0
1,218,500 Quorum Health Group, Inc.* ....... 30,157,875 2.6
483,000 Summit Care Corp.* ............... 10,626,000 0.9
360,000 Vitalink Pharmacy Svcs, Inc.* .... 8,550,000 0.7
------------- ------
222,327,875 19.1
Manufacturing
1,270,000 Flextronics Intl. Ltd.* .......... 35,083,750 3.0
Media and Entertainment
600,000 American Radio Systems Corp.* .... 22,350,000 1.9
390,000 Cox Radio, Inc.* ................. 8,580,000 0.7
615,000 Heftel Broadcasting Corp.* ....... 26,829,375 2.3
1,560,300 Saga Communications, Inc.* ....... 34,911,713 3.0
------------- ------
92,671,088 7.9
</TABLE>
<PAGE>
STATEMENT OF NET ASSETS (Continued)
- -------------------------------------------------------------------------------
September 30, 1996
<TABLE>
<CAPTION>
Shares or Market
Principal Amount Value %(1)
- -------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------
Common Stocks (Continued)
- -------------------------------------------------------------------------------
Real Estate & REIT's
136,500 Alexander's, Inc.* ..................... $ 9,452,625 0.8%
480,000 Avatar Holdings, Inc.* ................. 15,000,000 1.3
125,700 Highwoods Properties, Inc. ............. 3,818,138 0.3
250,000 Kimco Realty Corp. ..................... 7,437,500 0.7
200,000 Public Storage, Inc. ................... 4,525,000 0.4
115,000 Redwood Trust, Inc. .................... 3,680,000 0.3
215,000 Starwood Lodging Trust ................. 9,003,125 0.8
140,000 Storage USA, Inc. ...................... 4,655,000 0.4
250,000 Sun Communities, Inc. .................. 7,125,000 0.6
125,000 Vornado Realty Trust ................... 5,062,500 0.4
-------------- -------
69,758,888 6.0
Retail Trade & Restaurants
850,000 Dollar Tree Stores, Inc.* .............. 32,725,000 2.8
800,000 Heilig Meyers Co. ...................... 12,500,000 1.1
200,000 Nine West Group, Inc.* ................. 10,850,000 0.9
500,000 Petco Animal Supplies, Inc.* ........... 13,625,000 1.1
170,000 Proffitt's Inc.* ....................... 6,715,000 0.6
1,940,000 Smart and Final, Inc. .................. 46,560,000 4.0
145,000 Stein Mart, Inc.* ...................... 3,208,125 0.3
-------------- -------
126,183,125 10.8
Transportation
200,000 American Freightways Corp.* ............ 1,775,000 0.1
235,000 USA Truck, Inc.* ....................... 2,085,625 0.2
-------------- -------
3,860,625 0.3
Wholesale Trade
310,000 Industrie Natuzzi SPA .................. 14,415,000 1.2
Miscellaneous .................................... 10,549,507 0.9
-------------- -------
Total Common Stocks
(Cost $901,699,988) ............................. 1,072,375,288 92.0
-------------- -------
- -------------------------------------------------------------------------------
Convertible Preferred
- -------------------------------------------------------------------------------
Media and Entertainment
200,000 American Radio Systems Corp.
7% Conv. ............................... 10,800,000 0.9
(Cost $10,000,000)
- -------------------------------------------------------------------------------
Corporate Bonds
- -------------------------------------------------------------------------------
Communications
$20,500,000 Intl. CableTel, Inc. 7.25% Conv. Sub.
Notes 04/15/2005 ..................... 22,447,500 1.9
14,000,000 Intl. CableTel, Inc. 7.0% Conv. Sub.
Notes 06/15/2008 ..................... 12,810,000 1.1
11,000,000 Scandinavian Broadcasting Systems
7.25% Sub. Deb. Conv. 8/01/2005 ...... 11,110,000 1.0
-------------- -------
46,367,500 4.0
Government Services
5,000,000 Youth Services Intl. Inc. 7.00% Conv.
Sub. Deb. 02/01/2006 .................. 5,825,000 0.5
-------------- -------
Total Corporate Bonds
(Cost $52,306,522) .............................. 52,192,500 4.5
-------------- -------
- -------------------------------------------------------------------------------
Short Term Money Market Instrument
- -------------------------------------------------------------------------------
42,135,000 Prudential Funding Corp., 5.7%
Due 10/01/96 .......................... 42,135,000 3.6
-------------- -------
(Cost $42,135,000)
Total Investments
(Cost $1,006,141,510**) ......................... 1,177,502,788 101.0
Liabilities Less Cash and Other Assets ........... (11,445,134) (1.0)
-------------- -------
Net Assets (Equivalent to $35.50 per share based
on 32,842,555 shares of beneficial interest
outstanding) .................................... $1,166,057,654 100.0%
============== =======
</TABLE>
- ------
(1) Percentage of Net Assets
* Non-income producing security
** For Federal income tax purposes the cost basis is $1,006,233,514.
Aggregate unrealized appreciation and depreciation of investments are
$213,586,597 and $42,317,323, respectively.
- -------------------------------------------------------------------------------
14
<PAGE>
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
- -------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------------------
September 30, 1996
<TABLE>
<CAPTION>
Shares or Market
Principal Amount Value %(1)
- -------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------
Common Stocks
- -------------------------------------------------------------------------------
Amusement and Recreation Services
140,000 Circus Circus Enterprises, Inc.* . $ 4,952,500 2.4%
20,000 Golden Bear Golf, Inc.* .......... 395,000 0.2
75,000 Marcus Corp. ..................... 1,800,000 0.8
30,000 Mirage Resorts, Inc.* ............ 768,750 0.4
90,000 Studio Plus Hotels, Inc.* ........ 1,485,000 0.7
85,000 Sun Intl. Hotels Ltd.* ........... 4,356,250 2.1
------------ ------
13,757,500 6.6
Business Services
75,000 Olsten Corp. ..................... 1,865,625 0.9
40,000 PMT Services, Inc.* .............. 810,000 0.4
110,000 Robert Half Intl., Inc.* ......... 4,056,250 2.0
100,000 Stewart Enterprises, Inc. CL A ... 3,375,000 1.6
60,000 Western Staffing Services, Inc.* . 907,500 0.4
------------ ------
11,014,375 5.3
Chemical
85,000 OM Group, Inc. ................... 3,230,000 1.6
Communications
230,000 American Mobile Satellite Corp.* . 3,335,000 1.6
80,000 Cellular Comm. of P.R., Inc.* .... 2,040,000 1.0
150,000 Intl. CableTel, Inc.* ............ 3,843,750 1.9
135,000 Palmer Wireless, Inc.* ........... 2,387,813 1.1
------------ ------
11,606,563 5.6
Education
36,000 DeVry, Inc.* ..................... 1,638,000 0.8
34,000 Learning Tree Intl., Inc.* ....... 1,258,000 0.6
------------ ------
2,896,000 1.4
Financial
418,000 Charles Schwab Corp. ............. 9,614,000 4.6
160,000 DVI, Inc.* ....................... 2,280,000 1.1
50,000 Franklin Resources, Inc. ......... 3,318,750 1.6
285,000 Medallion Financial Corp.* ....... 4,132,500 2.0
375,000 Mercury Finance Co. .............. 4,500,000 2.2
29,000 Rockford Industries, Inc.* ....... 500,250 0.2
------------ ------
24,345,500 11.7
Food and Agriculture
110,000 Delta and Pine Land Co. .......... 3,217,500 1.6
Government Services
65,000 Corrections Corp. of America* .... 2,031,250 1.0
54,000 Spacehab, Inc.* .................. 459,000 0.2
65,000 Youth Services Intl., Inc.* ...... 901,875 0.4
------------ ------
3,392,125 1.6
Health Services
100,000 Counsel Corp.* ................... 1,087,500 0.5
80,000 Genesis Health Ventures, Inc.* ... 2,250,000 1.1
385,000 Manor Care, Inc. ................. 14,774,375 7.1
80,000 Multicare Companies, Inc.* ....... 1,740,000 0.8
105,000 Pediatric Services of America,
Inc.* ............................. 1,942,500 0.9
70,000 PHP Healthcare Corp.* ............ 2,003,750 1.0
125,000 Quorum Health Group, Inc.* ....... 3,093,750 1.5
45,000 Summit Care Corp.* ............... 990,000 0.5
------------ ------
27,881,875 13.4
Manufacturing
165,000 Flextronics Intl. Ltd.* .......... 4,558,125 2.2
Media and Entertainment
140,000 American Radio Systems Corp.* .... 5,215,000 2.5
120,000 Heftel Broadcasting Corp.* ....... 5,235,000 2.5
210,000 Saga Communications, Inc.* ....... 4,698,750 2.3
25,000 Univision Communications, Inc.* .. 837,500 0.4
------------ ------
15,986,250 7.7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Real Estate & REIT's
16,000 Alexander's, Inc.* ............... 1,108,000 0.5
30,000 Avatar Holdings, Inc.* ........... 937,500 0.5
70,000 Beacon Properties Corp. .......... 2,030,000 1.0
60,000 Cali Realty Corp. ................ 1,627,500 0.8
90,000 CBL & Associates Properties, Inc. 2,070,000 1.0
160,000 Columbus Realty Trust ............ 3,260,000 1.6
25,000 Crescent Real Estate Equities,
Inc. .............................. 1,028,125 0.5
80,000 Healthcare Realty Trust, Inc. .... 1,890,000 0.9
125,000 Highwoods Properties, Inc. ....... 3,796,875 1.8
120,000 Kimco Realty Corp. ............... 3,570,000 1.7
170,000 Public Storage, Inc. ............. 3,846,250 1.9
</TABLE>
<PAGE>
STATEMENT OF NET ASSETS (Continued)
- -------------------------------------------------------------------------------
September 30, 1996
<TABLE>
<CAPTION>
Shares or Market
Principal Amount Value %(1)
- -------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------
Common Stocks (Continued)
- -------------------------------------------------------------------------------
125,000 Redwood Trust, Inc. .................... $ 4,000,000 1.9%
85,000 Simon Debartolo Group, Inc. ............ 2,167,500 1.1
140,000 Starwood Lodging Trust ................. 5,862,500 2.8
150,000 Storage USA, Inc. ...................... 4,987,500 2.4
170,000 Sun Communities, Inc. .................. 4,845,000 2.3
66,500 Vornado Realty Trust ................... 2,693,250 1.3
-------------- -------
49,720,000 24.0
Retail Trade & Restaurants
120,000 Dollar Tree Stores, Inc.* .............. 4,620,000 2.2
100,000 Heilig Meyers Co. ...................... 1,562,500 0.8
45,000 Petco Animal Supplies, Inc.* ........... 1,226,250 0.6
120,000 Smart and Final, Inc. .................. 2,880,000 1.4
-------------- -------
10,288,750 5.0
Utility Services
220,000 Southern Union Co.* .................... 5,115,000 2.5
Wholesale Trade
60,000 Industrie Natuzzi SPA .................. 2,790,000 1.4
-------------- -------
Total Common Stocks
(Cost $171,370,089) ............................. 189,799,563 91.6
-------------- -------
- -------------------------------------------------------------------------------
Convertible Preferred
- -------------------------------------------------------------------------------
Media and Entertainment
50,000 American Radio Systems Corp.
7% Conv. ............................... 2,700,000 1.3
(Cost $2,500,000)
- -------------------------------------------------------------------------------
Corporate Bonds
- -------------------------------------------------------------------------------
Communications
$1,800,000 Cellular Comm. Intl. Units
1 Unit = $1000 Zero Coupon Sr. Disc.
Notes 8/15/2000 and 1
Warrant .............................. 1,170,000 0.5
2,000,000 Intl. CableTel, Inc. 7.25% Conv. Sub.
Notes 4/15/2005 ...................... 2,190,000 1.1
2,000,000 Intl. CableTel, Inc. 7.0% Conv. Sub.
Notes 6/15/2008 ...................... 1,830,000 0.9
2,000,000 Scandinavian Broadcasting Systems
7.25% Sub. Deb. Conv. 8/01/2005 ...... 2,020,000 1.0
-------------- -------
7,210,000 3.5
Financial
2,000,000 Leucadia National Corp. 5.25% Sub.
Deb. Conv. Due 02/01/2003 ............ 2,020,000 1.0
Government Services
1,200,000 Youth Services Intl. Inc. 7.0% Conv.
Sub. Deb. 02/01/2006 ................. 1,398,000 0.6
Real Estate & REITs
36,800 Avatar Holdings, Inc. 8.0%
Sr. Deb. 10/01/2000 .................. 33,212 0.0
-------------- -------
Total Corporate Bonds
(Cost $10,740,554) .............................. 10,661,212 5.1
-------------- -------
- -------------------------------------------------------------------------------
Short Term Money Market Instrument
- -------------------------------------------------------------------------------
7,792,000 Prudential Funding Corp., 5.7% due
10/01/96 ............................. 7,792,000 3.8
-------------- -------
(Cost $7,792,000)
Total Investments
(Cost $192,402,643**) ........................... 210,952,775 101.8
Liabilities Less Cash and Other Assets ........... (3,718,281) (1.8)
-------------- -------
Net Assets (Equivalent to $18.40 per share based
on 11,261,852 shares of beneficial interest
outstanding) .................................... $207,234,494 100.0%
============== =======
</TABLE>
<PAGE>
- ------
(1) Percentage of Net Assets
* Non-income producing security
** For Federal income tax purposes the cost basis is $192,396,828. Aggregate
unrealized appreciation and depreciation of investments are $24,082,169
and $5,526,222, respectively.
- -------------------------------------------------------------------------------
15
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------
September 30, 1996
<TABLE>
<CAPTION>
BARON ASSET BARON GROWTH
FUND & INCOME FUND
-------------- ---------------
<S> <C> <C>
Assets:
Investments in securities, at value (Cost $1,006,141,510 and
$192,402,643, respectively) ........................................$1,177,502,788 $210,952,775
Cash .................................................................. 0 11,801
Dividends and interest receivable ..................................... 1,615,613 494,456
Receivable for securities sold ........................................ 5,683,250 0
Receivable for shares sold ............................................ 284,573 174,294
Unamortized organization costs (Note 1) ............................... 0 21,367
Prepaid expenses ...................................................... 33,117 0
-------------- ---------------
1,185,119,341 211,654,693
-------------- ---------------
Liabilities:
Payable for securities purchased ...................................... 18,580,341 4,293,970
Accrued organization costs (Note 1) ................................... 0 21,367
Accrued expenses and other payables (Note 3) .......................... 481,346 104,862
-------------- ---------------
19,061,687 4,420,199
-------------- ---------------
Net Assets ..............................................................$1,166,057,654 $207,234,494
============== ===============
Net Assets consist of:
Par value .............................................................$ 328,425 $ 112,618
Paid-in capital in excess of par value ................................ 993,059,966 185,360,385
Undistributed net investment income ................................... 0 1,147,402
Undistributed net realized gains ...................................... 1,307,985 2,063,957
Net unrealized appreciation on investments ............................ 171,361,278 18,550,132
-------------- ---------------
Net Assets ..............................................................$1,166,057,654 $207,234,494
============== ===============
Shares of Beneficial Interest Outstanding
($.01 par value; indefinite shares authorized) ........................ 32,842,555 11,261,852
============== ===============
Net Asset Value Per Share ...............................................$ 35.50 $ 18.40
============== ===============
</TABLE>
<PAGE>
STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------
For the year ended September 30, 1996
<TABLE>
<CAPTION>
BARON ASSET BARON GROWTH
FUND & INCOME FUND
------------- ---------------
<S> <C> <C>
Investment income:
Income:
Interest ....................................... $ 4,676,691 $ 928,767
Dividends ...................................... 3,064,729 1,803,242
------------- ---------------
Total income ................................... 7,741,420 2,732,009
------------- ---------------
Expenses:
Investment advisory fees (Note 3) .............. 6,923,899 994,621
Distribution fees (Note 3) ..................... 1,730,975 248,655
Custodian fees ................................. 121,126 54,531
Shareholder servicing agent fees ............... 234,530 54,466
Amortization of organization costs (Note 1) .... 0 6,575
Registration and filing fees ................... 426,727 128,611
Trustee fees ................................... 50,368 6,839
Professional fees .............................. 37,657 17,351
Reports to shareholders ........................ 188,687 24,005
Insurance ...................................... 11,681 1,584
Miscellaneous .................................. 33,723 1,940
------------- ---------------
Total expenses ................................. 9,759,373 1,539,178
Custodian fees paid indirectly ................. 0 (5,252)
Net expenses ................................... 9,759,373 1,533,926
------------- ---------------
Net investment income (loss) ................... (2,017,953) 1,198,083
------------- ---------------
Realized and unrealized gain on investments:
Net realized gain on investments sold ............. 3,537,309 2,050,709
Change in net unrealized appreciation of
investments .................................... 95,636,324 16,132,008
------------- ---------------
Net gain on investments ........................ 99,173,633 18,182,717
------------- ---------------
Net increase in net assets resulting from
operations ................................... $97,155,680 $19,380,800
============= ===============
</TABLE>
See Notes to Financial Statements.
- -------------------------------------------------------------------------------
16
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------
September 30, 1996
<TABLE>
<CAPTION>
BARON ASSET FUND BARON GROWTH & INCOME FUND
--------------------------------- -------------------------------------
For the Period
For the For the For the January 3, 1995
Year Ended Year Ended Year Ended (Commencement of
September 30, September 30, September 30, Operations) to
1996 1995 1996 September 30, 1995
-------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss) ................ ($ 2,017,953) ($ 851,738) $ 1,198,083 $ 69,347
Net realized gain on investments sold ....... 3,537,309 149,491 2,050,709 271,446
Net change in unrealized appreciation on
investments ............................... 95,636,324 54,335,827 16,132,008 2,418,124
-------------- --------------- --------------- ------------------
Increase in net assets resulting from
operations ........................... 97,155,680 53,633,580 19,380,800 2,758,917
-------------- --------------- --------------- ------------------
Dividends to shareholders from:
Net investment income ....................... 0 0 (98,552) 0
Net realized gain on investments ............ (399,312) (2,514,282) (279,674) 0
-------------- --------------- --------------- ------------------
(399,312) (2,514,282) (378,226) 0
-------------- --------------- --------------- ------------------
Capital share transactions:
Proceeds from the sale of shares ............ 1,084,282,947 219,118,186 203,114,578 27,921,323
Net asset value of shares issued in
reinvestment of dividends ................. 386,670 2,410,279 368,158
Cost of shares redeemed ..................... (305,341,662) (62,932,974) (43,883,283) (2,047,773)
-------------- --------------- --------------- ------------------
Increase in net assets derived from
capital share transactions ........... 779,327,955 158,595,491 159,599,453 25,873,550
-------------- --------------- --------------- ------------------
Net increase in net assets .................. 876,084,323 209,714,789 178,602,027 28,632,467
Net assets:
Beginning of period ......................... 289,973,331 80,258,542 28,632,467 0
-------------- --------------- --------------- ------------------
End of period ............................... $1,166,057,654 $289,973,331 $207,234,494 $28,632,467
============== =============== =============== ==================
Undistributed net investment income at end of year $ 0 $ 0 $ 1,168,878 $ 69,347
============== =============== =============== ==================
Shares of Beneficial Interest:
Shares sold ................................. 32,101,812 8,798,265 11,899,055 2,094,005
Shares issued in reinvestment of dividends .. 13,224 111,227 24,692 0
Shares redeemed ............................. (9,168,078) (2,531,541) (2,600,496) (155,404)
-------------- --------------- --------------- ------------------
Net increase ................................ 22,946,958 6,377,951 9,323,251 1,938,601
============== =============== =============== ==================
</TABLE>
See Notes to Financial Statements.
- -------------------------------------------------------------------------------
17
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES
Baron Asset Fund (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as a diversified, open-end management
investment company established as a Massachusetts business trust on February
19, 1987. The Trust currently offers two series (individually a "Fund" and
collectively the "Funds"): Baron Asset Fund, started in June of 1987, and
Baron Growth & Income Fund, started in January of 1995. The following is a
summary of significant accounting policies followed by the Funds. The
policies are in conformity with generally accepted accounting principles.
(a) Security Valuation. Portfolio securities traded on any national stock
exchange or quoted on the NASDAQ National Market System are valued on the
basis of the last sale price on the date of valuation or, in the absence of
any sale on that date, the last sale price on the date the security last
traded. Other securities are valued at the mean of the most recent bid and
asked prices if market quotations are readily available. Where market
quotations are not readily available the securities are valued at their fair
value as determined in good faith by the Board of Trustees, although the
actual calculations may be done by others. Money market instruments held by
the Funds with a remaining maturity of sixty days or less are valued at
amortized cost, which approximates value.
(b) Securities Transactions and Investment Income. Securities transactions
are recorded on a trade date basis. Realized gain and loss from securities
transactions are recorded on an identified cost basis for financial reporting
and Federal income tax purposes. Dividend income is recognized on the
ex-dividend date and interest income is recognized on an accrual basis.
(c) Federal Income Taxes. Each Fund of the Trust is treated as a separate
entity for Federal income tax purposes. It is the policy of each Fund to
continue to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended, and to distribute all of its taxable
income, including net realized capital gains, if any, to its shareholders. No
federal income tax provision is therefore required.
(d) Expense Allocation. Expenses directly attributed to a Fund are charged to
that Fund's operations; expenses which are applicable to both Funds are
allocated on a basis deemed fair and equitable by the Trustees, usually on
the basis of average net assets.
(e) Organization Costs. Costs incurred in connection with the organization
and initial registration of Baron Growth & Income Fund have been deferred and
are being amortized on a straight-line basis over a five-year period. Baron
Capital, Inc. ("BCI"), a wholly-owned subsidiary of Baron Capital Group, Inc.
("BCG"), agreed to make advances for organization expenses incurred and will
be reimbursed as the costs are amortized.
(f) Distributions. Income distributions and capital gains distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments for net operating losses. During the year ended
September 30, 1996, Baron Asset Fund reclassified a net operating loss of
$1,978,696 to undistributed net realized gains and $39,257 to paid-in capital
and Baron Growth & Income Fund reclassified a return of capital primarily due
to dividends received of $21,476 to undistributed net realized gains.
(2) PURCHASES AND SALES OF SECURITIES
During the year ended September 30, 1996, purchases and sales of
securities, other than short term securities, aggregated $880,566,201 and
$127,379,025, respectively, for Baron Asset Fund, and $195,806,664 and
$39,450,459, respectively, for Baron Growth & Income Fund.
(3) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
(a) Investment Advisory Fees. BAMCO, Inc. (the "Adviser"), a wholly owned
subsidiary of BCG serves as investment adviser to the Funds. As compensation
for services rendered, the Adviser receives a fee payable monthly from the
assets of the Funds equal to 1% per annum of each Fund's average daily net
asset value. The Adviser has agreed that if the expenses (exclusive of
interest, taxes, brokerage, extraordinary expenses and amounts paid by the
Funds under the plan of distribution) of either Fund in any fiscal year
exceed the limits prescribed by any state in
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18
<PAGE>
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THE BARON FUNDS
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which that Fund's shares are qualified for sale, the Adviser will reduce its
fee by the amount of any such excess, up to the amount of the Adviser's fee.
The Trustees do not anticipate that the expenses will exceed 2.0% of the
first $100 million and 1.5% of the remainder in excess of $100 million of
each Fund.
(b) Distribution Fees. BCI is a registered broker dealer and the
distributor of the shares of the Funds pursuant to a distribution plan under
Rule 12b-1 of the 1940 Act. The distribution plan authorizes the Funds to pay
BCI a distribution fee equal on an annual basis to 0.25% of the Funds'
average daily net assets.
Brokerage transactions for the Funds may be effected by or through BCI.
During the year ended September 30, 1996, BCI earned $1,127,921 in brokerage
commissions from Baron Asset Fund, and $255,643 from Baron Growth & Income
Fund.
(c) Trustee Fees. Certain Trustees of the Trust may be deemed to be
affiliated with or interested persons (as defined by the 1940 Act) of the
Funds' Adviser or of BCI. None of the Trustees so affiliated received
compensation for services as a Trustee of the Trust. None of the Funds'
officers received compensation from the Funds.
(4) FINANCIAL HIGHLIGHTS
BARON ASSET FUND
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD:
<TABLE>
<CAPTION>
Year Ended September 30,
1996 1995 1994 1993 1992
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ....... $ 29.30 $ 22.82 $21.91 $ 16.20 $14.80
---------- -------- -------- -------- --------
Income from investment operations
Net investment income (loss) ............. (0.06) (0.09) (0.14) (0.13) (0.08)
Net realized and unrealized gains (losses)
on investments .......................... 6.29 7.23 1.82 6.00 1.52
---------- -------- -------- -------- --------
Total from investment operations ....... 6.23 7.14 1.68 5.87 1.44
Less distributions
Dividends from net investment income ..... (0.04)
Distributions from net realized gains .... (0.03) (0.66) (0.77) (0.16)
---------- -------- -------- -------- --------
Total Distributions .................... (0.03) (0.66) (0.77) (0.16) (0.04)
---------- -------- -------- -------- --------
Net asset value, end of year ............. $ 35.50 $ 29.30 $22.82 $ 21.91 $16.20
========== ======== ======== ======== ========
Total Return ........................... 21.3% 32.3% 8.0% 36.5% 9.7%
---------- -------- -------- -------- --------
Ratios/Supplemental Data
Net assets (in millions), end of year .... $1,166.1 $290.0 $80.3 $ 59.9 $43.8
Ratio of expenses to average net assets .. 1.4% 1.4% 1.6% 1.8% 1.7%
Ratio of net investment income (loss) to
average net assets ...................... (0.3%) (0.5%) (0.7%) (0.7%) (0.5%)
Portfolio turnover rate .................. 19.3% 35.2% 55.9% 107.9% 95.5%
Average per share commission rate paid*** $ 0.06
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987*
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ....... $10.88 $ 17.22 $12.98 $11.95 $10.00
-------- --------- -------- -------- --------
Income from investment operations
Net investment income (loss) ............. 0.07 0.21 0.13 0.05 0.07
Net realized and unrealized gains (losses)
on investments .......................... 4.05 (5.14) 4.81 1.18 1.88
-------- --------- -------- -------- --------
Total from investment operations ....... 4.12 (4.93) 4.94 1.23 1.95
Less distributions
Dividends from net investment income ..... (0.20) (0.16) (0.05) (0.03)
Distributions from net realized gains .... (1.25) (0.65) (0.17)
-------- --------- -------- -------- --------
Total Distributions .................... (0.20) (1.41) (0.70) (0.20)
-------- --------- -------- -------- --------
Net asset value, end of year ............. $14.80 $ 10.88 $17.22 $12.98 $11.95
======== ========= ======== ======== ========
Total Return ........................... 38.3% (30.7%) 39.9% 10.7% 19.5%
-------- --------- -------- -------- --------
Ratios/Supplemental Data
Net assets (in millions), end of year .... $47.4 $ 40.0 $47.7 $11.7 $ 3.9
Ratio of expenses to average net assets .. 1.7% 1.8% 2.1% 2.5% 2.8%**
Ratio of net investment income (loss) to
average net assets ...................... 0.5% 1.5% 1.3% 0.5% 1.9%**
Portfolio turnover rate .................. 142.7% 97.8% 148.9% 242.4% 84.7%
Average per share commission rate paid***
</TABLE>
- ------
* For the period June 12, 1987 (commencement of operations) to September
30, 1987.
** Annualized.
*** Disclosure required for fiscal years beginning after September 1, 1995.
The Fund's adviser and/or Baron Capital reimbursed the Fund for expenses
aggregating $8,561 (less than $0.01 per share) in 1990, $27,315 ($0.01 per
share) in 1989, $83,219 ($0.11 per share) in 1988, and $36,330 ($0.20 per
share) in 1987. The reimbursement amounts are excluded from the expense data
above.
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19
<PAGE>
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THE BARON FUNDS
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BARON GROWTH & INCOME FUND
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD:
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<TABLE>
<CAPTION>
Year Ended September 30,
1996 1995*
-------- --------
<S> <C> <C>
Net asset value, beginning of period ................ $ 14.77 $10.00
-------- --------
Income from investment operations
Net investment income ............................... 0.11 0.04
Net realized and unrealized gains on investments .... 3.66 4.73
-------- --------
Total from investment operations ............... 3.77 4.77
Less distributions
Dividends from net investment income ................ (0.04)
Distributions from net realized gains ............... (0.10)
-------- --------
Total Distributions ............................ (0.14)
-------- --------
Net asset value, end of period ...................... $ 18.40 $14.77
======== ========
Total Return ...................................... 25.8 % 47.7 %
-------- --------
Ratios/Supplemental Data
Net assets (in millions), end of period ............. $207.2 $28.6
Ratio of expenses to average net assets ............. 1.5 % 2.0 %**
Ratio of net investment income to average net assets 1.2 % 1.1 %**
Portfolio turnover rate ............................. 40.3 % 40.6 %
Average per share commission rate paid*** ........... $ 0.06
</TABLE>
- ------
* For the period January 3, 1995 (commencement of operations) to September
30, 1995.
** Annualized
*** Disclosure required for fiscal years beginning after September 1, 1995.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995
Any statements contained in this annual report which are not historical facts
are forward-looking statements; and, therefore, many important factors could
cause actual results to differ materially from those in the forward-looking
statements. Such factors include, but are not limited to, changes
(legislative or otherwise) in the industries in which the Funds invest, as
well as changes relating to taxes and mutual funds. The "Investment Policies
and Risks" section of the Prospectus discusses certain factors that could
cause actual results to differ materially from those in such forward-looking
statements.
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20
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000
INVESTMENT IN S&P AND THE RUSSELL 2000
Fiscal Russell 2000 BAF
------ ------------ ---
10000 10000
1987 10471 11950
1988 9339 13234
1989 11346 18521
1990 8266 12838
1991 11993 17760
1992 13066 19484
1993 17397 26595
1994 17892 28728
1995 22072 38002
1996 24971 46097
INFORMATION PRESENTED BY FISCAL YEAR AS OF SEPTEMBER 30
(UNAUDITED)
BARON ASSET FUND'S
MANAGEMENT
DISCUSSION AND ANALYSIS
Baron Asset Fund performed well in the fiscal year ended September 30, 1996,
both absolutely and relative to other equity funds and market averages. The
Fund's one year performance of 21.3% was better than its 17.9% average annual
performance since its inception almost ten years ago. Baron Asset Fund ranks
among the top 2% of all taxable equity funds since its inception in June
1987.
Although the Fund performed well during the year, performance was not uniform
throughout the year nor was the performance uniform across all areas of
investment. Baron Asset Fund began the fiscal year under-performing the
market averages in the December 1995 quarter, significantly out-performing
the market averages in the March and June quarters of 1996, and then closing
the year under-performing the market averages in the September 1996 quarter.
The Fund's approach to analyzing the long term prospects of businesses leaves
it susceptible to short periods of under-performance when other investors
focus on short term events and ignore the positive long term prospects of
businesses that our research has identified. After a period of negative
returns and under-performance for the last five months, the portfolio seems
attractively priced relative to the fundamental performance of the companies
in which we are invested, and we are well-positioned for relatively good
performance in 1997.
The performance of the Fund was not uniform across sectors. The Fund
performed well with its investments in Amusement & Recreation, Business
Services, Education, Government Services, Media & Entertainment and Retail
Stores. However, the Fund did not perform well with its investments in
Communications, Financial Services and Health Care Services. While the stock
prices of these investments did not perform well during the year, in most
cases the fundamentals of these businesses were strong and these industries
that under-performed last year represent significant opportunities for the
Fund in the upcoming year.
Baron Asset Fund concentrates its investments in small and mid sized
companies. During the year the performance of market averages that represent
this universe of smaller companies significantly under-performed the market
averages that represent more established large cap companies. We believe that
in the slow-growth environment that we anticipate for 1997, investors should
be willing to pay a premium for those companies that can grow at above
average rates and small cap stocks should do well in this environment after
under-performing in 1996.
In fiscal year 1997, the Fund will continue to invest in companies that are
undervalued, with significant growth prospects and increasing profitability.
The companies will continue to be identified through our independent research
efforts. Companies in which we invest will have the potential to increase in
price at least 50% over the next two years. The Fund will remain diversified
not only by industry and by investment theme, but also by external factors
that we have identified that could affect company performance. This approach
to investing in companies, and not trading in stocks, should allow the Fund
to continue to produce above average rates of return with an attractive risk
profile. We are looking forward to a successful 1997.
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21
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000
INVESTMENT IN BG&IF AND THE RUSSELL 2000
Fiscal Russell 2000 BGI
------ ------------ ---
10000 10000
1995 12397 14770
1996 13836 18575
BARON GROWTH & INCOME FUND'S MANAGEMENT
DISCUSSION AND ANALYSIS
Baron Growth & Income Fund performed well in the fiscal year ended September
30, 1996, both absolutely and relative to other equity funds and the market
averages. The Fund is the number one ranked growth & income fund since its
inception on January 3, 1995.
The Fund's strong performance can be attributed to its investment strategy of
allocating approximately 60% of its portfolio to rapidly growing, well
managed, very profitable small-cap companies that are attractively priced,
and the remaining 40% to value oriented, income producing securities, also
principally of smaller companies.
The growth component of the Fund performed well with its investments in
Amusement & Recreation, Business Services, Education, Government Services and
Retail Stores. The Fund's investments in Communications and Health Care
Services under-performed the Fund overall and provide opportunities for
strong performance in 1997.
The income component of the Fund performed well with its heavy allocation of,
on average, nearly 23% of the portfolio in REITs. The REIT portion of the
Fund gained 26.5% for the year. The combination of strong performance from
this income component and substantial current income provided the Fund with
very attractive relative risk characteristics for a fund that is mostly
invested in small cap companies.
In fiscal year 1997, the Fund's portfolio should continue to be structured as
it was in fiscal year 1996. Approximately 40% of the portfolio will likely
remain invested in income producing securities. We currently expect that more
than half of this portfolio segment will be invested in REITs. We expect the
income component of the Fund to produce annual returns of approximately 15%.
This is a combination of attractive yields and moderate business growth. The
growth component of the portfolio, like that of Baron Asset Fund, will be
fully invested in stocks that have the potential to appreciate in value at
least 50% during the next two years.
The Fund's portfolio is well positioned to offer attractive returns by
investing in small cap companies with significant growth potential, while
mitigating risk because of the cushion provided by its investments in
income-producing securities. We are looking forward to a successful 1997.
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22
<PAGE>
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THE BARON FUNDS
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REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
TO THE SHAREHOLDERS
AND BOARD OF TRUSTEES OF
BARON ASSET FUND:
We have audited the accompanying statements of net assets and liabilities of
Baron Asset Fund (comprising Baron Asset Fund and Baron Growth & Income Fund)
including the portfolio of investments as of September 30, 1996, the related
statements of operations for the year then ended, the statements of changes
in net assets for each of the two years in the period then ended, for Baron
Asset Fund and the period then ended and the period January 3, 1995
(commencement of operations) to September 30, 1995 for Baron Growth & Income
Fund, and the financial highlights for each of the periods indicated. These
financial statements and financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted standards.
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of securities
owned as of September 30, 1996 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective series constituting Baron Asset Fund as of September
30, 1996, the results of their operations, the changes in their net assets
and the financial highlights for each of the periods referred to above, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
November 27, 1996
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23
