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SEPTEMBER 30, 2014
BARON FUNDS
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DISCLOSURE REGARDING THE APPROVAL OF THE INVESTMENT ADVISORY AGREEMENTS FOR
BARON ASSET FUND, BARON GROWTH FUND, BARON SMALL CAP FUND, BARON OPPORTUNITY
FUND AND BARON FIFTH AVENUE GROWTH FUND BY THE BOARD OF TRUSTEES (Unaudited)
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The Board of Trustees (the Board) of Baron Investment Funds Trust (the
Trust) met on May 6, 2014 to discuss the selection of BAMCO, Inc. (the
Adviser) as the investment adviser and the approval of the investment
advisory agreements for Baron Asset Fund, Baron Growth Fund, Baron Small Cap
Fund, Baron Opportunity Fund and Baron Fifth Avenue Growth Fund, (each a Fund
and collectively, the Funds). The members of the Board who are not affiliated
with the Trust (the Independent Trustees) met in a separate session to discuss
and consider the renewal of the advisory agreement for the Funds. An
independent consultant provided reports to the Board and attended the Board
meeting. The Trustees received a substantial amount of information from the
Adviser and from the consultant, and were advised by independent counsel.
Based on its evaluation of this and other information, the Board, including
a majority of the Independent Trustees, approved the continuation of the
advisory agreements for the Funds for an additional one-year period.
In reaching its determination, the Board considered various factors that it
deemed relevant, including the factors listed below.
1. NATURE, EXTENT AND QUALITY OF SERVICES
As part of their consideration of the nature, extent and quality of services
provided by the Adviser, the Independent Trustees relied on the information
they received at or prior to the Board meeting, their experience and knowledge
gained from their service as Trustees and their experience generally and
information they had considered in past years and remained, in their thinking,
material to their consideration. In particular, the Board considered the
following:
o Its confidence in the Advisers senior personnel and portfolio
management, the financial condition of the Adviser and its
affiliates and the Advisers available resources;
o The nature, quality and the level of long-term performance of the
services provided by the Adviser, including: intensive devotion to
research, selection of broker/dealers for Fund portfolio
transactions,relationships with and supervision of third party
service providers, such as the Funds custodian and transfer agent,
the quality of shareholder reports, the ability to monitor
adherence to investment guidelines and restrictions, the legal,
accounting and compliance services provided to the Funds and
the support services provided to the Board;
o The Advisers investment principles and processes and the historical
performance of the Funds as compared to similar funds managed by
other advisers and other funds managed by the Adviser over comparable
periods;
o The total expense ratio of the Funds and comparisons to similar funds
managed by other advisers over comparable periods;
o The costs of portfolio management, including the types of investments
made for the Funds, the personnel and systems necessary for
implementation of investment strategies, and the pre-tax profits
realized by the Adviser and its affiliates from their relationship
with the Funds; and
o Additional services provided by the Adviser.
The Board concluded that the nature, extent and quality of the services
provided by the Adviser to each Fund were appropriate and that each Fund
was likely to continue to benefit from those services provided under the
relevant advisory agreement with the Adviser.
2. INVESTMENT PERFORMANCE OF THE FUNDS AND THE ADVISER
As part of its consideration of the investment performance of the Funds and the
Adviser, the Board took into account the analyses performed by and discussed
with the independent consultant. The Board considered for each Fund, among
other information, the independent consultants comparisons of the expense ratio
and contractual advisory fee with those of peer funds selected by the
independent consultant, as noted below. The Board noted that long-term
performance for the Funds was generally good compared to their peers. The Board
noted that each Fund with performance data covering at least ten years was
ranked in the first or second quintile for the ten-year period and in the first
or second quintile for at least one of the shorter-term performance periods.
For the Funds that underperformed relative to their peers during certain
periods, representatives of the Adviser described the reasons for the lower
relative performance and, as applicable, the steps the Adviser had taken to
improve performance. The Board also considered the independent consultants
risk-adjusted performance comparisons with comparable funds for Funds that
have been in existence for more than three years. The Board also considered
comparisons of each Funds annualized total return over one-, three-,
five- and ten-year periods, where applicable, against expense group and
performance universe averages and relevant securities market indices. After
considering all the information, the Board concluded that the Adviser
continued to invest in accordance with its longstanding principles and that
each Funds more recent relative performance was consistent with expectations
for the Advisers investment style under recent market conditions
3. COSTS OF SERVICES PROVIDED AND PROFITS TO BE REALIZED BY THE ADVISER
The Board considered benefits that accrue to the Adviser and its affiliates
from their relationship with the Funds. Representatives of the Adviser said
the Board should consider the advisory fee in the context of other fees paid
to the Advisers affiliates, such as the distribution fee paid pursuant to the
12b-1 plan. The Board was provided with information from the Adviser and the
independent consultant regarding the fees charged by the Adviser as compared to
the fees charged by comparable funds. This information compared various fees
and expenses, as well as the total expense ratios, of the Funds against the
same fees, expenses and total expense ratios of other funds of similar size,
character and investment strategies. The Board observed that, for most of the
Funds, while the management fee was relatively high, the other expenses paid by
the Funds generally were relatively low, when compared to their peers. They
concluded that the Funds higher management fee was justified given the
Advisers highly research intensive process and highly disciplined adherence to
its process.
The Board considered comparisons of the advisory fees charged and services
provided by the Adviser and its investment adviser affiliate to sub-advised
accounts and separately managed accounts and a profitability analysis prepared
by the Adviser. The Board considered that, while the advisory fees for the
other clients are the same as, or lower than, the fees for the Funds, the
Adviser or its affiliate performs significantly fewer services for those
clients compared with those provided by the Adviser to the Funds.
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BARON FUNDS
SEPTEMBER 30, 2014
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DISCLOSURE REGARDING THE APPROVAL OF THE INVESTMENT ADVISORY AGREEMENTS FOR
BARON ASSET FUND, BARON GROWTH FUND, BARON SMALL CAP FUND, BARON OPPORTUNITY
FUND AND BARON FIFTH AVENUE GROWTH FUND BY THE BOARD OF TRUSTEES (Unaudited)
(Continued)
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4. ECONOMIES OF SCALE AND BENEFITS TO INVESTORS
The Board considered the extent to which each Funds management fee reflected
economies of scale for the benefit of Fund shareholders, noting the sharp
decline in assets from their highs in 2007 and, then, a recovery and
appreciating that the economies of scale analysis is predicated on generally
predictable increasing assets. The Board considered that, except for Baron
Fifth Avenue Growth Fund, the Funds fee schedules do not have break points.
The Board considered that small- and mid-cap investment strategies require
more attention by the Adviser than a strategy that involves other types of
investing,particularly as asset size increases. The Board considered that the
Adviser was continuing to grow and upgrade its staff and invest in its business
even during this recent period of declining assets and reduced revenues.
The Board members reiterated their intention to continue to scrutinize the
extent of economies of scale, asset growth and the Advisers plans to invest
further to support the Funds. The Board concluded that approval of the
management fee for each Fund was supportable in light of the services
provided as discussed at the meeting, including the Advisers investments in
resources to support the Funds.
After due consideration of the above-enumerated factors and other factors in
deemed relevant, the Board, including a majority of the Independent Trustees,
approved the continuance of each Fund's investment advisory agreement.
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