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SECURITIES AND EXCHANGE COMMISSION ------------------------------
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FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-21296
BARON SELECT FUNDS
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
767 Fifth Avenue, 49th Floor
New York, NY 10153
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Linda S. Martinson, Esq.
c/o Baron Select Funds
767 Fifth Avenue,49th Floor
New York, New York 10153
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(Name and Address of Agent for Service)
Registrant's Telephone Number, including Area Code 212-583-2000
-----------------------------
Date of fiscal year end: December 31
------------------
Date of reporting period: June 30, 2006
-----------------
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17CRF 270.30e-1). The
Commission may use the information provided on Form N-CSR in its regulatory,
disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form
N-CSR, and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and suggestions for reducing the burden
to Secretary, Securities and Exchange Commission, 450 5th Street, NW,
Washington, D.C. 20549-6009. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. Section 3507.
Potential persons who are to respond to the collection of
information contained in this form are not required to respond
unless the form displays a currently valid OMB control number.
SEC 2569 (01-05)
Item 1. Baron Select Funds Semi-Annual Report for the period ended
June 30, 2006.
[Registered Castle Logo]
B A R O N
S E L E C T
F U N D S
BARON PARTNERS FUND
STATEMENT OF NET ASSETS.......................................................4
STATEMENT OF ASSETS AND
LIABILITIES .................................................................5
STATEMENT OF OPERATIONS.......................................................5
STATEMENTS OF CHANGES IN
NET ASSETS ..................................................................6
STATEMENT OF CASH FLOWS.......................................................6
NOTES TO FINANCIAL
STATEMENTS ..................................................................7
FUND EXPENSES................................................................10
DISCLOSURE REGARDING THE
APPROVAL OF THE INVESTMENT
ADVISORY CONTRACT BY THE
BOARD OF TRUSTEES ..........................................................11
767 Fifth Avenue
NY, NY 10153
212.583.2100
1.800.99.BARON
BaronFunds.com
SEMI-ANNUAL FINANCIAL REPORT JUNE 30, 2006
Dear Baron Partners Fund Shareholder:
Attached you will find unaudited financial statements for Baron Partners Fund
for the six months ended June 30, 2006. The Securities and Exchange Commission
requires mutual funds to furnish these statements semi-annually to their
shareholders.
We thank you for choosing to join us as fellow shareholders in Baron Partners
Fund. We will continue to work hard to justify your confidence.
Sincerely,
/s/ Ronald Baron
- ----------------
Ronald Baron
CEO and Chief Investment Officer
August 18, 2006
/s/ Peggy Wong
- --------------
Peggy Wong
Treasurer and CFO
August 18, 2006
A description of the Fund's proxy voting policies and procedures is available
without charge on the Fund's website, www.BaronFunds.com, or by calling 1-800-
99-BARON and on the SEC's website at www.sec.gov. The Fund's most current proxy
voting record, Form N-PX, is also available on the Fund's website,
www.BaronFunds.com and on the SEC's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Q is
available on the SEC's website www.sec.gov. The Fund's Form N-Q may also be
reviewed and copied at the SEC's Public Reference Room in Washington, DC;
information on the operation of the SEC's Public Reference Room may be obtained
by calling 800-SEC-0330. A copy of the Fund's Form N-Q may also be obtained upon
request by contacting Baron Funds at 1-800-992-2766. A schedule of Portfolio
Holdings current to the most recent quarter is also available at
www.BaronFunds.com.
- --------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The investment return and
principal value of an investment will fluctuate; an investor's shares, when
redeemed, may be worth more or less than their original cost. For more complete
information about Baron Partners Fund, 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 Baron Partners Fund unless accompanied or preceded by the
Fund's current prospectus.
BARON PARTNERS FUND (unaudited)
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- --------------------------------------------------------------------------------
COMPARISON OF THE CHANGE IN VALUE OF $10,000 INVESTMENT IN
BARON PARTNERS FUND^+** IN RELATION TO THE S&P 500^ and the Russell 2000^
[GRAPHIC OMITTED]
Baron Russell
Partners Fund^+** S&P 500^ 2000^
------------- ------- -----
01/31/1992 10,000 10,000 10,000
12/31/1992 11,963 10,954 10,953
12/31/1993 16,210 12,056 13,021
12/31/1994 16,895 12,213 12,784
12/31/1995 24,612 16,798 16,421
12/31/1996 29,452 20,656 19,130
12/31/1997 47,671 27,544 23,408
12/31/1998 53,059 35,410 22,812
12/31/1999 64,247 42,852 27,661
12/31/2000 67,123 38,940 26,825
12/31/2001 56,347 34,300 27,492
12/31/2002 45,982 26,718 21,861
12/31/2003 61,963 34,375 32,191
12/31/2004 88,203 38,099 38,091
12/31/2005 100,873 39,958 39,825
06/30/2006 110,780 41,060 43,097
Information Presented by Fiscal Year as of December 31 and for the six months
ended June 30, 2006
AVERAGE ANNUAL TOTAL RETURNS
for the periods ended June 30, 2006
Baron
Partners S&P Russell
Fund^** 500^ 2000^
- -------------------------------------------------------------------------------
Three Months (Not Annualized) (2.65%) (1.46%) (5.02%)
Six Months (Not Annualized) 9.82% 2.76% 8.21%
One Year 20.06% 8.62% 14.58%
Three Years 29.89% 11.21% 18.70%
Five Years 14.37% 2.48% 8.48%
Ten Years 14.29% 8.30% 9.05%
Since Inception (January 31, 1992)+ 18.15% 10.29% 10.66%
- -----------------
^ S&P 500, Russell 2000, and the Fund are with dividends. The inclusion of
dividends positively impacts the performance results of the Fund and the
indexes. The S&P 500 and the Russell 2000 are unmanaged indexes. The S&P
500 measures the performance of larger cap equities in the stock market in
general; the Russell 2000 of small companies.
+ Since inception, January 31, 1992, Baron Partners Fund's predecessor was a
limited investment partnership, which imposed different advisory fees,
operating expenses, and no dividend or capital gain distributions. The
restated performance information reflects the imposition of the same
advisory fees and expenses that would have been applied historically if the
Fund had had its current structure since inception in accordance with SEC
guidelines. The performance data include the predecessor partnership's
performance for the periods before the Fund's registration statement became
effective on April 30, 2003. The predecessor partnership was not registered
under the 1940 Act. Hence it was not subject to certain investment
restrictions imposed by the 1940 Act and by the Internal Revenue Code of
1986, which if applicable, might have adversely affected the performance of
the Fund.
** Past performance is no guarantee of future results. The performance data in
the table does not reflect the deduction of taxes that a shareholder would
pay on dividends, capital gain distributions, or redemption of Fund shares.
- --------------------------------------------------------------------------------
2
BARON PARTNERS FUND (unaudited)
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS (AS A PERCENTAGE OF LONG POSITIONS) AS OF
JUNE 30, 2006
- ----------------------------------------------------
% of Long
Positions
- ----------------------------------------------------
Wynn Resorts, Ltd. 7.6%
Las Vegas Sands Corp. 5.2%
Iron Mountain, Inc. 4.6%
ChoicePoint, Inc. 4.4%
Charles Schwab Corp. 4.2%
Manor Care, Inc. 4.2%
XTO Energy, Inc. 4.0%
Jefferies Group, Inc. 3.9%
AllianceBernstein Holding L.P. 3.7%
Boyd Gaming Corp. 3.3%
- ----------------------------------------------------
45.1%
- ----------------------------------------------------
TOP TEN INDUSTRIES
(AS A PERCENTAGE OF LONG POSITIONS)
AS OF JUNE 30, 2006
[PIE CHART]
Recreation & Resorts 18.8%
Financial Services - Brokerage & Exchanges 13.5%
Business Services 9.0%
Financial Services - Asset Management 8.9%
Energy Services 5.6%
Real Estate - REITs 5.1%
Retail - Specialty Stores 5.1%
Transportation 4.6%
Healthcare Facilities 4.2%
Financial Services - Insurance 2.9%
Other 22.3%
3
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
- --------------------------------------------------------------------------------
AS OF JUNE 30, 2006
Shares Cost Value
- --------------------------------------------------------------------------------
COMMON STOCKS (109.00%)
ADVERTISING SERVICES
(1.02%)
275,000 Getty Images, Inc.* $ 17,639,684 $ 17,465,250
AUTOMOTIVE PARTS (0.96%)
200,000 Johnson Controls, Inc. 16,253,089 16,444,000
BUSINESS SERVICES (9.88%)
2,000,000 ChoicePoint, Inc.* 69,222,009 83,540,000
2,300,000 Iron Mountain, Inc.* 68,142,215 85,974,000
--------------- ---------------
137,364,224 169,514,000
DISTRIBUTION (2.35%)
1,000,000 Fastenal Co. 41,109,857 40,290,000
EDUCATION (0.90%)
160,000 Strayer Education, Inc. 16,954,684 15,539,200
ENERGY SERVICES (6.14%)
500,000 Helmerich & Payne, Inc. 33,180,152 30,130,000
1,700,000 XTO Energy, Inc. 43,592,911 75,259,000
--------------- ---------------
76,773,063 105,389,000
FINANCIAL SERVICES --
ASSET MANAGEMENT (9.73%)
1,137,500 AllianceBernstein Holding
L.P. 63,104,694 69,546,750
750,000 Janus Capital Group, Inc. 13,201,560 13,425,000
400,000 Legg Mason, Inc. 48,775,084 39,808,000
1,025,000 Nuveen Investments, Inc.,
Cl A 34,752,789 44,126,250
--------------- ---------------
159,834,127 166,906,000
FINANCIAL SERVICES --
BROKERAGE & EXCHANGES (14.82%)
5,000,000 Charles Schwab Corp. 51,307,910 79,900,000
120,000 Chicago Mercantile
Exchange
Holdings, Inc., Cl A 15,545,091 58,938,000
1,125,000 International Securities
Exchange, Inc., Cl A 34,980,682 42,828,750
2,450,000 Jefferies Group, Inc. 55,095,997 72,593,500
--------------- ---------------
156,929,680 254,260,250
FINANCIAL SERVICES --
INSURANCE (3.17%)
700,000 Arch Capital Group, Ltd.* 25,246,122 41,622,000
450,000 Axis Capital Holdings,
Ltd. 11,610,332 12,874,500
--------------- ---------------
36,856,454 54,496,500
FINANCIAL SERVICES --
MISCELLANEOUS (2.98%)
575,000 National Financial
Partners
Corp. 27,772,375 25,478,250
450,000 The First Marblehead
Corp. 14,385,447 25,623,000
--------------- ---------------
42,157,822 51,101,250
GAMING SERVICES (1.53%)
800,000 Shuffle Master, Inc.* 20,506,313 26,224,000
HEALTHCARE FACILITIES (4.65%)
1,700,000 Manor Care, Inc. 56,664,142 79,764,000
HEALTHCARE PRODUCTS (1.73%)
525,000 Zimmer Holdings, Inc.* 32,528,519 29,778,000
HOTELS AND LODGING (2.76%)
770,000 Four Seasons Hotels, Inc. 44,815,857 47,308,800
REAL ESTATE SERVICES (2.69%)
500,000 CoStar Group, Inc.* 19,573,936 29,915,000
350,000 The St. Joe Company 21,910,870 16,289,000
--------------- ---------------
41,484,806 46,204,000
REAL ESTATE --
HOME BUILDING (2.27%)
1,525,000 Toll Brothers, Inc.* 44,085,370 38,994,250
REAL ESTATE -- REITS (5.62%)
249,000 AvalonBay Communities,
Inc. 26,487,851 27,544,380
250,000 Boston Properties, Inc. 14,835,865 22,600,000
500,000 General Growth
Properties, Inc. 16,346,702 22,530,000
650,000 Kimco Realty Corp. 17,415,133 23,718,500
--------------- ---------------
75,085,551 96,392,880
Shares Cost Value
- --------------------------------------------------------------------------------
RECREATION AND RESORTS (19.74%)
1,550,000 Boyd Gaming Corp. $ 68,716,255 $ 62,558,000
210,000 Kerzner Intl., Ltd.* 4,653,486 16,648,800
1,250,000 Las Vegas Sands Corp.* 57,840,823 97,325,000
875,000 Penn National Gaming,
Inc.* 28,391,828 33,932,500
1,750,000 Wynn Resorts, Ltd. * 72,463,524 128,275,000
--------------- ---------------
232,065,916 338,739,300
RESTAURANTS (1.82%)
325,000 California Pizza Kitchen,
Inc.* 9,543,897 8,931,000
525,000 Red Robin Gourmet
Burgers, Inc.* 23,588,466 22,344,000
--------------- ---------------
33,132,363 31,275,000
RETAIL -- CONSUMER STAPLES (2.26%)
600,000 Whole Foods Market, Inc. 30,445,985 38,784,000
RETAIL -- SPECIALTY STORES (5.64%)
550,000 Blue Nile, Inc.* 14,760,565 17,688,000
575,000 CarMax, Inc.* 15,992,328 20,389,500
1,050,000 Dicks Sporting Goods,
Inc.* 32,168,945 41,580,000
750,000 Select Comfort Corp.* 12,215,411 17,227,500
--------------- ---------------
75,137,249 96,885,000
TRANSPORTATION (5.10%)
800,000 C. H. Robinson Worldwide,
Inc. 20,066,739 42,640,000
800,000 Expeditors International
of Washington, Inc. 20,930,533 44,808,000
--------------- ---------------
40,997,272 87,448,000
UTILITY SERVICES (1.24%)
800,000 ITC Holdings Corp. 22,493,714 21,264,000
--------------- ---------------
TOTAL COMMON STOCKS 1,451,315,741 1,870,466,680
--------------- ---------------
Principal Amount
- --------------------------------------------------------------------------------
CORPORATE BONDS (0.93%)
RECREATION AND RESORTS
$ 5,000,000 Wynn Resorts, Ltd. 6.00%
Sub. Conv. Deb.
due 07/15/2015 4,918,286 15,920,000
--------------- ---------------
TOTAL INVESTMENTS (109.93%) $ 1,456,234,027 1,886,386,680
===============
LIABILITIES LESS
CASH AND OTHER ASSETS (-9.93%) (170,457,694)
---------------
NET ASSETS (EQUIVALENT TO $20.24 PER
SHARE BASED ON 84,768,508 SHARES
OUTSTANDING) $ 1,715,928,986
===============
- ---------------
% Represents percentage of net assets
* Non-income producing securities
See Notes to Financial Statements.
4
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
- --------------------------------------------------------------------------------
JUNE 30, 2006
ASSETS:
Investments in securities, at value (Cost $1,456,234,027) $1,886,386,680
Cash 496,248
Dividends and interest receivable 983,395
Due from broker 3,024
Receivable for securities sold 4,260,482
Receivable for shares sold 6,604,000
Prepaid expenses 15,777
--------------
1,898,749,606
--------------
LIABILITIES:
Due to custodian bank 147,500,000
Payable for securities purchased 33,614,902
Payable for shares redeemed 497,020
Accrued expenses and other payables 1,208,698
--------------
182,820,620
--------------
NET ASSETS $1,715,928,986
==============
NET ASSETS CONSIST OF:
Capital paid-in $1,307,362,604
Accumulated net investment loss (3,824,672)
Accumulated net realized loss (17,761,599)
Net unrealized appreciation on investments 430,152,653
--------------
NET ASSETS $1,715,928,986
==============
SHARES OUTSTANDING
($.01 PAR VALUE; INDEFINITE SHARES AUTHORIZED) 84,768,508
==============
NET ASSET VALUE PER SHARE $ 20.24
==============
STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2006
INVESTMENT INCOME:
INCOME:
Interest $ 180,842
Dividends 9,655,813
------------
Total income 9,836,655
------------
EXPENSES:
Investment advisory fees 7,832,111
Distribution fees 1,958,028
Shareholder servicing agent fees 166,775
Reports to shareholders 198,400
Professional fees 32,075
Registration and filing fees 34,114
Custodian fees 23,106
Trustee fees 46,735
Miscellaneous 14,356
------------
Operating expenses 10,305,700
Interest expense 3,355,627
------------
Total expenses 13,661,327
------------
Net investment loss (3,824,672)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments sold (10,923,233)
Change in net unrealized appreciation of investments 150,606,627
------------
Net gain on investments 139,683,394
------------
Net increase in net assets resulting from operations $135,858,722
============
See Notes to Financial Statements.
5
BARON PARTNERS FUND
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STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2006 DECEMBER 31, 2005
---------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss $ (3,824,672) $ (9,744,412)
Net realized (loss) gain on
investments (10,923,233) 33,784,164
Net change in unrealized appreciation
on investments 150,606,627 131,774,894
-------------- --------------
Increase in net assets resulting from
operations 135,858,722 155,814,646
-------------- --------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net realized gain on investments 0 (53,956,540)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from the sale of shares 466,594,011 1,048,959,250
Net asset value of shares issued in
reinvestment of dividends 0 51,770,755
Cost of shares redeemed (289,562,513) (432,281,144)
-------------- --------------
Increase in net assets derived from
capital share transactions 177,031,498 668,448,861
-------------- --------------
Net increase in net assets 312,890,220 770,306,967
NET ASSETS:
Beginning of period 1,403,038,766 632,731,799
-------------- --------------
End of period $1,715,928,986 $1,403,038,766
============== ==============
ACCUMULATED NET INVESTMENT (LOSS)
INCOME
AT THE END OF PERIOD $ (3,824,672) $ 0
============== ==============
SHARES:
Shares sold 23,406,276 61,189,922
Shares issued in reinvestment of
dividends 0 2,977,432
Shares redeemed (14,746,677) (25,609,039)
-------------- --------------
Net increase 8,659,599 38,558,315
============== ==============
STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2006
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Sales of capital shares $ 466,761,436
Cash distributions paid 0
Repurchase of capital shares (290,742,644)
-------------
Cash provided by capital share transactions 176,018,792
-------------
Decrease in due from broker 424,593
Increase in due to custodian bank 56,000,000
-------------
232,443,385
-------------
CASH PROVIDED (USED) BY OPERATIONS:
Purchases of portfolio securities (557,748,349)
Proceeds from sales of portfolio securities 328,636,497
Cash paid in connection with swap transactions (202,375)
Other decreases (3,545)
-------------
(229,317,772)
-------------
Net investment loss (3,824,672)
Net change in receivables/payables related to operations 529,568
-------------
(232,612,876)
-------------
Net decrease in cash (169,491)
-------------
Cash and cash equivalents beginning of period 665,739
-------------
Cash and cash equivalents end of period $ 496,248
=============
Supplemental cash flow information:
Interest paid $ 2,936,089
=============
See Notes to Financial Statements.
6
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (UNAUDITED)
- -------------------------------------------------------------------------------
(1) ORGANIZATION.
Baron Select Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as an open-end management investment
company established as a Delaware statutory trust on April 30, 2003. Baron
Partners Fund (the "Fund") is a separate non-diversified series of the Trust.
The Fund may employ "leverage" by borrowing money and using it for the purchase
of additional securities. Borrowing for investment increases both investment
opportunity and investment risk. The Fund's investment objective is to seek
capital appreciation.
The Fund was organized originally as a limited partnership in January 1992 under
the laws of the State of Delaware (the "Partnership"). Effective as of the close
of business on April 30, 2003, the Partnership was reorganized into a Delaware
statutory trust. The Fund commenced operations with an initial tax- free
contribution of assets and liabilities, including securities-in-kind from the
Partnership.
(2) SIGNIFICANT ACCOUNTING POLICIES.
The following is a summary of significant accounting policies followed by the
Fund. The policies are in conformity with accounting principles generally
accepted in the United States of America.
(A) SECURITY VALUATION. Portfolio securities traded on any national stock
exchange are valued based on the last sale price. For securities traded on
NASDAQ, the Fund uses the NASDAQ Official Closing Price. Where market quotations
are not readily available, or in the Adviser's judgment, they do not accurately
reflect fair value of a security, or an event occurs after the market close but
before the Fund is priced that materially affects the value of a security, the
securities will be valued by the Adviser using procedures established by the
Board of Trustees. The Adviser has a fair valuation committee comprised of
senior executives and members of the Board. Factors the committee uses include
whether a current price is stale, there is recent news, the security is thinly
traded, transactions are infrequent, or quotations are genuine. There can be no
assurance, however, that a fair valuation used by the Fund on any given day will
more accurately reflect the market value of an investment than the closing price
of such investment in its market. Debt instruments having a remaining maturity
greater than sixty days will be valued at the highest bid price from the dealer
maintaining an active market in that security or on the basis of prices obtained
from a pricing service approved by the Board of Trustees. Money market
instruments held by the Fund 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/expense is recognized on the
ex-dividend date and interest income is recognized on an accrual basis.
(C) FEDERAL INCOME TAXES. It is the policy of the Fund to continue to qualify as
a regulated investment company under Subchapter M of the Internal Revenue Code
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) DISTRIBUTIONS. Income distributions and capital gain 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, wash sale losses deferred, and
realized gains (losses) from swap transactions. Distributions received from Real
Estate Investment Trusts ("REITs") may be composed of dividends, realized gains
and return of capital. These amounts are initially estimated and may be
subsequently reclassified upon receipt of actual information from the REITs.
(E) USE OF ESTIMATES. The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, and
the amounts of income and expenses during the period. Actual results could
differ from those estimates.
(F) COMMITMENTS AND CONTINGENCIES. In the normal course of business, the Fund
may enter into contracts and agreements that contain a variety of
representations and warranties, which provide general indemnification. The
maximum exposure to the Fund under these agreements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. However, based on experience, the Fund expects the risk of loss to be
remote.
7
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
(G) CASH AND CASH EQUIVALENTS. The Fund considers all short term liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
(3) PURCHASES AND SALES OF SECURITIES.
For the six months ended June 30, 2006, purchases and sales of securities, other
than short term securities, aggregated $589,177,391 and $330,321,926,
respectively.
(4) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
(A) INVESTMENT ADVISORY FEES. BAMCO, Inc. (the "Adviser"), a wholly owned
subsidiary of Baron Capital Group, Inc. ("BCG"), serves as investment adviser to
the Fund. As compensation for services rendered, the Adviser receives a fee
payable monthly from the assets of the Fund equal to 1% per annum of the Fund's
average daily net asset value. The Adviser has contractually agreed to reduce
its fee to the extent required to limit the expense ratio for the Fund to 1.45%,
excluding portfolio transaction costs, interest and extraordinary expenses.
(B) DISTRIBUTION FEES. Baron Capital, Inc. ("BCI"), a wholly owned subsidiary of
BCG, is a registered broker-dealer and the distributor of the shares of the Fund
pursuant to a distribution plan under Rule 12b-1 of the 1940 Act. The
distribution plan authorizes the Fund to pay BCI a distribution fee equal on an
annual basis to 0.25% of the Fund's average daily net assets.
(C) TRUSTEE FEES. Certain Trustees of the Fund may be deemed to be affiliated
with or interested persons (as defined by the 1940 Act) of the Fund's Adviser or
of BCI. None of the Trustees so affiliated received compensation for his or her
services as a Trustee of the Fund. None of the Fund's officers received
compensation from the Fund.
(5) LINE OF CREDIT. The Fund has a line of credit with the custodian bank in the
amount of $200,000,000 to be used for investment purposes. Interest is charged
to the Fund, based on its borrowings, at a rate per annum equal to the Federal
Funds Rate plus a margin of 1.50%.
During the six months ended June 30, 2006, the Fund had an average daily balance
on the line of credit of $108,088,541 at a weighted average interest rate of
6.26%. At June 30, 2006, the Fund had an outstanding loan in the amount of
$147,500,000 under the line of credit.
(6) SWAP CONTRACTS. The Fund may enter into equity swap transactions as a
substitute for investing or selling short directly in securities. A swap
transaction is entered into with a counterparty to exchange the returns on a
particular security or a basket of securities. The gross returns to be exchanged
or "swapped" between the parties are calculated with respect to a "notional
amount". The counterparty will generally agree to pay the Fund the amount, if
any, by which the notional amount of the swap contract would have increased had
it been invested or decreased if sold short in the particular stocks. Upon
entering into the swap contract, the Fund is required to pledge to the broker an
amount of cash and/or other assets equal to a certain percentage of the contract
amount. During the period the swap contract is open, the Fund marks to market
the underlying instruments, including accrued dividends, and recognizes any
unrealized gain or loss. Net payments made or received periodically are
recognized as realized gain or loss. Swap contracts may involve exposure to loss
in excess of the amount recognized in the Statement of Assets and Liabilities.
The notional amount reflects the exposure the Fund has in the underlying
securities. These transactions are subject to credit risks in addition to the
various risks related to the underlying securities. At June 30, 2006, there were
no swap contracts outstanding.
(7) SHORT SALES. The Fund may sell securities short. When the Fund sells short,
the Fund records a liability for securities sold short and records an asset
equal to the proceeds received. The amount of the liability is subsequently
marked to market to reflect the market value of the securities sold short. The
Fund may incur dividend expense if a security that has been sold short declares
a dividend. The Fund is exposed to market risk based on the amount, if any, that
the market value of the securities sold short exceeds the proceeds received. The
Fund is required to maintain collateral in a segregated account for the
outstanding short sales. Short sales involve elements of market risks and
exposure to loss in excess of the amount recognized in the Statement of Assets
and Liabilities. The Fund's risk of loss in these types of short sales is
unlimited because there is no limit to the cost of replacing the borrowed
security.
8
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
(8) INCOME TAXES AND DISTRIBUTIONS TO SHAREHOLDERS.
Federal income tax regulations differ from generally accepted accounting
principles; therefore, distributions determined in accordance with tax
regulations may differ in amount or character from net investment income and
realized gains for financial reporting purposes. Financial reporting records are
adjusted for permanent book/tax differences to reflect tax character. Financial
records are not adjusted for temporary differences.
As of June 30, 2006, the cost of investments on a tax basis was as follows:
Cost of investments $1,456,461,945
==============
Gross tax unrealized appreciation $ 475,060,467
Gross tax unrealized depreciation (45,135,732)
--------------
Net tax unrealized appreciation $ 429,924,735
==============
The tax composition of dividends paid during the six month period ended
June 30, 2006, and fiscal year ended December 31, 2005 was as follows:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2006 DECEMBER 31, 2005
---------------- -----------------
Ordinary Income* $0 $26,360,760
Long-Term Capital Gains $0 $27,595,780
- ---------------
* For tax purposes, short-term capital gains are considered ordinary income
distributions.
(9) FINANCIAL HIGHLIGHTS.
Selected data for a share of beneficial interest outstanding throughout each
period:
FOR THE YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED ---------------------------
JUNE 30, 2006 2005 2004 2003*
---------------- -------- ------ ------
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.43 $ 16.85 $12.17 $10.00
-------- -------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.05) (0.13) (0.06) (0.10)
Net realized and unrealized gain on investments 1.86 2.49 5.17 3.63
-------- -------- ------ ------
TOTAL FROM INVESTMENT OPERATIONS 1.81 2.36 5.11 3.53
-------- -------- ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income 0.00 0.00 0.00 0.00
Distributions from net realized gains 0.00 (0.78) (0.43) (1.36)
-------- -------- ------ ------
TOTAL DISTRIBUTIONS 0.00 (0.78) (0.43) (1.36)
-------- -------- ------ ------
NET ASSET VALUE, END OF PERIOD $ 20.24 $ 18.43 $16.85 $12.17
======== ======== ====== ======
TOTAL RETURN 9.8%+ 14.4% 42.3% 35.7%+
-------- -------- ------ ------
RATIOS/SUPPLEMENTAL DATA
Net assets (in millions), end of period $1,715.9 $1,403.0 $632.7 $164.3
Ratio of total expenses to average net assets 1.74%** 1.62% 1.46% 1.77%**
Less: Ratio of interest expense to average net assets (0.43%)** (0.27%) (0.12%) (0.37)%**
-------- -------- ------ ------
Ratio of operating expenses to average net assets 1.31%** 1.35% 1.34% 1.40%
======== ======== ====== ======
Ratio of net investment loss to average net assets (0.49%)** (0.85%) (0.83%) (1.39)%**
Portfolio turnover rate 19.50%+ 37.62% 57.77% 36.67%+
- ---------------
* For the period April 30, 2003 (commencement of operations as a mutual fund)
to December 31, 2003.
** Annualized.
+ Not annualized.
9
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
FUND EXPENSES (UNAUDITED)
- --------------------------------------------------------------------------------
As a shareholder of the Fund, you may incur two types of costs: ongoing
expenses and transaction costs. Ongoing expenses include advisory fees,
distribution and service (12b-1) fees and other Fund expenses. Due to the
payment of Rule 12b-1 fees, long-term shareholders may indirectly pay more than
the maximum permitted front-end sales charge. The information on this page is
intended to help you understand your ongoing costs of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
This Example is based on an investment of $1,000 invested on January 1,
2006 and held for the six months ended June 30, 2006.
ACTUAL EXPENSES
The table below titled "Based on Actual Total Return" provides information
about actual account values and actual expenses. You may use the information
provided in this table, together with the amount you invested, to estimate the
expenses that you paid over the period. To estimate the expenses you paid on
your account, divide your ending account value by $1,000 (for example, an $8,600
ending account value divided by $1,000 = 8.6), then multiply the result by the
number under the heading titled "Expenses Paid During the Period".
BASED ON ACTUAL TOTAL RETURN FOR THE SIX MONTHS ENDED JUNE 30, 2006*
BEGINNING ENDING ANNUALIZED EXPENSES
ACTUAL TOTAL ACCOUNT VALUE ACCOUNT VALUE EXPENSE PAID DURING
RETURN JANUARY 1, 2006 JUNE 30, 2006 RATIO+ THE PERIOD#
------------ --------------- ------------- ---------- -----------
BARON PARTNERS FUND 9.82% $1,000.00 $1,098.21 1.74% $9.05
- ---------------
* Assumes all reinvestment of dividends and capital gain distributions, if
any.
# Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, multiplied by the of number days in
the most recent fiscal half-year, then divided by 365.
+ Annualized Expense Ratio for the six months ended June 30, 2006, includes
1.31% for operating expenses and 0.43% for interest expense.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table below titled "Based on Hypothetical Total Return" provides
information about hypothetical account values and hypothetical expenses based on
the actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account values and
expenses you paid for the period. You may use the information provided in this
table to compare the ongoing costs of investing in the Fund and other funds. To
do so, compare the 5% hypothetical example relating to the Fund with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table below are meant to highlight your
ongoing costs and do not reflect any transactional costs, such as redemption
fees, if any. Therefore, the table is useful in comparing ongoing costs only and
will not help you determine your relative total costs of owning different mutual
funds. In addition, if these transactional costs were included, your costs would
have been higher.
BASED ON HYPOTHETICAL TOTAL RETURN FOR THE SIX MONTHS ENDED JUNE 30, 2006
HYPOTHETICAL BEGINNING ENDING ANNUALIZED EXPENSES
ANNUALIZED ACCOUNT VALUE ACCOUNT VALUE EXPENSE PAID DURING
TOTAL RETURN JANUARY 1, 2006 JUNE 30, 2006 RATIO+ THE PERIOD#
------------ --------------- ------------- ---------- -----------
BARON PARTNERS FUND 5.00% $1,000.00 $1,016.17 1.74% $8.70
- ---------------
# Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, multiplied by the number of days in
the most recent fiscal half-year, then divided by 365.
+ Annualized Expense Ratio for the six months ended June 30, 2006, includes
1.31% for operating expenses and 0.43% for interest expense.
10
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
DISCLOSURE REGARDING THE APPROVAL OF THE INVESTMENT ADVISORY CONTRACT BY THE
BOARD OF TRUSTEES
- --------------------------------------------------------------------------------
The Board of Trustees (the "Board") of Baron Select Funds (the "Trust") met on
May 23, 2006, to discuss the selection of BAMCO, Inc. as the adviser ("Adviser")
and the approval of the advisory fee for the Baron Partners Fund series of the
trust (the "Fund"). The members of the Board who are not affiliated with the
Fund's Adviser (the "Independent Trustees") met in separate session to discuss
and consider the renewal of the advisory contract for the Fund. An independent
consultant provided reports to the Board and attended the May Board meeting. The
Trustees received a substantial amount of information from the Adviser and from
the consultant. Based on its evaluation of this and other information, the
Board, including a majority of the Independent Trustees, approved the
continuation of the advisory agreement for the Fund for an additional one year
period.
In considering the advisory agreement and in reaching its determination, the
Board reviewed and analyzed 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 services provided by the Adviser, the
Independent Trustees relied on information received and knowledge gained
throughout the year. The Board considered the Adviser's resources and the
Board's confidence in the Adviser's senior personnel and portfolio management
staff. The Board paid particular attention to the quality of the services
provided by the Adviser and the nature of those services, including the
extensive devotion to research efforts by the Adviser and the long-term approach
to portfolio management. The Board also considered the level of performance of
other services provided by the Adviser, including selection of broker/dealers
for Fund portfolio transactions, relationships with and supervision of third
party service providers, including the Fund's custodian and transfer agent, the
ability to monitor adherence to risk profiles, investment guidelines and
restrictions. The Board also considered the support services provided to the
Board and the legal and accounting services provided to the Fund. The Board
concluded that the nature, extent and quality of the services provided by the
Adviser to the Fund were appropriate and that the Fund was likely to continue to
benefit from those services provided under the contracts with the Adviser.
2. INVESTMENT PERFORMANCE OF THE FUND AND THE ADVISER
The Board's analysis of the investment performance of the Fund took into account
reports prepared by an independent consultant and data supplied by independent
data service providers. Performance of the Fund was compared to performance of
similar funds managed by other advisers over comparable periods, as well as to
the expenses of those other funds. The independent analysis considered total
return and risk ratios of the Fund and of similar funds, and a comparison of
annualized total return over one, three, and five year periods, against expense
group and performance universe averages. The Board considered the performance of
the Fund as measured against its peers and against other Funds managed by the
Adviser. After considering all the information, the Board concluded that the
Fund and its shareholders were benefitting from the Adviser's investment
management of the Fund, although noted that past performance is no guarantee of
future results.
3. COSTS OF SERVICES PROVIDED AND PROFITS TO BE REALIZED BY THE ADVISER
The Board examined the fees charged by the Adviser as compared to the fees
charged by comparable funds, based on information provided by the Adviser and by
the independent consultant. The information considered by the Board compared
various fees and expenses, as well as total expense ratios, of the Fund against
the same fees and expenses of other funds of similar size, character and
investment strategies. Although the operating expense ratios for the Fund were
not the lowest, they were not the highest either. The Board noted that operating
expense ratios for the Fund had continued to decrease since the inception of the
Fund.
The Board considered the Adviser's management fees for other mutual fund
accounts for which the Adviser serves as a sub-adviser. While the fees for those
sub-advised accounts are lower than the fees for the Fund, the Adviser performs
only portfolio management services for those accounts, and does not provide the
many other services provided by the Adviser to the Fund. The Board discussed and
considered those other services, which include accounting, oversight of service
providers, legal, regulatory, risk management, and trustee support.
The Board also considered the costs of portfolio management, including the types
of investments made for the Fund, the personnel and systems necessary to
implement investment strategies, and the pre-tax profits realized by the Adviser
and its affiliates from their relationship with the Fund. The Board also
considered the financial condition of the Adviser and its affiliates.
The Board concluded that the management fee, as well as the total expenses paid
by the Fund to the Adviser and its affiliates, were reasonable in light of the
services provided and the performance of the Fund achieved by the Adviser over
various time periods, and that the other expenses of the Fund were also
reasonable.
4. ECONOMIES OF SCALE AND BENEFITS TO INVESTORS
The Board considered the extent to which the Fund's management fee reflected
economies of scale for the benefit of Fund shareholders. The Board considered
that the Fund does not have breakpoint fees. The Board considered that the small
and mid cap investment strategy required more attention by the Adviser than a
strategy that involved other types of investing, particularly as the assets size
increased in size. The Board considered other components of the services
provided by the Adviser with respect to economies of scale achieved as asset
sizes increase. The Board concluded that each Fund's management fee structure
was reasonable with respect to economies achieved for the benefit of
shareholders.
After due consideration of the above enumerated factors, and additional factors,
the Board, including a majority of the Independent Trustees, concluded that
approval of the Fund's investment advisory agreement was in the best interests
of the Fund and its shareholders.
11
[Registered Castle Logo]
B A R O N
S E L E C T
F U N D S
JUNE06
Item 2. Code of Ethics.
Not applicable at this time. This item is appliacble to annual
reports.
Item 3. Audit Committee Financial Expert.
Not applicable at this time. This item is appliacble to annual
reports.
Item 4. Principal Accountant Fees and Services.
Not applicable at this time. This item is appliacble to annual
reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable at this time. This item is appliacble to annual
reports.
Item 6. Schedule of Investments.
Please see Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
NOT APPLICABLE.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
NOT APPLICIABLE.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
NOT APPLICABLE.
Item 10. Submission of Matters to a Vote of Security Holders.
NOT APPLICABLE>
Item 11. Controls and Procedures.
(a) The Registrant's principal executive officer and principal financial
officer have concluded that the Registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company
Act of 1940) are effective based on their evaluation of these controls
and procedures as of a date within 90 days of the filing date of this
report.
(b) There were no changes in the Registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Investment
Company Act of 1940) that occurred during the Registrant's second
fiscal quarter of the period covered by this report that have
materially affected, or are reasonably likely to materially affect,
the Registrant's internal control over financial reporting.
Item 12. Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
BARON SELECT FUNDS
By: /s/ Ronald Baron
-------------------
Ronald Baron
CEO and Chief Investment Officer
Date: August 30, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Ronald Baron
--------------------
Ronald Baron
CEO and Chief Investment Officer
Date: August 30, 2006
By: /s/ Peggy Wong
--------------------
Peggy Wong
Treasurer and Chief Financial Officer
Date: August 30, 2006
A signed original of this written statement has been provided to Baron Select
Funds and will be retained by Baron Select Funds and furnished to the Securities
and Exchange Commission or its staff upon request.