UNITED STATES OMB APPROVAL
SECURITIES AND EXCHANGE COMMISSION OMB Number: 3235 -0570
Washington, D.C. 20549 Expires: October 31, 2006
Estimated average burden
hours per response...
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
- --------------------------------------------------------------------------------
(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: December 31, 2005
--------------------
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 (3-03)
Item 1. Baron Select Funds Annual Report for the period ended
December 31, 2005.
[Registered Logo]
B A R O N
S E L E C T
F U N D S
MANAGEMENT DISCUSSION OF
FUND PERFORMANCE ............................................................3
FUND EXPENSES.................................................................4
STATEMENT OF NET ASSETS.......................................................5
STATEMENT OF ASSETS AND
LIABILITIES .................................................................6
STATEMENT OF OPERATIONS.......................................................7
STATEMENTS OF CHANGES IN
NET ASSETS ..................................................................8
STATEMENT OF CASH FLOWS.......................................................9
NOTES TO FINANCIAL
STATEMENTS .................................................................10
REPORT OF INDEPENDENT
REGISTERED PUBLIC
ACCOUNTING FIRM ............................................................14
TAX INFORMATION..............................................................15
MANAGEMENT OF THE FUND.......................................................15
767 Fifth Avenue
NY, NY 10153
212.583.2100
1.800.99.BARON
BaronFunds.com
ANNUAL FINANCIAL REPORT DECEMBER 31, 2005
DEAR BARON PARTNERS FUND SHAREHOLDER:
Attached you will find audited financial statements for Baron Partners Fund for
its fiscal year ended December 31, 2005. 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
Chief Investment Officer and Portfolio Manager
February 22, 2006
/s/Peggy Wong
Peggy Wong
Treasurer and CFO
February 22, 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.
- ------------
Some of our comments are based on current management expectations and are
considered "forward-looking statements." Actual future results, however, may
prove to be different from our expectations. You can identify forward-looking
statements by words such as "estimate", "may", "expect", "should", "could",
"believe", "plan" and other similar terms. We cannot promise future returns and
our opinions are a reflection of our best judgment at the time this report is
compiled.
The views expressed in this report reflect those of the Company only through the
end of the period stated in this report. The views are not intended as
recommendations or investment advice to any person reading this report and are
subject to change at any time based on market and other conditions and Baron has
no obligation to update them.
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)
- --------------------------------------------------------------------------------
================================================================================
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*
[LINE GRAPH]
Baron
Partners
Funds S & P 500 Russell 2000
-------- --------- ------------
01/31/92 10000 10000 10000
12/31/92 11963 10954 10953
12/31/93 16210 12056 13021
12/31/94 16895 12213 12784
12/31/95 24612 16798 16421
12/31/96 29452 20656 19130
12/31/97 47671 27544 23408
12/31/98 53059 35410 22812
12/31/99 64247 42852 27661
12/31/00 67123 38940 26825
12/31/01 56347 34300 27492
12/31/02 45982 26718 21861
12/31/03 61963 34375 32191
12/31/04 88203 38099 38091
12/31/05 100873 39958 39825
Information Presented by Fiscal Year as of December 31
AVERAGE ANNUAL TOTAL RETURN
for the periods ended December 31, 2005
Since Inception
One Year Five Years Ten Years 01/31/1992 +
-------- ---------- --------- ---------------
Baron Partners Fund ** 14.37% 8.49% 15.15% 18.07%
Russell 2000 * 14.55% 8.22% 19.26% 10.44%
S & P 500 * 14.88% 0.52% 19.05% 10.47%
- -----------
* The 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 sotck 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 distribution schedules.
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 wasn't 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.
** The performance data 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
DECEMBER 31, 2005
- -------------------------------------------------
% OF LONG
POSITIONS
- -------------------------------------------------
Wynn Resorts, Ltd. 7.4%
Iron Mountain, Inc. 6.2%
ChoicePoint, Inc. 6.0%
Apollo Group, Inc., Cl A 5.1%
XTO Energy, Inc. 5.0%
Hewitt Associates, Inc. 4.7%
Manor Care, Inc. 4.6%
Charles Schwab Corp. 4.2%
First Marblehead Corp. 3.3%
Axis Capital Holdings, Ltd. 3.2%
- -------------------------------------------------
49.7%
- -------------------------------------------------
TOP TEN INDUSTRIES
(AS A PERCENTAGE OF LONG POSITIONS)
AS OF DECEMBER 31, 2005
[PIE CHART]
Recreation and Resorts 15.0%
Business Services 12.2%
Financial Services - Brokerage & Exchanges 11.3%
Education 6.1%
Financial Services - Insurance 5.7%
Real Estate 5.6%
Retail - Specialty Stores 5.5%
Energy Services 5.0%
Financial Services - Asset Management 5.0%
Consulting 4.7%
Other 23.9%
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
Baron Partners Fund's performed well in the year ending December 31, 2005. The
Fund gained 14.37%. The S&P 500, an index of large cap stocks, gained 4.91% and
the Russell 2000, an index of small cap companies, gained 4.55% in the same
period.
Baron Partners Fund has performed well since it converted into an open-end
mutual fund on April 30, 2003 and earlier, when it was an investment
partnership. In the period since the Fund's conversion on April 30, 2003,
through December 31, 2005, the Fund gained 34.61% per year versus 14.25% per
year for the S&P 500 and 23.15% per year for the Russell 2000. The Fund has
significantly outperformed both the Russell 2000 and the S&P 500 since its
inception in January 1992 (See graph on page 2).
Baron Partners Fund performed well throughout the year. In the first quarter the
Fund lost 0.74% but outperformed a weak stock market where the S&P 500 lost
2.15% and the Russell 2000 lost 5.34%. In the remaining three quarters the fund
gained 15.22% and also outperformed the market where the S&P 500 gained
7.21% and the Russell 2000 gained 10.45%.
The Fund's performance was not uniform across sectors. The Fund's performance
was led by some of its investments in Financial Services, most notably in the
Brokerage & Exchange, Asset Management and Insurance areas. In addition, the
Fund performed well with its investments in Energy Services, Business Services,
Real Estate and Transportation. The Fund's performance was negatively impacted
by its investments in Education and Miscellaneous Financial Services.
The Fund's short positions did not have a significant impact on the Fund's
performance in 2005.
In fiscal year 2006, the Fund will continue to invest in a concentrated manner
in companies that in our opinion are undervalued relative to their long-term
growth prospects and ability to sustain superior levels of profitability. While
we do not believe that shorting stocks will be significant in 2006, the Fund may
establish short positions in companies we believe have limited growth prospects,
are poorly managed, have a highly leveraged balance sheet, or are overpriced. We
are looking forward to a successful 2006.
3
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. 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 July 1, 2005
and held for the six months ended December 31, 2005.
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(1)
BEGINNING ENDING ANNUALIZED EXPENSES
ACTUAL TOTAL ACCOUNT VALUE ACCOUNT VALUE EXPENSE PAID DURING
RETURN JULY 1, 2005 DECEMBER 31, 2005 RATIO THE PERIOD(2)
------------ ------------- ----------------- ---------- -------------
BARON PARTNERS FUND 9.32% $1,000.00 $1,093.24 1.68%* $8.86
- ---------------
(1) For the six months ended December 31, 2005. Assumes all reinvestment of
dividends and capital gain distributions, if any.
(2) 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.
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(1)
HYPOTHETICAL BEGINNING ENDING ANNUALIZED EXPENSES
ANNUALIZED ACCOUNT VALUE ACCOUNT VALUE EXPENSE PAID DURING
TOTAL RETURN JULY 1, 2005 DECEMBER 31, 2005 RATIO THE PERIOD(2)
------------ ------------- ----------------- ---------- -------------
BARON PARTNERS FUND 5.00% $1,000.00 $1,016.74 1.68%* $8.54
- ---------------
(1) For the six months ended December 31, 2005.
(2) 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 DECEMBER 31, 2005
INCLUDES 1.35% FOR OPERATING EXPENSES AND 0.33% FOR INTEREST EXPENSE.
4
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
AS OF DECEMBER 31, 2005
Shares Cost Value
- -----------------------------------------------------------------------------
COMMON STOCKS (105.23%)
BUSINESS SERVICES (12.96%)
2,000,000 ChoicePoint, Inc.*+ $ 69,222,009 $ 89,020,000
2,200,000 Iron Mountain, Inc.* 64,454,323 92,884,000
--------------- ---------------
133,676,332 181,904,000
CONSULTING (4.99%)
2,500,000 Hewitt Associates, Inc.* 72,378,743 70,025,000
EDUCATION (6.46%)
1,250,000 Apollo Group, Inc., Cl A* 73,569,581 75,575,000
160,000 Strayer Education, Inc. 16,954,684 14,992,000
--------------- ---------------
90,524,265 90,567,000
ENERGY SERVICES (5.32%)
1,700,000 XTO Energy, Inc. 43,592,912 74,698,000
FINANCIAL SERVICES --
ASSET
MANAGEMENT (5.33%)
550,000 Alliance Capital
Management
Holding L.P. 25,896,245 31,069,500
1,025,000 Nuveen Investments, Inc.,
Cl A 34,752,789 43,685,500
--------------- ---------------
60,649,034 74,755,000
FINANCIAL SERVICES --
BANKING (1.02%)
800,000 UCBH Holdings, Inc. 14,830,019 14,304,000
FINANCIAL SERVICES --
BROKERAGE & EXCHANGES (11.97%)
4,300,000 Charles Schwab Corp. 40,936,806 63,081,000
125,000 Chicago Mercantile
Exchange
Holdings, Inc., Cl A 16,499,682 45,936,250
750,000 International Securities
Exchange, Inc., Cl A* 21,417,558 20,640,000
850,000 Jefferies Group, Inc. 33,677,236 38,233,000
--------------- ---------------
112,531,282 167,890,250
FINANCIAL SERVICES --
INSURANCE (6.08%)
700,000 Arch Capital Group, Ltd.* 25,246,122 38,325,000
1,500,000 Axis Capital Holdings,
Ltd. 40,593,260 46,920,000
--------------- ---------------
65,839,382 85,245,000
FINANCIAL SERVICES --
MISCELLANEOUS (3.51%)
1,500,000 First Marblehead Corp. 57,817,447 49,290,000
GAMING SERVICES (0.99%)
550,000 Shuffle Master, Inc.* 14,373,344 13,827,000
HEALTHCARE FACILITIES
(4.82%)
1,700,000 Manor Care, Inc. 56,664,142 67,609,000
HEALTHCARE SERVICES --
INSURANCE (1.36%)
240,000 WellPoint, Inc.* 8,334,660 19,149,600
HOME BUILDING (1.54%)
625,000 Toll Brothers, Inc.* 16,633,928 21,650,000
HOTELS AND LODGING
(2.73%)
770,000 Four Seasons Hotels, Inc. 44,815,857 38,307,500
REAL ESTATE (5.94%)
250,000 Boston Properties, Inc. 14,835,865 18,532,500
473,933 CoStar Group, Inc.* 18,031,911 20,459,688
500,000 General Growth
Properties, Inc. 16,346,703 23,495,000
650,000 Kimco Realty Corp. 17,415,133 20,852,000
--------------- ---------------
66,629,612 83,339,188
RECREATION AND RESORTS (15.07%)
447,700 Boyd Gaming Corp. 19,502,815 21,337,382
275,000 Carnival Corp. 13,625,623 14,704,250
210,000 Kerzner Intl., Ltd.* 4,653,485 14,437,500
450,000 Las Vegas Sands Corp.* 15,607,784 17,761,500
450,000 MGM Mirage, Inc.* 18,533,106 16,501,500
850,000 Penn National Gaming,
Inc.* 27,473,748 28,007,500
1,800,000 Wynn Resorts, Ltd. * 75,453,108 98,730,000
--------------- ---------------
174,849,669 211,479,632
Shares Cost Value
- -----------------------------------------------------------------------------
RESTAURANTS (2.56%)
325,000 California Pizza Kitchen,
Inc.* $ 9,543,898 $ 10,390,250
500,000 Red Robin Gourmet
Burgers, Inc.* 22,653,408 25,480,000
--------------- ---------------
32,197,306 35,870,250
RETAIL--CONSUMER STAPLES (1.10%)
200,000 Whole Foods Market, Inc. 4,808,122 15,478,000
RETAIL--SPECIALTY STORES (5.84%)
550,000 Blue Nile, Inc.* 14,760,565 22,170,500
575,000 CarMax, Inc.* 15,992,328 15,916,000
1,050,000 Dicks Sporting Goods,
Inc.* 32,168,945 34,902,000
325,000 Select Comfort Corp.* 6,358,523 8,888,750
--------------- ---------------
69,280,361 81,877,250
TRANSPORTATION (4.04%)
800,000 C. H. Robinson Worldwide,
Inc. 20,066,739 29,624,000
400,000 Expeditors International of
Washington, Inc. 20,930,533 27,004,000
--------------- ---------------
40,997,272 56,628,000
UTILITY SERVICES (1.60%)
800,000 ITC Holdings Corp. 22,493,714 22,472,000
--------------- ---------------
TOTAL COMMON STOCKS 1,203,917,403 1,476,365,670
--------------- ---------------
Notional Amount
- -----------------------------------------------------------------------------
SWAP CONTRACTS (0.00%)
- -----------------------------------------------------------------------------
$(280,800) Total Return Swap
Contract
on a Variety of Short
Securities Terminating
06/30/2006 0 0
--------------- ---------------
Principal Amount
- -----------------------------------------------------------------------------
CORPORATE BONDS (0.85%)
- -----------------------------------------------------------------------------
RECREATION AND RESORTS
$5,000,000 Wynn Resorts, Ltd. 6.00%
Sub. Conv. Deb.
due 07/15/2015 4,914,741 12,012,500
--------------- ---------------
TOTAL INVESTMENTS (106.08%) $ 1,208,832,144 1,488,378,170
===============
LIABILITIES LESS
CASH AND OTHER ASSETS (-6.08%) (85,339,404)
---------------
NET ASSETS (EQUIVALENT TO $18.43 PER
SHARE BASED ON 76,108,909 SHARES
OUTSTANDING) $ 1,403,038,766
===============
- ---------------
% Represents percentage of net assets
* Non-income producing securities
+ Represents security, or a portion thereof, segregated with broker as
collateral for swap contracts.
See Notes to Financial Statements.
5
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
DECEMBER 31, 2005
ASSETS:
Investments in securities, at value (Cost $1,208,832,144) $1,488,378,170
Cash 665,739
Dividends and interest receivable 1,036,280
Due from broker 427,617
Receivable for securities sold 1,741,700
Receivable for shares sold 6,771,425
--------------
1,499,020,931
--------------
LIABILITIES:
Due to custodian bank 91,500,000
Due to broker 197,175
Payable for securities purchased 1,891,600
Payable for shares redeemed 1,677,151
Accrued expenses and other payables 716,239
--------------
95,982,165
--------------
NET ASSETS $1,403,038,766
==============
NET ASSETS CONSIST OF:
Capital paid-in $1,130,331,106
Accumulated net realized loss (6,838,366)
Net unrealized appreciation on investments 279,546,026
--------------
NET ASSETS $1,403,038,766
==============
SHARES OUTSTANDING
($.01 PAR VALUE; INDEFINITE SHARES AUTHORIZED) 76,108,909
==============
NET ASSET VALUE PER SHARE $ 18.43
==============
See Notes to Financial Statements.
6
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31, 2005
------------------
INVESTMENT INCOME:
INCOME:
Interest $ 699,140
Dividends (net of withholding taxes of $5,455) 8,061,677
------------
Total income 8,760,817
------------
EXPENSES:
Investment advisory fees 11,425,669
Distribution fees 2,856,417
Reports to shareholders 537,780
Shareholder servicing agent fees 239,995
Registration and filing fees 173,888
Trustee fees 82,894
Professional fees 56,461
Custodian fees 35,510
Miscellaneous 23,052
------------
Total operating expenses 15,431,666
Interest expense 3,073,563
------------
Total expenses 18,505,229
------------
Net investment loss (9,744,412)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments sold 33,784,164
Change in net unrealized appreciation of investments 131,774,894
------------
Net gain on investments 165,559,058
------------
Net increase in net assets resulting from operations $155,814,646
============
See Notes to Financial Statements.
7
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
------------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss $ (9,744,412) $ (2,252,135)
Net realized gain on investments 33,784,164 40,120,593
Net change in unrealized appreciation on
investments 131,774,894 72,084,684
-------------- ------------
Increase in net assets resulting from
operations 155,814,646 109,953,142
-------------- ------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net realized gain on investments (53,956,540) (11,165,295)
-------------- ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from the sale of shares 1,048,959,250 405,169,767
Net asset value of shares issued in
reinvestment of dividends 51,770,755 10,479,556
Cost of shares redeemed (432,281,144) (45,968,023)
-------------- ------------
Increase in net assets derived from
capital share transactions 668,448,861 369,681,300
-------------- ------------
Net increase in net assets 770,306,967 468,469,147
NET ASSETS:
Beginning of year 632,731,799 164,262,652
-------------- ------------
End of year $1,403,038,766 $632,731,799
============== ============
ACCUMULATED NET INVESTMENT INCOME AT END
OF YEAR $ 0 $ 0
============== ============
SHARES:
Shares sold 61,189,922 26,676,880
Shares issued in reinvestment of
dividends 2,977,432 678,541
Shares redeemed (25,609,039) (3,306,451)
-------------- ------------
Net increase 38,558,315 24,048,970
============== ============
See Notes to Financial Statements.
8
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31, 2005
------------------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Sales of capital shares $ 1,054,079,643
Cash distributions paid (2,185,786)
Repurchase of capital shares (430,869,909)
---------------
Cash provided by capital share transactions 621,023,948
Decrease in due from broker 990,464
Increase in due to custodian bank 91,500,000
---------------
713,514,412
---------------
CASH PROVIDED (USED) BY OPERATIONS:
Purchases of portfolio securities (1,248,104,135)
Proceeds from sales of portfolio securities 449,982,059
Cash paid in connection with swap transactions (679,550)
Other decreases (6,115)
---------------
(798,807,741)
Net investment loss (9,744,412)
Net change in receivables/payables related to operations (98,693)
---------------
(808,650,846)
---------------
Net decrease in cash (95,136,434)
---------------
Cash and cash equivalents beginning of year 95,802,173
---------------
Cash and cash equivalents end of year $ 665,739
===============
Supplemental cash flow information:
Interest paid $ 2,658,263
===============
Non-cash financing activities:
Net asset value of shares issued in reinvestment of
dividends $ 51,770,755
===============
See Notes to Financial Statements.
9
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(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 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, INVESTMENT INCOME AND EXPENSE ALLOCATION.
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) CASH AND CASH EQUIVALENTS. The Fund considers all short term liquid
investments with a maturity of three months of less when purchased to be cash
equivalents.
(3) PURCHASES AND SALES OF SECURITIES.
For the year ended December 31, 2005, purchases and sales of securities, other
than short term securities, aggregated $1,226,975,164 and $437,392,530,
respectively.
10
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
(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.
During the period January 1, 2005 to October 13, 2005, BCI earned gross
brokerage commissions of $453,479 on brokerage transactions effected by or
through BCI. On October 14, 2005, BCI ceased its broker-dealer business and the
Fund has conducted no further trading with BCI since that date.
(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 year ended December 31, 2005, the Fund had an average daily balance
on the line of credit of $75,346,250 at a weighted average interest rate of
4.05%. At December 31, 2005, the Fund had an outstanding loan in the amount of
$91,500,000 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.
The notional value of the contract amount with respect to the Fund's outstanding
equity swap contract as of December 31, 2005 was ($280,800).
(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.
11
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.
For the year ended December 31, 2005, the Fund recorded the following permanent
reclassifications to reflect tax character. Reclassifications to paid-in capital
relate primarily to a tax practice that treats a portion of the proceeds from
each redemption of capital shares as a distribution of taxable net investment
income and/or realized capital gains. Reclassifications between net investment
income and realized gains relate primarily to the tax treatment of net operating
losses and realized gains (losses) on swap transactions. Results of operations
and net assets were not affected by these transactions.
UNDISTRIBUTED UNDISTRIBUTED
NET INVESTMENT INCOME REALIZED GAIN/LOSS CAPITAL-PAID-IN
--------------------------------- ----------------------------- -----------------------------
$9,744,412 $(12,451,655) $2,707,243
As of December 31, 2005, the components of net assets on a tax basis were as
follows:
Cost of investments $1,212,707,426
==============
Gross tax unrealized appreciation $ 310,034,637
Gross tax unrealized depreciation (34,363,893)
--------------
Net tax unrealized appreciation 275,670,744
Post October loss deferral (2,963,084)
Paid-in Capital 1,130,331,106
--------------
Net Assets $1,403,038,766
==============
Under current tax law, capital losses realized after October 31 may be
deferred and treated as occurring on the first day of the following fiscal
year. The post October loss deferral of $2,963,084 will be used to offset
future capital gains at December 31, 2006.
The tax composition of dividends paid for the years ending December 31, 2005
and 2004 were as follows:
2005 2004
----------- -----------
Ordinary Income* $26,360,760 $ --
Long-term capital gains $27,595,780 $11,165,295
- ---------------
* For tax purposes, short-term capital gains are considered ordinary income
distributions.
12
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
(9) FINANCIAL HIGHLIGHTS.
Selected data for a share of beneficial interest outstanding throughout each
year:
YEAR ENDED DECEMBER 31,
---------------------------
2005 2004 2003*
-------- ------ ------
NET ASSET VALUE, BEGINNING OF YEAR $ 16.85 $12.17 $10.00
-------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.13) (0.06) (0.10)
Net realized and unrealized gain on investments 2.49 5.17 3.63
-------- ------ ------
TOTAL FROM INVESTMENT OPERATIONS 2.36 5.11 3.53
-------- ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income 0.00 0.00 0.00
Distributions from net realized gains (0.78) (0.43) (1.36)
-------- ------ ------
TOTAL DISTRIBUTIONS (0.78) (0.43) (1.36)
-------- ------ ------
NET ASSET VALUE, END OF YEAR $ 18.43 $16.85 $12.17
======== ====== ======
TOTAL RETURN 14.4% 42.3% 35.7%+
-------- ------ ------
RATIOS/SUPPLEMENTAL DATA
Net assets (in millions), end of year $1,403.0 $632.7 $164.3
Ratio of total expenses to average net assets 1.62% 1.46% 1.77%**
Less: Ratio of interest expense to average net assets (0.27%) (0.12%) (0.37%**
-------- ------ ------
Ratio of operating expenses to average net assets 1.35% 1.34% 1.40%**
======== ====== ======
Ratio of net investment loss to average net assets (0.85%) (0.83%) (1.39%**
Portfolio turnover rate 37.62% 57.77% 36.67%+
- ---------------
* For the period April 30, 2003 (commencement of operations) to December 31,
2003.
** Annualized.
+ Not annualized.
13
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
- ------------------------------------
TO THE BOARD OF TRUSTEES
AND SHAREHOLDERS OF BARON
PARTNERS FUND
- ------------------------------------
In our opinion, the accompanying statement of assets and liabilities, including
the statement of net assets, and the related statements of operations and of
changes in net assets and cash flows, and the financial highlights present
fairly, in all material respects, the financial position of Baron Partners Fund
(the "Fund"), at December 31, 2005, the results of its operations, the changes
in its net assets and its cash flows, and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 22, 2006
14
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
- -------------------------------------------------------------------------------
We are required by the Internal Revenue Code to advise you within 60 days
of the Fund's fiscal year end as to the federal tax status of distributions paid
by the Fund during such fiscal year.
The Fund's distributions to shareholders included:
o $27,244,782 from ordinary income (including short-term capital gains),
o $29,419,002 from long-term capital gains, subject to a maximum allowable
rate of 15% for individuals pursuant to The Jobs and Growth Tax Relief
Reconciliation Act of 2003.
Of the total ordinary income distributions, 23.01% is qualified dividend
income subject to a reduced tax rate. For corporate shareholders, 23.10% of the
total ordinary dividend qualifies for the corporate dividends received
deduction.
The information and distributions reported may differ from the information
and distributions taxable to the shareholders for the calendar year ended
December 31, 2005. The information necessary to complete your income tax return
for the calendar year ended December 31, 2005 is listed on Form 1099- DIV which
was mailed to you in January 2006.
MANAGEMENT OF THE FUND
- -------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
The Board of Trustees oversees the management of Baron Select Funds (the
"Fund"). The following table lists the Trustees and executive officers of the
Fund, their date of birth, current positions held with the Fund, length of time
served, principal occupations during the past five years and other
Trusteeships/Directorships held outside the Fund complex. Unless otherwise
noted, the address of each executive officer and Trustee is Baron Select Funds,
767 Fifth Avenue, 49th Floor, New York, NY 10153. Trustees who are not deemed to
be "interested persons" of the Fund as defined in the 1940 Act are referred to
as "Disinterested Trustees." Trustees who are deemed to be "interested persons"
of the Fund are referred to as "Interested Trustees." All Trustees listed below,
whether Interested or Disinterested, serve as trustee for the Baron Partners
Fund series.
INTERESTED TRUSTEES:
POSITION(S) LENGTH OTHER TRUSTEE/
HELD WITH OF TIME PRINCIPAL OCCUPATION(S) DIRECTORSHIPS
NAME, ADDRESS & DATE OF BIRTH THE FUNDS SERVED DURING THE PAST FIVE YEARS HELD BY THE TRUSTEE
- ----------------------------- --------- ------ -------------------------- -------------------
Ronald Baron *+ President, Chief 3 years Chairman, CEO, and Director, None outside the Baron
767 Fifth Avenue Executive Officer, Baron Capital, Inc. (1982- Funds Complex.
New York, NY 10153 Chief Investment Present), Baron Capital
DOB: May 23, 1943 Officer, Trustee and Management, Inc. (1983-Present),
Portfolio Manager Baron Capital Group, Inc. (1984-
Present), BAMCO, Inc. (1987-
Present); Portfolio Manager,
Baron Asset Fund (1987-Present),
Baron Growth Fund (1995-
Present); President (2004-
Present), Chairman (1999-2004),
CIO and Trustee (1987-Present),
Baron Investment Funds Trust;
President (2004-Present),
Chairman (1997-2004), CIO and
Trustee (1997-Present), Baron
Capital Funds Trust; President
(2004-Present), Chairman (2003-
2004), CIO and Trustee (2003-
Present), Baron Select Funds.
15
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
INTERESTED TRUSTEES:
POSITION(S) LENGTH OTHER TRUSTEE/
HELD WITH OF TIME PRINCIPAL OCCUPATION(S) DIRECTORSHIPS
NAME, ADDRESS & DATE OF BIRTH THE FUNDS SERVED DURING THE PAST FIVE YEARS HELD BY THE TRUSTEE
- ----------------------------- --------- ------ -------------------------- -------------------
Linda S. Martinson*+ Vice President, 3 years General Counsel, Vice President None outside the Baron
767 Fifth Avenue Secretary, General and Secretary, Baron Capital, Funds Complex.
New York, NY 10153 Counsel and Trustee Inc. (1983-Present), BAMCO, Inc.
DOB: February 23, 1955 (1987-Present), Baron Capital
Group, Inc. (1984-Present),
Baron Capital Management, Inc.
(1983-Present); Vice President,
Secretary, General Counsel and
Trustee, Baron Investment Funds
Trust (1987-Present); Vice
President, Secretary, General
Counsel and Trustee, Baron
Capital Funds Trust (1997-
Present); Vice President,
General Counsel, Secretary and
Trustee, Baron Select Funds
(2003-Present).
Morty Schaja*+ Executive Vice 3 years President and Chief Operating None outside the Baron
767 Fifth Avenue President, Chief Officer, Baron Capital, Inc. Funds Complex.
New York, NY 10153 Operating Officer and (1999-Present); Senior Vice
DOB: October 30, 1954 Trustee President and Chief Operating
Officer, Baron Capital, Inc.
(1997-1999); Managing Director,
Vice President, Baron Capital,
Inc. (1991-1999); and Director,
Baron Capital, Inc., Baron
Capital Group, Inc., Baron
Capital Management, Inc., and
BAMCO, Inc. (1998-Present);
Executive Vice President (2004-
Present), President (1999-2004),
COO (1999-Present) and Trustee
(1996-Present), Baron Investment
Funds Trust; Executive Vice
President (2004-Present),
President (1999-2004), COO
(1999-Present) and Trustee
(1997-Present) Baron Capital
Funds Trust; Executive Vice
President (2004-Present),
President, COO and Trustee
(2003-Present), Baron Select
Funds.
16
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
DISINTERESTED TRUSTEES:
POSITION(S) LENGTH OTHER TRUSTEE/
HELD WITH OF TIME PRINCIPAL OCCUPATION(S) DIRECTORSHIPS
NAME, ADDRESS & DATE OF BIRTH THE FUNDS SERVED DURING THE PAST FIVE YEARS HELD BY THE TRUSTEE
- ----------------------------- --------- ------ -------------------------- -------------------
Steven B. Dodge ^** Trustee 1 year CEO, Windover Development Chairman of the Audit
239 Summer Street (Elected Corporation (2004-Present) Committee, Member of
Manchester, MA 01944 10/22/04) (private real estate development Executive and Special
DOB: July 12, 1945 company); Founder and Chairman, Independent Committees,
American Tower Corporation Sotheby's Holdings,
(1998-Present); Founder, Inc. (2000-Present);
Chairman and CEO, American Radio Chairman of Audit
Systems (1988-1998); Founder, Committee, Nextel
Chairman and CEO, American Partners, Inc. (2000-
Cablesystems (1978-1988); Present)
Chairman of Audit Committee,
member of Executive and Special
Independent Committees,
Sotheby's Holdings, Inc. (2000-
Present); Chairman of Audit
Committee, Nextel Partners, Inc.
(2000-Present); Trustee, Baron
Investment Funds Trust, Baron
Capital Funds Trust, Baron
Select Funds (2004-Present).
Norman S. Edelcup (dag)^** Trustee 3 years Director, (2001-Present) and Director, Florida
244 Atlantic Isles Senior Vice President (2001- Savings Bank (2001-
Sunny Isles Beach, FL 33160 2004), Florida Savings Bank; Present);
DOB: May 8, 1935 Mayor (October 2003-Present), Director, Valhi, Inc.
Commissioner, Sunny Isles Beach, (1975-Present)
Florida (2001-2003); Senior Vice (diversified company).
President, Item Processing of
America (1999-2000) (a
subsidiary of The Intercept
Group); Chairman, Item
Processing of America (1989-
1999) (a financial institution
service bureau); Director,
Valhi, Inc. (1975-Present)
(diversified company); Director,
Artistic Greetings, Inc. (1985-
1998); Trustee, Baron Investment
Funds Trust (1987-Present);
Trustee, Baron Capital Funds
Trust (1997-Present); Trustee,
Baron Select Funds (2003-
Present).
17
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
DISINTERESTED TRUSTEES:
POSITION(S) LENGTH OTHER TRUSTEE/
HELD WITH OF TIME PRINCIPAL OCCUPATION(S) DIRECTORSHIPS
NAME, ADDRESS & DATE OF BIRTH THE FUNDS SERVED DURING THE PAST FIVE YEARS HELD BY THE TRUSTEE
- ----------------------------- --------- ------ -------------------------- -------------------
David I. Fuente ^** Trustee 1 year Director (1987-Present), Director, Office Depot
701 Tern Point Circle (Elected Chairman (1987-2001) and CEO (1987-Present);
Boca Raton, FL 33431 10/22/04) (1987-2000) Office Depot; Director, Ryder
DOB: September 10, 1945 Director, Ryder Systems, Inc. Systems, Inc. (1998-
(1998-Present); Director, Dick's Present); Director,
Sporting Goods, Inc. (1993- Dick's Sporting Goods,
Present); Trustee, Baron Inc. (1993-Present).
Investment Funds Trust, Baron
Capital Funds Trust, and Baron
Select Funds (2004-Present).
Charles N. Mathewson ^** Chairman and Trustee 3 years; Chairman Emeritus (October 2003- None outside the Baron
9295 Prototype Road (Elected as Present), Chairman, Funds Complex.
Reno, NV 89521 Chairman International Game Technology,
DOB: June 12, 1928 08/04) Inc. (1986-2003) (manufacturer
of microprocessor-controlled
gaming machines and monitoring
systems); Chairman, American
Gaming Association (1994-2002);
Chairman (2004-Present), Trustee
(1987-Present), Baron Investment
Funds Trust; Chairman (2004-
Present), Trustee (1997-
Present), Baron Capital Funds
Trust; Chairman (2004-Present),
Trustee (2003-Present), Baron
Select Funds.
Harold W. Milner ^** Trustee 3 years Retired; President and CEO, None outside the Baron
2293 Morningstar Drive Kahler Realty Corporation (1985- Funds Complex.
Park City, UT 84060 1997) (hotel ownership and
DOB: November 11, 1934 management); Trustee, Baron
Investment Funds Trust (1987-
Present); Trustee, Baron Capital
Funds Trust (1997-Present);
Trustee, Baron Select Funds
(2003-Present).
18
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
DISINTERESTED TRUSTEES:
POSITION(S) LENGTH OTHER TRUSTEE/
HELD WITH OF TIME PRINCIPAL OCCUPATION(S) DIRECTORSHIPS
NAME, ADDRESS & DATE OF BIRTH THE FUNDS SERVED DURING THE PAST FIVE YEARS HELD BY THE TRUSTEE
- ----------------------------- --------- ------ -------------------------- -------------------
Raymond Noveck (dag)^** Trustee 3 years Private Investor (1999-Present); None outside the Baron
31 Karen Road President, The Medical Funds Complex.
Waban, MA 02168 Information Line, Inc. (1997-
DOB: May 4, 1943 1998) (health care information);
President, Strategic Systems,
Inc. (1990-1997) (health care
information); Director, Horizon/
CMS Healthcare Corporation
(1987-1997); Trustee, Baron
Investment Funds Trust (1987-
Present); Trustee, Baron Capital
Funds Trust (1997-Present);
Trustee, Baron Select Funds
(2003-Present).
David A. Silverman, MD ^** Trustee 3 years Physician and Faculty, New York Director, New York
146 Central Park West University School of Medicine Blood Center (1999-
New York, NY 10024 (1976-Present); Trustee, Baron Present).
DOB: March 14, 1950 Investment Funds Trust (1987-
Present); Trustee, Baron Capital
Funds Trust (1997-Present);
Trustee, Baron Select Funds
(2003-Present).
OFFICERS OF THE FUNDS:
Clifford Greenberg Senior Vice 3 years Senior Vice President, Baron None
767 Fifth Avenue President and Capital, Inc., Baron Capital
New York, NY 10153 Portfolio Manager Group, Inc., and BAMCO, Inc.,
DOB: April 30, 1959 (2003-Present); Vice President,
Baron Capital, Inc., Baron
Capital Group, Inc., and BAMCO,
Inc. (1997-2003); Director,
Baron Capital, Inc. and Baron
Capital Group, Inc. (2000-
Present); Director, BAMCO, Inc.
and Baron Capital Management,
Inc. (2003-Present); Portfolio
Manager, Baron Small Cap Fund
(1997-Present); General Partner,
HPB Associates, LP (1984-1996)
(investment partnership).
Andrew Peck Vice President and 3 years Vice President and Co-Portfolio None
767 Fifth Avenue Co-Portfolio Manager Manager, Baron Asset Fund (2003-
New York, NY 10153 Present); Analyst, Baron
DOB: March 25, 1969 Capital, Inc. (1998-Present).
19
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
OFFICERS OF THE FUNDS
POSITION(S) LENGTH OTHER TRUSTEE/
HELD WITH OF TIME PRINCIPAL OCCUPATION(S) DIRECTORSHIPS
NAME, ADDRESS & DATE OF BIRTH THE FUNDS SERVED DURING THE PAST FIVE YEARS HELD BY THE TRUSTEE
- ----------------------------- --------- ------ -------------------------- -------------------
Susan Robbins Vice President 3 years Senior Analyst, Vice President None
767 Fifth Avenue and Director, Baron Capital,
New York, NY 10153 Inc. (1982-Present); Baron
DOB: October 19, 1954 Capital Management, Inc. (1984-
Present).
Mitchell J. Rubin Vice President and 3 years Vice President and Senior None
767 Fifth Avenue Portfolio Manager Analyst, Baron Capital, Inc.
New York, NY 10153 (1997-Present); Portfolio
DOB: September 22, 1966 Manager, Baron iOpportunity Fund
(2000-Present); Portfolio
Manager, Baron Fifth Avenue
Growth Fund (2004-Present).
Peggy C. Wong Treasurer and Chief 3 years Treasurer and Chief Financial None
767 Fifth Avenue Financial Officer Officer, Baron Capital, Inc.,
New York, NY 10153 Baron Capital Group, Inc.,
DOB: April 30, 1961 BAMCO, Inc. and Baron Capital
Management, Inc. (1987-Present).
- -------------------------------------------------------------------------------
* Trustees deemed to be "interested persons" of the Fund as that term is
defined in the Investment Company Act of 1940 by reason of their
employment with the Fund's Adviser and Distributor.
+ Members of the Executive Committee, which is empowered to exercise all of
the powers, including the power to declare dividends, of the full Board of
Trustees when the full Board of Trustees is not in session.
(dag) Members of the Audit Committee.
^ Members of the Nominating Committee.
** Members of the Committee of "Non-interested" Trustees.
20
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 3, 2005, to discuss the selection of BAMCO, Inc. as the adviser ("Adviser")
and the approval of the advisory fee for the Baron Partners Fund series (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 in particular, by
Ronald Baron, the portfolio manager. 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 quality of the shareholder reports, and the ability to
monitor adherence to 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, five and ten 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 total expense ratios for the Fund were not
the lowest, they were not the highest either. The Board noted that total 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
21
BARON PARTNERS FUND
- --------------------------------------------------------------------------------
the Adviser and its affiliates from their relationship with the Fund. The Board
considered benefits that enured to affiliates, including brokerage fees earned
by an affiliated broker/dealer. 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 asset 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 the Fund's management fee structure was
reasonable with respect to economies achieved for the benefit of shareholders.
5. BENEFITS TO THE ADVISER AND ITS AFFILIATES
The Board considered benefits that accrue to the Adviser and its affiliates from
their relationship with the Fund. The Board acknowledged that an affiliated
broker/dealer served as one of the brokers used by the Adviser for Fund
transactions. The Board considered that the rates paid to the affiliated broker
were less than the rates paid to other brokers and considered a best execution
analysis performed by an outside independent consultant with respect to the
transactions by the affiliate. Based on its reviews of information provided
quarterly throughout the year regarding affiliated brokerage, the Board
concluded that the use of the affiliated broker to execute portfolio
transactions was appropriate and consistent with established procedures adopted
by the Board. However, the Adviser reported that the affiliated broker would
cease acting as such before the end of the calendar year.
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.
22
[Registered Logo]
B A R O N
S E L E C T
F U N D S
AR05
Item 2. Code of Ethics.
Filed herewith pursuant to Item 10(a) (1) of Item 2 to Form N-CSR. The
Fund will provide a copy of the Code of Ethics to any person without
charge, upon written request to info@baronfunds.com or by calling
1-800-992-2766.
Item 3. Audit Committee Financial Expert.
The Board of Trustees of the Fund has determined that Norman S.
Edelcup, and Raymond Noveck, both members of the Audit Committee,
possess the technical attributes identified in Instruction 2(b) of
Item 3 to Form N-CSR to qualify as "Audit Committee Financial Expert"
and has designated both Mr. Edelcup and Raymond Noveck as the Audit
Committee's Financial Experts. Both Mr. Noveck and Mr. Edelcup are
"idependent" Trustees pursuant to paragraph (a)(2) of Item 3 to Form
N-CSR.
Item 4. Principal Accountant Fees and Services.
The following table shows the fees paid to PricewaterhouseCoopers,
LLP, the registrant's prinicpal accounting firm during the fiscal year
January 1, 2005 to December 31, 2005 (a) for profesional services
rendered for the audit of the registrant's annual financial statements
or services that are normally provided in connection with statutory
and regulatory filings or engagements ("Audit Fees"), (b) for
assurance and related services that are reasonably related to the
performance of the audit and are not included as Audit Fees
("Audit-Related Fees"), (c) for professional services rendered for tax
compliance, tax advice and tax planning ("Tax Fees"), and (d) for
products and services provided by such accounting firm that are not
included in (a), (b) or (c) above ("All Other Fees").
For the Fiscal Year Ended December 31, 2005:
Audit Fees Tax Fees
----------- ---------
Baron Partners Fund $24,593 $5,400
Pursuant to its charter, the Audit Committee shall pre-approve all audit
and non-audit services provided by the independent auditors and in
connection therewith to review and elvaluate the qualifications,
independence and performance of the Fund's independent auditors.
Item 5. Audit Committee of Listed Registrants.
The members of the Fund's Audit Committee are Norman Edelcup and Raymond
Noveck, both "idependent" Trustees pursuant to paragraph (a)(2) of Item 3
to Form N-CSR.
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, as amended) 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 significant changes in the Registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under the
Investment Company Act of 1940, as amended) that occurred during the
Registrant's last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Registrant's internal
control over financial reporting.
Item 12. Exhibits.
a). Ex-99.COE
Current copy of the Funds Code of Ethics pursuant to Item 2 of the
Form N-CSR.
b). Ex-99.CERT
Certification pursuant to Item 10(b) of the Form N-CSR.
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
President and Chief Executive Officer
Date: March 10, 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
President and Chief Executive Officer
Date: March 10, 2006
By: /s/ Peggy Wong
--------------------
Peggy Wong
Treasurer and Chief Financial Officer
Date: March 10, 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.