497 1 bpf4970407.txt DEFINITIVE PROSPECTUS AND SAI | PROSPECTUS | April 30, 2007 | | | | | | | | -------------------------------------------------------------------------------- BARON PARTNERS FUND -------------------------------------------------------------------------------- B | A | R | O | N | | S | E | L | E | C | T | | F | U | [REGISTERED CASTLE LOGO] N | D | BARON S | FUNDS(r) -------------------------------------------------------------------------------- This prospectus is for the Baron Select Funds which currently has only one series, The Baron Partners Fund series. If you are interested in the Baron Investment Funds Trust which containes the Baron Asset Fund, Baron Growth Fund, Baron Small Cap Fund, Baron iOpportunity Fund and Baron Fifth Avenue Growth Fund series, please visit the Funds' website www.BaronFunds.com or contact us at 1-800-99-BARON. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- This prospectus contains essential information for anyone investing in this Fund. Please read it carefully and keep it for reference. Baron Partners Fund As with all mutual funds, the fact that these shares are registered with the Securities and Exchange Commission does 767 Fifth Avenue not mean that the Commission has approved New York, New York 10153 or disapproved them or determined whether this prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime. 1-800-99-BARON April 30, 2007 212-583-2100 -------------------------------------------------------------------------------- TABLE OF CONTENTS BARON FUNDS -------------------------------------------------------------------------------- Information about the Investment Goals and Strategies........... 3 Fund Performance............................... 5 Fund Expenses............................. 8 Financial Highlights...................... 9 Management of the Funds................... 10 -------------------------------------------------------------------------------- Information about your How Your Shares are Priced................ 12 Investment How to Purchase Shares.................... 12 How to Redeem Shares...................... 17 How to Exchange Shares.................... 19 Special Information about The Baron Funds Website................................... 19 Disclosure of Portfolio Holdings.......... 20 Distributions and Taxes................... 21 General Information....................... 22 -------------------------------------------------------------------------------- Baron Funds(r) 1-800-99BARON 2 BARON FUNDS INFORMATION ABOUT THE FUND -------------------------------------------------------------------------------- INFORMATION ABOUT THE FUND INVESTMENT GOALS AND STRATEGIES GOAL Capital appreciation. INVESTMENT STRATEGY In making investment decisions for the Fund, the Adviser seeks: 1. securities that the Adviser believes have favorable price to value characteristics based on the Adviser's assessment of their prospects for future growth and profitability. 2. businesses that the Adviser believes are well managed, have significant long term growth prospects and are attractively priced. The Adviser's research process includes visits and interviews with company managements, their major competitors, and often their customers. The Adviser also studies industry data, statistics and trends. The Adviser looks for the ability of a company to grow substantially within a four or five year period following investment. The Adviser looks for special business niches that the Adviser believes offer favorable business opportunities and sustainable barriers to competition. The Adviser also seeks what it believes are strong management capabilities, good employee morale, and the favorable reputations of the businesses in their communities. The Adviser's analysts and portfolio managers also study an individual business' financial strength and profitability. The Fund purchases stocks whose prices the Adviser believes are undervalued relative to their businesses' long term growth prospects, future cash flows and asset values. The Fund seeks to invest in businesses before their long term growth prospects are appreciated by other investors. The Fund may make significant investments in companies in which the Adviser has the greatest conviction. Of course, there can be no guarantee the Fund will be successful at achieving its objectives. The Fund has a long term outlook. The Fund often invests in businesses and maintains those investments for several years. The Adviser does so hoping for significant business growth, and as a result, stock price appreciation over that time period. As long term investors in business, the Fund is designed for long term shareholders. The Fund is not designed nor intended to be suitable for investors who intend to purchase and then sell their Fund shares after a short period. Please see pages 16 of this prospectus regarding the Fund policies on short term trading. Baron Partners Fund is a non-diversified fund that invests in long and short positions primarily in U.S. securities. The Fund establishes long positions in securities the Adviser believes have favorable price to value characteristics based on the Adviser's assessment of their prospects for future growth and profitability and the potential to increase in value at least 100% over four subsequent years. The Fund will make money if the stock prices of securities it owns increase. It will lose money if the securities fall in price. -------------------------------------------------------------------------------- 3 www.BaronFunds.com Baron Funds(r) INFORMATION ABOUT THE FUND BARON FUNDS -------------------------------------------------------------------------------- The Fund may also sell short securities. It may establish short positions in securities the Adviser believes have limited growth prospects, are poorly managed, have a highly leveraged balance sheet, or are over-priced. When the Fund takes a short position, the Adviser believes the company's stock price will fall. If it falls sufficiently, the Fund will make money. If it instead increases in price, the Fund will lose money. The Fund will not utilize more than 35% of its total assets in maintaining short positions. The Adviser believes that this long and short strategy may reduce the risks inherent in the equity markets. The Adviser invests without regard for market trends. It instead focuses on long lasting "mega-trend" opportunities presented by individual long or short investments. To take advantage of opportunities to invest, the Fund may borrow money from banks (leverage) in an amount up to one-third of its total assets after giving effect to such borrowing. Baron Partners Fund also invests in private equity investments. These private company investments occur either with companies that currently exist in the Fund's portfolio when such companies are taken private or if these companies are acquired by private equity or through established relationships with managements. WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND? GENERAL STOCK MARKET RISK Investing in the stock market is risky because equity securities fluctuate in value, often based on factors unrelated to the intrinsic value of the issuer. These fluctuations may be due to political, economic or general market circumstances. Other factors may affect a single company or industry, but not the broader market. Because securities' values fluctuate, when you sell your investment in the Fund you may receive more or less money than you originally invested. LARGE POSITIONS The Fund may establish significant positions in companies in which the Adviser has the greatest conviction. If the stock price of one or more of those companies should decrease, it would have a big impact on the Fund's net asset value. These large positions may represent a significant part of a company's outstanding stock, and sales by the Fund could adversely affect stock prices. The Fund's returns may be more volatile than those of a less concentrated portfolio. SPECIFIC SECURITIES RISKS Earnings, cash flows and valuations projected by the Adviser for a long position may not be achieved, which would negatively impact the stock market price of that company. For a short position, the company or the securities markets may have favorable developments or news that positively affect the stock market price of that company. NON-DIVERSIFIED The Fund is non-diversified, which means it may have large positions in fewer companies or industries than a diversified fund. A concentrated portfolio is more -------------------------------------------------------------------------------- Baron Funds(r) 1-800-99BARON 4 BARON FUNDS INFORMATION ABOUT THE FUND -------------------------------------------------------------------------------- likely to experience significant fluctuations in value, exposing the Fund to a greater risk of loss in any given period than a diversified fund. SHORT SALES If the price of the stock sold short increases after the sale, the Fund will lose money because it will have to pay a higher price to repurchase the borrowed stock when it closes its short position. The loss of value on a short sale is theoretically unlimited. The Fund may not be able to close out a short position at an acceptable time or price. The Fund has to borrow the securities to enter into the short sale. If the lender demands the securities be returned, the Fund must deliver them promptly, either by borrowing from another lender or buying the securities. If this occurs at the same time other short sellers are trying to borrow or buy in the securities, a "short squeeze" could occur, causing the stock price to rise and making it more likely that the Fund will have to cover its short position at an unfavorable price. LEVERAGE The Fund may borrow from banks and pledge its assets in connection with the borrowing. If the interest expense on the borrowings is greater than the income and increase in value of the securities purchased with the proceeds of borrowing, the use of leverage will decrease the return to stockholders in the Fund. Use of leverage also tends to magnify the volatility of the Fund's returns. LONG TERM OUTLOOK AND PROJECTIONS The Fund is designed for long-term investors who are willing to hold investments for a substantial period of time. The cash flows and valuations that the Adviser projects for a company may not be achieved, which would negatively impact the stock market price of that company. PRIOR PERFORMANCE OF PREDECESSOR PARTNERSHIP Although the Fund was registered as a mutual fund in 2003, it has been managed in the same style and by the same portfolio manager since the Partnership's inception in January 1992, and its conversion to a Delaware statutory trust structure on April 30, 2003. The Partnership's investment objectives, policies, guidelines and restrictions were, in all material respects, equivalent to the Fund's. The following information shows the Fund's annual returns and long term performance, restated to reflect the imposition of the same advisory fees and other operating expenses (excluding portfolio transaction costs, interest, and extraordinary expenses) that would have been applied historically if the Fund had its current fee structure since inception. Prior to May 1, 2003, these fees and expenses were assumed to be 1.45% of average net assets, which is the maximum expense level of the Fund due to an expense reimbursement agreement provided by the Adviser and which is higher than the average fees and expenses of the Fund when it was the Partnership, which were approximately 1.1% of average net assets. During this period, the Fund was not subject to certain investment restrictions, diversification requirements and other restrictions of the Investment Company Act of 1940 or the Internal Revenue Code of 1986, which if applicable, might have adversely affected the performance of the Fund. -------------------------------------------------------------------------------- 5 www.BaronFunds.com Baron Funds(r) INFORMATION ABOUT THE FUND BARON FUNDS -------------------------------------------------------------------------------- The information provides some indications of the risks of investing in the Fund. The bar chart shows you how the performance for the Fund has varied from year to year. The table compares the performance of the Fund over time to a relevant index. How the Fund has performed in the past is not necessarily an indication of how it will perform in the future. The Annual Financial Report contains additional performance information which is available upon request without charge by writing or calling the Fund at the address and telephone number set forth on the back of this Prospectus. Performance information can be found online at www.BaronFunds.com/performance. Annual returns for periods ended 12/31 of each year [Line Graph]
------------------------------------------------------------------------------------------------- 61.8% 11.3% 21.1% 4.4% (16.0%) (18.4) 34.8% 42.3% 14.4% 21.5% ------------------------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 -------------------------------------------------------------------------------------------------
Best quarter: 12/31/98 56.0% Worst quarter: 09/30/98 -31.2% AVERAGE ANNUAL TOTAL RETURNS (for periods ended 12/31/06) The following table shows the Fund's annual returns and long-term performance (before and after taxes), which includes the predecessor Partnership's average annual return, restated to reflect the imposition of the same advisory fees and other operating expenses (excluding portfolio transaction costs, interest, and extraordinary expenses) that would have been applied historically before and after taxes, and the change in value of a broad- based market index over various periods ended December 31, 2006. Prior to May 1, 2003, these fees and expenses were assumed to be 1.45% of average net assets, which is the maximum expense level of the Fund due to an expense reimbursement agreement provided by the Adviser and which is higher than the average fees and expenses of the Fund when it was the Partnership, which were approximately 1.1 % of average net assets. The index information is intended to permit you to compare the Fund's performance to a broad measure of market performance. The after-tax returns are intended to show the impact of assumed federal income taxes on an investment in the Fund. The Fund's "Return after taxes on distributions" shows the effect of taxable distributions (dividends and capital gains distributions), but assumes that you still hold the Fund shares at the end of -------------------------------------------------------------------------------- Baron Funds(r) 1-800-99BARON 6 BARON FUNDS INFORMATION ABOUT THE FUND -------------------------------------------------------------------------------- the period and so do not have any taxable gain or loss on your investment in shares of the Fund. The Fund's "Return after taxes on distributions and sale of Fund shares" shows the effect of both taxable distributions and any taxable gain or loss that would be realized if the Fund shares were purchased at the beginning and sold at the end of the period. After-tax returns are calculated using the highest individual federal marginal income tax rate in effect at the time of each distribution and assumed sale, but do not include the impact of state and local taxes. In some instances, the "Return after taxes on distributions and sale of Fund shares" is greater than the "Return before taxes" because you are assumed to be able to use the capital loss on the sale of Fund shares to offset other taxable gains. Your actual after-tax returns depend on your own tax situation and may differ from those shown. After-tax returns reflect past tax effects and are not predictive of future tax effects. After-tax returns are not relevant to investors who hold their Fund shares in a tax-deferred account (including a 401(k) or IRA or Coverdell account), or to investors that are tax-exempt.
---------------------------------------------------------------------------------------------------------------------- Since 1 year 5 years 10 years Inception* ---------------------------------------------------------------------------------------------------------------------- Return before taxes 21.55% 16.82% 15.33% 18.30% ---------------------------------------------------------------------------------------------------------------------- Return after taxes on distributions 21.50% 15.91% 14.83% 17.86% ---------------------------------------------------------------------------------------------------------------------- Return after taxes on distributions and sale of Fund shares 14.07% 14.42% 13.68% 16.86% ---------------------------------------------------------------------------------------------------------------------- Russell 2000 (reflects no deductions for fees, expenses or taxes) 18.37% 11.39% 9.44% 10.95% ---------------------------------------------------------------------------------------------------------------------- S & P 500 (reflects no deductions for fees, expenses or taxes) 15.80% 6.17% 8.40% 10.82% ----------------------------------------------------------------------------------------------------------------------
* Inception date of the Partnership was January 31, 1992. The S & P 500 is an unmanaged index that measures the performance of larger cap equities. The Russell 2000 is a widely recognized unmanaged index of smaller companies. The Fund may also compare its performance to the performance of its respective peer groups, as published by Morningstar & Lipper. -------------------------------------------------------------------------------- 7 www.BaronFunds.com Baron Funds (r) INFORMATION ABOUIT THE FUND BARON FUNDS -------------------------------------------------------------------------------- FUND EXPENSES The table below describes the fees and expenses that you would pay if you buy and hold shares of the Fund. ANNUAL FUND EXPENSES+ (Expenses that are deducted from the Fund's assets) Management Fee.....................................................1.00% Distribution (12b-1) Fee*..........................................0.25% Other Expenses.....................................................0.07% ----- Total Operating Expenses**.........................................1.32% Interest Expense...................................................0.45% ----- Total Annual Fund Expenses**.......................................1.77% ===== ---------- + Based on the fiscal year ended December 31, 2006. * Due to payment of Rule 12b-1 fees, long term shareholders may indirectly pay more than the maximum permitted front-end sales charge. ** The Adviser has agreed that for so long as it is Adviser to the Fund, it will reimburse certain expenses of the Fund so that its total operating expenses (exclusive of portfolio transaction costs, interest, and extraordinary expenses) are limited to 1.45% of average daily net assets. Certain expenses of the Fund, such as interest and dividend expenses, are not subject to the operating expense limitation. EXAMPLE This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund's operating and interest expenses remain the same. These costs are exclusive of transactional expenses such as brokerage expense. Although your actual costs may be higher or lower, based on these assumptions your costs would be: YEAR 1 3 5 10 -------------------------------------------------------------------------------- BARON PARTNERS FUND $180 $557 $959 $2,084 -------------------------------------------------------------------------------- There are additional charges if you have retirement accounts and wire transfers. You also may purchase and redeem your shares through broker-dealers or others who may charge a commission or other transaction fee for their services (see "How to Purchase Shares" and "How to Redeem Shares"). The 12b-1 fee is paid to Baron Capital, Inc. for shareholder and distribution services. Because the fee is paid out of the Fund's assets on an on-going basis, over time it will increase the cost of your investment and may cost you more than paying other types of sales charges. -------------------------------------------------------------------------------- Baron Funds (r) 1-800-99BARON 8 BARON FUNDS INFORMATION ABOUT THE FUND -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the Fund's financial performance for the fiscal years indicated. Certain information reflects financial results for a single Fund share. The "total return" shows how much your investment in the Fund would have increased (or decreased) during each year, assuming you had reinvested all dividends and distributions. These financial highlights have been audited by PricewaterhouseCoopers, LLP, the Fund's independent registered public accounting firm, whose report, along with the Fund's financial statements, is included in the annual financial report, which is available upon request.
Fiscal Year Ended December 31 2006 2005 2004 2003* Net Asset Value, Beginning of Year $18.43 $16.85 $12.17 $10.00 ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Loss (0.16)^ (0.13) (0.06) (0.10) Net Realized and Unrealized Gain on Investments 4.13 2.49 5.17 3.63 ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 3.97 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 (0.06) (0.78) (0.43) (1.36) ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.06) (0.78) (0.43) (1.36) ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Year $22.34 $18.43 $16.85 $12.17 =================================================================================================================================== TOTAL RETURN 21.55% 14.37% 42.35% 35.76%+ =================================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets (in millions), End of Year $2,403.1 $1,403.0 $632.7 $164.3 Ratio of Total Expenses to Average Net Assets 1.77% 1.62% 1.46% 1.77%** Less: Ratio of Interest Expense to Average Net Assets (0.45%) (0.27%) (0.12%) (0.37%)** ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 1.32% 1.35% 1.34% 1.40%** ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Loss to Average Net Assets (0.80%) (0.85%) (0.83%) (1.39%)** Portfolio Turnover Rate 35.92% 37.62% 57.77% 36.67%+ -----------------------------------------------------------------------------------------------------------------------------------
* For the period April 30, 2003 (Commencement of Operations) to December 31, 2003. ** Annualized. + Not annualized. ^ Based on average shares outstanding. -------------------------------------------------------------------------------- 9 www.BaronFunds.com Baron Funds(r) INFORMATION ABOUT THE FUND BARON FUNDS -------------------------------------------------------------------------------- MANAGEMENT OF THE FUND The Board of Trustees oversees the management of the Fund. A list of the Board members and the Fund's officers may be found in the Statement of Additional Information. The Fund's adviser is BAMCO, Inc., located at 767 Fifth Avenue, New York, NY 10153. BAMCO serves as investment adviser to other registered mutual funds, including Baron Asset Fund, Baron Growth Fund, Baron Small Cap Fund, Baron iOpportunity Fund, and Baron Fifth Avenue Growth Fund. The Adviser is a subsidiary of Baron Capital Group, Inc. ("BCG"). Baron Capital, Inc. ("Baron Capital" or "Distributor"), a registered broker-dealer and a member of the NASD, and the distributor of the shares of the Fund, is also a subsidiary of BCG. Ronald Baron is the founder, chief executive officer and chairman of the Adviser and BCG (and its subsidiaries) and, with his family, is the principal owner of BCG. Mr. Baron has been the portfolio manager of Baron Partners Fund since its inception as a limited partnership on January 31, 1992. He has managed Baron Asset Fund and Baron Growth Fund, two registered mutual funds, since their inceptions in 1987 and 1995, respectively, and he has managed money for others since 1975. Mr. Baron is also a senior member of the Adviser's research team and is responsible for stock selection and the portfolio structure. Mr. Baron's responsibilities to manage other funds and accounts may conflict with his responsibilities to the Fund. The Fund's Statement of Additional Information provides additional information about Mr. Baron's compensation, other accounts managed by Mr. Baron and his ownership of securities in the Fund. For its services 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 is contractually obligated to reimburse certain expenses of the Fund so that its totaling operating expenses (exclusive of portfolio transaction costs, interest and extraordinary expenses) are limited to 1.45% of average daily net assets. A discussion regarding the basis for the approval by the Board of Trustees of the investment advisory contract of the Fund is available in the Fund's Semi-Annual Report to the Shareholders for the six months ended June 30, 2006. 12b-1 PLAN The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940 that allows the Fund to pay distribution fees for the sale and distribution of its shares and for services provided to shareholders. A substantial portion of the 12b-1 fees is directed to third parties that provide shareholder servicing to existing shareholders. Because the fee is paid out of the Fund's assets on an on-going basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. The 12b-1 plan authorizes the Fund to pay Baron Capital a distribution fee equal on an annual basis to 0.25% of the Fund's average daily net assets. The Distributor or its -------------------------------------------------------------------------------- Baron Funds(r) 1-800-99BARON 10 BARON FUNDS INFORMATION ABOUT THE FUND -------------------------------------------------------------------------------- affiliates may enter into arrangements with third parties to sell the Fund to, or hold the Fund for, their customers in programs and pay such third parties directly for charges which may include, among others, those related to shareholder servicing, shareholder accounting, and custody expenses that exceed the amount of the 12b-1 fee. See the Statement of Additional Information for a more detailed listing of the expenses covered by the Distribution Plan. Third Party Arrangements The Adviser, the Distributor or their affiliates may at their own expense out of their own financial resources (a source of which may be payment under a Fund's distribution plan), make cash payments to some, but not all brokers, dealers, or financial intermediaries for shareholder services, as an incentive to sell shares of the Fund and/or promote retention of their customer's assets in the Fund. These payments, sometimes referred to as "revenue sharing," do not change the price paid by investors to purchase the Fund's shares or the amount the Fund receives as proceeds from such sales. Subject to approval by the Board of Trustees, the Fund may pay to financial intermediaries out of the Fund's assets (in addition to 12b-1 payments), fees for servicing shareholder accounts. Such financial intermediaries would have omnibus accounts with the Fund's transfer agent and provide shareholder servicing and/or sub- transfer agent services to shareholders or beneficial owners. It is anticipated that any amounts paid by the Fund to such financial intermediaries shall not exceed the amount the Fund would have incurred in maintaining the shareholder accounts for those who invest in the Fund directly rather than through these financial intermediaries. As of December 31, 2006, the Fund has made no such payments. Revenue sharing payments may be made to brokers, dealers and other financial intermediaries that provide services to the Fund or to shareholders of the Fund, including shareholder servicing, transaction processing, sub- accounting services, marketing support and/or access to sales meetings, sales representatives and management representatives of the broker, dealer or other financial intermediaries. Revenue sharing payments may also be made to brokers, dealers and other financial intermediaries for inclusion of the Fund on a sales list, including a preferred or select sales list, in other sales programs, or as an expense reimbursement in cases where the broker, dealer or other financial intermediary provides shareholder services to Fund shareholders. Revenue sharing payments may be structured: (i) as a percentage of net sales; (ii) as a percentage of net assets; and/or (iii) as a fixed dollar amount. -------------------------------------------------------------------------------- 11 www.BaronFunds.com Baron Funds(r) INFORMATION ABOUT YOUR INVESTMENT BARON FUNDS -------------------------------------------------------------------------------- HOW YOUR SHARES ARE PRICED The purchase or sale price for your shares is the Fund's net asset value per share ("NAV"), which is generally calculated as of the close of regular trading of the New York Stock Exchange (the "Exchange") (usually 4:00 p.m. Eastern time) on each day the Exchange is open. Your purchase or sale will be priced at the next NAV calculated after your order is accepted by the Fund's transfer agent. If you purchase or sell shares through a brokerage firm, bank or other financial institution, your transaction will receive the NAV next calculated after the financial institution receives your order if it promptly transmits the order to the Fund's transfer agent. The Fund has agreements with certain financial institutions which authorize the financial institutions to accept orders or designate third parties to accept orders on behalf of the Fund. If you place your order through these authorized financial institutions, the order will be considered received when the authorized party accepts the order. Those orders will be priced at the NAV next computed after acceptance of the order by the authorized institution or its agent. The Fund's investments are valued based on the last sale 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, and the committee reports to the Board every quarter. 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. The Fund may change the time at which orders are priced if the Exchange closes at a different time or an emergency exists. For securities traded on NASDAQ, the Fund uses the NASDAQ Official Closing Price. HOW TO PURCHASE SHARES You may purchase shares of the Fund directly without paying a sales charge. Please use the Fund's "Regular Account Application" form to open an account. Special applications are available to open Individual Retirement Accounts such as Traditional, Roth, SEP, or Simple IRAs (collectively "IRAs", or individually "IRA") and Coverdell accounts. All applications can be found online at www.BaronFunds.com/applications. Please complete the application form in its entirety. If you do not provide all the information requested, your application wil be returned to you and your investment will not be established. The minimum initial investment is $2,000 unless you choose to invest through the Baron Automatic Investment Plan (see page [ ]of this prospectus). At the sole discretion of the Adviser, the initial investment minimum may be waived for certain investors. In addition, -------------------------------------------------------------------------------- Baron Funds(r) 1-800-99BARON 12 BARON FUNDS INFORMATION ABOUT YOUR INVESTMENT -------------------------------------------------------------------------------- the Fund will not enforce the minimum for accounts opened through other financial institutions and administrators which might act as intermediaries for investors in the Fund and may not have systems that are able to enforce the Fund's minimum. There is no minimum for subsequent purchases except for purchases made through the Fund's website (see page [ ] of this prospectus). The Fund may reject any proposed purchase. Please see page [ ] of this prospectus for the Fund's policy on short term trading. Any person or entity with a valid U.S. tax identification number can invest in the Fund. Refer to the Fund's "Anti-Money Laundering Regulations" on the following page for a list of required information. Please call the Fund's transfer agent at 1-800-442-3814, if you have any questions. ANTI-MONEY LAUNDERING REGULATIONS As part of the Fund's legal responsibility to fight the funding of terrorism and money laundering activities, the Fund requires a detailed verification of the identity of a shareholder, and individuals with authority or control over accounts opened by entities such as corporations, partnerships or trusts. When you open an account the Fund will request such information as is necessary to verify your identity as a shareholder, as well as the identities of any individuals with authority or control over accounts being opened by entities. THE INFORMATION REQUESTED INCLUDES NAME, ADDRESS, DATE OF BIRTH, AND U.S. TAXPAYER IDENTIFICATION NUMBER. Please make sure to provide all this required information. Incomplete information will delay your investment. The Fund will not process your investment until all required information has been provided. You will receive the NAV of the Fund on the date that all required information has been provided to the Fund's transfer agent. United Missouri Bank of Kansas City, N.A. will hold your investment check until all required information has been received. Investment funds received by bank wire will also be held by United Missouri Bank of Kansas City, N.A. If the application is not complete, the Fund's representatives will attempt to collect any missing information by contacting you directly. If you purchase the Fund through a broker/dealer or other financial institution, we will attempt to get the missing information from or through such entity. If the application is complete, the Fund will process the investment and will take steps to verify your identity. The Fund may request additional information or documents, if needed, to verify an identity. If the Fund cannot verify your information, the account will be closed and you will receive proceeds based on the next calculated NAV of the Fund. If the Fund deems it necessary, and upon written notice to you, the payment of redemption proceeds to you may be suspended to comply with the anti-money laundering regulations applicable to the Fund. The Fund will share the identity of its shareholders with federal regulators if required to do so by law and may report a failure to verify a shareholder's identity with federal authorities in accordance with applicable law. -------------------------------------------------------------------------------- 13 www.BaronFunds.com Baron Funds(r) INFORMATION ABOUT YOUR INVESTMENT BARON FUNDS -------------------------------------------------------------------------------- You may invest or add to your account using any of the following methods: BY MAIL TO OPEN A NEW ACCOUNT send your signed application form with your check payable to BARON FUNDS(r) to: Baron Funds(r) P.O. Box 219946 Kansas City, MO 64121-9946 or by overnight mail to: Baron Funds(r) 430 West 7th Street Kansas City, MO 64105-1514 PLEASE MAKE SURE YOU INDICATE HOW MUCH MONEY YOU WANT INVESTED IN BARON PARTNERS FUND. Checks must be payable in U.S. dollars and must be drawn on a U.S. bank. Third party checks, credit cards, money orders, travelers checks, bearer securities and cash will not be accepted. For IRAs and Coverdell accounts, please specify the year for which the contribution is made. If no year is specified it will be applied as a current year contribution. WHEN ADDING TO YOUR ACCOUNT complete the additional investment form provided at the bottom of your account statement or purchase confirmation. If you do not have that form, write a note with the account number indicating Baron Partners Fund along with your additional investment check. Send it to either the regular or overnight address. BY WIRE You can make your initial or additional investments in the Fund by wire. To do so: (1) contact the Fund's transfer agent, DST Systems, Inc., at 1-800-442-3814 to obtain an account number. (2) Complete and sign the application form and mail it to Baron Funds, P.O. Box 219946, Kansas City, MO 64121-9946. (3) Instruct your bank to wire funds to the United Missouri Bank of Kansas City, N.A., ABA No. 1010-0069-5, Account No. 98-7037-101-4. (4) Be sure to specify the following information in the wire: (a) Fund you are buying, (b) your account number, (c) your name, and (d) your wire number. The Fund is not responsible for delays in the wiring process. BY TELEPHONE Once your account is open and if you have Banking instructions on your account, you may add to your investment or exchange among the other Baron Funds(r) by telephone unless you specifically declined either of these options on your account application, by -------------------------------------------------------------------------------- Baron Funds(r) 1-800-99BARON 14 BARON FUNDS INFORMATION ABOUT YOUR INVESTMENT -------------------------------------------------------------------------------- speaking with a live representative or by our automated voice recognition system "BaronTel." Call 1-800-442-3814 to invest or exchange by telephone. Please see page [] of this prospectus for additional information on exchanges. By choosing this option to make a purchase, you authorize Baron Funds(r) to draw on your bank account. Please note that for an exchange, your accounts must be identically registered. If you need to add this option to your account, call 1-800-442-3814 for the forms. BY INTERNET You may open a new account through the Baron Funds(r) website by going to www.BaronFunds.com/openaccount. For important information about Internet purchases see "Special Information about Baron Funds Website" on page [ ] of this prospectus. You may add to an existing account through the Baron Funds(r) website by going to www.BaronFunds.com/myaccount. You must have ACH/Banking instructions on your account in order to make online purchases. BARON AUTOMATIC INVESTMENT PLAN Baron Automatic Investment Plan (the "Plan") is an automatic investment plan offered by the Fund. For any account starting with an investment of less than $2,000, the minimum initial investment is $500 with subsequent monthly investments of as little as $50 automatically invested from your checking account. Once your investment has reached $2,000, you have the option of either discontinuing the Plan by contacting the Fund or continuing to invest in the Fund. If your initial investment is greater than $2,000 and you wish to utilize the Plan for your account, please contact the Fund. To enroll in the Plan, complete the Enrollment Form (available by calling 1- 800-99-BARON), attach a voided check and mail with your application either to Baron Funds(r), P.O. Box 219946, Kansas City, MO 64121-9946 or to the overnight address, Baron Funds(r), 430 West 7th Street, Kansas City, MO 64105-1514. If your account has already been established without banking instructions and you wish to enroll in the Baron Automatic Investment Plan, please send a "signature guaranteed" letter of instruction with a voided check attached, to either the regular or overnight address. You can obtain a signature guarantee from most securities firms or banks, BUT NOT FROM A NOTARY PUBLIC. THROUGH BROKER-DEALERS You may purchase shares of the Fund through a broker-dealer or other financial institution that may charge a transaction fee. If you purchase the shares directly from the Fund, no transaction fee is charged. The Fund also participates in no transaction fee programs with many national brokerage firms. -------------------------------------------------------------------------------- 15 www.BaronFunds.com Baron Funds(r) INFORMATION ABOUT YOUR INVESTMENT BARON FUNDS -------------------------------------------------------------------------------- POLICY REGARDING FREQUENT PURCHASES AND REDEMPTIONS OF FUND SHARES The Fund discourages any person who is not a long-term investor from investing in the Fund. The Board of Trustees of the Fund has adopted policies and procedures to minimize frequent purchases and redemptions of Fund shares by shareholders. The Fund believes that frequent trading (which may include market timing, short term trading or excessive trading) of Fund shares has the potential to adversely impact other shareholders of the Fund. The Fund makes investments for the long term, and have had relatively low turnover of the portfolios. See page [ ] of this prospectus for more information about this long-term approach. The Adviser believes that frequent trading of Fund shares causes risks to the Fund and its shareholders. Frequent trading may dilute the value of Fund shares held by long-term shareholders, trigger gains taxable to Fund shareholders, increase brokerage and administrative costs and interfere with the efficient management of the Fund. It may disrupt the Adviser's ability to manage the Fund in accordance with its objectives. This disadvantages other shareholders of the Fund and adds to Fund costs, as the Adviser may be required to sell investments prematurely to raise cash to meet redemptions. The impact could be particularly severe for the smaller fund, because the frequent activity would have greater impact on each remaining longer-term shareholder. The risk to long-term shareholders of a non-diversified fund are pronounced, because there may potentially be less liquidity, therefore incurring greater trading-related transaction costs. Shareholders could also be negatively affected by frequent trading if the Adviser is forced to re-balance the portfolio and thereby incur substantial expenses in doing so. If the Adviser reasonably believes that a person is not a long-term investor, it will attempt to prohibit that person from investing in the Fund. The Fund presumes that a person who trades in and then out of a Fund within six months or less is not a long-term investor, although the Fund will consider evidence that rebuts that presumption including, at the Fund's sole discretion, the existence of extenuating circumstances such as medical emergencies or other hardships. The Adviser will examine information that is reasonably available to it at the time including information supplied by third parties and a person's investment history, to the extent known, in other mutual funds or investment vehicles (including vehicles managed by the Adviser or its affiliates) and if it is able to identify a person whom the Adviser deems is not a long term investor it will attempt to (i) bar the person from returning to the Fund or (ii) reject the investment from the outset. Although the Adviser may not be able to identify all persons who engage in frequent trading, it will make attempts to minimize frequent trading activity in the Fund. Certain financial institutions and administrators which act as intermediaries for investors in the Fund may have systems that cannot accommodate the Fund's policy regarding frequent purchases and redemptions of Fund shares. In these limited instances, the Fund must rely on those intermediaries to enforce their own frequent trading policies. If the Adviser reasonably believes an intermediary is not enforcing its own policy, or the Fund's -------------------------------------------------------------------------------- Baron Funds (r) 1-800-99BARON 16 BARON FUNDS INFORMATION ABOUT YOUR INVESTMENT -------------------------------------------------------------------------------- policy regarding frequent purchases and redemptions even though such intermediary has systems that can accommodate the Fund's policy, the Fund may prohibit the intermediary from investing on behalf of any of its clients. The Fund's policies and procedures may be modified or terminated at any time. The Fund continues to reserve the right to reject any purchase or exchange request for any reason. HOW TO REDEEM SHARES You may redeem your shares of the Fund by any of the methods described below. If you are selling shares in an IRA or Coverdell account please read the information in the IRA of Coverdell Plan Document. Redemptions will not be made until all of the requirements for redemption are met. Redemptions are priced at the next NAV calculated after your redemption request is received in proper form. If you have recently purchased shares your redemption proceeds may not be sent to you until the purchase check has cleared your bank, which generally occurs within fifteen calendar days. BY MAIL Write a letter that includes the following information: the name of the registered owner(s) of the account, the name of the Fund, the number of shares or dollar amount to be redeemed, and the account number. The letter must be signed in exactly the same way the account is registered, including the signature of each joint owner, if applicable. Mail the request to the transfer agent at Baron Funds, P.O. Box 219946, Kansas City, MO 64121- 9946, or by overnight mail to Baron Funds, 430 West 7th Street, Kansas City, MO 64105-1514. A signature guarantee is required for redemptions of more than $50,000 in any quarter. See the "Special Information About Redemptions" section on page [ ] of this prospectus. Within seven days after receipt of a redemption request by the transfer agent in proper form, the Fund will normally mail you the proceeds. BY TELEPHONE You are automatically granted the telephone redemption option when you open your account unless you decline the option on your account application or by calling 1-800-442-3814. Once made, your telephone request cannot be changed. There is no minimum amount that you may redeem by telephone from your account. The maximum amount that you may redeem by telephone in any quarter is $50,000. You may receive the proceeds by any one of the following methods: (a) we will mail a check to the address to which your account is registered, (b) we will transmit the proceeds by electronic funds transfer to a previously designated bank account (usually a two banking day process), or (c) we will wire the proceeds to a pre-authorized bank account for a $10.00 fee which will be deducted from your redemption proceeds (usually a next banking day process). -------------------------------------------------------------------------------- 17 www.BaronFunds.com Baron Funds(r) INFORMATION ABOUT YOUR INVESTMENT BARON FUNDS -------------------------------------------------------------------------------- The Fund has the right to refuse a telephone redemption if it believes it is advisable to do so. You will be responsible for any fraudulent telephone order as long as the Fund and its transfer agent use reasonable procedures to confirm that telephone instructions are genuine. BY BROKER-DEALER You may redeem shares through broker-dealers or other institutions who may charge you a fee. The Fund may have special redemption procedures with certain broker-dealers. SPECIAL INFORMATION ABOUT REDEMPTIONS If the amount to be redeemed in any quarter is greater than $50,000, all of the signatures on a redemption request must be signature guaranteed. IF YOU HAVE CHANGED YOUR ADDRESS WITHIN 30 DAYS PRIOR TO A REDEMPTION REQUEST, A SIGNATURE GUARANTEE IS REQUIRED FOR ANY AMOUNT OF REDEMPTION. A signature guarantee helps protect you and the Fund from fraud. You can obtain a signature guarantee from most securities firms or banks, BUT NOT FROM A NOTARY PUBLIC. If you are ------------------------------ redeeming $50,000 or less per quarter, and if proceeds are sent to the address of record (which has not been changed within 30 days), no signature guarantee is required. For joint accounts, each signature must be signature guaranteed. Please call the transfer agent at 1-800-442-3814 if you are unsure of any of the requirements. Please remember that the Fund will not redeem your shares until the original letter of instruction with the signature guarantee in proper form has been received by the transfer agent. The transfer agent may require other documentation from corporations, trustees, executors, and others who hold shares on behalf of someone else. If you have any questions concerning the requirements, please call the transfer agent at 1-800-442-3814. Redemptions will not be made until all of the conditions, including receipt in proper form of all required documentation by the transfer agent, have been satisfied. A redemption or exchange of Fund shares may generate a tax liability. If you redeem more than $250,000 or one percent of the net asset value of the Fund during any ninety-day period, the Fund has the right to pay the redemption price, either totally or partially, by a distribution of portfolio securities instead of cash. If your account falls below $2,000 because of withdrawals, the Fund may ask you to increase your balance. If it is still below $2,000 after sixty days, the Fund may close your account and send you the proceeds. The Fund may suspend the normal redemption process if trading on the New York Stock Exchange is suspended or if an emergency exists that reasonably precludes the valuation of the Fund's net assets or if the SEC permits such suspension. -------------------------------------------------------------------------------- Baron Funds(r) 1-800-99BARON 18 BARON FUNDS INFORMATION ABOUT YOUR INVESTMENT -------------------------------------------------------------------------------- HOW TO EXCHANGE SHARES You may exchange all or a portion of your investment in Baron Partners Fund to another. You may exchange shares by mail, telephone (speaking with a live representative or using our automated voice recognition system "BaronTel") or through the Baron Funds(r) website. You must not have opted out of the telephone option to do an exchange online. Please see "Special Information about the Baron Funds Website" below. Any new account established through an exchange will have the same registration, the same privileges and will be subject to the same minimum investment requirements as your original account. There is currently no fee for an exchange. Exchanges will be executed on the basis of the relative NAV of the shares exchanged. An exchange is considered a sale for federal income tax purposes, for which you may realize a taxable gain or loss. The Fund reserves the right to cancel the exchange privilege of any investor who uses the exchange privilege excessively. The Fund may change or temporarily suspend the exchange privilege during unusual market conditions. See the Fund's "Policy Regarding Frequent Purchases and Redemptions of Fund Shares" on page [ ] of this prospectus. OTHER FEES The Fund charges a fee of $5 per year, with a maximum charge of $20, to provide historical information for an account. Please call the Fund's transfer agent at 1-800-442-3814 for additional information. SPECIAL INFORMATION ABOUT THE BARON FUNDS WEBSITE The Baron Funds(r) website, www.BaronFunds.com, allows you to check your Fund account balance and historical transactions and make purchases or exchanges of Fund shares or exchange into other Baron Funds(r). You are automatically granted the online transaction option unless you decline the option on your account application or by calling 1-800-442-3814. To purchase shares online you must have telephone transaction privileges and bank instructions with respect to your account. Payment for the purchase of Fund shares through the website may be made only through a debit of your bank account at a domestic bank that is a member of the Federal Reserve System. The Fund imposes a limit of $25,000 per initial purchase transaction through the website. Subsequent online purchase transactions may be for up to $250,000. The minimum initial investment is $2,000 or if utilizing the Baron Automatic Investment Plan, you can start with an initial investment of $500, with subsequent minimum investments of $50 per month. The minimum investment for subsequent purchases through the website is $10. Redemptions can not be processed via the website. However, shareholders have the option to redeem by telephone (maximums apply) or via mail. -------------------------------------------------------------------------------- 19 www.BaronFunds.com Baron Funds(r) INFORMATION ABOUT YOUR INVESTMENT BARON FUNDS -------------------------------------------------------------------------------- Please be aware that the Internet is an unsecured, unstable, unregulated and unpredictable environment. Your ability to use the Fund's website for transactions is dependent on the Internet, equipment, software, systems, data and services provided by various vendors and third parties. While the Fund and the Distributor and Transfer Agent have established certain security measures, they cannot assure that inquiries, account information or trading activity will be completely secure. There may also be delays, malfunctions or other inconveniences or times when the website is not available for Fund transactions or other purposes. If this occurs, you should consider using other methods to purchase or exchange shares. The Fund, the Adviser, the Distributor or the Transfer Agent are not liable for any delays, malfunctions or unauthorized interception or access to communications or account information. Neither the Fund, the Transfer Agent, Distributor or Adviser will be liable for any loss, liability, cost or expense for following instructions communicated through the Internet, including fraudulent or unauthorized instructions. DISCLOSURE OF PORTFOLIO HOLDINGS The Board has adopted policies and procedures governing the disclosure of the Fund's portfolio holdings. More detailed information about this policy can be found in the Fund's Statement of Additional Information. QUARTERLY: The Fund posts on the website, usually five business days after the quarter end, the top ten long positions for the Fund. In addition, the Fund posts on the website, usually on the fifteenth business day after quarter end, all long securities positions representing one half of one percent or greater of the Fund's net assets (as a percentage of total long positions if the Fund is leveraged) and the cash position at the just- ended quarter end. All of this information will remain on the website until the next quarter end's information is posted. MONTHLY: In addition, the Fund posts on the Baron Funds' website, usually the tenth business day after month end, the Fund's ten largest long positions, stated as a percentage of net assets (as a percentage of total long positions if the Fund is leveraged). This information will remain on the website until the next month end's information is posted. Other information that may be of interest to investors, such as industry breakdowns and a historical analysis of security impact, may be available on the Baron Funds' website. The website address is www.BaronFunds.com. The link to Fund information is http://www.BaronFunds.com/ourfunds. Holdings information for each of the Funds offered by Baron Funds can be accessed from this link. The Fund may release the portfolio information to persons earlier than the dates stated above only if the Chief Operating Officer, Chief Financial Officer, General Counsel or -------------------------------------------------------------------------------- Baron Funds(r) 1-800-99BARON 20 BARON FUNDS INFORMATION ABOUT YOUR INVESTMENT -------------------------------------------------------------------------------- Chief Compliance Officer of the Fund determines that the release of such information is in the best interest of the Fund's shareholders, that there is a legitimate business purpose, and the person agrees in writing to maintain the confidentiality of the information and not to trade on the information. More detailed information about these arrangements can be found in the Fund's Statement of Additional Information. If the Fund inadvertently releases the information prior to the dates stated above to any person, and there was no agreement as described, the Fund will promptly post the information to the website. The Fund may also release what the Fund's executive officers reasonably deem to be immaterial information prior to the above time table as the Fund deems appropriate. No employee of the Adviser is allowed to accept compensation or consideration in any form with respect to the release of the of Fund's portfolio holdings. "Consideration" includes any agreement to maintain assets in the Fund or in other investment companies or accounts managed by the Adviser. Any exceptions to any of the Fund's disclosure policies are reported to the Board. DISTRIBUTIONS AND TAXES The Fund pays its shareholders dividends from its net investment income and distributes any net realized capital gains at least once each year. Your distributions will be reinvested in the Fund unless you instruct the Fund otherwise. There are no charges on reinvestments. After every distribution, the value of a share is automatically reduced by the amount of the distribution. If you elect not to reinvest and the postal or other delivery service is unable to deliver checks to your address of record, your distribution will be reinvested in additional shares at the NAV next determined after the check is returned to the Fund. No interest will accrue on amounts represented by uncashed distribution or redemption checks. You are subject to federal income tax on Fund distributions, unless your investment is in an IRA, Coverdell or other tax-advantaged account. The tax status of any distribution is the same regardless of how long you have invested in the Fund and whether you reinvest your distributions or take them in cash. Income and short-term capital gain distributions are taxed at the ordinary income rate. Long-term capital gains distributions are taxed generally as capital gains. The tax status of the annual distribution will be detailed in an annual tax statement from the Fund. Distributions declared by the Fund may also be subject to state and local taxes. You should consult with your own tax adviser regarding your personal tax situation. If you do not provide the Fund with your valid U.S. social security or taxpayer identification number, you will be subject to backup withholding for taxes. -------------------------------------------------------------------------------- 21 www.BaronFunds.com Baron Funds(r) INFORMATION ABOUT YOUR INVESTMENT BARON FUNDS -------------------------------------------------------------------------------- GENERAL INFORMATION CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT On or about May 11, 2007, State Street Bank and Trust Company, One Lincoln Street, Boston, MA 02111, will become the custodian for the Fund's cash and securities. The Fund is in the process of transferring its account from its former custodian The Bank of New York. DST Systems, Inc. serves as transfer agent and dividend disbursing agent for the shares. They are not responsible for investment decisions for the Fund. SHAREHOLDER INFORMATION If you have questions about your account or transactions please contact the transfer agent, DST Systems, Inc., P.O. Box 219946, Kansas City, MO 64121-9946, or by telephone at 1-800-442-3814. If you have questions about general Fund information please call the Fund's office at 1-800-99-BARON or 212- 583-2100. As a Delaware statutory trust, annual shareholder meetings are not required. The Fund generally sends quarterly reports to shareholders. Pending legal proceedings, if any, are discussed in the Statement of Additional Information. PRIVACY NOTICE Baron Partners Fund collects nonpublic personal information about you from the following sources: o Information we receive from you on applications or other forms o Information about your transactions with us, our affiliates, or others, and o Information we receive from third parties, such as credit reporting agencies. "Nonpublic personal information" is nonpublic information about you that we obtain in connection with providing a financial product or service to you. We may share your name and address among affiliates for purposes of sending you information about products of ours that we believe may be of interest to you and inform you of our upcoming investors' conference. We do not disclose any nonpublic personal information about our customers to anyone, except as permitted or required by law. Examples of permitted disclosures under the law include sharing with companies that work for us to provide you service, such as a transfer agent or mailing house. All such companies act on our behalf, are contractually obligated to keep the information that we provide to them confidential, and use the information only to provide the services that we have asked them to perform for you and us. -------------------------------------------------------------------------------- Baron Funds(r) 1-800-99BARON 22 BARON FUNDS INFORMATION ABOUT YOUR INVESTMENT -------------------------------------------------------------------------------- We restrict access to nonpublic information about you to those employees who need to know that information to provide products or services to you. We maintain physical, electronic, and procedural safeguards to guard your nonpublic personal information. This pledge is also available at all times on our Website www.BaronFunds.com or by calling 1-800-99BARON. FOR MORE INFORMATION Investors who want more information about the Fund may obtain the following documents free upon request at the numbers or address below. SHAREHOLDER REPORTS Additional information about the Fund's investments will be available in the Fund's quarterly and annual financial reports to Shareholders. In the Fund's annual financial report you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION Additional information is also contained in the Statement of Additional Information dated April 30, 2007. A current Statement of Additional Information is on file with the Securities and Exchange Commission ("SEC") and is incorporated by reference. You may obtain the Statement of Additional Information and the shareholder reports without charge by writing or calling the Fund. TO OBTAIN INFORMATION By telephone: Call 1-800-99-BARON (1-800-992-2766) By mail: Write to: BARON FUNDS 767 Fifth Avenue New York, NY 10153 By e-mail: Send your request to: info@BaronFunds.com On the Internet: Only text versions of Baron Select Funds documents can be viewed on-line or downloaded from: http:\\www.BaronFunds.com or from the EDGAR database on the SEC's Internet site at: http:\\www.sec.gov OTHER: You can also obtain copies by visiting the SEC's Public Reference Room in Washington, D.C. (phone 1-202-942-8090). Copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at publicinfo@sec.gov or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102. SEC file number: 811-21296 Ticker Symbol: BPTRX No person has been authorized to give any information or to make any representations other than those contained in this Prospectus or in the related Statement of Additional Information. -------------------------------------------------------------------------------- 23 www.BaronFunds.com Baron Funds(r) [PHOTOS] [PHOTOS] [REGISTERED CASTLE LOGO] B A R O N F U N D S 767 Fifth Avenue o New York, NY 10153 [Registered Castle Logo BARON SELECT FUNDS BARON SELECT FUNDS BARON PARTNERS FUND 767 Fifth Avenue New York, New York 10153 (800) 99-BARON 212-583-2100 ------------------------- STATEMENT OF ADDITIONAL INFORMATION April 30, 2007 ------------------------- This Statement of Additional Information ("SAI") is not a prospectus. This SAI should be read in conjunction with the Fund's Prospectus dated April 30, 2007, which may be obtained without charge by writing or calling the Fund at the address and telephone number above. The Fund's Prospectus is incorporated by reference into this SAI and the SAI has been incorporated by reference into the Fund's Prospectus. The Fund's audited financial statements are incorporated into this SAI by reference to the Fund's 2006 Annual Financial Report. You may request a copy of the Annual Financial Report at no charge by writing or calling the Fund at the address and number above. ------------------------- No person has been authorized to give any information or to make any representations other than those contained in this SAI or in the related Prospectus. TABLE OF CONTENTS ----------------- PAGE IN STATEMENT OF ADDITIONAL PAGE IN INFORMATION PROSPECTUS FUND HISTORY AND CLASSIFICATION............. 1 Investment Goals, Strategies and Risks.... 1-8 3-5 MANAGEMENT THE FUNDS........................ 10 10 Portfolio Manager......................... 10 Board of Trustees and Officers............ 12 Code of Ethics............................ 22 Principal Holders of Shares............... 22 Investment Adviser........................ 23 10 Proxy Voting.............................. 25 BROKERAGE................................... 26 DISTRIBUTOR................................. 28 10 Distribution Plan......................... 28 10-11 REDEMPTION AND PURCHASE OF SHARES........... 31 12-20 NET ASSET VALUE............................. 32 12 TAXES....................................... 32 21 ORGANIZATION AND CAPITALIZATION............. 33 OTHER INFORMATION........................... 34 23 Calculations of Performance Data.......... 34 FUND HISTORY AND CLASSIFICATION ------------------------------- BARON SELECT FUNDS (the "Company") is an open-end management investment company organized originally as a limited partnership in January 1992, under the laws of the State of Delaware (the "Partnership"). On January 30, 2003, the partners of the Partnership approved conversion of the Partnership to a statutory trust, and on April 30, 2003, the Partnership converted into a statutory trust under the laws of the State of Delaware. The Company is structured to be able to issue shares in multiple series, each constituting a separate portfolio with separate assets and liabilities from any other series. There is one series currently available, Baron Partners Fund (the "Fund"). The Fund is the successor to the Partnership and has substantially the same investment objectives and strategies as did the Partnership. The Fund also has the same portfolio manager, Ronald Baron, as the Partnership. INVESTMENT GOALS, STRATEGIES AND RISKS -------------------------------------- The Fund's investment objective is to seek capital appreciation. In addition to the principal investment strategies of the Fund described in the Prospectus on pages 1 and 2, the Fund may use the additional strategies described below. These investment strategies are not fundamental policies and may be changed by the Fund's Board of Trustees. Shareholders would be notified of any material changes. Some of the strategies discussed below are mentioned in the Prospectus, but are explained in more detail here. FOREIGN SECURITIES o The Fund may invest up to 25% of its total assets directly ------------------- in the securities of foreign issuers which are not publicly traded in the U.S. and may also invest in foreign securities in domestic markets through depositary receipts or listed securities without regard to this limitation. These securities may involve additional risks not associated with securities of domestic companies, including exchange rate fluctuations, political or economic instability, the imposition of exchange controls, or expropriation or confiscatory taxation. Issuers of foreign securities are subject to different, often less detailed, accounting, reporting and disclosure requirements than are domestic issuers. The Fund may invest in securities commonly known as American Depository Receipts ("ADRs"), and in European Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs") or other securities convertible into securities of foreign issuers. ADRs are certificates issued by a U.S. bank or trust company and represent the right to receive securities of a foreign issuer deposited in a domestic bank or foreign branch of a United States bank and traded on a U.S. exchange or in an over-the-counter market. EDRs and GDRs are receipts issued in Europe generally by a non-U.S bank or trust company that evidence ownership of non-U.S. or domestic securities. There are no fees imposed on the purchase or sale of ADRs, EDRs or GDRs although the issuing bank or trust company may impose fees on the purchase of dividends and the conversion of ADRs, EDRs and GDRs 1 into the underlying securities. Investment in ADRs has certain advantages over direct investment in the underlying non-U.S. securities, since (i) ADRs are U.S. dollar denominated investments which are easily transferable and for which market quotations are readily available and (ii) issuers whose securities are represented by ADRs are subject to the same auditing, accounting and financial reporting standards as domestic issuers. EDRs and GDRs are not necessarily denominated in the currency of the underlying security. REITs o The Fund may invest in the equity securities of real estate investment ----- trusts ("REITs"). A REIT is a corporation or business trust that invests in real estate and derives its income from rents from or sales of real property or interest on loans secured by mortgages on real property. The market value of REITs may be affected by numerous factors, including decreases in the value of real estate, vacancies, decreases in lease rates, defaults by lessees, changes in the tax laws or by their inability to qualify for the tax-free pass-through of their income. LENDING o The Fund may lend its portfolio securities to institutions as a means ------- of earning additional income. In lending portfolio securities, the Fund may incur delays in recovery of loaned securities or a loss of rights in the collateral. To minimize such risks, such loans will only be made if the Fund deems the other party to be of good standing and determines that the income justifies the risk. The Fund will not lend more than 25% of its total assets. MORTGAGE-BACKED SECURITIES o The Fund may invest in mortgage-backed securities --------------------------- that are issued or guaranteed by U.S. government agencies or instrumentalities, such as the Government National Mortgage Association and the Federal National Mortgage Association. Mortgage-backed securities represent direct or indirect participation in, or are secured by and payable from, mortgage loans secured by real property. These securities are subject to the risk that prepayments on the underlying mortgages will cause the principal and interest on the mortgage-backed securities to be paid prior to their stated maturities. Mortgage prepayments are more likely to accelerate during periods of declining long-term interest rates. If a prepayment occurs, the Fund may have unanticipated proceeds which it may then have to invest at a lower interest rate, and may be penalized by not having participated in a comparable security not subject to prepayment. The Fund does not anticipate investing more than 5% of its assets in such securities. WHEN-ISSUED SECURITIES o The Fund may invest in debt and equity securities ----------------------- purchased on a when-issued basis. Although the payment and interest terms of when-issued securities are established at the time the purchaser enters into the commitment, the actual payment for and delivery of when-issued securities generally takes place within 45 days. The Fund bears the risk that interest rates on debt securities at the time of delivery may be 2 higher or lower than those contracted for on the when-issued security. Failure of the issuer to deliver the security purchased on a when-issued basis may result in a loss or missed opportunity to make an alternative investment. The Fund does not anticipate investing more than 5% of its assets in such securities. MEDIUM AND LOWER RATED CORPORATE DEBT SECURITIES o The Fund may invest in debt -------------------------------------------------- securities that are rated in the medium to lowest rating categories by S&P and Moody's, some of which may be known as "junk bonds." The Fund does not anticipate investing more than 35% of its assets in such securities. The Fund will rely on the Adviser's judgment, analysis and experience in evaluating debt securities. The Adviser believes that the difference between perceived risk and actual risk creates the opportunity for profit which can be realized through thorough analysis. Ratings by S&P and Moody's evaluate only the safety of principal and interest payments, not market value risk. Because the creditworthiness of an issuer may change more rapidly than is able to be timely reflected in changes in credit ratings, the Adviser monitors corporate debt securities of issuers held in the Fund's equity portfolio. The credit ratings assigned by a rating agency to a security are not considered by the Adviser in selecting a security. The Adviser examines the intrinsic value of a security in light of market conditions and the underlying fundamental values. Because of the nature of medium and lower rated corporate debt securities, achievement by the Fund of its investment objectives when investing in such securities is dependent on the credit analysis of the Adviser. The Adviser could be wrong in its analysis. If the Fund purchased primarily higher rated debt securities, these risks would be substantially reduced. A general economic downturn or a significant increase in interest rates could severely disrupt the market for medium and lower grade corporate debt securities and adversely affect the market value of such securities. The ability of issuers of medium and lower grade corporate debt securities to repay principal and to pay interest, to meet projected business goals and to obtain additional financing may be adversely affected by economic conditions. Such consequences could lead to an increased incidence of default for such securities and adversely affect the value of the corporate debt securities in the Fund's portfolio. The secondary market prices of medium and lower grade corporate debt securities are more sensitive to adverse economic changes or individual corporate developments than are higher rated debt securities. Adverse publicity and investor perceptions, whether or not based on rational analysis, and periods of economic uncertainty may also affect the value and liquidity of medium and lower grade corporate debt securities, although such factors also present investment opportunities when prices fall below intrinsic values. Yields on debt securities in the portfolio that are interest rate sensitive can be expected to fluctuate over time. 3 To the extent that there is no established market for some of the medium or low grade corporate debt securities in which the Fund may invest, there may be thin or no trading in such securities and the ability of the Adviser to value accurately such securities may be adversely affected. Further, it may be more difficult for the Fund to sell securities for which no established market exists as compared with securities for which such a market does exist. During periods of reduced market liquidity and in the absence of readily available market quotations for medium and lower grade corporate debt securities held in the Fund's portfolio, the responsibility of the Adviser to value the Fund's securities becomes more difficult and the Adviser's judgment may play a greater role in the valuation of the Fund's securities due to a reduced availability of reliable objective data. To the extent that the Fund purchases illiquid securities or securities which are restricted as to resale, the Fund may incur additional risks and costs. Illiquid and restricted securities may be particularly difficult to value and their disposition may require greater effort and expense than more liquid securities. The Fund may be required to incur costs in connection with the registration of restricted securities in order to dispose of such securities, although pursuant to Rule 144A under the Securities Act of 1933 certain securities may be determined to be liquid pursuant to procedures adopted by the Board of Trustees under applicable guidelines. The Fund may invest in securities of distressed issuers when the intrinsic values of such securities, in the opinion of the Adviser, warrant such investment. OTHER DEBT SECURITIES o The Fund may invest in zero-coupon, step-coupon, and ---------------------- pay-in-kind securities. These securities are debt securities that do not make regular interest payments. Zero-coupon and step-coupon securities are sold at a deep discount to their face value; pay-in-kind securities pay interest through the issuance of additional securities. The market value of these debt securities generally fluctuates in response to changes in interest rates to a greater degree than interest-paying securities of comparable term and quality. The secondary market value of corporate debt securities structured as zero coupon securities or payment-in-kind securities may be more volatile in response to changes in interest rates than debt securities which pay interest periodically in cash. Because such securities do not pay current interest, but rather, income is accrued, to the extent that a Fund does not have available cash to meet distribution requirements with respect to such income, it could be required to dispose of portfolio securities that it otherwise would not. Such disposition could be at a disadvantageous price. Investment in such securities also involves certain tax considerations. The Fund from time to time may also purchase indebtedness and participations therein, both secured and unsecured, of debtor companies in reorganization or financial restructuring. Such indebtedness may be in the form of loans, notes, bonds or debentures. When the Fund purchases a participation interest they assume the credit risk associated with the 4 bank or other financial intermediary as well as the credit risk associated with the issuer of any underlying debt instrument. The Fund may also purchase trade and other claims against, and other unsecured obligations of, such debtor companies, which generally represent money due a supplier of goods or services to such company. Some debt securities purchased by the Fund may have very long maturities. The length of time remaining until maturity is one factor the Adviser considers in purchasing a particular indebtedness. The purchase of indebtedness of a troubled company always involves a risk as to the creditworthiness of the issuer and the possibility that the investment may be lost. The Adviser believes that the difference between perceived risk and actual risk creates the opportunity for profit which can be realized through thorough analysis. There are no established markets for some of this indebtedness and it is less liquid than more heavily traded securities. Indebtedness of the debtor company to a bank are not securities of the banks issuing or selling them. The Fund may purchase loans from national and state chartered banks as well as foreign ones. The Fund may invest in senior indebtedness of the debtor companies, although on occasion subordinated indebtedness may also be acquired. The Fund may also invest in distressed first mortgage obligations and other debt secured by real property. The Fund does not currently anticipate investing more than 5% of its assets in trade and other claims. The Fund may enter into repurchase agreements with certain banks or non-bank dealers. In a repurchase agreement the Fund buys a security at one price, and at the time of sale, the seller agrees to repurchase that security at a mutually agreed upon time and price. Repurchase agreements could involve certain risks in the event of the failure of the seller to repurchase the securities as agreed, which may cause a fund to suffer a loss, including loss of interest on or principal of the security, and costs associated with delay and enforcement of the repurchase agreement. Repurchase agreements with a duration of more than seven days are considered illiquid securities. As a form of borrowing, the Fund may engage in reverse repurchase agreements with certain banks or non-bank dealers, where the Fund sells a security and simultaneously agrees to buy it back later at a mutually agreed upon price. To the extent the Fund engages in reverse repurchase agreements it will maintain a segregated account consisting of liquid assets or highly marketable securities to cover its obligations. Reverse repurchase agreements may expose the Fund to greater fluctuations in the value of its assets. SHORT SALES ----------- The Fund may sell securities short. The Fund may sell a security that the Fund does not own. In order to do so, the Fund must borrow the security to deliver it to the purchaser and later buy that security in the market to return it to the lender. The value of a security sold short could increase and the Fund would have to pay more to buy the security to deliver to such tender than it received from the purchaser in the short sale. The Fund's risk 5 of loss in these types of short sales is theoretically unlimited because there is no limit to the cost of replacing the borrowed security. The Fund may also sell short a security the Fund owns or a security equivalent in kind or amount to a security the Fund has a right to obtain (for example, a security convertible into the security sold short or a security the adviser believes will be deliverable upon the closing of a transaction). The Fund may also short securities when in the opinion of the Adviser the position is covered by owning a security that has ownership rights to assets that include all of the assets of the security shorted. If the value of the securities in these types of short sales increases, the Fund loses the opportunity to participate in the gain of the covered positions. The Fund may sell a security short only on a fully collateralized basis, which requires that the Fund establish and maintain a segregated account. OPTIONS TRANSACTIONS AND SWAPS ------------------------------ The Fund may write (sell) put and covered call options and purchase put and call options on equity and/or debt securities. The Fund may also enter into equity swap transactions. All calls sold by the Fund must be "covered" (i.e., the Fund must own the underlying securities) or must meet the asset segregation requirements described below as long as the call is outstanding. Even though the Fund will receive the option premium to help protect it against loss, a call sold by the Fund exposes the Fund during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying security or instrument and may require the Fund to hold a security or instrument which it might otherwise have sold, and a put exposes the Fund to theoretically unlimited liability as the price of the security increases. A put option gives the purchaser of the option, upon payment of a premium, the right to sell, and the writer the obligation, when exercised, to buy, the underlying security, at the exercise price. A call option, upon payment of a premium, gives the purchaser of the option the right to buy, and the seller, if exercised, the obligation to sell, the underlying security at the exercise price. An American style put or call option may be exercised at any time during a fixed period while a European style put or call option may be exercised only upon expiration or during a fixed period prior thereto, and the Fund may engage in either style option. The Fund is authorized to engage in transactions with respect to exchange-listed options, over-the-counter options ("OTC options") and other derivative investments. Exchange-listed options are issued by a regulated intermediary such as the Options Clearing Corporation ("OCC"), which guarantees the performance of the obligations of the parties to such options. The discussion below uses the OCC as an example, but is also applicable to other financial intermediaries. Rather than taking or making delivery of the underlying security through the process of exercising the option, listed options are usually closed by entering into offsetting purchase 6 or sale transactions that do not result in ownership of the new option. The Fund's ability to close out its position as a purchaser or seller of an OCC or exchange-listed put or call option is dependent, in part, upon the liquidity of the option market. Among the possible reasons for the absence of a liquid option market on an exchange are: (i) insufficient trading interest in certain options; (ii) restrictions on transactions imposed by an exchange; (iii) trading halts, suspensions or other restrictions imposed with respect to particular classes or series of options or underlying securities including reaching daily price limits; (iv) interruption of the normal operations of the OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to handle current trading volume; or (vi) a decision by one or more exchanges to discontinue the trading of options (or a particular class or series of options), in which event the relevant market for that option on that exchange would cease to exist, although outstanding options on that exchange would generally continue to be exercisable in accordance with their terms. The hours of trading for listed options may not coincide with the hours during which the underlying instruments are traded. To the extent that the option markets close before the markets for the underlying instruments, significant price and rate movements can take place in the underlying markets that cannot be reflected in the option markets. OTC options are purchased from or sold to securities dealers, financial institutions or other parties ("Counterparties") through direct bilateral agreement with the Counterparty. In contrast to exchange-listed options, which generally have standardized terms and performance mechanics, all the terms of an OTC option are negotiated by the parties. The Fund expects generally to enter into OTC options that have cash settlement provisions, although it is not required to do so. Equity swap transactions are entered into with financial institutions through a direct agreement with the Counterparty, generally an ISDA Master Agreement, the specific terms of which are negotiated by the parties. The Fund may use equity swaps, or other derivative instruments, for hedging purposes against potential adverse movements in security prices or for non-hedging purposes such as seeking to enhance return. The Fund may be required to post collateral for such transactions. There is no central clearing or unless the parties provide for it, guaranty function in an OTC option or derivative, including swaps. As a result, if the Counterparty fails to make or take delivery of the security or other instrument or fails to make a cash settlement payment due in accordance with the option, the Fund will lose any premium it paid for the option as well as any anticipated benefit of the transaction. The Adviser must assess the creditworthiness of each Counterparty to determine the likelihood that the terms of the OTC option or the derivative will be satisfied. The Fund will engage in OTC option transactions and derivatives only with previously approved Counterparties. The staff of the SEC currently takes the position that OTC options purchased by a fund, and portfolio 7 securities "covering" the amount of the fund's obligation pursuant to an OTC option sold by it (the cost of the sell-back plus the in-the-money amount, if any,) are illiquid, and are subject to a fund's limitations on investments in illiquid securities unless the fund has the legal right to terminate the option on not more than seven days notice and the counterparty has a high credit quality rating. USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS ---------------------------------------------- Many hedging transactions, in addition to other requirements, require that the Fund segregate liquid high grade assets with its custodian to the extent Fund obligations are not otherwise "covered" through ownership of the underlying security or instrument. In general, either the full amount of any obligation by the Fund to pay or deliver securities or assets must be covered at all times by the securities or instruments required to be delivered, or, subject to any regulatory restrictions, an amount of cash or liquid securities at least equal to the current amount of the obligation must be segregated with the custodian. The segregated assets cannot be sold or transferred unless equivalent assets are substituted in their place or it is no longer necessary to segregate them. For example, a call option written by the Fund will require the Fund to hold the securities subject to the call (or securities convertible into the needed securities without additional consideration) or to segregate liquid securities sufficient to purchase and deliver the securities if the call is exercised. Hedging transactions may be covered by other means when consistent with applicable regulatory policies. INVESTMENT RESTRICTIONS ----------------------- The Fund has adopted investment restrictions, described below, which are fundamental policies of the Fund and may not be changed without the approval by a majority of the Fund's shares or, if less , at least two-thirds of a quorum of a majority of the shares. Unless otherwise noted, all percentage restrictions are measured as of the time of the investment after giving effect to the transaction. The Fund MAY NOT: 1. Issue senior securities or borrow money in excess of amounts permitted by law (which currently requires asset coverage of 300% immediately after such borrowing, subject to exceptions for borrowings of up to 5% for short-term purposes and in an unlimited amount for certain redemptions). 2. Purchase or sell commodities or commodity contracts in conformity with regulations of the Commodities Futures Trading Commission such that the Fund would not be required to register as a commodity pool. 3. Purchase or sell oil and gas interests or real estate. Debt obligations or equity securities issued by companies engaged in the oil, gas or real estate business 8 or secured by oil and gas or real estate are not considered oil or gas interests or real estate for purposes of this restriction. 4. Underwrite securities of other issuers except insofar as the Fund is the seller of such securities. 5. Make loans, except to the extent the purchase of debt obligations of any type (including loan participations, repurchase agreements and corporate commercial paper) are considered loans and except that the Fund may lend portfolio securities in compliance with requirements established from time to time by the Securities and Exchange Commission. 6. Mortgage, pledge or hypothecate any of its assets, except in connection with borrowings, loans of portfolio securities, or other permitted transactions. 7. Invest 25% or more of the value of its total assets in any particular industry. As a non-fundamental policy, the Fund will not invest more than 15% of its assets in restricted or illiquid securities, including repurchase agreements maturing in more than seven days. The Securities and Exchange Commission currently requires that the following conditions be met whenever portfolio securities are loaned: (1) the Fund must receive at least 100% cash collateral from the borrower; (2) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (3) the Fund must be able to terminate the loan at any time; (4) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities, and any increase in market value; (5) the Fund may pay only reasonable custodian fees in connection with the loan; and (6) while voting rights on the loaned securities may pass to the borrower, the Fund's trustees must terminate the loan and regain the right to vote the securities if a material event adversely affecting the investment occurs. These conditions may be subject to future modifications. TURNOVER RATE ------------- The Adviser expects that the average annual turnover rate of the portfolio of the should not exceed 100%. The turnover rate fluctuates depending on market conditions. The turnover rates for the Fund for the past two years ended December 31 are: 2006 2005 35.9% 37.6% 9 DISCLOSURE POLICY ----------------- Information regarding the Fund's policies regarding the disclosure of portfolio information is contained in the prospectus. Disclosures are made on the Fund's web site, www.BaronFunds.com. The Fund's disclosure policy is designed to address the interests of shareholders of the Fund, which, the Board feels, minimizes any potential conflicts. The Fund's Chief Compliance Officer reports to the Board every quarter on these, and other matters. The Fund discloses portfolio holdings in connection with the day-to-day operations and management of the Fund, including to the Fund's custodian (daily) and auditors (annually). Portfolio holdings may also be disclosed to other service providers to the Fund, including pricing services (daily), portfolio management and trading systems (daily), and proxy voting systems (quarterly). In these situations, the Fund, the Adviser or the Distributor have entered into agreements with the service providers whereby they agree to keep the information confidential, and to refrain from trading on the basis of the information. When engaged in purchasing and selling securities for the Fund through brokers and dealers or other trading platforms, the Fund discloses certain information about one or more of the securities positions it owns. The Fund does not have separate non-disclosure agreements with each of these trading entities, but the Fund would immediately cease doing business with any entity the Adviser believes is misusing the information. MANAGEMENT OF THE FUND ---------------------- PORTFOLIO MANAGER ----------------- Ronald Baron is the portfolio manager of Baron Partners Fund. OTHER ACCOUNTS MANAGED ---------------------- As of December 31, 2006:
------------------------------------------------------------------------------------------------------ TOTAL NUMBER OF ASSETS TYPE OF ACCOUNT PORTFOLIO MANAGER ACCOUNTS (millions) ------------------------------------------------------------------------------------------------------ Registered Investment Companies Ronald Baron 9 $10,602 ------------------------------------------------------------------------------------------------------ Other pooled investment vehicles(1) 5 198 ------------------------------------------------------------------------------------------------------ Other Accounts 48 531 ------------------------------------------------------------------------------------------------------
(1) For 2 of the accounts with total assets of $86 million, the advisory fee is based on performance, although one account ($68 million) is a fund of fund. 10 POTENTIAL CONFLICTS OF INTEREST ------------------------------- Conflicts of interest could arise in connection with managing the Fund along with other Baron Funds and other clients of the Adviser and clients of the Adviser's affiliated investment adviser. Because of market conditions, client investment guidelines and the consideration of such factors as current holidays, cash availability, and diversification considerations, not all investment opportunities will be available to the Fund and all clients at all times. The Adviser has allocation policies designed to ensure that no Fund or client is systematically given preferential treatment over time. The Fund's Chief Compliance Officer monitors allocations for consistency with this policy and reports to the Board of the Fund annually. Because an investment opportunity may be suitable for multiple accounts, the Fund may not be able to take full advantage of that opportunity because the opportunity may be allocated among many or all of the Baron Funds and clients managed by the Adviser and its affiliates. To the extent that the Fund's portfolio manager has responsibilities for managing other client accounts, the portfolio manager may have conflicts of interest with respect to his time and attention among relevant accounts. In addition, differences in the investment restrictions or strategies among a Fund and other accounts may cause a portfolio manager to take action with respect to another account that differs from the action taken with respect to the Fund. In some cases, another account managed by a portfolio manager may provide more revenue to the Adviser. While this may create additional conflicts of interest for the portfolio manager in the allocation of management time, resources and investment opportunities, the Adviser takes all necessary steps to ensure that the portfolio manager endeavors to exercise his discretion in a manner that is equitable to all interested persons. A conflict could also arise when the portfolio manager has an investment in the Fund as opposed to another Baron Fund or has a larger investment in the Fund than in other accounts he manages. The Adviser could also receive a performance-based fee with respect to certain accounts. The Adviser believes that it has policies and procedures in place that address the Fund's potential conflicts of interest. Such policies and procedures address, among other things, trading practices (e.g., brokerage commissions, cross trading, aggregation and allocation of transactions, sequential transactions, allocations of orders for execution to broker- dealers), disclosure of confidential information and employee trading. COMPENSATION ------------ Mr. Baron has an employment agreement in principal. His compensation includes a fixed base salary and a fixed bonus that is roughly equivalent to 42% of his base salary. This contract is for five years, with automatic one year extensions thereafter. Mr. Baron also has a line of credit from the Firm and the Firm has agreed to post collateral up to a fixed -11- amount for his personal bank loans. The terms of his contract are based on Mr. Baron's role as the Firm's founder, chief executive officer, chief investment officer, and his position as portfolio manager for the majority of the Firm's assets under management. Consideration is given to Mr. Baron's reputation, the long-term performance records of the funds under his management, and the profitability of the Firm. In addition to his cash compensation, Mr. Baron benefits from a line of credit that is guaranteed by Baron Capital. OWNERSHIP OF PORTFOLIO MANAGER ------------------------------ As of December 31, 2006, the Portfolio Manager ownership of Fund Shares was:
------------------------------------------------------------------------------- DOLLAR RANGE OF PORTFOLIO MANAGER FUND FUND SHARES OWN -------------------------------------------------------------------------------- Ronald Baron Baron Partners Fund Over $1,000,000 --------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS ------------------------------ The Board of Trustees oversees the management of 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 with the other Baron Funds, 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 Fund. -12-
----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION(s) OTHER NAME, ADDRESS & POSITION(s) HELD LENGTH OF DURING THE PAST TRUSTEE/DIRECTORSHIPS DATE OF BIRTH WITH THE FUNDS TIME SERVED FIVE YEARS HELD BY THE TRUSTEE ----------------------------------------------------------------------------------------------------------------------------------- INTERESTED TRUSTEES: Ronald Baron *+ Chief Executive 4 years Chairman, CEO and Director: None outside the Baron 767 Fifth Avenue Officer, Chief Baron Capital, Inc. Funds Complex. New York, NY 10153 Investment (1982-Present), Baron DOB: May 23, 1943 Officer, Trustee Capital Management, Inc. and Portfolio (1983-Present), Baron Manager Capital Group, Inc. (1984-Present), BAMCO, Inc. (1987-Present); President: Baron Capital, Inc. (03/06-Present), Baron Capital Management, Inc. (03/06-Present), Baron Capital Group, Inc. (03/06-Present), BAMCO, Inc. (03/06-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; CIO and Portfolio Manager: Baron Managed Funds plc (2005-Present). ----------------------------------------------------------------------------------------------------------------------------------- -13- ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION(s) OTHER NAME, ADDRESS & POSITION(s) HELD LENGTH OF DURING THE PAST TRUSTEE/DIRECTORSHIPS DATE OF BIRTH WITH THE FUNDS TIME SERVED FIVE YEARS HELD BY THE TRUSTEE ----------------------------------------------------------------------------------------------------------------------------------- Linda S. Martinson*+ Chief Operating 4 years President: Baron Investment None outside the 767 Fifth Avenue Officer, Funds Trust, Baron Capital Baron Funds Complex. New York, NY 10153 President, Funds Trust, Baron Select DOB: February 23, Secretary, Funds (02/07-Present); Chief 1955 General Counsel and Operating Officer: Baron Trustee Capital Group, Inc., Baron Capital, Inc., BAMCO, Inc., and Baron Capital Management, Inc. (05/06-Present); General Counsel: Baron Capital, Inc., Baron Capital Management, Inc. (1983-Present); General Counsel: Baron Capital Group, Inc. (1984-Present); General Counsel, Secretary: BAMCO, Inc. (1987-Present); Treasurer: BAMCO, Inc. (1987-1993); Director: BAMCO, Inc. (1988-1996, 2003-Present); Vice President: BAMCO, Inc. (1993-Present); Secretary: Baron Capital, Inc., Baron Capital Management, Inc., Baron Capital Group, Inc. (1997-Present); Vice President: Baron Capital, Inc., Baron Capital Management, Inc. (1998-Present); Vice President: Baron Capital Group, Inc. (1999-Present); Director: Baron Capital Group, Inc., Baron Capital, Inc., Baron Capital Management, Inc. (2003-Present); Vice President, Secretary, Trustee, General Counsel: Baron Investment Funds Trust (1987-Present); Vice President, Secretary, Trustee, General Counsel: Baron Capital Funds Trust (1998-Present); Vice President, Secretary, Trustee, General Counsel: Baron Select Funds (2003-Present); Director, Baron Managed Funds plc (2005-Present). ----------------------------------------------------------------------------------------------------------------------------------- -14- ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION(s) OTHER NAME, ADDRESS & POSITION(s) HELD LENGTH OF DURING THE PAST TRUSTEE/DIRECTORSHIPS DATE OF BIRTH WITH THE FUNDS TIME SERVED FIVE YEARS HELD BY THE TRUSTEE ----------------------------------------------------------------------------------------------------------------------------------- DISINTERESTED TRUSTEES: Norman S. Edelcup+^** Trustee 4 years Director (2006-Present) Director (2006-Present) CompX 244 Atlantic Isles CompX International, Inc. International, Inc. Sunny Isles Beach, FL (diversified manufacturer (diversified manufacturer of 33160 of engineered components); engineered components); DOB: May 8, 1935 Mayor (2003-Present), Director (1975-Present), Commissioner (2001-2003), Valhi, Inc. (diversified Sunny Isles Beach, Florida; company). Director (2001-2006), Senior Vice President (2001-2004), Florida Savings Bank; Senior Vice President (1999-2000), Item Processing of America (a subsidiary of The Intercept Group); Chairman (1989-1999), Item Processing of America (a financial institution service bureau); Director (1975-Present), Valhi, Inc. (diversified company); Director (1985- 1998), Artistic Greetings, Inc.; Trustee (1987-Present), Baron Investment Funds Trust; Trustee (1997-Present), Baron Capital Funds Trust; Trustee (2003-Present), Baron Select Funds . David I. Fuente ^** Trustee 2 years Director (1987-Present), Director (1987-Present), Circle 701 Tern Chairman (1987-2001), CEO Office Depot; Director Point Boca Raton, (1987-2000) Office Depot; (1998-Present), Ryder Systems, FL 33431 Director (1998-Present), Ryder Inc.; Director (1993-Present), DOB: September 10, 1945 Systems, Inc.; Director Dick's Sporting Goods, Inc. (1993-Present), Dick's Sporting Goods, Inc.; Trustee (2004-Present), Baron Investment Funds Trust, Baron Capital Funds Trust, and Baron Select Funds. ----------------------------------------------------------------------------------------------------------------------------------- -15- ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION(s) OTHER NAME, ADDRESS & POSITION(s) HELD LENGTH OF DURING THE PAST TRUSTEE/DIRECTORSHIPS DATE OF BIRTH WITH THE FUNDS TIME SERVED FIVE YEARS HELD BY THE TRUSTEE ----------------------------------------------------------------------------------------------------------------------------------- Charles N. Mathewson^** Chairman and 4 years; Chairman Emeritus (October None outside the Baron Funds 9295 Prototype Road Trustee (Elected as 2003-Present), Chairman Complex. Reno, NV 89521 Chairman (1986-2003), International DOB: June 12, 1928 08/04) Game Technology, Inc. (manufacturer of microprocessor-controlled gaming machines and monitoring systems); Chairman (1994-2002), American Gaming Association; 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 4 years Retired; Chairman (2006- None outside the 2293 Morningstar Drive Present), Lighting Protection Baron Funds Complex. Morningstar Drive Systems, LCC; President and Park City, UT 84060 CEO (1985-1997) Kahler Realty DOB: November Corporation (hotel ownership 11, 1934 and management); Trustee (1987-Present), Baron Investment Funds Trust; Trustee (1997-Present), Baron Capital Funds Trust; Trustee (2003-Present), Baron Select Funds. Raymond Noveck^++ Trustee 4 years Private Investor None outside the Baron 31 Karen Road (1999-Present); President Funds Complex. Waban, MA 02168 (1997-1998), The Medical DOB: May 4, 1943 Information Line, Inc. (healthcare information); President (1990-1997), Strategic Systems, Inc. (health care information); Director (1987-1997), Horizon/CMS Healthcare Corporation; Trustee (1987-Present), Baron Investment Funds Trust; Trustee (1997-Present), Baron Capital Funds Trust ; Trustee (2003-Present), Baron Select Funds. ----------------------------------------------------------------------------------------------------------------------------------- -16- ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION(s) OTHER NAME, ADDRESS & POSITION(s) HELD LENGTH OF DURING THE PAST TRUSTEE/DIRECTORSHIPS DATE OF BIRTH WITH THE FUNDS TIME SERVED FIVE YEARS HELD BY THE TRUSTEE ----------------------------------------------------------------------------------------------------------------------------------- David A. Silverman,MD^**Trustee 4 years Physician and Faculty Director (1999-Present), 146 Central Park West (1976-Present), New York New York Blood Center. New York, NY 10024 University School of Medicine; DOB: March 14, 1950 Trustee (1987-Present), Baron Investment Funds Trust; Trustee (1997-Present), Baron Capital Funds Trust; Trustee (2003-Present), Baron Select Funds. Alex Yemenidjian^** Trustee <1 year Trustee: Baron Capital Funds Director (2005-Present), 1925 Century Park (Appointed Trust, Baron Select Funds, Guess?, Inc.; Director East Suite 1975 12/06) (12/06-Present), Baron (2005-Present), Regal Los Angeles, CA 90067 Investment Funds Trust (2006- Entertainment Group; Director DOB: December 27, 1955 Present); Chairman and CEO (2005-Present), USC Marshall 27, 1955 (2005-Present), Armenco School of Business Board of Holdings, LLC (investment Leaders; Co-chair of Imagine company); Director (2005- the Arts Campaign Present), Guess?, Inc. (2005-Present), California (retail); Director (2005- State University-Northridge; Present), Regal Entertainment Trustee (2000-Present), Group (entertainement American Film Institute; company); Director (2005- Director (1989-Present), The Present) USC Marshall School Lincy Foundation; Director of Business Board of (1989-Present), The United Leaders; Co-chair of Imagine Armenian Fund; Director and the Arts Campaign (2005- member of Executive Committee Present), California State (1989-2005), MGM MIRAGE, Inc. University-Northridge; Trustee (2001-2006), The Museum of Television and Radio; Trustee (2000-Present), American Film Institute; Trustee (2000-2007), Metro-Goldwyn-Mayer, Inc.; Director (1989-Present), The Lincy Foundation; Director (1989-Present), The United Armenian Fund; Director and member of Executive Committee (1989-2005), MGM MIRAGE, Inc.; President and COO (1989-1999), MGM Grand, Inc. (now MGM MIRAGE, Inc.); Managing Partner (1984-1989), Parks, Palmer, Turner & Yemenidjian (certified public accounting firm). ----------------------------------------------------------------------------------------------------------------------------------- -17- ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION(s) OTHER NAME, ADDRESS & POSITION(s) HELD LENGTH OF DURING THE PAST TRUSTEE/DIRECTORSHIPS DATE OF BIRTH WITH THE FUNDS TIME SERVED FIVE YEARS HELD BY THE TRUSTEE ----------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL OFFICERS OF THE FUNDS: Clifford Greenberg Senior Vice 4 years Director: BAMCO, Inc., Baron None. 767 Fifth Avenue President Capital Management, Inc. New York, NY 10153 (2003-Present); Director: DOB: April 30, 1959 Baron Capital Group, Inc., Baron Capital, Inc. (2000-Present); Senior Vice President: Baron Capital Group, Inc., Baron Capital, Inc., Baron Capital Management, Inc. and BAMCO, Inc. (2003-Present); Vice President: Baron Capital, Inc. (1997-2003); Portfolio Manager: Baron Small Cap Fund (1997-Present); General Partner: HPB Associates, L.P. (1984-1996). Gretta J. Heaney Chief Compliance 3 years Chief Compliance Officer: None. 767 Fifth Avenue Officer Baron Managed Funds plc New York, NY 10153 (2005-Present), Baron DOB: July 10, 1960 Investment Funds Trust, Baron Capital Funds Trust, Baron Select Funds (2004-Present); Vice President, Assistant General Counsel, Chief Compliance Officer: Baron Capital Management, Inc., BAMCO, Inc. (2004 -Present), Baron Capital, Inc. (2002-Present); Vice President, Goldman Sachs (2000-2002); Vice President, Associate Counsel, Hoenig & Co., Inc. (1995-2000). Andrew Peck Vice President 4 years Vice President: BAMCO, Inc. None 767 Fifth Avenue (2003-Present); Vice New York, NY 10153 President: Baron Investment DOB: March 25, 1969 Funds Trust (2003-Present); Vice President, Research Analyst: Baron Capital, Inc. (1998-Present); Co-Portfolio Manager: Baron Asset Fund (2003-Present); Co-Portfolio Manager (mid cap accounts): Baron Capital Management, Inc. (04/06-Present). ----------------------------------------------------------------------------------------------------------------------------------- -18- ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION(s) OTHER NAME, ADDRESS & POSITION(s) HELD LENGTH OF DURING THE PAST TRUSTEE/DIRECTORSHIPS DATE OF BIRTH WITH THE FUNDS TIME SERVED FIVE YEARS HELD BY THE TRUSTEE ----------------------------------------------------------------------------------------------------------------------------------- Susan Robbins Vice President 4 years Director, Vice President and None 767 Fifth Avenue Senior Analyst: Baron Capital New York, NY 10153 Management, Inc. DOB: October 19, 1954 (1982-Present), Baron Capital, 1954 Inc. (1982-Present), BAMCO, Inc. (1997-Present), Baron Capital Group, Inc. (1982-Present); Vice President: Baron Investment Funds Trust (1994-Present), Baron Capital Funds Trust (1998-Present), Baron Select Funds (2003-Present). Peggy C. Wong Treasurer and 4 years Chief Financial Officer: None 767 Fifth Avenue Chief Financial Baron Capital Group, Inc., New York, NY 10153 Officer Baron Capital, Inc., BAMCO, Inc., DOB: April 30, 1961 Baron Capital Management, Inc., Baron Investment Funds Trust (1987-Present); Treasurer: Baron Capital, Inc. (1988-Present), Baron Capital Group, Inc. and Baron Capital Management, Inc. (1990-Present), BAMCO, Inc. (1993-Present); Baron Investment Funds Trust (1992-Present); Chief Financial Officer, Treasurer: Baron Capital Funds Trust (1998-Present), Baron Select Funds (2003-Present), Baron Managed Funds plc.(2005-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 Funds' 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. # Members of the Audit Committee. ^ Members of the Nominating Committee. ** Members of the "Non-Interested" Committee. The Trustees of the Fund are responsible for the overall supervision of the operation of the Fund and perform various duties imposed on trustees of investment companies by the 1940 Act and under the Fund's Declaration of Trust and By-laws. Some of the Trustee listed above also serves as a Trustee of Baron Investment Funds Trust (formerly known as Baron Asset Fund) and Baron Capital Funds Trust, registered investment companies. The Fund pays each Trustee who is not an interested person of the Fund or the Adviser (each a "Disinterested" Trustee) annual compensation in addition to reimbursement of out- -19- of-pocket expenses in connection with attendance at meetings of the Trustees. Specifically, each Disinterested Trustee receives a base annual compensation of $10,000, with the Chairman receiving an additional $1,300 for his office. An additional $1,300 each, paid to each Disinterested Trustee for attendance in person at the quarterly Trustee Meetings; $325 is paid per quarterly meeting, if the Trustee attends by telephone. The Interested Trustees and Officers receive no direct remuneration in such capacity from the Fund. The Board of Trustees has established four committees, i.e., Audit, Executive Committee, Nominating and Independent. There are two members of the Audit Committee. The Audit Committee recommends to the full Board the engagement or discharge of the Fund's independent accountants; directs investigations into matters within the scope of the independent accountants' duties; reviews with the independent accountants the result of the audit; and reviews the independence of the independent accountants. Each member of the Audit Committee receives an aggregate of $1,300 in annual compensation for serving on the Audit Committee. The Audit Committee met twice during the fiscal year ended December 31, 2006. There are two 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. Members of the Executive Committee serve on the committee without compensation. There were three meetings of the Executive Committee during the fiscal year ended December 31, 2006. There are seven members of the Nominating Committee. The Nominating Committee recommends to the full Board those persons to be nominated for election as Trustees by shareholders and selects and proposes nominees for election by Trustees between shareholders' meeting. The Nominating Committee does not normally consider candidates proposed by shareholders for election as Trustees. Members of the Nominating Committee serve without compensation. There were no meetings of the Nominating Committee during the fiscal year ended December 31, 2006. There are seven members of the Independent Committee, all of whom serve on the committee without compensation. The committee discusses various Fund matters, including the advisory contract and distribution plan. Its members are all Disinterested Trustees of the Fund. This committee met four times during the fiscal year ended December 31, 2006. -20- TRUSTEE OWNERSHIP OF FUND SHARES -------------------------------- As of December 31, 2006 the Investment by the following Trustees in Fund Shares was: -------------------------------------------------------------------------------- Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Dollar Range of Equity Trustee in Family of Name of Trustee Securities in the Funds Investment Companies -------------------------------------------------------------------------------- Interested: Ronald Baron >$100,000 >$100,000 -------------------------------------------------------------------------------- Linda S. Martinson $50,001-$100,000 >$100,000 -------------------------------------------------------------------------------- Disinterested: Norman Edelcup >$100,000 >$100,000 -------------------------------------------------------------------------------- David I. Fuente $0 >$100,000 -------------------------------------------------------------------------------- Charles Mathewson >$100,000 >$100,000 -------------------------------------------------------------------------------- Harold Milner >$100,000 >$100,000 -------------------------------------------------------------------------------- Raymond Noveck >$100,000 >$100,000 -------------------------------------------------------------------------------- David Silverman $10,001-$50,000 $10,0001-$50,000 -------------------------------------------------------------------------------- Alex Yemenidjian* $50,001-$100,000 >$100,000 -------------------------------------------------------------------------------- * Alex Yemenidjian was appointed to the Board in December 2006. The Disinterested Trustees do not own any securities of the Adviser, the Distributor or any other entity controlling; controlled by or under common control with the Adviser or Distributor. -21- TRUSTEE COMPENSATION TABLE -------------------------- The Trustees of the Fund received the following compensation from the Fund for the fiscal year ended December 31, 2006:
--------------------------------------------------------------------------------------------------------------------- Aggregate Pension or Estimated Annual Total Compensation Compensation Retirement Benefits Benefits Upon From Fund and Fund Name From the Fund Accrued As Part of Retirement Complex Paid to Fund Expenses Trustees --------------------------------------------------------------------------------------------------------------------- Interested: Ronald Baron $0 N/A N/A $0 --------------------------------------------------------------------------------------------------------------------- Linda S. Martinson $0 N/A N/A $0 --------------------------------------------------------------------------------------------------------------------- Disinterested: Steven B. Dodge* $ 1,667 N/A N/A $ 2,167 --------------------------------------------------------------------------------------------------------------------- Norman Edelcup $16,500 N/A N/A $65,000 --------------------------------------------------------------------------------------------------------------------- David I. Fuente $11,300 N/A N/A $45,000 --------------------------------------------------------------------------------------------------------------------- Charles Mathewson $13,250 N/A N/A $52,500 --------------------------------------------------------------------------------------------------------------------- Harold Milner $15,200 N/A N/A $60,000 --------------------------------------------------------------------------------------------------------------------- Raymond Noveck $16,500 N/A N/A $65,000 --------------------------------------------------------------------------------------------------------------------- David Silverman $15,200 N/A N/A $60,000 --------------------------------------------------------------------------------------------------------------------- Alex Yemenidjian** $0 N/A N/A $40,400 ---------------------------------------------------------------------------------------------------------------------
* As of March 3, 2006, Steve Dodge is no longer a trustee. ** Alex Yemenidjian was appointed to the Board in December 2006. CODE OF ETHICS -------------- The Fund, the Adviser and the Distributor have adopted a written code of ethics pursuant to Rule 17j-1 under the Investment Company Act of 1940 (the "1940 Act"). The code of ethics allows employees, subject to the code, to invest in securities including, under certain circumstances, securities held or to be purchased by the Fund. PRINCIPAL HOLDERS OF SHARES --------------------------- As of December 31, 2006, the following persons were known to the Fund to be the record or beneficial owners of 5% or more of the outstanding securities of the Fund: -22- NAME & Address Percentage Owned -------------- ---------------- National Financial Services Corp 26.0% Charles Schawb & Co., Inc 24.5% Prudential Investment Management 6.4% As of December 31, 2006, all of the officers and Trustees of the Fund as a group beneficially owned directly or indirectly 4.6% of the Fund. INVESTMENT ADVISER The investment adviser to the Fund is BAMCO, Inc. (the "Adviser"), a New York corporation with its principal offices at 767 Fifth Avenue, New York, N.Y. 10153 and a subsidiary of Baron Capital Group, Inc. ("BCG"). Mr. Ronald Baron is the controlling stockholder of BCG and is BAMCO's chief investment officer. Mr. Baron has over 32 years of experience as a Wall Street analyst and has managed money for others for over 27 years. Mr. Baron is the portfolio manager for the Fund and was the portfolio manager for the predecessor Partnership since its inception in 1992 through the Adviser's affiliate, Baron Capital Management, Inc. ("BCM"). Pursuant to an Advisory Agreement with the Fund (the "Advisory Agreement"), the Adviser furnishes continuous investment advisory services and management to the Fund, including making the day-to-day investment decisions and arranging portfolio transactions for the Fund subject to such policies as the Trustees may determine. The fee paid to the Adviser is 1% of assets per annum. The Adviser has contractually agreed to limit the expense ratio for the Fund to 1.45%, excluding portfolio transaction costs, interest and extraordinary expenses for as long as the Adviser serves as investment adviser to the Fund. Baron Partners Fund incurred advisory expenses of $17,718,092 for the year ended December 31, 2006; $11,425,669 for the year ended December 31, 2005; and $2,698,473 for the year ended December 31, 2004. Under the Advisory Agreements, the Adviser, at its own expense and without reimbursement from the Fund, furnishes office space and all necessary office facilities, equipment and executive personnel for managing the Fund, and pays the salaries and fees of all officers and Trustees who are interested persons of the Adviser. The Adviser also uses a portion of its assets to pay all or a portion of the charges of third party programs that make the shares of the Fund available to their customers. The Fund pays all operating and other expenses not borne by the Adviser such as audit, accounting and legal fees; custodian fees; expenses of registering and qualifying its shares with federal and state securities commissions; expenses in preparing shareholder reports and proxy solicitation materials; expenses associated with the Fund's shares such as dividend disbursing, transfer agent and registrar fees; certain insurance expenses; -23- compensation of Trustees who are not interested persons of the Adviser; and other miscellaneous business expenses. The Fund also pays the expenses of offering the shares of the Fund, including the registration and filing fees, legal and accounting fees and costs of printing the prospectus and related documents. The Fund also pays all taxes imposed on it and all brokerage commissions and expenses incurred in connection with its portfolio transactions. The Adviser utilizes the staffs of BCG and its subsidiary BCM to provide research. Directors, officers or employees of the Adviser and/or its affiliates may also serve as officers or Trustees of the Fund or of other funds managed by the Adviser. BCM is an investment adviser to institutional and individual accounts. Clients of BCM and the other funds managed by the Adviser have investment objectives which may or may not vary from those of each other and of the Fund. BCM and the Adviser invest assets in such clients' accounts and in the accounts of principals and employees of BCM and its affiliates in investments substantially similar to, or the same as, those which constitute the principal investments of the Fund. When the same securities are purchased for or sold by the Fund and any of such other accounts, it is the policy of the Adviser and BCM to allocate such transactions in a manner deemed equitable by the Adviser. All trading by employees is subject to the Code of Ethics of the Fund and the Adviser. In certain circumstances the Adviser may make investments for the Fund that conflict with investments being made by BCM. The Adviser may also make investment decisions for the Fund that are inconsistent with the investment decisions for other funds it manages. The Advisory Agreement provides that the Fund may use "Baron" as part of its name for so long as the Adviser serves as investment adviser to the Fund. The Fund acknowledges that the word "Baron" in its name is derived from the name of the entities controlling, directly and indirectly, the Adviser, which derive their name from Ronald Baron; that such name is the property of the Adviser and its affiliated companies for copyright and/or other purposes; and that if for any reason the Adviser ceases to be the Fund's investment adviser, the Fund will promptly take all steps necessary to change its name to one that does not include "Baron," absent the Adviser's written consent. The Advisory Agreement provides that the Adviser shall have no liability to the Fund or its shareholders for any error of judgment or mistake of law or for any loss suffered by the Fund on account of any action taken in good faith; provided, that the Adviser shall not be protected against liabilities arising by virtue of willful misfeasance, bad faith or gross negligence, or reckless disregard of the Adviser's obligations under the Advisory Agreement. The Advisory Agreement was last approved by a majority of the Trustees, including a majority of the Trustees who are not "interested persons" (as defined by the Investment Company Act of 1940 ("1940 Act" )) on May 23, 2006. -24- The Advisory Agreement is terminable without penalty by either the Fund (when authorized by majority vote of either its outstanding shares or the Trustees) or the Adviser on 60 days' written notice. The Advisory Agreement shall automatically terminate in the event of its "assignment" (as defined by the 1940 Act). A discussion regarding the basis for the approval by the Board of Trustees of the investment advisory contract of the Fund is available in the Fund's Semi-Annual Financial Report to Shareholders for the six months ended June 30, 2006. PROXY VOTING POLICIES AND PROCEDURES ------------------------------------ The Fund has delegated to BAMCO the investment Adviser, all decision making on proxy voting. The Adviser makes its own independent voting decisions, although it may consider recommendations from third parties in its decision making process. The Adviser makes voting decisions solely in the best interests of the Fund and its shareholders. It is the policy of the Adviser in voting proxies to vote each proposal with the objective of maximizing long-term investment returns for the Fund. The Adviser uses guidelines which are reviewed quarterly by a Proxy Review Committee established by the Adviser. While the Adviser makes investment decisions based, in part, on the strength of a company's management team, it will not automatically support management proposals if such proposals are inconsistent with the Adviser's policies. If it is determined that there is a potential material conflict of interest between the interests of the Adviser and the interests of a Fund, the Committee will review the matter and may either (i) request that the Fund consent to the Adviser's vote, (ii) vote in accordance with the published recommendations of and independent voting organization, or (iii) appoint an independent third party to vote. A full copy of the Proxy Voting Policies and Procedures as well as the most current proxy voting record (on Form N-PX for the twelve months ended June 30th, is available upon filing with the SEC, which can be no later than August 31st of each year) for the Fund is available without charge on the Fund's website www.BaronFunds.com or on the SEC's website, www.sec.gov. SERVICE AGREEMENTS The Fund has agreements with various service providers pursuant to which administrative services such as record keeping, reporting and processing services are provided to the Fund's shareholders. -25- BROKERAGE --------- The Adviser is responsible for placing the portfolio brokerage business of the Fund with the objective of obtaining the best net results for the Fund, taking into account prompt, efficient and reliable executions at a favorable price. Purchase and sale orders are placed with brokers which the Adviser believes will achieve "best execution" of such orders. Best execution involves consideration of a number of factors, including direct net economic results to the Fund, the efficiency with which the transaction is executed, the ability to effect the transaction in the size and price range requested, the ability to effect the transaction with minimum impact on the market, the financial strength and stability of the broker, the broker's familiarity with a particular security, the broker's commitment of resources to executing the transaction, and past experience with a broker. The Adviser's affiliate Baron Capital, Inc. ("Baron Capital") was one of the brokers that provided brokerage services to the Fund, but Baron Capital ceased its brokerage activities in October of 2005. 23
For the Fiscal Year Ended 12/31 ----------------------------------------------------------------------------------------- 2006 2005 2004 ----------------------------------------------------------------------------------------- Total Commissions Paid by the Fund $1,223,908 $1,466,643 $713,454 ----------------------------------------------------------------------------------------- Commissions Paid to BCI $0 $ 453,479 $430,685 ----------------------------------------------------------------------------------------- % of Aggregate Dollar Amount of Commissions Paid to BCI 0.0% 30.9% 60.4% ----------------------------------------------------------------------------------------- % of Aggregate Dollar Amount of Transactions Involving Payment of Commissions to BCI 0.0% 49.8% 59.3% ----------------------------------------------------------------------------------------- % of Total Transactions (Principal & Agency) Where BCI Acted as Broker 0.0% 49.8% 58.5% -----------------------------------------------------------------------------------------
-26- Under the Investment Advisory Agreements and as permitted by Section 28(e) of the Securities and Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer which provides brokerage and research services to the Adviser an amount of commission for effecting a securities transaction for the Fund in excess of the amount other broker-dealers would have charged for the transaction if the Adviser determines in good faith that the greater commission is consistent with the Fund's policies and is reasonable in relation to the value of the brokerage and research services provided by the executing broker-dealer viewed in terms of either a particular transaction or the Adviser's overall responsibilities to the Fund or to its other clients. The term "brokerage and research services" includes advice as to the value of securities, the advisability of investing in, purchasing, or selling securities, and the availability of securities or of purchasers or sellers of securities; furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts; and effecting securities transactions and performing functions incidental thereto such as clearance and settlement. Such research and information may be used by the Adviser or its affiliates to supplement the services it is required to perform pursuant to the Advisory Agreement in serving the Fund and/or other advisory clients of affiliates. Broker-dealers may be willing to furnish statistical research and other factual information or services to the Adviser for no consideration other than brokerage or underwriting commissions. Securities may be bought or sold through such broker-dealers, but at present, unless otherwise directed by the Fund, a commission higher than one charged elsewhere will not be paid to such a firm solely because it provided research to the Adviser. Research provided by brokers is used for the benefit of all of the Adviser's or its affiliates' clients and not solely or necessarily for the benefit of the Fund. The Adviser's investment management personnel attempt to evaluate the quality of research provided by brokers. Results of this effort are sometimes used by the Adviser as a consideration in the selection of brokers to execute portfolio transactions. Investment decisions for the Fund and for investment accounts managed by BCM and the Adviser are made independent of each other in light of differing considerations for the various accounts. The same investment decision may, however, be made for two or more of the Adviser's, and/or BCM's accounts. In such event, simultaneous transactions are inevitable. Purchases and sales are averaged as to price where possible and allocated to accounts in a manner deemed equitable by the Adviser in conjunction with BCM. This procedure could have a detrimental effect upon the price or value of the security for the Fund, but may have a beneficial effect. -27- DISTRIBUTOR ----------- Distribution of Securities -------------------------- The Fund has a distribution agreement with Baron Capital, an affiliate of the Adviser. The Distributor acts as the agent for the Fund for the continuous public offering of its shares on a best efforts basis pursuant to a distribution plan adopted under Rule 12b-1 under the 1940 Act ("Distribution Plan"). DISTRIBUTION PLAN ----------------- The Distributor does not receive underwriting commissions, but the Distribution Plan authorizes the Fund to pay the Distributor a distribution fee equal on an annual basis to 0.25% of the Fund's average daily net assets. Due to the possible continuing nature of Rule 12b-1 payments, long-term investors may pay more than the economic equivalent of the maximum front-end sales charge permitted by the NASD. The distribution fee is paid to the Distributor in connection with its activities or expenses primarily intended to result in the sale of shares, including, but not limited to, compensation to registered representatives or other employees of the Distributor; compensation to and expenses of employees of the Distributor who engage in or support the distribution of shares or who service shareholder accounts; telephone expenses; preparing, printing and distributing promotional and advertising material; preparing, printing and distributing the Prospectus and reports to other than current shareholders; compensation for certain shareholder services; and commissions and other fees to broker-dealers or other persons who have introduced investors to the Fund. The total amount of the fee is payable to the Distributor regardless of the actual expenses incurred, which may be more or less than the distribution fees received by the Distributor. The Distributor or its affiliates may enter into arrangements with third parties to sell the Fund in programs that make the Fund'S shares available to their customers and pay such third parties amounts in excess of the 12b-1 fee. The Excess amounts typically represent savings of expenses the Fund would otherwise incur in performing record keeping and transfer agency functions. The Adviser reimburses the Distributor for certain of those excess charges. The Distributor, the Adviser and/or their affiliates, at their expense, currently provide additional compensation to certain financial intermediaries to make Fund shares available to their customers. These financial intermediaries include retirement plan sponsors, service providers and administrators, which provide recordkeeping and administrative services and other services to retirement plan participants; and banks broker-dealers, insurance companies, and other service providers which provide distribution-related and shareholder services. The amount of payments made to a financial intermediary in any given year will vary based on the amount of assets attributable to a financial intermediary. These payments help defray the costs incurred by financial intermediaries for, among other things, providing marketing and other services intended to assist in the offer and sale of Fund shares, for shareholder servicing -28- activities, and/or for sub-transfer agency services provided to individual shareholders where a financial intermediary maintains omnibus accounts with the Fund's Transfer Agent. The expenses listed below are payable by the Fund and are not treated as distribution or service fees under the Distribution Plan even if they are considered to be primarily intended to result in the sale of shares within the meaning of Rule 12b-1 of the 1940 Act: (a) the costs of preparing, printing or reproducing and mailing all required reports and notices to shareholders; (b) the costs of preparing, printing or reproducing and mailing all proxy statements and proxies (whether or not such proxy materials include any item relating to or directed toward the sale of shares); (c) the costs of preparing, printing or reproducing and mailing all prospectuses and statements of additional information to current shareholders; (d) all external legal and accounting fees relating to the preparation of any such report, prospectus, and proxy materials; (e) all external fees and expenses relating to the qualification of the Fund and/or their shares under the securities or "Blue Sky" laws of any jurisdiction; (f) all fees under the 1940 Act and the Securities Act of 1933, including fees in connection with any application for exemption relating to or directed toward the sale of Shares; (g) all fees and assessments, if any, of the Investment Company Institute or any successor organization, whether or not its activities are designed to provide sales assistance; (h) all costs of preparing and mailing confirmations of shares sold or redeemed and reports of share balances; (i) all external costs of responding to telephone or mail inquiries of shareholders or prospective shareholders; and (j) all other external costs and expenses of an administrative nature. The Distribution Plan requires that while it is in effect the Distributor report to the Trustees in writing, at least quarterly, the amounts of all expenditures, the identity of the payees and the purposes for which such expenditures were made for the preceding fiscal quarter. For year fiscal year ended December 31, 2006, the Fund paid distribution fees of $4,429,523 (an additional $399,131 was absorbed by the Distributor and/or its affiliates and not paid by the Fund pursuant to the 0.25% limitation). -29- COMPENSATION TABLE ------------------ The following table discloses compensation received by Baron Capital, Inc. from the Fund for the year ended December 31, 2006:
-------------------------------------------------------------------------------------------------------------------- Net Underwriting Compensation on Discounts and Redemptions and Brokerage Other Commissions Repurchases Commissions Compensation* -------------------------------------------------------------------------------------------------------------------- Baron Partners Fund $0 $0 $0 $4,429,523 --------------------------------------------------------------------------------------------------------------------
* Fees received pursuant to Distribution Plan. Trustees of the Fund who are not interested persons of the Fund have no direct or indirect financial interest in the operation of the Distribution Plan or any agreement thereunder. All the interested Trustees have such an interest. The Distribution Plan has been approved by the Fund's Board of Trustees, including a majority of the Trustees who are not interested persons of the Fund and who have no direct or indirect financial interest in the operation of the Distribution Plan or in any agreements related thereto. In approving the Distribution Plan, the Trustees considered various factors and determined that there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders. The anticipated benefits include the following: (i) the likelihood of attracting and retaining investments in the Fund and (ii) the consequent reduced expense ratios due to economies of scale, ability to purchase larger blocks of securities, resulting in decreased expenses, and minimization of adverse effects from forced sales of portfolio securities to meet redemptions. Baron Capital is authorized to make payments to authorized dealers, banks and other financial institutions who have rendered distribution assistance and ongoing shareholder support services, shareholder servicing assistance or record keeping. Certain states may require that any such person be registered as a dealer with such state. The Fund may execute portfolio transactions with and purchase securities issued by depository institutions that receive payments under the Distribution Plan. No preference will be shown in the selection of investments for the instruments of such depository institutions. Baron Capital may also retain part of the distribution fee as compensation for its services and expenses in connection with the distribution of shares. If the Distribution Plan is terminated, the Fund will owe no payments to Baron Capital other than any portion of the distribution fee accrued through the effective date of termination but then unpaid. Unless terminated in accordance with its terms, the Distribution Plan will continue in effect for a one year period, and from year to year thereafter if such continuance is specifically approved at least annually by the Fund's Trustees and by a majority of the Trustees who are -30- not interested persons of the Fund and who have no direct or indirect financial interest in the operation of the Distribution Plan or in any agreements related thereto, such votes cast in person at a meeting called for the purpose of such vote. The Distribution Plan may be terminated at any time by the vote of a majority of the members of the Fund's Board of Trustees who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the Distribution Plan or in any agreements related thereto or by the vote of a majority of the outstanding shares. The Distribution Plan may not be amended to increase materially the amount of payments to be made without the approval of the Fund's shareholders. All material amendments must be approved by a vote of the Trustees and of the Trustees who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the Distribution Plan or in any agreements related thereto, such votes cast in person at a meeting called for the purpose of such vote. CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT ------------------------------------------------ On or about May 11, 2007, State Street Bank and Trust Company, One Lincoln Street, Boston, MA 02111, will become the custodian for the Fund's cash and securities. The Fund is in the process of transferring its account from its former custodian The Bank of New York. DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105, is the transfer agent and dividend agent for the Fund's shares. Neither institution assists in or is responsible for investment decisions involving assets of the Fund. REDEMPTION OF SHARES -------------------- The Fund expects to make all redemptions in cash, but has reserved the right to make payment, in whole or in part, in portfolio securities. Payment will be made other than all in cash if the Fund's Board of Trustees determines that economic conditions exist which would make payment wholly in cash detrimental to the Fund's best interests. Portfolio securities to be so distributed, if any, would be selected in the discretion of the Fund's Board of Trustees and priced as described under "Determining Your Share Price" herein and in the Prospectus. ACCOUNTING ---------- The Adviser keeps the books of account of each Fund, and calculates daily the income and net asset value per share of each Fund. -31- NET ASSET VALUE ---------------- As more fully set forth in the Prospectus under "Determining Your Share Price," the net asset value per share of the Fund is determined as of the close of regular trading of the New York Stock Exchange (the "Exchange") (usually 4:00 p.m. Eastern Standard Time) on each day that the Exchange is open. The Exchange is open all week days that are not holidays, which it announces annually. The most recent announcement states it will not be open on New Year's Day, Martin Luther King, Jr.'s Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. Securities traded on more than one national securities exchange are valued at the last sale price of the day as of which such value is being determined as reflected at the close of the exchange which is the principal market for such securities. U.S. Government obligations and other debt instruments having sixty days or less remaining until maturity are stated at amortized cost. Debt instruments having a greater remaining maturity will be valued at the bid price from a 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. TAXES ----- The Fund intends to qualify every year as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986 (the "Code"). Qualification as a regulated investment company relieves the Fund of Federal income taxes on the portion of its net investment income and net realized capital gains distributed to shareholders. The Fund intends to distribute virtually all of its net investment income and net realized capital gains at least annually to its shareholders. A non-deductible 4% excise tax will be imposed on the Fund to the extent that it does not distribute (including declaration of certain dividends), during each calendar year, (i) 98% of its ordinary income for such calendar year, (ii) 98% of its capital gain net income (the excess of short and long term capital gain over short and long term capital loss) for each one-year period ending October 31 and (iii) certain other amounts not distributed in previous years. Shareholders will be taxed during each calendar year on the full amount of such dividends distributed (including certain declared dividends not actually paid until the next calendar year). For Federal income tax purposes, distributions paid from net investment income and from any net realized short-term capital gains are taxable to shareholders as ordinary income, -32- unless such dividends are "qualified dividend income" (as defined in the Code) eligible for a reduced rate of tax, whether received in cash or in additional shares. Distributions paid from net capital gains are taxable as long-term capital gains, whether received in cash or shares and regardless of how long a shareholder has held shares, and are not eligible for the dividends received deduction. Distributions of investment income (but not distributions of short-term or long-term capital gains) received by shareholders will qualify for the 70% dividends received deduction available to corporations to the extent designated by the Fund in a notice to each shareholder. Unless all of the Fund's gross income constitutes dividends from domestic corporations qualifying for the dividends received deduction, a portion of the distributions of investment income to those holders of the Fund which are corporations will not qualify for the 70% dividends received deduction. The dividends received deduction for corporate holders may be further reduced if the shares with respect to which dividends are received are treated as debt-financed or deemed to have been held for less than forty-six (46) days. The Fund will send written notices to shareholders regarding the Federal income tax status of all distributions made during each calendar year as ordinary income or capital gain and the amount qualifying for the 70% dividends received deduction. The foregoing relates to Federal income taxation. Distributions may also be subject to state and local taxes. The Fund is organized as a Delaware statutory trust. Under current law, so long as the Fund qualifies for the Federal income tax treatment described above, it is believed that it will not be liable for any income or franchise tax imposed by Delaware. Investors are urged to consult their own tax advisers regarding the application of Federal, state and local tax laws. ORGANIZATION AND CAPITALIZATION ------------------------------- Baron Select Funds is an open-end investment company organized as a series fund under the statutory trust law of The State of Delaware. The only series currently available is Baron Partners Fund. Shares entitle their holders to one vote per share on all matters submitted to a vote of shareholders. The Company's Declaration of Trust provides that no matters need be submitted to shareholders except as required by the 1940 Act. Consequently, matters such as mergers, acquisitions and sales of assets may not require shareholder approval. In the election of Trustees, shares have non-cumulative voting rights, which means that holders of more than 50% of the shares voting for the election of Trustees can elect all Trustees and, in such event, the holders of the remaining shares voting for the election of Trustees will not be able to elect any person or persons as Trustees. Shares have no preemptive or subscription rights, and are transferable. -33- Under Delaware law, shareholders have no liability for any liabilities of the Company or any of its series. Under the Company's Declaration of Trust, all liabilities and assets of the Company are allocated among its various series and no series (and no creditor or shareholder of any series) participates in or is subject to the assets or liabilities of any other series. OTHER INFORMATION ----------------- REGISTERED PUBLIC ACCOUNTANTS ----------------------------- PricewaterhouseCoopers LLP, 300 Madison Avenue, New York, New York 10017, has been selected as independent registered public accounting firm of the Fund. CALCULATIONS OF PERFORMANCE DATA -------------------------------- Advertisements and other sales literature for the Funds may refer to average annual total return and actual return. Average annual total return is computed by finding the average annual compounded rates of return over a given period that would equate a hypothetical initial investment to the ending redeemable value thereof, as follows: n P(1+T) = ERV Where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value at the end of the period of a hypothetical $1,000 investment made at the beginning of the period Actual return is computed by measuring the percentage change between the net asset value of a hypothetical $1,000 investment in the Fund at the beginning of a period and the net asset value of that investment at the end of a period. After-tax returns are included in the table below to show the impact of assumed federal income taxes on an investment in the Funds. A Fund's total return "after taxes on distributions" shows the effect of taxable distributions, but not any taxable gain or loss, on an investment in shares of the Fund for a specified period of time. A Fund's total return "after taxes on distributions and sale" shows the effect of both taxable distributions and any taxable gain or loss realized by the shareholder upon the sale of fund shares at the end of a specified period. To determine these figures, all income, short-term capital gain distributions, and long-term capital gain distributions are assumed to have been taxed at the highest -34- marginal individualized federal tax rate then in effect. Those maximum tax rates are applied to distributions prior to reinvestment and the after-tax portion is assumed to have been reinvested in the Fund. State and local taxes are ignored. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns reflect past tax effects only and are not predictive of future tax effects. Average Annual Total Return (After Taxes on Distributions ) is computed as follows: n P (1+T) = ATV D Where: P = a hypothetical initial payment of $1,000 T = average annual total return (after taxes on distributions) n = number of years ATV D = ending redeemable value of a hypothetical $1,000 investment made at the beginning of the period, at the end of the period (or fractional portion thereof), after taxes on fund distributions but not after taxes on redemptions. Average Annual Total Return (After Taxes on Distributions and Sale of Fund Fund Shares) computed as follows: n P (1+T) = ATV DR Where: P = a hypothetical initial payment of $1,000 T = average annual total return (after taxes on distributions andredemption) n = number of years ATV DR = ending redeemable value of a hypothetical $1,000 investment made at the beginning of the period, at the end of the period (or fractional portion thereof), after taxes on fund distributions and redemption. All performance calculations assume that dividends and distributions are reinvested at the net asset value on the appropriate reinvestment dates and include all recurring fees. Prior to May 1, 2003, the performance calculations have been restated and adjusted since inception applying the flat maximum expense ratio of 1.45% that would apply to the Fund (exclusive of portfolio transaction costs, interest and extraordinary expenses). The adjustments remove any prior performance allocations or other management or service fees and assumes the Fund operated as a mutual fund in paying out realized gains and income, if any, annually. -35- Computed, adjusted and restated in the manner described above, the performance, as of December 31, 2006 has been:
Average | Average | Average | Average Annual | Annual Cumulative | Annual Cumulative | Annual Cumulative 1 YR | 5 YR 5 YR | 10 YR 10 YR | Since Since | | | Inception Inception ------------------------------------------------------------------------------------------------ BARON PARTNERS FUND | | | | | | Return before taxes 21.55% | 16.82% 117.59% | 15.33% 316.29% | 18.30% 1,126.07% | | | Return after taxes on | | | distributions 21.50% | 15.91% 109.25% | 14.83% 298.45% | 17.86% 1,060.45% | | | Return after taxes on | | | distributions & sale of Fund | | | shares 14.07% | 14.42% 96.09% | 13.68% 260.39% | 16.86% 921.38% | | | Russell 2000 (reflects no | | | deductions for fees expenses | | | or taxes) 18.37% | 11.39% 71.47% | 9.44% 146.43% | 10.95% 371.40% | | | Russell 2500 (reflects no | | | deductions for fees expenses | | | or taxes) 15.80% | 6.17% 34.90% | 8.40% 124.01% | 10.82% 362.71% | | | ---------------------------------------------------------------------------------------------------------------------------
Performance results represent past performance and are not necessarily representative of future results. Investment return and principal value will fluctuate so that shares may be worth more or less than their original cost when redeemed. In addition to advertising average annual and actual return data, comparative performance information may be used in advertising materials about the Fund, including data and other information from Lipper Analytical Services, Inc., DA Investment Technologies, Morningstar Inc., Money, Forbes, SEI, Ibbotson, No Load Investor, Growth Fund Guide, Fortune, Barron's, The New York Times, The Wall Street Journal, Changing Times, Medical Economics, Business Week, Consumer Digest, Dick Davis Digest, Dickenson's Retirement Letter, Equity Fund Outlook, Executive Wealth Advisor, Financial World, Investor's Daily, Time, Personal Finance, Investment Advisor, SmartMoney, Rukeyser, Kiplinger's, NAPFA News, US News, Bottomline, Investors Business Daily, Bloomberg Radio, CNBC, USA Today, 1998 Mutual Fund Report, Mutual Fund Magazine, The Street.com, Bloomberg Personal, Worth, Washington Business Journal, Investment News, Hispanic Magazine, Institutional Investor, Rolling Stone Magazine, Microsoft Investor, Individual Investor, SmartMoney Interactive, Art & Auction, Dow Jones Newswire, Dow Jones News, The Boston Globe, Standard & Poor's Advisor Insight, CBS Market Watch, Morningstar.Net, On Wall Street, Los Angeles Times, Standard & Poor's Outlook, Bloomberg Online, Fund Action, Funds Net Insight, Boston Herald, Dow Jones Investment Advisor, Annuity.Net.com, Morningstar Fund -36- Investor, Associated Press, Bloomberg Business News, Standard & Poor's Personal Wealth, The Washington Post, The Daily Telegraph (UK), NewsDay, New York Post, Miami Herald, Yahoo Finance, Arizona Republic, Mutual Fund Market News, Chicago Tribune, Investor Force, Pensions and Investments St. Paul Pioneer Press, Deseret News Publishing, Dallas Morning News, PSI Daily, Financial Planning Investment News, Newark Star Ledger, Reuters, Time - European Edition, Registered Representative Magazine and Crain's NY Business. The Fund may also use comparative performance data from indexes such as the Dow Jones Industrial Average, Standard & Poor's 400, 500, Small Cap 600, 1,500, or Midcap 400, Value Line Index, Wilshire 4,500, 5000, or Small Cap, NASDAQ/OTC Composite, New York Stock Exchange, and the Russell 1000, 2000, 2500, 3000, 2000 Growth, 2000 Value, or Midcap. With respect to the rating services, the Fund may use performance information that ranks the Fund in any of the following categories: all funds, aggressive growth funds, value funds, mid-cap funds, small-cap funds, growth funds, equity income funds, and any combination of the above listed categories. FINANCIAL STATEMENTS -------------------- The Fund's financial statements for the year ended December 31, 2006 appearing in the 2006 Annual Financial Report to Shareholders and the report thereon of PricewaterhouseCoopers LLP, independent registered public accounting firm, appearing therein, are incorporated by reference in this Statement of Additional Information. -37-