-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NXN9X1Z4tgzYHjSoB+CnVvQ6NetcNUl6RTLOxHETiK8tY6riTcmXPI1QB8Z2mfl4 VLMI+5nFSblatHunlbV5zw== 0001017918-07-000111.txt : 20070720 0001017918-07-000111.hdr.sgml : 20070720 20070720142540 ACCESSION NUMBER: 0001017918-07-000111 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20070720 DATE AS OF CHANGE: 20070720 EFFECTIVENESS DATE: 20070720 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BARON INVESTMENT FUNDS TRUST (f/k/a BARON ASSET FUND) CENTRAL INDEX KEY: 0000810902 IRS NUMBER: 136891420 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-12112 FILM NUMBER: 07991229 BUSINESS ADDRESS: STREET 1: 767 FIFTH AVE STREET 2: 49TH FL CITY: NEW YORK STATE: NY ZIP: 10153 BUSINESS PHONE: 2125832000 MAIL ADDRESS: STREET 1: 767 FIFTH AVE STREET 2: 49TH FL CITY: NEW YORK STATE: NY ZIP: 10153 FORMER COMPANY: FORMER CONFORMED NAME: BARON ASSET FUND DATE OF NAME CHANGE: 19920703 0000810902 S000000582 BARON ASSET FUND C000001635 BARON ASSET FUND BARAX 0000810902 S000000583 BARON GROWTH FUND C000001636 BARON GROWTH FUND BGRFX 0000810902 S000000584 BARON SMALL CAP FUND C000001637 BARON SMALL CAP FUND BSCFX 0000810902 S000000585 BARON iOPPORTUNITY FUND C000001638 BARON iOPPORTUNITY FUND BIOPX 0000810902 S000000586 BARON FIFTH AVENUE GROWTH FUND C000001639 BARON FIFTH AVENUE GROWTH FUND BFTHX 497 1 bift4970707.txt DEFINITIVE PROSPECTUS AND SAI MATERIALS | PROSPECTUS | June 30, 2007 | | | | | | | | - -------------------------------------------------------------------------------- BARON ASSET FUND BARON GROWTH FUND BARON SMALL CAP FUND BARON iOPPORTUNITY FUND BARON FIFTH AVENUE GROWTH FUND - -------------------------------------------------------------------------------- B | A | R | O | N | | I | N | V | E | S | T | M | E | N | T | | F | U | [REGISTERED CASTLE LOGO] N | D | BARON S | FUNDS(r) - -------------------------------------------------------------------------------- This prospectus is for the Baron Investment Funds Trust which currently has five series, Baron Asset Fund, Baron Growth Fund, Baron Small Cap Fund, Baron iOpportunity Fund and Baron Fifth Avenue Growth Fund. If you are interested in the Baron Select Funds which contains the Baron Partners 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 these Funds. Please Baron Asset Fund Funds. Please read it carefully and keep Baron Growth Fund it for reference. Baron Small Cap Fund Baron iOpportunity Fund As with all mutual funds, the fact that Baron Fifth Avenue Growth Fund 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 June 30, 2007 212-583-2100 - -------------------------------------------------------------------------------- TABLE OF CONTENTS BARON FUNDS(r) - -------------------------------------------------------------------------------- Information about the Investment Goals and Strategies........... 3 Funds Performance............................... 6 Fund Expenses............................. 11 Financial Highlights...................... 13 Other Investment Strategies............... 16 Management of the Funds................... 19 - -------------------------------------------------------------------------------- Information about your How Your Shares are Priced................ 21 Investment How to Purchase Shares.................... 21 How to Redeem Shares...................... 26 How to Exchange Shares.................... 28 Special Information about The Baron Funds Website................................... 29 Disclosure of Portfolio Holdings.......... 30 Distributions and Taxes................... 31 General Information....................... 31 - -------------------------------------------------------------------------------- 2 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT THE FUNDS - -------------------------------------------------------------------------------- INVESTMENT GOALS AND STRATEGIES GOALS Baron Asset Fund capital appreciation through long-term investments primarily in securities of medium sized companies with undervalued assets or favorable growth prospects Baron Growth Fund capital appreciation through long-term investments primarily in the securities of small growth companies Baron Small Cap Fund capital appreciation through investments primarily in securities of small companies Baron iOpportunity Fund capital appreciation through investments in growth businesses that benefit from technology advances Baron Fifth Avenue Growth Fund capital appreciation through investments primarily in the securities of larger growth companies INVESTMENT STRATEGIES In making investment decisions for the Funds, the Adviser seeks: 1. securities that the Adviser believes have favorable price to value characteristics based on the Adviser's assessment of th eir prospects for future growth and profitability. 2. businesses that the Adviser believes are well managed, have significant long term growth prospects and are attractively pr iced. 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 favorable reputations in their communities. The Adviser's analysts and portfolio managers also study an individual business' financial strength and profitability. The Funds purchase stocks whose prices the Adviser believes are undervalued relative to their businesses' long term growth prospects, future cash flows and asset values. The Funds seek to invest in businesses before their long term growth - -------------------------------------------------------------------------------- www.BaronFunds.com 3 INFORMATION ABOUT THE FUNDS BARON FUNDS(r) - -------------------------------------------------------------------------------- prospects are appreciated by other investors. The Funds may make significant investments in companies in which the Adviser has the greatest conviction. Of course, there can be no guarantee the Funds will be successful at achieving their objectives. The Funds have a long term outlook. The Funds often invest in businesses and maintain 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 Baron Funds are designed for long term shareholders. The Funds are not designed nor intended to be suitable for investors who intend to purchase and then sell their Baron Fund shares after a short period. Please see pages 25-26 of this prospectus regarding the Funds' policies on short term trading. BARON ASSET FUND invests for the long term primarily in common stocks of mid-sized growth companies selected for their capital appreciation potential. A mid-sized growth company is defined as one having a market capitalization of $2.5 billion to $10 billion. BARON ASSET FUND purchases stocks in businesses that the Adviser believes could double in value in four years after their purchase. Of course, there can be no guarantee that the Adviser will be successful in achieving the Fund's objectives. Because of its long term approach, the Fund could have a significant percentage of its assets invested in securities that have appreciated beyond their original market cap ranges. BARON GROWTH FUND invests primarily in common stocks of smaller growth companies selected for their capital appreciation potential. A small sized company is defined as having a market value of under $2.5 billion at the time of purchase. BARON GROWTH FUND invests for the long term in small cap businesses the Adviser expects to double in size in four or five years, and then hopefully, double again in the next four or five years. The Adviser seeks to purchase for BARON GROWTH FUND, securities the Adviser expects to increase in value 100% in four years and then double again in the following four or five years. Of course, there can be no guarantee the Adviser will be successful in achieving the Fund's objectives. If the Adviser is successful in identifying and investing for the long term in fast growing small businesses for the Fund, the Fund's shareholders should expect to have a significant percentage of BARON GROWTH FUND's assets invested in successful mid-sized growth companies purchased when those businesses were small. When these investments are sold as their characteristics, maturation and growth prospects change, the Adviser will use available cash proceeds to invest in small cap businesses having market capitalizations of less than $2.5 billion. BARON SMALL CAP FUND invests primarily in common stocks selected for their capital appreciation potential. At least 80% of the Fund's total assets are invested in the securities of smaller companies based on the market size of the investment at the time of purchase. A small sized company is defined as having a market value of under $2.5 billion at the time of purchase. The Adviser seeks to purchase securities that the Adviser expects could increase in value 50% within two years. - -------------------------------------------------------------------------------- 4 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT THE FUNDS - -------------------------------------------------------------------------------- BARON iOPPORTUNITY FUND invests primarily in common stocks of growth businesses selected for their capital appreciation potential. The Fund seeks investments in companies that the Adviser believes have growth opportunities that result from the rapidly changing information technology environment, including the Internet. The Adviser seeks to invest in both new emerging companies and more mature "bricks and mortar" businesses that the Adviser believes have significant, sustainable, growth opportunities. These investments, as with investments for the other Baron Funds , will be purchased at prices the Adviser deems attractive based on the Adviser's then- projected cash flows and/or customer and asset valuations. At least 80% of the Fund's total assets are invested in securities of companies that have Internet-related and information technology growth opportunities. The Adviser seeks to purchase securities that the Adviser expects could increase in value 100% within four years. BARON FIFTH AVENUE GROWTH FUND invests primarily in common stocks of growth companies selected for their capital appreciation potential. At least 80% of the Fund's total assets are invested in the securities of larger companies with market values of greater than $5 billion based on the market size of the investment at the time of purchase. The Adviser seeks to purchase securities that the Adviser expects could increase in value 100% over five years. KINDS OF SECURITIES THE FUNDS BUY The Funds invest primarily in common stocks but may also invest in other equity-type securities such as convertible bonds and debentures, preferred stocks, warrants and convertible preferred stocks. The Funds may also make investments in securities that are not publicly-traded. Securities are selected for their capital appreciation potential, and investment income is not a consideration. BARON ASSET FUND invests primarily in medium sized growth companies with market capitalizations at the time of investment of under $10 billion. BARON GROWTH FUND and BARON SMALL CAP FUND invest primarily in small sized companies with market values under $2.5 billion at the time of purchase. These Funds will not sell positions just because their market values have increased. The Funds will add to positions in a company even though its market capitalization has increased through appreciation beyond the limits stated, if, in the Adviser's judgment, the company is still an attractive investment. BARON iOPPORTUNITY FUND invests in companies of all sizes with primarily Internet and information technology related growth opportunities. BARON FIFTH AVENUE GROWTH FUND invests primarily in the securities of larger growth companies with market values of over $5 billion. PRINCIPAL RISKS OF INVESTING IN THE FUNDS 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 - -------------------------------------------------------------------------------- www.BaronFunds.com 5 INFORMATION ABOUT THE FUNDS BARON FUNDS(r) - -------------------------------------------------------------------------------- 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 a Fund you may receive more or less money than you originally invested. SMALL AND MEDIUM SIZED COMPANIES The Adviser believes there is more potential for capital appreciation in smaller companies but there also may be more risk. Securities of smaller companies may not be well known to most investors and the securities may be thinly traded. Smaller company securities may fluctuate in price more widely than the stock market generally and they may be more difficult to sell during market downturns. There is more reliance on the skills of a company's management and on their continued tenure. This investment approach requires a long-term outlook and may require shareholders to assume more risk and to have more patience than investing in the securities of larger, more established companies. LARGE POSITIONS Even though the Funds are diversified, the Funds 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 Funds' net asset value. These large positions may represent a significant part of a company's outstanding stock, and sales by the Funds could adversely affect stock prices. The Funds' returns may be more volatile than those of a less concentrated portfolio. LONG TERM OUTLOOK AND PROJECTIONS The Funds are 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. INTERNET AND INFORMATION TECHNOLOGY Internet-related and information technology companies as well as companies propelled by new technologies may present the risk of rapid change and product obsolescence and their successes may be difficult to predict for the long term. Some Internet-related companies may be newly formed and have limited operating history and experience. Internet-related companies may also be adversely affected by changes in governmental policies, competitive pressures, and changing demand. The securities of these companies may also experience significant price movements caused by disproportionate investor optimism or pessimism with little or no basis in the company's fundamentals or economic conditions. SECURITIES NOT PUBLICLY TRADED Securities that are not publicly traded may be difficult to sell, or may be subject to agreements that prohibit or limit sale or other disposition. This investment approach requires a long-term outlook and may involve more risk. PERFORMANCE The information below shows the Funds' annual returns and their long term performance. The information provides some indications of the risks of investing in the Funds. The bar charts show you how the performance for each Fund has varied from year to year. The tables compare the performance of the Funds over time to relevant indexes. How the Funds have performed in the past is not necessarily an indication of how they - -------------------------------------------------------------------------------- 6 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT THE FUNDS - -------------------------------------------------------------------------------- will perform in the future. The annual report contains additional performance information which is available upon request without charge by writing or calling the Funds 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. BARON ASSET FUND Annual returns for periods ended 12/31 of each year - -------------------------------------------------------------------------------- 33.9% 4.3% 16.3% 0.4% -10.1% -20.0% 27.3% 27.1% 12.5% 14.6% - -------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Best Quarter: 12/31/98: 26.6% Worst Quarter: 09/30/98: -23.4% BARON GROWTH FUND Annual returns for periods ended 12/31 of each year - -------------------------------------------------------------------------------- 31.1% 0.1% 44.7% -4.6% 12.7% -12.3% 31.7% 26.6% 5.7% 15.5% - -------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Best Quarter: 12/31/99: 23.8% Worst Quarter: 09/30/98: -22.1% - -------------------------------------------------------------------------------- www.BaronFunds.com 7 INFORMATION ABOUT THE FUNDS BARON FUNDS(r) - -------------------------------------------------------------------------------- BARON SMALL CAP FUND Annual returns for periods ended 12/31 of each year - -------------------------------------------------------------------------------- 2.2% 70.8% -17.5% 5.2% -9.7% 38.8% 22.2% 8.3% 11.8% - -------------------------------------------------------------------------------- 1998 1999 2000 2001 2002 2003 2004 2004 2005 Best Quarter: 12/31/99: 34.6% Worst Quarter: 09/30/98: -28.1% BARON iOPPORTUNITY FUND Annual returns for periods ended 12/31 of each year - -------------------------------------------------------------------------------- -3.6% -29.0% 73.8% 25.6% 7.0% 12.1% - -------------------------------------------------------------------------------- 2001 2002 2003 2004 2005 2006 Best Quarter: 12/31/01: 43.3% Worst Quarter: 09/30/01: -37.9% - -------------------------------------------------------------------------------- 8 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT THE FUNDS - -------------------------------------------------------------------------------- BARON FIFTH AVENUE GROWTH FUND Annual returns for periods ended 12/31 of each year - -------------------------------------------------------------------------------- 8.5% 10.2% - -------------------------------------------------------------------------------- 2005 2006 Best Quarter: 12/31/06: 7.3% Worst Quarter: 03/31/05: -4.7% AVERAGE ANNUAL TOTAL RETURNS (for periods ended 12/31/06) The following table shows the Funds' average annual returns (before and after taxes) and the change in value of a broad- based market index over various periods ended December 31, 2006. The index information is intended to permit you to compare each 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 a Fund. A Fund's "RETURN AFTER TAXES ON DISTRIBUTIONS" shows the effect of taxable distributions (dividends and capital gain distributions), but assumes that you still hold the Fund shares at the end of the period and so do not have any taxable gain or loss on your investment in shares of the Fund. A Fund's "RETURN AFTER TAXES ON DISTRIBUTIONS & 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 specified 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 & 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. - -------------------------------------------------------------------------------- www.BaronFunds.com 9 INFORMATION ABOUT THE FUNDS BARON FUNDS(r) - --------------------------------------------------------------------------------
Since 1 year 5 years 10 years Inception - ----------------------------------------------------------------------------------------------------------------- BARON ASSET FUND (Inception date: 6-12-87) - ----------------------------------------------------------------------------------------------------------------- Return before taxes 14.64% 10.80 9.35% 13.31% - ----------------------------------------------------------------------------------------------------------------- Return after taxes on distributions 13.37% 10.06% 8.62% 12.49% - ----------------------------------------------------------------------------------------------------------------- Return after taxes on distributions & sale of Fund shares 11.17% 9.28% 8.07% 11.91% - ----------------------------------------------------------------------------------------------------------------- S&P 500 (reflects no deductions for fees, expenses or taxes)* 15.80% 6.17% 8.40% 10.79% - ----------------------------------------------------------------------------------------------------------------- Russell 2000 (reflects no deductions for fees, expenses or taxes)* 18.37% 11.39% 9.44% 10.05% - ----------------------------------------------------------------------------------------------------------------- Russell MidCap Growth (reflects no deductions for fees, expenses or taxes)* 10.66% 8.22% 8.62% 10.62%^ - ----------------------------------------------------------------------------------------------------------------- Russell 2500 (reflects no deductions for fees, expenses or taxes)* 16.16% 12.19% 11.26% 11.78% - ----------------------------------------------------------------------------------------------------------------- BARON GROWTH FUND (Inception date: 12-31-94) - ----------------------------------------------------------------------------------------------------------------- Return before taxes 15.50% 12.30% 13.81% 17.75% - ----------------------------------------------------------------------------------------------------------------- Return after taxes on distributions 14.65% 11.99% 13.11% 17.05% - ----------------------------------------------------------------------------------------------------------------- Return after taxes on distributions & sale of Fund shares 11.18% 10.76% 12.14% 16.00% - ----------------------------------------------------------------------------------------------------------------- Russell 2000 (reflects no deductions for fees, expenses or taxes) 18.37% 11.39% 9.44% 11.49% - ----------------------------------------------------------------------------------------------------------------- S&P 500 (reflects no deductions for fees, expenses or taxes) 15.80% 6.17% 8.40% 11.74% - ----------------------------------------------------------------------------------------------------------------- BARON SMALL CAP FUND (Inception date: 09-30-97) - ----------------------------------------------------------------------------------------------------------------- Return before taxes 11.83% 13.16% 12.19% - ----------------------------------------------------------------------------------------------------------------- Return after taxes on distributions 9.83% 12.44% 11.74% - ----------------------------------------------------------------------------------------------------------------- Return after taxes on distributions & sale of Fund shares 10.32% 11.45% 10.85% - ----------------------------------------------------------------------------------------------------------------- Russell 2000 (reflects no deductions for fees, expenses or taxes) 18.37% 11.39% 7.47% - ----------------------------------------------------------------------------------------------------------------- S&P 500 (reflects no deductions for fees, expenses or taxes) 15.80% 6.17% 6.09% - ----------------------------------------------------------------------------------------------------------------- BARON iOPPORTUNITY FUND (Inception date: 02-29-00) - ----------------------------------------------------------------------------------------------------------------- Return before taxes 12.14% 13.22% 1.32% - ----------------------------------------------------------------------------------------------------------------- Return after taxes on distributions 12.14% 13.22% 1.30% - ----------------------------------------------------------------------------------------------------------------- Return after taxes on distributions & sale of Fund shares 7.89% 11.60% 1.12% - ----------------------------------------------------------------------------------------------------------------- NASDAQ Composite (reflects no deductions for fees expenses or taxes) 9.52% 4.37% -9.27% - ----------------------------------------------------------------------------------------------------------------- S&P 500 (reflects no deductions for fees, expenses or taxes) 15.80% 6.17% 2.18% - ----------------------------------------------------------------------------------------------------------------- Baron Fifth Avenue Growth Fund (Inception date: 04-30-04) - ----------------------------------------------------------------------------------------------------------------- Return before taxes 10.17% 10.69% - ----------------------------------------------------------------------------------------------------------------- Return after taxes on distributions 10.17% 10.69% - ----------------------------------------------------------------------------------------------------------------- Return after taxes on distributions & sale of Fund shares 6.61% 9.19% - ----------------------------------------------------------------------------------------------------------------- S&P 500 (reflects no deductions for fees, expenses or taxes) 15.80% 11.74% - -----------------------------------------------------------------------------------------------------------------
* The Adviser believes that the Russell 2000 and the Russell 2500 are no longer appropriate comparison indexes for Baron Asset Fund (BAF). The Russell 2000 measures the performance of small companies and the Russell 2500 of small and mid-sized companies. Prior to February 15, 2007, BAF's strategy was to invest in small- and mid-sized growth companies. Since then, BAF's investment strategy has shifted to mid-sized companies. The Adviser believes that the Russell MidCap Growth is more representative of the Fund's current investment objective. We will continue to provide the comparison to the smaller cap indexes until March 31, 2008. ^ For the period 06/30/87 to 12/31/06. - -------------------------------------------------------------------------------- 10 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT THE FUNDS - -------------------------------------------------------------------------------- The Russell 2000 is a widely recognized unmanaged index of smaller companies. The Russell 2500 is an unmanaged index of small to medium companies. The Russell MidCap Growth is an unmanaged index of those Russell MidCap Mid-sized companies that are classified as growth companies. The NASDAQ Composite is an unmanaged index that tracks the performance of market-value weighted common stocks listed on NASDAQ. The S&P 500 is an unmanaged index that measures the performance of larger cap equities. The Funds may also compare their performance to the performance of their respective peer groups, as published by Morningstar and Lipper. FUND EXPENSES The table below describes the fees and expenses that you would pay if you buy and hold shares of the Funds. Annual Fund Operating Expenses (Expenses that are deducted from a Fund's assets)
TOTAL DISTRI- ANNUAL MANAGE- BUTION FUND MENT (12b-1) OTHER EXPENSE OPERATING FEE FEE* EXPENSES WAIVERS EXPENSES - ---------------------------------------------------------------------------------------------------- BARON ASSET FUND 1.0% 0.25% 0.08% 0% 1.33% - ---------------------------------------------------------------------------------------------------- BARON GROWTH FUND 1.0% 0.25% 0.06% 0% 1.31% - ---------------------------------------------------------------------------------------------------- BARON SMALL CAP FUND 1.0% 0.25% 0.08% 0% 1.33% - ---------------------------------------------------------------------------------------------------- BARON iOPPORTUNITY FUND 1.0% 0.25% 0.20% 0% 1.45%** - ---------------------------------------------------------------------------------------------------- BARON FIFTH AVENUE GROWTH FUND 1.0% 0.25% 0.14% 0% 1.39%** - ----------------------------------------------------------------------------------------------------
+ Based on the fiscal year ended September 30, 2006. * Due to the payment of Rule 12b-1 fees, long-term shareholders may indirectly pay more than the maximum permitted front- end sales charge. ** The Adviser has contractually agreed to reimburse certain expenses of BARON iOPPORTUNITY FUND and BARON FIFTH AVENUE GROWTH FUND so that their total operating expenses are limited to 1.50% and 1.40% of average net assets, respectively. The advisory contracts are renewable annually. BARON iOPPORTUNITY FUND imposes a short-term trading fee of 1% on redemptions of shares held for less than 6 months. - -------------------------------------------------------------------------------- www.BaronFunds.com 11 INFORMATION ABOUT THE FUNDS BARON FUNDS(r) - -------------------------------------------------------------------------------- Example This example is intended to help you compare the cost of investing in the Funds 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 Funds' operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: YEAR 1 3 5 10 - -------------------------------------------------------------------------------- BARON ASSET FUND $135 $421 $729 $1,601 - -------------------------------------------------------------------------------- BARON GROWTH FUND $133 $415 $718 $1,579 - -------------------------------------------------------------------------------- BARON SMALL CAP FUND $135 $421 $729 $1,601 - -------------------------------------------------------------------------------- BARON iOPPORTUNITY FUND $148 $459 $792 $1,735 - -------------------------------------------------------------------------------- BARON FIFTH AVENUE GROWTH FUND $142 $440 $761 $1,669 - -------------------------------------------------------------------------------- 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" on page 21 and "How to Redeem Shares" on page 26 of this prospectus.) The 12b-1 fee is paid to Baron Capital, Inc. for shareholder and distribution services. Because the fees are paid out of the Funds' assets on an ongoing basis, over time it will increase the cost of your investment and may cost you more than paying other types of sales charges. - -------------------------------------------------------------------------------- 12 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT THE FUNDS - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the Funds' 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 period, assuming you had reinvested all dividends and distributions. These financial highlights have been audited by PricewaterhouseCoopers LLP, the Funds' independent registered public accounting firm, whose report, along with the Funds' financial statements, is included in the annual report, which is available upon request. BARON ASSET FUND
Fiscal Year Ended September 30 2006 2005 2004 2003 2002 Net Asset Value, Beginning of Year $ 56.52 $ 47.89 $ 40.05 $ 35.65 $ 40.22 - -------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Loss (0.27) (0.46) (0.43) (0.46) (0.55) Net Realized and Unrealized Gains on Investments 6.64 12.08 8.27 6.04 0.05 - -------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 6.37 11.62 7.84 5.58 (0.50) - -------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS Dividends from Net Investment Income 0.00 0.00 0.00 0.00 0.00 Distributions from Net Realized Gains (2.81) (2.99) 0.00 (1.18) (4.07) - -------------------------------------------------------------------------------------------------------------------- Total Distributions (2.81) (2.99) 0.00 (1.18) (4.07) - -------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Year $ 60.08 $ 56.52 $ 47.89 $ 40.05 $ 35.65 ==================================================================================================================== TOTAL RETURN 11.54% 25.21% 19.58% 16.11% (2.54%) ==================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets (in millions), End of Year $3,365.6 $2,687.4 $2,002.4 $1,957.2 $2,055.2 Ratio of Total Expenses to Average Net Assets 1.33% 1.34% 1.34% 1.34% 1.35% Less: Ratio of Interest Expense to Average Net Assets 0.00% 0.00% 0.00% 0.00% (0.02%) - -------------------------------------------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 1.33% 1.34% 1.34% 1.34% 1.33% - -------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Loss to Average Net Assets (0.49%) (0.91%) (0.90%) (1.14%) (1.16%) Portfolio Turnover Rate 21.87% 11.47% 19.57% 27.95% 6.01% - --------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- www.BaronFunds.com 13 INFORMATION ABOUT THE FUNDS BARON FUNDS(r) - -------------------------------------------------------------------------------- BARON GROWTH FUND
Fiscal Year Ended September 30 2006 2005 2004 2003 2002 Net Asset Value, Beginning of Year $ 45.96 $ 38.92 $ 32.65 $ 26.96 $ 27.18 - ----------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Loss (0.29) (0.29) (0.30) (0.25) (0.23) Net Realized and Unrealized Gains on Investments 3.61 7.33 6.57 5.94 1.65 - ----------------------------------------------------------------------------------------------------------------- Total from Investment Operations 3.32 7.04 6.27 5.69 1.42 - ----------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS Dividends from Net Investment Income 0.00 0.00 0.00 0.00 0.00 Distributions from Net Realized Gains (2.05) 0.00 0.00 0.00 (1.64) - ----------------------------------------------------------------------------------------------------------------- Total Distributions (2.05) 0.00 0.00 0.00 (1.64) - ----------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Year $ 47.23 $ 45.96 $ 38.92 $ 32.65 $ 26.96 ================================================================================================================= TOTAL RETURN 7.36% 18.09% 19.20% 21.11% 5.02% ================================================================================================================= RATIOS/SUPPLEMENTAL DATA Net Assets (in millions), End of Year $5,315.8 $5,005.1 $3,135.6 $2,185.4 $1,030.3 Ratio of Expenses to Average Net Assets 1.31% 1.31% 1.33% 1.36% 1.35% - ----------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Loss to Average Net Assets (0.61%) (0.73%) (0.89%) (1.11%) (1.02%) Portfolio Turnover Rate 21.27% 15.50% 27.15% 32.63% 18.31% - -----------------------------------------------------------------------------------------------------------------
BARON SMALL CAP FUND
Fiscal Year Ended September 30 2006 2005 2004 2003 2002 Net Asset Value, Beginning of Year $ 23.08 $ 19.18 $ 17.26 $ 13.73 $12.69 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Loss (0.18) (0.10) (0.15) (0.11) (0.14) Net Realized and Unrealized Gains on Investments 1.43 4.55 2.07 4.02 1.18 - ----------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.25 4.45 1.92 3.91 1.04 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS Dividends from Net Investment Income 0.00 0.00 0.00 0.00 0.00 Distributions from Net Realized Gains (0.74) (0.55) 0.00 (0.38) 0.00 - ----------------------------------------------------------------------------------------------------------- Total Distributions (0.74) (0.55) 0.00 (0.38) 0.00 - ----------------------------------------------------------------------------------------------------------- Net Asset Value, End of Year $ 23.59 $ 23.08 $ 19.18 $ 17.26 $13.73 =========================================================================================================== TOTAL RETURN 5.52% 23.56% 11.12% 29.20% 8.20% =========================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets (in millions), End of Year $2,921.7 $2,828.6 $1,782.1 $1,210.5 $719.1 Ratio of Expenses to Average Net Assets 1.33% 1.33% 1.33% 1.36% 1.36% - ----------------------------------------------------------------------------------------------------------- Ratio of Net Investment Loss to Average Net Assets (0.73%) (0.48%) (0.88%) (0.87%) (0.97%) Portfolio Turnover Rate 39.99% 24.68% 32.92% 30.29% 55.07% - -----------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 14 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT THE FUNDS - -------------------------------------------------------------------------------- BARON iOPPORTUNITY FUND
Fiscal Year Ended September 30 2006 2005 2004 2003 2002 Net Asset Value, Beginning of Year $ 9.16 $ 7.58 $ 6.48 $ 3.63 $ 4.09 - -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Loss (0.03) (0.09) (0.10) (0.05) (0.06) Net Realized and Unrealized Gains (Losses) on Investments 0.92 1.66 1.18 2.89 (0.40) - -------------------------------------------------------------------------------------------------------------- Total from Investment Operations 0.89 1.57 1.08 2.84 (0.46) - -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS Dividends from Net Investment Income 0.00 0.00 0.00 0.00 0.00 Distributions from Net Realized Gains 0.00 0.00 0.00 0.00 0.00 - -------------------------------------------------------------------------------------------------------------- Total Distributions 0.00 0.00 0.00 0.00 0.00 - -------------------------------------------------------------------------------------------------------------- Redemption Fees Added to Paid in Capital 0.00+ 0.01 0.02 0.01 0.00+ - -------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Year $10.05 $ 9.16 $ 7.58 $ 6.48 $ 3.63 ============================================================================================================== TOTAL RETURN 9.72% 20.84%^ 16.98%^ 78.51%^ (11.25%)^ ============================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets (in millions), End of Year $145.4 $145.7 $133.9 $109.3 $ 57.5 Ratio of Total Expenses to Average Net Assets 1.45% 1.52% 1.56% 1.67% 1.65% Less: Expense Reimbursement by Investment Adviser 0.00% (0.02%) (0.06%) (0.17%) (0.15%) - -------------------------------------------------------------------------------------------------------------- Ratio of Net Expenses to Average Net Assets 1.45% 1.50% 1.50% 1.50% 1.50% - -------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Loss to Average Net Assets (0.26%) (1.01%) (1.25%) (1.18%) (1.20%) Portfolio Turnover Rate 67.25% 83.64% 86.35% 89.72% 96.41% - --------------------------------------------------------------------------------------------------------------
+ Less than $0.01 per share. ^ The total returns would have been lower had certain expenses not been reduced during the periods shown. BARON FIFTH AVENUE GROWTH FUND
Fiscal Year Ended September 30 2006 2005 2004* Net Asset Value, Beginning of Year $ 11.56 $ 9.89 $10.00 - --------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Loss (0.02) (0.05) (0.02) Net Realized and Unrealized Gains (Losses) on Investments 0.68 1.72 (0.09) - --------------------------------------------------------------------------------------------- Total from Investment Operations 0.66 1.67 (0.11) - --------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS Dividends from Net Investment Income 0.00 0.00 0.00 Distributions from Net Realized Gains 0.00 0.00 0.00 - --------------------------------------------------------------------------------------------- Total Distributions 0.00 0.00 0.00 - --------------------------------------------------------------------------------------------- Net Asset Value, End of Year $ 12.22 $11.56 $ 9.89 ============================================================================================= TOTAL RETURN 5.71% 16.89%^ (1.10%)^+ ============================================================================================= RATIOS/SUPPLEMENTAL DATA Net Assets (in millions), End of Year $ 123.3 $ 96.5 $ 49.3 Ratio of Total Expenses to Average Net Assets 1.39% 1.49% 1.67%** Less: Expense Reimbursement by Investment Adviser 0.00% (0.09%) (0.27%)** - --------------------------------------------------------------------------------------------- Ratio of Net Expenses to Average Net Assets 1.39% 1.40% 1.40%** - --------------------------------------------------------------------------------------------- Ratio of Net Investment Loss to Average Net Assets (0.16%) (0.58%) (0.79%)** Portfolio Turnover Rate 105.77% 46.71% 7.58%+ - ---------------------------------------------------------------------------------------------
* For the period April 30, 2004 (Commencement of Operations) to September 30, 2004. ** Annualized. + Not Annualized. ^ The total returns would have been lower had certain expenses not been reduced during the periods shown. - -------------------------------------------------------------------------------- www.BaronFunds.com 15 INFORMATION ABOUT THE FUNDS BARON FUNDS(r) - -------------------------------------------------------------------------------- OTHER INVESTMENT STRATEGIES CASH POSITION When the Adviser determines that opportunities for profitable investments are limited or that adverse market conditions exist, all or a portion of the Funds' assets may be invested in cash or cash equivalents such as money market instruments, which include U.S. Government securities, certificates of deposit, short-term investment grade corporate bonds and other short-term debt instruments, and repurchase agreements. When a Fund's investments in cash or similar investments increase its investment objectives may not be achieved. BARON ASSET FUND may borrow up to 5% of its net assets for extraordinary or emergency temporary investment purposes or to meet redemption requests which might otherwise require an untimely sale of portfolio securities. BARON GROWTH FUND, BARON SMALL CAP FUND, BARON iOPPORTUNITY FUND and BARON FIFTH AVENUE GROWTH FUND may borrow up to 30% of the value of their respective total assets, including the amount borrowed, as of the time the borrowing is made, for temporary, emergency or other purposes. DEBT SECURITIES The Funds may invest in debt securities which may include notes, bonds, debentures and money market instruments. Debt securities represent an obligation of the issuer to repay a loan of money to it, often with interest. The debt securities in which the Funds may invest include rated and unrated securities and convertible instruments. There is no minimum rating for the debt securities that may be purchased for those Funds. The Funds rely on the Adviser's assessment of the issuer's securities and do not use independent ratings organizations. ILLIQUID SECURITIES BARON ASSET FUND may invest up to 10%, and BARON GROWTH FUND, BARON SMALL CAP FUND, BARON iOPPORTUNITY FUND and BARON FIFTH AVENUE GROWTH FUND may invest up to 15%, of their respective net assets in securities that are illiquid. An illiquid security is one that cannot be disposed of in the ordinary course of business within seven days. SPECIAL SITUATIONS The Funds may invest in "special situations." A special situation arises when, in the opinion of the Adviser, the securities of a company will be recognized and appreciate in value due to a specific anticipated development at that company. Such developments might include a new product, a management change, an acquisition or a technological advancement. FOREIGN SECURITIES The Funds may invest without limitation in the securities of foreign issuers in U.S. denominated form known as American Depository Receipts. They may also invest in foreign denominated form (Global Depository Receipts or European Depository Receipts), up to 10% of the respective total assets of BARON ASSET FUND, BARON GROWTH FUND and BARON SMALL CAP FUND and up to 25% of the total assets of BARON iOPPORTUNITY FUND and BARON FIFTH AVENUE GROWTH FUND. OPTIONS AND DERIVATIVES BARON ASSET FUND may write (sell) covered call options or purchase put options on equity and/or debt securities. BARON GROWTH FUND, BARON SMALL - -------------------------------------------------------------------------------- 16 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT THE FUNDS - -------------------------------------------------------------------------------- CAP FUND, BARON iOPPORTUNITY FUND and BARON FIFTH AVENUE GROWTH FUND may sell put options and covered call options and purchase put and call options on equity and/or debt securities. A call option gives the purchaser of the options the right to buy, and when exercised obligates the writer to sell, the underlying security at the exercise price. A put option gives the purchaser of the option the right to sell, and when exercised obligates the writer to buy, the underlying security at the exercise price. The options may be listed or over-the-counter. The Funds may also enter into equity swap agreements and other derivative investments. OTHER STRATEGIES The Funds have additional investment strategies and restrictions that govern their activities. For a list of these restrictions and more information about the investment strategies, please see the section "Investment Goals, Strategies and Risks" in the Statement of Additional Information. Those that are identified as "fundamental" may only be changed with shareholder approval, while the others may be changed by the Board of Trustees. ADDITIONAL RISK FACTORS OPTIONS AND DERIVATIVES Options may fail as hedging techniques in cases where the price movements of the securities underlying the options do not follow the price movements of the portfolio securities subject to the hedge. Gains on investments in options and derivatives depend on the Adviser's ability to anticipate correctly the direction of stock prices, interest rates, and other economic factors. Options may lose all their value in a relatively short period of time. The dealer who takes the other side of a derivative transaction could fail. Where a liquid secondary market does not exist, the Fund would likely be unable to control losses by closing its position. DEBT SECURITIES Lower rated securities may have a higher yield, and the potential for a greater return than investment grade securities, but may also have more risk. Lower rated securities are generally meant for longer-term investing and may be subject to certain risks with respect to the issuing entity and to market fluctuations. See the Statement of Additional Information for more information. The Adviser will also evaluate the securities and the ability of the issuers to pay interest and principal. With lower rated debt securities, a Fund's ability to achieve its investment objective may be more dependent on the Adviser's credit analysis than might be the case with higher rated securities. The market price and yield of lower rated securities are generally more volatile than those of higher rated securities. Factors adversely affecting the market price and yield of these securities will adversely affect the Fund's net asset value. The trading market for these securities may be less liquid than that of higher rated securities. Companies that issue lower rated securities may be highly leveraged or may have unstable earnings, and consequently the risk of the investment in the securities of such issuers may be greater than with higher rated securities. - -------------------------------------------------------------------------------- www.BaronFunds.com 17 INFORMATION ABOUT THE FUNDS BARON FUNDS(r) - -------------------------------------------------------------------------------- The interest bearing features of debt securities carry a promise of income flow, but the price of the securities are inversely affected by changes in interest rates and are therefore subject to the risk of market price fluctuations. The market values of debt securities may also be affected by changes in the credit ratings or financial condition of the issuers. FOREIGN SECURITIES Investments in foreign securities may have greater risks than investments in domestic securities and such risks may be unrelated to the price of the security. Such risks include currency exchange risks, as the value of local currency relates to the U.S. dollar. The value of a foreign security may be worth less in U.S. Dollars even if the security increases in value in its own country due to declines in exchange rates or changes in U.S. or foreign laws. Foreign investments are also subject to political and economic risks, particularly in countries with unstable governments, different legal systems, and limited industries. In some countries there may be the risk of governments seizing the assets or operations of a company. Further, there may be less governmental supervision of foreign markets, including non-standardized financial reporting and less publicly available information. There is also the risk that the foreign securities may be less liquid, there may be delays in settlement of purchase and sale transactions, and there may not be adequate protection to ensure the other side will complete a transaction. CONVERTIBLE SECURITIES Since convertible securities combine the investment characteristics of both bonds and common stocks, the Funds' convertible securities investments absorb the market risks of both stocks and bonds. The combination does, however, make the investment less sensitive to interest rate changes than straight bonds of comparable maturity and quality and usually less volatile than common stocks. Because of these factors, convertible securities are likely to perform differently than broadly-based measures of the stock and bond markets. BORROWINGS To the extent a Fund borrows, it must maintain continuous asset coverage of 300% of the amount borrowed. Such borrowing has special risks. Any amount borrowed will be subject to interest costs that may or may not exceed the appreciation of the securities purchased. ILLIQUID SECURITIES The absence of a trading market could make it difficult to ascertain a market value for illiquid positions. A Fund's net asset value could be adversely affected if there were no ready buyer at an acceptable price at the time the Fund decided to sell. Time-consuming negotiations and expenses could occur in disposing of the shares. SPECIAL SITUATIONS Investments in special situations have the risk that the anticipated development does not occur or does not attract the expected attention. - -------------------------------------------------------------------------------- 18 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT THE FUNDS - -------------------------------------------------------------------------------- MANAGEMENT OF THE FUNDS The Board of Trustees oversees the management of the Funds. A list of the Board members and the Funds' officers may be found in the Statement of Additional Information. BAMCO, Inc., the Adviser, is located at 767 Fifth Avenue, New York, New York 10153, and is responsible for portfolio management. It is a subsidiary of Baron Capital Group, Inc. ("BCG"). Baron Capital, Inc. ("Baron Capital" or "Distributor"), a registered broker-dealer and the distributor of the shares of the Funds, 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. Linda S. Martinson is the president and chief operating officer of the Adviser and BCG (and its subsidiaries) and has been with the Adviser and BCG since 1983. The portfolio managers for the Funds are senior members of BAMCO's research team, and are responsible for stock selection and the portfolio structure. Mr. Baron has been the portfolio manager of BARON ASSET FUND and BARON GROWTH FUND since their inception. He has managed money for others since 1975. As of July 23, 2003, Andrew Peck, is a co-portfolio manager of BARON ASSET FUND. Mr. Peck has worked at Baron Funds as an analyst since February of 1998. Before that he was an analyst at a large brokerage firm. Mr. Baron and Mr. Peck collaborate on all investment decisions. Differences of opinion are discussed until both portfolio managers agree on a decision. Cliff Greenberg has been the portfolio manager of BARON SMALL CAP FUND since its inception. Mr. Greenberg joined Baron Funds in January of 1997. He was a general partner and portfolio manager at HPB Associate, L.P., an investment partnership from January 1990 until he joined Baron Funds. As of March 3, 2006, BARON iOPPORTUNITY FUND is managed by Michael Lippert. Since December 2001, Mr. Lippert has been an analyst for the Baron iOpportunity Fund. From April 2001 to December 2001, Mr. Lippert was a research analyst and general counsel for JLF Asset Management, and from 2000 to 2001 he was a partner at Baker & Botts. As of May 1, 2006, BARON FIFTH AVENUE GROWTH FUND is managed by Randall Haase. Mr. Haase was an investment manager at Duquesne Capital Management, LLC, a large hedge fund, from 2000 to 2005, and from 1989 to 2000 worked at Alliance Capital Management, L.P. as a portfolio manager, from 1993 to 2000, and as an analyst from 1989 to 1993. Each of the portfolio managers named above may serve as portfolio managers or analysts for other products offered by affiliates that could conflict with their responsibilities to the Funds for which they are portfolio managers. The Funds' Statement of Additional Information provides additional information about the Portfolio Manager's compensation, other accounts managed by the Portfolio Managers, and each Portfolio Manager's ownership of securities in the Fund. For its services, the Adviser receives a fee payable monthly from the assets of each Fund equal to 1% per annum of the respective average daily net asset value of BARON ASSET FUND, BARON GROWTH FUND, BARON SMALL CAP FUND and BARON iOPPORTUNITY FUND. - -------------------------------------------------------------------------------- www.BaronFunds.com 19 INFORMATION ABOUT THE FUNDS BARON FUNDS(r) - -------------------------------------------------------------------------------- BARON FIFTH AVENUE GROWTH FUND pays the Adviser 1% for assets under $1 billion, 0.95% for assets greater that $1 billion but less than $2 billion, 0.90% for assets over $2 billion but less than $3 billion, 0.85% for assets over $3 billion but less than $4 billion, and 0.80% for assets greater than $4 billion. A discussion regarding the basis for the approval by the Board of Trustees of the investment advisory contract of each Fund is available in the Fund's Annual Report to Shareholders for the fiscal year ending September 30, 2006. 12B-1 PLAN The Funds have adopted a plan under Rule 12b-1 of the Investment Company Act of 1940 that allows the Funds to pay distribution fees for the sale and distribution of their 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 fees are paid out of the Funds' 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. Baron Capital, a registered broker-dealer and a member of the NASD, is an affiliate of the Adviser and serves as the distributor of the Funds. The 12b-1 plan authorizes the Funds to pay Baron Capital a distribution fee equal on an annual basis to 0.25% of each Fund's average daily net assets. 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 a 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 Funds' shares or the amount the Funds receive as proceeds from such sales. Subject to approval by the Board of Trustees, the Funds may pay to financial intermediaries out of the applicable Fund's assets (in addition to 12b-1 payments), fees for servicing shareholder accounts. Such financial intermediaries would have omnibus accounts with the Funds' 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 Funds to such financial intermediaries shall not exceed the amount each 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 Funds have made no such payments. Revenue sharing payments may be made to brokers, dealers and other financial intermediaries that provide services to the Funds or to shareholders of the Funds, 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 - -------------------------------------------------------------------------------- 20 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT YOUR INVESTMENT - -------------------------------------------------------------------------------- inclusion of the Funds 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. HOW YOUR SHARES ARE PRICED The purchase or sale price for your shares is the particular Fund's net asset value per share ("NAV"), which is generally calculated as of the close of 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 Baron Funds' 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 Funds' transfer agent. The Funds have agreements with certain financial institutions which authorize the financial institutions to accept orders or designate third parties to accept orders on behalf of the Funds. 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 Funds' 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 Funds 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 Funds 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 Funds will use the NASDAQ Official Closing Price. HOW TO PURCHASE SHARES You may purchase shares of the Funds directly without paying a sales charge. Please use the Funds' "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 - -------------------------------------------------------------------------------- www.BaronFunds.com 21 INFORMATION ABOUT YOUR INVESTMENT BARON FUNDS(r) - -------------------------------------------------------------------------------- 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 will be returned to you and your investment will not be established. The minimum initial investment is $2,000 per Fund unless you choose to invest through the Baron Automatic Investment Plan (see page 24 of this prospectus). At the sole discretion of the Adviser, the initial investment minimum may be waived for certain investors. Certain financial institutions and administrators which act as intermediaries for investors in the Funds may have systems that are not able to enforce the Funds' minimums. There is no minimum for subsequent purchases except for purchases made through the Funds' website (see page 29-30 of this prospectus). The Funds may reject any proposed purchase. Please see pages 25-26 of this prospectus for the Funds' policy on short term trading. Any person or entity with a valid U.S. tax identification number can invest in the Funds. Refer to the Funds' "Anti-Money Laundering Regulations" below for a list of required information. Please call the Funds' transfer agent at 1-800-442-3814, if you have any questions. ANTI-MONEY LAUNDERING REGULATIONS As part of the Funds' legal responsibility to fight the funding of terrorism and money laundering activities, the Funds require 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 Funds 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 Funds will not process your investment until all required information has been provided. You will receive the NAV of the Fund(s) in which you are investing on the date that all required information has been provided to the Funds' transfer agent. United Missouri Bank of Kansas City, N.A. will hold your investment check for fifteen days or until your check clears to further prevent any fraudulent transactions, and until all required anti-money laundering 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 Funds' representatives will attempt to collect any missing information by contacting you directly. If you purchase the Baron Funds through a broker/dealer or other financial institution, such broker/dealer or other financial institution will be responsible for collecting such information. If the application is complete, the Funds will process the investment and will take steps to verify your identity. The Funds may request additional information or documents, if needed, to verify an identity. If the Funds cannot verify your information, the account will be closed and you will receive proceeds based on the next calculated NAV of the Fund(s) in which you invested. If the Funds deem it necessary, and upon written notice to you, the payment of redemption proceeds to you may be suspended to comply with the - -------------------------------------------------------------------------------- 22 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT YOUR INVESTMENT - -------------------------------------------------------------------------------- anti-money laundering regulations applicable to the Funds. The Funds 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. 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 by regular mail with your check payable to BARON FUNDS 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 EACH FUND. Checks must be payable in U.S. dollars and must be drawn on a U.S. bank. Third party checks, starter 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 in which Baron Fund the investment should go, along with your additional investment check. Please note that any investment funded by check will be subject to a fifteen day hold or until the check clears, to prevent any fraudulent transaction. Send it to either the regular or overnight address. By Wire You can make your initial or additional investments in the Funds by wire. To do so: (1) contact the Funds' 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. - -------------------------------------------------------------------------------- www.BaronFunds.com 23 INFORMATION ABOUT YOUR INVESTMENT BARON FUNDS(r) - -------------------------------------------------------------------------------- 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 Baron Funds by telephone, unless you specifically declined either of these options on your account application, by 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 pages 28-29 of this prospectus for additional information on exchanges. By choosing this option to make a purchase, you authorize Baron Funds 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 website by going to www.BaronFunds.com/openaccount. For important information about Internet purchases, see "Special Information about Baron Funds Website" on pages 29-30 of this prospectus. You may add to an existing account through the Baron Funds 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 The Baron Automatic Investment Plan (the "Plan") is an automatic investment plan offered by the Funds. 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 Funds or continuing to invest in the Funds. If your initial investment is greater than $2,000 and you wish to utilize the Baron Automatic Investment Plan for your account, please contact the Funds. To enroll in the Plan, complete the Enrollment Form (available by calling 1-800-99-BARON), attach a voided check and mail it with your application, either to Baron Funds , P.O. Box 219946, Kansas City, MO 64121-9946 or to the overnight address, Baron Funds , 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 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. - -------------------------------------------------------------------------------- 24 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT YOUR INVESTMENT - -------------------------------------------------------------------------------- THROUGH BROKER-DEALERS You may purchase shares of the Funds through a broker-dealer or other financial institution that may charge a transaction fee. If you purchase the shares directly from the Funds, no transaction fee is charged. The Funds also participate in no transaction fee programs with many national brokerage firms. POLICY REGARDING FREQUENT PURCHASES AND REDEMPTIONS OF FUND SHARES The Funds discourage any person who is not a long-term investor from investing in any of the Funds. The Board of Trustees of the Funds has adopted policies and procedures to minimize frequent purchases and redemptions of Fund shares by shareholders. The Funds believe 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 Funds. All of the Funds make investments for the long term, and have had relatively low turnover of the portfolios. See page 3 of this prospectus for more information about this long-term approach. The Adviser believes that frequent trading of Fund shares causes risks to the Funds and their 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 Funds. It may disrupt the Adviser's ability to manage the Funds in accordance with their objectives. This disadvantages other shareholders of the Funds 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 sized funds such as BARON iOPPORTUNITY FUND and BARON FIFTH AVENUE GROWTH FUND, because the frequent activity would have greater impact on each remaining longer-term shareholder. The risk to long- term shareholders of BARON SMALL CAP FUND and BARON GROWTH FUND are pronounced because these funds invest in smaller capitalization companies that have potentially less liquidity, therefore incurring greater trading-related transaction costs. 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 Funds. THE FUNDS PRESUME 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 Funds will consider evidence that rebuts that presumption including, in each 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. - -------------------------------------------------------------------------------- www.BaronFunds.com 25 INFORMATION ABOUT YOUR INVESTMENT BARON FUNDS(r) - -------------------------------------------------------------------------------- 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 Funds. BARON iOPPORTUNITY FUND imposes a 1% short term trading fee (see page 27 of this prospectus) to discourage frequent trading. The Funds will not allow exchanges for an investor the Adviser reasonably believes is not a long-term investor. Certain financial institutions and administrators which act as intermediaries for investors in the Funds may have systems that cannot accommodate the Funds' policy regarding frequent purchases and redemptions of Fund shares. In these limited instances, the Funds 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 Funds' policy regarding frequent purchases and redemptions even though such intermediary has systems that can accommodate the Funds' policy, the Funds may prohibit the intermediary from investing on behalf of any of its clients. The Funds' policies and procedures may be modified or terminated at any time. The Funds continue 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 Funds 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 or 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 request 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. A signature guarantee is required for redemptions of more than $50,000 in any quarter. See the "Special Information About Redemptions" section on pages 27-28 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. - -------------------------------------------------------------------------------- 26 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT YOUR INVESTMENT - -------------------------------------------------------------------------------- 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 must redeem by telephone in any quarter is $50,000 per Fund. 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). The Funds have the right to refuse a telephone-redemption if they believe it is advisable to do so. You will be responsible for any fraudulent telephone order as long as the Funds and their 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 Funds may have special redemption procedures with certain broker-dealers. SHORT-TERM TRADING FEE BARON iOPPORTUNITY FUND imposes a short-term trading fee on redemptions and exchanges of shares held for less than six months. The fee is 1% of the redemption value and is deducted from the redemption proceeds. The Fund uses the "first-in, first-out" method to determine the holding period, so if you bought shares on different days, the shares purchased first will be redeemed first for determining whether the fee applies. The fee is retained by the Fund for the benefit of the remaining shareholders to offset the administrative costs associated with processing redemptions and exchanges and to offset the portfolio transaction costs and facilitate portfolio management. The Fund will waive the fee for defined contribution plans. The Fund may waive the fee on redemptions if the Fund believes it is in the best interest of the Fund. Please check with your account representative before you purchase your shares to determine whether the fee waiver is applicable. SPECIAL INFORMATION ABOUT REDEMPTIONS If the amount to be redeemed in any quarter is greater than $50,000 per Fund, all of the signatures on a redemption request must be signature guaranteed. IF YOU HAVE CHANGED - -------------------------------------------------------------------------------- www.BaronFunds.com 27 INFORMATION ABOUT YOUR INVESTMENT BARON FUNDS(r) - -------------------------------------------------------------------------------- YOUR ADDRESS WITHIN 30 DAYS OF A REDEMPTION REQUEST, A SIGNATURE GUARANTEE IS REQUIRED FOR ANY AMOUNT OF REDEMPTION. A signature guarantee helps protect you and the Funds 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 per Fund, and if the proceeds are to be 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 Funds 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 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 1% of the net asset value of a Fund during any 90-day period, that 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 60 days, the Fund may close your account and send you the proceeds. The Funds 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 Funds' net assets or if the SEC permits such suspension. HOW TO EXCHANGE SHARES You may exchange all or a portion of your investment in one Baron 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 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. Baron iOpportunity Fund imposes a short term trading fee on redemptions and exchanges of shares held less than six - -------------------------------------------------------------------------------- 28 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT YOUR INVESTMENT - -------------------------------------------------------------------------------- months. The Funds reserve the right to cancel the exchange privilege of any investor who uses the exchange privilege excessively. The Funds may change or temporarily suspend the exchange privilege during unusual market conditions. See the Funds' "Policy Regarding Frequent Purchases and Redemptions of Fund Shares" on pages 25-26 of this prospectus. OTHER FEES The Funds charge a fee of $5 per year, with a maximum charge of $20, to provide historical information for an account. Please call the Funds' transfer agent at 1-800-442-3814 for additional information. SPECIAL INFORMATION ABOUT THE BARON FUNDS WEBSITE The Baron Funds website, www.BaronFunds.com, allows you to check your Fund account balance and historical transactions and make purchases of Fund shares or exchange into other Baron Funds . 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 Funds impose a limit of $25,000 per initial purchase transaction through the website. Subsequent purchase transactions may be for up to $250,000. The minimum initial investment is $2,000 per Fund 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 cannot be processed via the website. However, shareholders have the option to redeem by telephone (maximums apply) or via mail. Please be aware that the Internet is an unsecured, unstable, unregulated and unpredictable environment. Your ability to use the Funds' website for transactions is dependent on the Internet, equipment, software, systems, data and services provided by various vendors and third parties. While the Funds and their 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 Funds, the Adviser, their Distributor or their Transfer Agent are not liable for any delays, malfunctions or unauthorized interception or access to communications or account information. - -------------------------------------------------------------------------------- www.BaronFunds.com 29 INFORMATION ABOUT YOUR INVESTMENT BARON FUNDS(r) - -------------------------------------------------------------------------------- Neither the Funds, their 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 each Fund's portfolio holdings. More detailed information about this policy can be found in the Funds' Statement of Additional Information. QUARTERLY: The Funds post on the Funds' website, usually on the fifth business day after the quarter end, its top ten long positions. In addition, the Funds post 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 each Fund's net assets 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, each Fund posts on the website, usually on the tenth business day after month end, its ten largest long positions, stated as a percentage of net assets. 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 Funds' website. The website address is www.BaronFunds.com. The link to Fund information is http://www.BaronFunds.com/ourfunds. Holdings information for each Fund can be accessed from this link. The Funds 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 Chief Compliance Officer of the Fund determines that the release of such information is in the best interest of the Funds' shareholders, that there is a legitimate business purpose, and the person agrees in writing to maintain the confidentiality of the information and not to misuse the information. More detailed information about these arrangements can be found in the Funds' Statement of Additional Information. If the Funds inadvertently release the information prior to the dates stated above to any person, and there was no agreement as described, the Funds will promptly post the information to the website. A Fund may also release what the Funds' 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 Funds' portfolio holdings. "Consideration" includes any agreement to maintain assets in the Funds or in other investment companies or accounts managed by the Adviser. Any exceptions to any of the Funds' disclosure policies are reported to the Board. - -------------------------------------------------------------------------------- 30 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT YOUR INVESTMENT - -------------------------------------------------------------------------------- DISTRIBUTIONS AND TAXES Each Fund pays its shareholders dividends from its net investment income and distributes any net realized capital gains 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. GENERAL INFORMATION CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT In July 2007, State Street bank and Trust Company, One Lincoln Street, Boston MA 02111, will become the custodian for the Funds' cash and securities. The Funds are in the process of transferring their accounts form 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 Baron Funds . 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 Baron Funds' office at 1-800-99-BARON or 212-583- 2100. - -------------------------------------------------------------------------------- www.BaronFunds.com 31 INFORMATION ABOUT YOUR INVESTMENT BARON FUNDS(r) - -------------------------------------------------------------------------------- As a Massachusetts business trust, annual shareholder meetings are not required. The Funds send quarterly reports to shareholders. Pending legal proceedings, if any, are disclosed in the Statement of Additional Information. PRIVACY NOTICE The Baron Funds collect 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. 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 1-800-99-BARON. FOR MORE INFORMATION Investors who want more information about the Baron Funds may obtain the following documents free upon request at the numbers or address below. SHAREHOLDER REPORTS Additional information about the Funds' investments is available in the Funds' quarterly reports to Shareholders. In the Funds' annual report you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during the last fiscal year. - -------------------------------------------------------------------------------- 32 1-800-99BARON BARON FUNDS(r) INFORMATION ABOUT YOUR INVESTMENT - -------------------------------------------------------------------------------- Statement of Additional Information Additional information is also contained in the Statement of Additional Information dated June 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 Funds. To Obtain Information By telephone: Call 1-800-99-BARON (1-800-992-2766) By mail: Write to: BARON FUNDS(r) 767 Fifth Avenue New York, NY 10153 By e-mail: Send your request to: info@BaronFunds.com On the Internet: Text-only versions of Baron Funds documents can be viewed online 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. Ticker Symbols: Baron Asset Fund BARAX Baron Growth Fund BGRFX Baron Small Cap Fund BSCFX Baron iOpportunity Fund BIOPX Baron Fifth Avenue Growth Fund BFTHX SEC file number: 811-5032 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. - -------------------------------------------------------------------------------- www.BaronFunds.com 33 NOTES - -------------------------------------------------------------------------------- NOTES - -------------------------------------------------------------------------------- [PHOTOS] [PHOTOS] [REGISTERED CASTLE LOGO] B A R O N F U N D S 767 Fifth Avenue o New York, NY 10153 BARON ASSET FUND BARON GROWTH FUND BARON SMALL CAP FUND BARON IOPPORTUNITY FUND BARON FIFTH AVENUE GROWTH FUND 767 Fifth Avenue New York, New York 10153 (800) 99-BARON 212-583-2100 ____________________________ STATEMENT OF ADDITIONAL INFORMATION June 30, 2007 ____________________________ This Statement of Additional Information ("SAI") is not a prospectus. This SAI should be read in conjunction with the Funds' Prospectus, dated June 30, 2007, which may be obtained without charge by writing or calling the Funds at the address and telephone number above. The Funds' Prospectus is incorporated by reference into this SAI and the SAI has been incorporated by reference into the Funds' Prospectus. The Funds' audited financial statements are incorporated in to this SAI by reference to the Funds' 2006 Annual Financial Report. You may request a copy of the Annual Financial Report at no charge by writing or calling the Firm 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 ............ 3 Investment Goals, Strategies and Risks .... 3-8 3-6,16-18 MANAGEMENT THE FUNDS ....................... 11 19 Portfolio Managers ........................ 11 Board of Trustees and Officers ............ 13 Code of Ethics ............................ 2 Principal Holders of Shares ............... 22 Investment Adviser ........................ 23 19 Proxy Voting .............................. 23 BROKERAGE .................................. 25 DISTRIBUTOR ................................ 26 Distribution Plan ......................... 26 20 REDEMPTION AND PURCHASE OF SHARES .......... 29 21-30 NET ASSET VALUE ............................ 29 TAXES ...................................... 30 21 ORGANIZATION AND CAPITALIZATION ............ 30 OTHER INFORMATION .......................... 31 32-33 Calculations of Performance Data ...... 31 FUND HISTORY AND CLASSIFICATION EFFECTIVE OCTOBER 22, 2004, the name of BARON ASSET FUND (the "Trust") was changed to BARON INVESTMENT FUNDS TRUST. The Trust is an open-end, diversified management investment company originally organized and established under the laws of the Commonwealth of Massachusetts on February 19, 1987. The Trust 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 are five series currently available (individually a "Fund" and collectively the "Funds"):
DATE OF COMMENCEMENT OF NAME OF SERIES DATE OF FIRST PUBLIC OFFERING INVESTMENT TRADING - -------------- ----------------------------- ----------------------- Baron Asset Fund June 11, 1987 June 12, 1987 Baron Growth Fund (formerly named Baron Growth & Income Fund) December 31, 1994 January 3, 1995 Baron Small Cap Fund September 30, 1997 October 1, 1997 Baron iOpportunity Fund February 29, 2000 March 1, 2000 Baron Fifth Avenue Growth Fund April 30, 2004 May 1, 2004
INVESTMENT GOALS, STRATEGIES AND RISKS BARON ASSET FUND'S investment objective is to seek capital appreciation through long-term investments in securities of medium sized companies with undervalued assets or favorable growth prospects. BARON ASSET FUND invests primarily in medium sized companies with market capitalizations at the time of purchase of between $2.5 billion and $10 billion. BARON GROWTH FUND's investment objective is to seek capital appreciation through long-term investments primarily in small growth companies. BARON GROWTH FUND invests primarily in the securities of smaller companies with market capitalizations of up to $2.5 billion. A small sized company is defined as having a market value of under $2.5 billion. BARON SMALL CAP FUND'S investment objective is to seek capital appreciation through investments primarily in securities of small companies. BARON SMALL CAP FUND invests primarily in the securities of smaller companies with market capitalizations of up to $2.5 billion. The investment objective of BARON iOPPORTUNITY FUND is capital appreciation through investments in growth businesses that benefit from technology advances. BARON IOPPORTUNITY FUND invests in companies of all sizes with Internet and information technology related growth opportunities. BARON FIFTH AVENUE GROWTH FUND'S investment objective is capital appreciation through investments primarily in the securities of larger growth companies with market capitalizations in excess of $5 billion. In addition to the principal investment strategies of the Funds described in the Prospectus on pages 3-6 and 16-18, the Funds 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 BARON ASSET FUND, BARON GROWTH FUND and BARON SMALL CAP FUND may invest up to 10% and BARON IOPPORTUNITY FUND and BARON FIFTH AVENUE GROWTH FUND may invest up to 25% of their respective 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 Funds may invest in securities commonly known as American Depository Receipts ("ADRs"), and in European Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs") or other -3- 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 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 The Funds 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 The Funds may lend their portfolio securities to institutions as a means of earning additional income. In lending their portfolio securities, the Funds 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 Funds deem the other party to be of good standing and determine that the income justifies the risk. BARON ASSET FUND will not lend more than 10% of its total assets and BARON GROWTH FUND, BARON SMALL CAP FUND, BARON IOPPORTUNITY FUND and BARON FIFTH AVENUE GROWTH FUND will not lend more than 25% of their respective total assets. MORTGAGE-BACKED SECURITIES The Funds 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 Funds 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 Funds do not anticipate investing more than 5% of their respective assets in such securities. WHEN-ISSUED SECURITIES The Funds 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 Funds bear the risk that interest rates on debt securities at the time of delivery may be 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 Funds do not anticipate investing more than 5% of their respective assets in such securities. MEDIUM AND LOWER RATED CORPORATE DEBT SECURITIES All of the Funds 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 Funds do not anticipate investing more than 35% of their respective assets in such securities. The Funds 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 Funds' equity portfolio. -4- 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 Funds of their respective 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 Funds 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 a 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. To the extent that there is no established market for some of the medium or low grade corporate debt securities in which the Funds 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 a 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 a Fund's portfolio, the responsibility of the Adviser to value that 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 a Fund purchases illiquid securities or securities which are restricted as to resale, that 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. A 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 Funds 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 The Funds 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. BARON GROWTH FUND, BARON SMALL CAP FUND, BARON IOPPORTUNITY FUND and BARON FIFTH AVENUE GROWTH 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 Funds purchase a participation interest they assume the credit risk associated with the bank or other financial intermediary as well as the credit risk associated with the issuer of any underlying debt instrument. The Funds -5- 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 Funds 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 Funds may purchase loans from national and state chartered banks as well as foreign ones. The Funds may invest in senior indebtedness of the debtor companies, although on occasion subordinated indebtedness may also be acquired. The Funds may also invest in distressed first mortgage obligations and other debt secured by real property. The Funds do not currently anticipate investing more than 5% of their respective assets in trade and other claims. The Funds 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 Funds 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 a 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 BARON GROWTH FUND, BARON SMALL CAP FUND, BARON IOPPORTUNITY FUND and BARON FIFTH AVENUE GROWTH FUND may sell securities short, either as a hedge against an anticipated decline in a stock price, to reduce portfolio volatility, or in connection with special situations or arbitrage activities. A Fund may also sell 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 sell 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. A Fund may sell a security that the Fund borrows and does not own. To sell short, 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 for the security than it has received from the purchaser in the short sale. The Fund's risk of loss is theoretically unlimited because there is no limit to the cost of replacing the borrowed security, even in the case of a short that is fully covered by long positions. If the value of the securities increases, the Fund loses the opportunity to participate in the gain of the covered positions. A 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 BARON ASSET FUND may write (sell) covered call options or purchase put options on equity and/or debt securities. BARON GROWTH FUND, BARON SMALL CAP FUND, BARON IOPPORTUNITY FUND and BARON FIFTH AVENUE GROWTH FUND may write (sell) put and covered call options and purchase put and call options on equity and/or debt securities. The Funds may also enter into equity swap transactions. All calls sold by the Funds must be "covered" (i.e., a Fund must own the underlying securities) or must meet the asset segregation requirements described below as long as the call is outstanding. Even though a Fund will receive the option premium to help protect it against loss, a call sold by a Fund exposes that Fund during the term of the option to possible loss of opportunity to realize appreciation in the market price of the -6- 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 Funds may engage in either style option. The Funds are 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 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 Funds expect generally to enter into OTC options that have cash settlement provisions, although they are 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 Funds 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 Funds 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 Funds 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 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. -7- USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS Many hedging transactions, in addition to other requirements, require that a Fund segregate liquid 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 a Fund will require that 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 Funds have adopted investment restrictions, described below, which are fundamental policies of the Funds and may not be changed without the approval by a majority of the Funds' shares or, 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. BARON ASSET FUND may not: 1. Issue senior securities except in connection with any permitted borrowing where the Fund is deemed to have issued a senior security; 2. Borrow money except from banks for temporary purposes in an amount not exceeding 5% of the Fund's net assets at the time the borrowing is made; 3. Purchase securities on margin except for short-term credit necessary for the clearance of portfolio transactions; 4. Make short sales of securities, maintain a short position, or write put options; 5. Purchase or sell commodities or commodity contracts; 6. Purchase or sell real estate or real estate mortgage loans or invest in the securities of real estate companies unless such securities are publicly traded; 7. Invest in oil, gas or mineral-related programs or leases; 8. Invest more than 25% of the value of its total assets in any one industry, except investments in U.S. government securities; 9. Purchase the securities of any one issuer other than the U.S. government or any of its agencies or instrumentalities, if immediately after such purchase more than 5% of the value of the Fund's total assets would be invested in such issuer or the Fund would own more than 10% of the outstanding voting securities of such issuer, except that up to 25% of the value of the Fund's total assets may be invested without regard to the 5% and 10% limitations; 10. Invest more than 10% of the value of the Fund's total assets in securities which are restricted or illiquid or in repurchase agreements maturing or terminable in more than seven days; 11. Invest in securities of other open end investment companies (except in connection with a merger, consolidation or other reorganization and except for the purchase of shares of registered open-end money market mutual funds if double advisory fees are not assessed), invest more than 5% of the value of the Fund's total assets in more than 3% of the total outstanding voting securities of another investment company or more than 10% of the value of the Fund's total assets in securities issued by other investment companies; 12. Participate on a joint, or a joint and several, basis in any securities trading account; 13. Underwrite securities of other issuers; 14. Make loans to other persons, except up to 10% of the value of the Fund's total assets in loans of -8- portfolio securities and except to the extent that the purchase of publicly traded debt securities and the entry into repurchase agreements in accordance with the Fund's investment objective and policies may be deemed to be loans; 15. Mortgage, pledge or hypothecate any portfolio securities owned or held by the Fund, except as may be necessary in connection with permitted borrowing; 16. Invest more than 5% of its total assets in warrants to purchase common stock; 17. Purchase securities of any issuer with a record of less than three years' continuous operation, including predecessors, except obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, if such purchase would cause the investments of the Fund in all such issuers to exceed 5% of the value of the total assets of the Fund; or 18. Purchase or retain any securities of an issuer any of whose officers, directors, trustees or security holders is an officer or Trustee of the Fund, or is a member, officer or Director of the Adviser, if after the purchase of the securities of such issuer by the Fund one or more of such persons owns beneficially more than 1/2 of 1% of the shares or securities, or both, all taken at market value, of such issuer, and such persons owning more than 1/2 of 1% of such shares or securities together own beneficially more than 5% of such shares or securities, or both, all taken at market value. BARON GROWTH FUND, BARON SMALL CAP FUND and BARON IOPPORTUNITY FUND may not: 1. Issue senior securities or borrow money or utilize leverage in excess of 25% of its net assets (plus 5% for emergency or other short-term purposes) from banks from time to time. 2. Except as described in the prospectus or SAI, engage in short-sales, purchase securities on margin or maintain a net short position. 3. Purchase or sell commodities or commodity contracts except for hedging purposes and in conformity with regulations of the Commodities Futures Trading Commission such that the Fund would not be considered a commodity pool. 4. Purchase or sell oil and gas interests or real estate. Debt or equity securities issued by companies engaged in the oil, gas or real estate business are not considered oil or gas interests or real estate for purposes of this restriction. First mortgage loans and other direct obligations secured by real estate are not considered real estate for purposes of this restriction. 5. Invest more than 25% of the value of its total assets in any one industry, except investments in U.S. government securities. 6. Purchase the securities of any one issuer other than the U.S. government or any of its agencies or instrumentalities, if immediately after such purchase more than 5% of the value of the Fund's total assets would be invested in such issuer or the Fund would own more than 10% of the outstanding voting securities of such issuer, except that up to 25% of the value of the Fund's total assets may be invested without regard to the 5% and 10% limitations. 7. Underwrite securities of other issuers. 8. Make loans, except to the extent the purchase of debt obligations of any type (including repurchase agreements and corporate commercial paper) are considered loans and except that the Fund may lend portfolio securities to qualified institutional investors in compliance with requirements established from time to time by the Securities and Exchange Commission and the securities exchanges where such securities are traded. 9. Participate on a joint, or a joint and several, basis in any securities trading account. 10. Mortgage, pledge or hypothecate any of its assets, except as may be necessary in connection with options, loans of portfolio securities, or other permitted borrowings. 11. Purchase securities of any issuer with a record of less than three years' continuous operations, including predecessors, except obligations issued or guaranteed by the U.S. government or its agencies or instrumentalities, if such purchase would cause the investments of the Fund in all such issuers to exceed 5% of the value of the total assets of the Fund. 12. Invest more than 15% of its assets in restricted or illiquid securities, including repurchase agreements maturing in more than seven days. -9- As a non-fundamental policy, BARON GROWTH FUND, BARON SMALL CAP FUND and BARON IOPPORTUNITY FUND will not: 1. Purchase more than 3% of the outstanding voting securities of another registered investment company except in connection with a merger, consolidation or other reorganization or as otherwise permitted by the 1940 Act. BARON FIFTH AVENUE GROWTH 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 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, BARON FIFTH AVENUE GROWTH 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 portfolios of BARON ASSET FUND, BARON GROWTH FUND and BARON FIFTH AVENUE GROWTH FUND should not exceed 50% and of BARON SMALL CAP FUND and BARON IOPPORTUNITY FUND should not exceed 100%. The turnover rate fluctuates depending on market conditions. The turnover rates for the Funds for the past two years ended September 30 are: -10- FUND 2006 2005 ---- ---- ---- Baron Asset Fund 22% 11% Baron Growth Fund 21% 16% Baron Small Cap Fund 40% 25% Baron iOpportunity Fund 67% 84% Baron Fifth Avenue Growth Fund 106% 47% DISCLOSURE POLICY Information regarding the Funds' policies regarding the disclosure of portfolio information is contained in the prospectus. Disclosures are made on the Funds' web site, www.BaronFunds.com. The Funds' disclosure policy is designed to address the interests of shareholders of the Funds, which, the Board feels, minimizes any potential conflicts. The Funds' Chief Compliance Officer reports to the Board every quarter on these, and other matters. The Funds disclose portfolio holdings in connection with the day-to-day operations and management of the Funds, including to the Funds' custodian (daily) and auditors (annually). Portfolio holdings may also be disclosed to other service providers to the Funds, including pricing services (daily), portfolio management and trading systems (daily), and proxy voting systems (quarterly). In these situations, the Funds, 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 each Fund through brokers and dealers or other trading platforms, the Funds disclose certain information about one or more of the securities positions they own. The Funds do not have separate non-disclosure agreements with each of these trading entities, but the Funds would immediately cease doing business with any entity the Adviser believes is misusing the information. MANAGEMENT OF THE FUNDS PORTFOLIO MANAGERS Baron Asset Fund Ronald Baron Andrew Peck Baron Growth Fund Ronald Baron Baron Small Cap Fund Clifford Greenberg Baron iOpportunity Fund Michael Lippert Baron Fifth Avenue Growth Fund Randall Haase -11- OTHER ACCOUNTS MANAGED As of December 31, 2006: - -------------------------------------------------------------------------------- NUMBER OF TOTAL ADDITIONAL ASSETS PORTFOLIO MANAGER TYPE OF ACCOUNT ACCOUNTS (MILLIONS) - -------------------------------------------------------------------------------- Ronald Baron Registered Investment Companies 7 $3,522 Other pooled investment vehicles 5(1) $ 198(1) Other Accounts 48 $ 531 - ------------------------------------------------------------------------------ Andrew Peck Registered Investment Companies 1 $ 9 Other pooled investment vehicles 1 $ 115 - ------------------------------------------------------------------------------ Clifford Greenberg Registered Investment Companies 0 $ 0 - ------------------------------------------------------------------------------ Michael Lippert Registered Investment Companies 2 $ 49 - ------------------------------------------------------------------------------ Randall Haase Registered Investment Companies 0 $ 0 Other pooled investment vehicles 1 $ 6 ============================================================================== (1) For 2 of the accounts with total assets of $86 million, the advisory fee is based on performance, although one account ($67 million) is a fund of funds. POTENTIAL CONFLICTS OF INTEREST Conflicts of interest could arise in connection with managing a Fund along with other Funds and other clients of the Adviser and clients of the Adviser's affiliated investment advisers. 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 all Funds and 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 Funds' Chief Investment Officer, President and Chief Compliance Officer meet at least quarterly to review performance and allocations among account for consistency with this policy. Because an investment opportunity may be suitable for multiple accounts, a Fund may not be able to take full advantage of that opportunity because the opportunity may be allocated among many or all of the Funds and clients managed by the Adviser and its affiliates. To the extent that a 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 Advisor. While this may create additional conflicts of interest for the portfolio manager in the allocation of management time, resources and investment opportunities, the Advisor takes all necessary steps to ensure that portfolio managers endeavor to exercise their discretion in a manner that is equitable to all interested persons. A conflict could also arise when a portfolio manager has an investment in one Fund as opposed to another or has a larger investment in one Fund than in others 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 Funds' potential conflicts of interest. -12- Such policies and procedures address, among other things, trading practices (e.g., brokerage commissions, cross trading, aggregation and allocation of transactions, sequential transactions, allocation 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 bonus that is roughly equivalent to 42% of his base salary. The contract is for five years, with automatic one year extentions thereafter. Mr. Baron also has a line of credit from the Firm and the Firm has agreed to post collateral up to a fixed 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. The compensation for Messrs. Greenberg, Peck, Lippert and Haase includes a base salary and an annual bonus. Their bonuses are subjectively determined by the Firm's chief executive officer. It is based on the assessment of Messrs. Greenberg's, Peck's, Lippert's and Haase's individual long-term investment performance, their respective overall contribution to the Firm, and the Firm's profitability. In addition, Messrs. Greenberg and Peck own equity in Baron Capital Group and are eligible for special bonuses based on the Firm achieving its long-term growth and profitability objectives. 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 OWNED - ---------------------------------------------------------------------------- Ronald Baron Baron Asset Fund Over $1,000,000 Baron Growth Fund Over $1,000,000 Baron Small Cap Fund Over $1,000,000 Baron iOpportunity Fund Over $1,000,000 Baron Fifth Avenue Growth Fund Over $1,000,000 - ---------------------------------------------------------------------------- Andrew Peck Baron Asset Fund Over $1,000,000 Baron Small Cap Fund $100,001-$500,000 Baron iOpportunity Fund $1-$10,000 Baron Fifth Avenue Growth Fund $100,001-$500,000 - ---------------------------------------------------------------------------- Clifford Greenberg Baron Small Cap Fund Over $1,000,000 - ---------------------------------------------------------------------------- Michael Lippert Baron Asset Fund $0 Baron Growth Fund $1-$10,001 Baron Small Cap Fund $50,001-$100,000 Baron iOpportunity Fund $100,001-$500,000 Baron Fifth Avenue Growth Fund $0 - ---------------------------------------------------------------------------- Randall Haase Baron Fifth Avenue Growth Fund Over $1,000,000 ============================================================================ -13- BOARD OF TRUSTEES AND OFFICERS The Board of Trustees oversees the management of the Funds. The following table lists the Trustees and executive officers of the Funds, their date of birth, current positions held with the Funds, length of time served, principal occupations during the past five years and other Trusteeships/Directorships held outside the Fund complex. Unless otherwise noted, the address of each executive officer and Trustee is Baron Funds, 767 Fifth Avenue, 49th Floor, New York, NY 10153. Trustees who are not deemed to be "interested persons" of the Funds as defined in the 1940 Act are referred to as "Disinterested Trustees." Trustees who are deemed to be "interested persons" of the Funds are referred to as "Interested Trustees." All Trustees listed below, whether Interested or Disinterested, serve as trustee for all five portfolios.
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 19 years Chairman, CEO and Director: None outside the Baron Funds Complex. 767 Fifth Avenue Officer, Chief Baron Capital, Inc. (1982- New York, NY 10153 Investment Officer, Present), Baron Capital DOB: May 23, 1943 Trustee and Management, Inc. (1983- Portfolio Manager Present), Baron Capital Group, Inc. (1984-Present), BAMCO, Inc. (1987-Present); President: Baron Capital, Inc. (03/06-06/07), Baron Capital Management, Inc.(03/06-06/07), Baron Capital Group, Inc. (03/06-06/07), BAMCO, Inc. (03/06-06/07); President (2004- 02/07), Chairman (1999-2004), CIO and Trustee (1987-Present): Baron Investment Funds Trust; President (2004-02/07), Chairman (1997-2004), CIO and Trustee (1997-06/07): Baron Capital Funds Trust; President (2004-02/07), Chairman (2003-2004), CIO and Trustee (2003-Present): Baron Select Funds; CIO and Portfolio Manager: Baron Managed Funds plc (2005-Present); Baron USA Partners Fund, Ltd. (1993-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 - ------------- -------------- ----------- ---------- ------------------- Linda S. Martinson*+ President, Chief 19 years President: Baron Capital None outside the Baron Funds Complex. 767 Fifth Avenue Operating Officer, Group, Inc., Baron Capital, New York, NY 10153 Secretary, General Inc., BAMCO, Inc., DOB: February 23, 1955 Counsel and Trustee Baron Capital Management, Inc. (06/07-Present); Chief Operating Officer: Baron Capital Group, Inc., Baron Capital, Inc., BAMCO, Inc., Baron Capital Management, Inc. (05/06-Present); General Counsel: Baron Capital, Inc., Baron Capital Management, Inc. (1983-Present); Baron Capital Group, Inc. (1984-Present); and BAMCO, Inc. (1987-Present); Director: BAMCO, Inc. (1988-1996, 2003-Present), Baron Capital Group, Inc., Baron Capital, Inc., Baron Capital Management, Inc. (2003-Present); Secretary: BAMCO, Inc. (1987-Present), Baron Capital, Inc., Baron Capital Management, Inc., Baron Capital Group Inc. (1997-Present); President (02/07- Present), Vice President (1987-02/07), Secretary, Trustee, General Counsel: Baron Investment Funds Trust (1987- Present); President (02/07-06/07), Vice President (1998-02/07), Secretary, Trustee, General Counsel: Baron Capital Funds Trust (1998-06/07); President (02/07-Present), Vice President (2003- 02/07), Secretary, Trustee, General Counsel: Baron Select Funds (2003- Present); Director: Baron Managed Funds plc (2005-Present), Baron USA Partners Fund, Ltd. (2006-Present). Has acted as Treasurer: BAMCO, Inc. (1987-1993); Vice President: BAMCO, Inc. (1993-06/07), Baron Capital, Inc., Baron Capital Management, Inc. (1998-06/07), Baron Capital Group, Inc. (1999-06/07). -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 - ------------- -------------- ----------- ---------- ------------------- DISINTERESTED TRUSTEES: Norman S. Edelcup+^** Trustee 19 years Director (2006-Present) CompX Director (2006-Present) CompX City of Sunny Isles Beach International, Inc. International, Inc. 18070 Collins Avenue (diversified manufacturer of (diversified manufacturer of Sunny Isles Beach, FL engineered components); Mayor engineered components); 33160 (2003-Present), Commissioner Director (1975-Present), DOB: May 8, 1935 (2001-2003), Sunny Isles Valhi, Inc. (diversified Beach, Florida; Director, company). (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 Baron Investment Funds Trust (1987-Present), Baron Capital Funds Trust (1997-0607), Baron Select Funds (2003-Present). 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, FL (1987-2000) Office Depot; (1998-Present), Ryder Systems, 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: Baron Capital Funds Trust (2004-06/07), Baron Investment Funds Trust, Baron Select Funds (2004-Present). -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 - ------------- -------------- ----------- ---------- ------------------- Charles N. Mathewson^** Chairman and Trustee 19 years; Chairman Emeritus (October None outside the Baron Funds Complex. 9295 Prototype Drive Elected as 2003-Present), Chairman 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: Baron Capital Funds Trust (2004-06/07), Baron Investment Funds Trust (2004- Present), Baron Select Funds (2004-Present); Trustee: Baron Investment Funds Trust (1987-Present), Baron Capital Funds Trust (1997-06/07), Baron Select Funds (2003-Present). Harold W. Milner^** Trustee 19 years Retired; President and CEO None outside the Baron Funds Complex. 2293 Morningstart Drive (1985-1997) Kahler Realty Park City, UT 84060 Corporation (hotel ownership DOB: November 11, 1934 and management); Trustee: Baron Investment Funds Trust (1987-Present), Baron Capital Funds Trust (1997-06/07), Baron Select Funds (2003-Present). Raymond Noveck+#^** Trustee 19 years Private Investor (1999-Present) None outside the Baron 31 Karen Road President (1997-1998), The Waban, MA 02168 The Medical Information Line, Inc. DOB: May 4, 1943 (healthcare information); President(1990-1997), Strategic Systems, Inc. (healthcare information); Director (1987-1997), Horizon/CMS Healthcare Corporation; Trustee: Baron Investment Funds Trust (1987-Present), Baron Capital Funds Trust (1997-06/07), Baron Select Funds(2003-Present). -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 - ------------- -------------- ----------- ---------- ------------------- David A. Silverman,MD^**Trustee 19 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: Baron Investment Funds Trust (1987-Present), Baron Capital Funds Trust (1997-06/07), Baron Select Funds (2003-Present). Alex Yemenidjian^** Trustee 1 year Chairman and CEO (2005-Present), Director (2005-Present), 1925 Century Park (Appointed Armenco Holdings, LLC Guess?, Inc.; Director East Suite 1975 01/06) (investment company); Director (2005-Present), Regal Los Angeles, CA 90067 (2005-Present), Guess?, Inc. Entertainment Group; Director DOB: December 27, 1955 (retail); Director (2005- (2005-Present), USC Marshall 27, 1955 Present), Regal Entertainment School of Business Board of Group (entertainment company); Leaders; Co-chair of Imagine Director (2005-Present), USC the Arts Campaign Marshall School of Business (2005-Present), California Board of Leaders; Co-Chair of State University-Northridge; Imagine the Arts Campaign Trustee (2000-Present), (2005-Present), Cal;ifornia American Film Institute; State University-Northridge; Director (1989-Present), The Trustee (2000-Present), Lincy Foundation; Director American Film Institute; (1989-Present), The United Chairman and CEO (1999-2005) Armenian Fund; Director and Metro-Goldwyn-Mayer, Inc.; member of Executive Committee Director(1989-Present), The (1989-2005), MGM MIRAGE, Inc. 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).; Trustee: Baron Investment Funds Trust (2006-Present), Baron Capital Funds Trust (12/06-06/07), Baron Select Funds (12/06-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 - ------------- -------------- ----------- ---------- ------------------- ADDITIONAL OFFICERS OF THE FUNDS: Clifford Greenberg Senior Vice 10 years Director: BAMCO, Inc., Baron None. 767 Fifth Avenue President and Capital Management, Inc. New York, NY 10153 Portfolio Manager (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 USA DOB: July 10, 1960 Partners Fund Ltd. (2006- Present), Baron Capital Funds Trust (2004-06/07), Baron Investment 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 and 4 years Vice President: BAMCO, Inc. None 767 Fifth Avenue Co-Portfolio Manager (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). -19- 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 19 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, 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 (1998-06/07), Baron Select Funds (2003-Present). Peggy C. Wong Treasurer and Chief 19 years Chief Financial Officer: Baron None 767 Fifth Avenue Financial Officer Capital Group, Inc., Baron New York, NY 10153 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 (1998-06/07), Baron Select Funds (2003-Present), Baron Managed Funds plc.(2005-Present), Baron USA Partners Fund, Ltd (1993-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 Funds are responsible for the overall supervision of the operation of the Portfolios and the Funds and perform various duties imposed on trustees of investment companies by the 1940 Act and under the Funds' Declaration of Trust and By-laws. Each Trustee listed above also serves as a Trustee of Baron Capital Funds Trust and Baron Select Funds, registered investment companies. The Funds pay 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-of-pocket expenses in connection with attendance at meetings of the Trustees. Specifically, each Disinterested Trustee receives a base annual compensation of $27,000 with the -20- Chairman receiving an additional $3,350 for this office. An additional $3,350 each paid to each Disinterested Trustee for attendance in person at the quarterly Trustee Meetings; $838 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 Funds. 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 Funds' 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 $3,350 in annual compensation for serving on the Audit Committee. The Audit Committee met two times during the fiscal year ended September 30, 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 September 30, 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 September 30, 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 Funds. This committee met four times during the fiscal year ended September 30, 2006. TRUSTEE OWNERSHIP OF FUND SHARES The following table shows the dollar range of shares beneficially owned by each Trustee as of December 31, 2006: - ---------------------------------------------------------------------------- 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 > $100,000 > $100,000 - ---------------------------------------------------------------------------- DISINTERESTED: Norman Edelcup >$100,000 >$100,000 - ---------------------------------------------------------------------------- David Fuente >$100,000 >$100,000 - ---------------------------------------------------------------------------- Charles Mathewson > $100,000 > $100,000 - ---------------------------------------------------------------------------- Harold Milner > $100,000 > $100,000 - ---------------------------------------------------------------------------- -21- - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- Raymond Noveck > $100,000 > $100,000 - ------------------------------------------------------------------------------- David Silverman $10,001 - $50,000 $0 - ------------------------------------------------------------------------------- Alex Yemenidjian^ $0 >$100,000 - ------------------------------------------------------------------------------- ^ Mr. Yemenidjian was not appointed to the Board until January 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. TRUSTEE COMPENSATION TABLE The Trustees of the Funds received the following compensation from the Funds for the fiscal year ended September 30, 2006:
- ------------------------------------------------------------------------------------------------- PENSION OR TOTAL RETIREMENT COMPENSATION AGGREGATE BENEFITS ESTIMATED ANNUAL FROM FUND AND COMPENSATION FROM ACCRUED AS PART BENEFITS UPON FUND COMPLEX NAME THE FUNDS OF FUNDS EXPENSES RETIREMENT PAID TO TRUSTEES - ---------------------------------------- -------------------------------------------------------- INTERESTED: RONALD BARON $ 0 N/A N/A $ 0 - ------------------------------------------------------------------------------------------------- LINDA S. MARTINSON $ 0 N/A N/A $ 0 - ------------------------------------------------------------------------------------------------- DISINTERESTED: Steve Dodge* $ 4,187 $ 8,416 - ------------------------------------------------------------------------------------------------- Norman Edelcup $ 41,187 N/A N/A $ 61,249 - ------------------------------------------------------------------------------------------------- David Fuente $ 27,787 N/A N/A $ 41,249 - ------------------------------------------------------------------------------------------------- Charles Mathewson $ 36,162 N/A N/A $ 53,749 - ------------------------------------------------------------------------------------------------- Harold Milner $ 35,325 N/A N/A $ 52,500 - ------------------------------------------------------------------------------------------------- Raymond Noveck $ 41,187 N/A N/A $ 61,249 - ------------------------------------------------------------------------------------------------- David Silverman $ 37,837 N/A N/A $ 56,249 - ------------------------------------------------------------------------------------------------- Alex Yemenidjian^ $ 30,300 N/A N/A $ 30,300 - -------------------------------------------------------------------------------------------------
* As of March 3, 2006, Steve Dodge was no longer a trustee. ^ Mr. Yemenidjian was not appointed to the Board until January 2006. -22- CODE OF ETHICS The Funds, 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 by the Funds. PRINCIPAL HOLDERS OF SHARES As of December 31, 2006, the following persons were known to the Funds to be the record or beneficial owners of more than 5% of the outstanding securities of the Funds:
BARON BARON BARON BARON BARON FIFTH ASSET GROWTH SMALL CAP IOPPORTUNITY AVENUE GROWTH ----- ------ --------- ------------ ------------- CHARLES SCHWAB & CO., INC 25.81% 14.67% 27.25% 40.14% 40.52% NATIONAL FINANCIAL SERVICES CORP 25.97% 39.75% 16.51% 18.86% SAXON & CO 5.11% CHARLES MATHEWSON TRUST 5.12%
The above record owners except for the Charles Mathewson Trust are brokerage firms or other financial institutions that hold stock for the benefit of their respective customers. As of December 31, 2006, all of the officers and Trustees of BARON INVESTMENT FUNDS TRUST as a group beneficially owned directly or indirectly 0.75% of BARON ASSET FUND'S outstanding shares; 0.15% of BARON GROWTH FUND'S outstanding shares; 0.65% of BARON SMALL CAP FUND'S outstanding shares; 4.00% of BARON IOPPORTUNITY FUND'S outstanding shares and 12.79% of BARON FIFTH AVENUE GROWTH FUND'S outstanding shares. INVESTMENT ADVISER The investment adviser to the Funds 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 30 years of experience as a Wall Street analyst and has managed money for others for over 25 years. He has been a participant in Barron's Roundtable and has been a featured guest on Wall Street Week, CNN and CNBC/FNN. Pursuant to separate Advisory Agreements with each Fund (the "Advisory Agreement"), the Adviser furnishes continuous investment advisory services and management to each Fund, including making the day-to-day investment decisions and arranging portfolio transactions for the Funds subject to such policies as the Trustees may determine. For such services, the Adviser receives an annual fee from BARON ASSET FUND, BARON GROWTH FUND, BARON SMALL CAP FUND and BARON IOPPORTUNITY FUND of 1% of the assets of the respective Fund. BARON FIFTH AVENUE GROWTH FUND pays the Adviser 1% for assets under $1 billion, 0.95% for assets greater that $1 billion but less than $2 billion, 0.90% for assets over $2 billion but less than $3 billion, 0.85% for assets over $3 billion but less than $4 billion, and 0.80% for assets greater than $4 billion. BARON ASSET FUND incurred advisory expenses of $30,729,535 for the year ended September 30, 2006; $24,082,420 for the year ended September 30, 2005; and $19,971,130 for the year ended September 30, 2004. BARON GROWTH FUND incurred advisory expenses of $53,223,049 for the year ended September 30, 2006; $43,997,569 for the year ended September 30, 2005; and $27,394,586 for the year ended September 30, 2004. BARON SMALL CAP FUND incurred advisory expenses of $30,244,958 for the year ended September 30, 2006; $24,401,721 for the year ended September -23- 30, 2005; and $16,072,603 for the year ended September 2004. BARON IOPPORTUNITY FUND incurred advisory expenses of $1,538,749 for the year ended September 30, 2006; $1,463,915 for the year ended September 30, 2005; and $ 1,338,401 for the year ended September 30, 2004. BARON FIFTH AVENUE GROWTH FUND incurred advisory expenses of $1,307,613 for the year ended September 30, 2006; $688,368 for the year ended September 30, 2005; and $150,962 for the period April 30, 2004 (commencement of operations) to September 30, 2004. The Adviser has contractually agreed to limit the expense ratio for BARON IOPPORTUNITY FUND to 1.5% and for BARON FIFTH AVENUE GROWTH FUND to 1.4%. Under the Advisory Agreements, the Adviser, at its own expense and without reimbursement from the Funds, furnishes office space and all necessary office facilities, equipment and executive personnel for managing the Funds, 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 Funds available to their customers. The Funds pay all operating and other expenses not borne by the Adviser such as audit, external 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 each Fund's shares such as dividend disbursing, transfer agent and registrar fees; certain insurance expenses; compensation of Trustees who are not interested persons of the Adviser; and other miscellaneous business expenses. The Funds also pay the expenses of offering the shares of each respective Fund, including the registration and filing fees, legal and accounting fees and costs of printing the prospectus and related documents. Each 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 Baron Capital Management, Inc. ("BCM") to provide research. Directors, officers or employees of the Adviser and/or its affiliates may also serve as officers or Trustees of the Funds 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 Funds. 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 Funds. When the same securities are purchased for or sold by a 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 Funds and the Adviser. In certain circumstances the Adviser may make investments for the Funds that conflict with investments being made by BCM. The Adviser may also make investment decisions for a Fund that are inconsistent with the investment decisions for other funds it manages. Each 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 that Fund. Each 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 that Fund's investment adviser, that Fund will promptly take all steps necessary to change its name to one that does not include "Baron," absent the Adviser's written consent. Each Advisory Agreement provides that the Adviser shall have no liability to that Fund or its shareholders for any error of judgment or mistake of law or for any loss suffered by that 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 Agreements were approved by a majority of the Trustees, including a majority of the Trustees who are not "interested persons" (as defined by the 1940 Act) for BARON ASSET FUND on May 11, 1987, for BARON GROWTH FUND on October 21, 1994, and for BARON SMALL CAP FUND on July 29, 1997. The Advisory Agreements must normally be approved annually by the Trustees or a majority of the particular Fund's shares and by a majority of the Trustees who are not parties to the Advisory Agreement or interested persons of any such party. With respect to BARON ASSET FUND, -24- BARON GROWTH FUND, BARON SMALL CAP FUND, and BARON IOPPORTUNITY FUND such approval for 2006 was given at a Board of Trustees meeting held on May 3, 2006. With respect to BARON FIFTH AVENUE GROWTH FUND, the Advisory Agreement was approved on February 2, 2004, for an initial term of two years. Each 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. Each 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 each Fund is available in the Funds' Annual Financial Report to Shareholders for the fiscal year ending September 30, 2006. PROXY VOTING POLICIES AND PROCEDURES The Funds have delegated to BAMCO, the 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 Funds and their 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 Funds. 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 an 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 Funds is available without charge on the Funds' website, www.BaronFunds.com or at the SEC's website, www.sec.gov. SERVICE AGREEMENTS The Funds have agreements with various service providers pursuant to which administrative services such as record keeping, reporting and processing services are provided to the Funds' shareholders. BROKERAGE The Adviser is responsible for placing the portfolio brokerage business of the Funds with the objective of obtaining the best net results for the Funds, 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 a 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. -25- The Adviser's affiliate Baron Capital, Inc. ("Baron Capital") was one of the brokers that provided brokerage services to the Funds, but Baron Capital ceased its brokerage activities in October of 2005. For the Fiscal Year Ended 09/30
2006 2005 2004 ---- ---- ---- TOTAL COMMISSIONS PAID Baron Asset Fund $ 849,211 $ 575,404 $ 1,680,814 Baron Growth Fund $ 2,290,594 $ 2,449,947 $ 3,524,607 Baron Small Cap Fund $ 2,943,970 $ 2,813,126 $ 3,190,938 Baron iOpportunity Fund $ 249,538 $ 427,721 $ 635,257 Baron Fifth Avenue Growth Fund $ 113,469 $ 72,371 $ 59,624** COMMISSIONS PD TO BCI^ Baron Asset Fund $ 8,403 $ 168,087 $ 1,109,837 Baron Growth Fund $ 14,768 $ 578,158 $ 1,659,403 Baron Small Cap Fund $ 12,521 $ 439,790 $ 1,047,784 Baron iOpportunity Fund $ 886 $ 98,717 $ 270,139 Baron Fifth Avenue Growth Fund $ 985 $ 32,660 $ 50,778** % OF AGGREGATE DOLLAR AMOUNT OF COMMISSIONS PD TO BCI^ Baron Asset Fund 0.99% 29.21% 66.03% Baron Growth Fund 0.64% 23.60% 47.08% Baron Small Cap Fund 0.43% 15.63% 32.84% Baron iOpportunity Fund 0.36% 23.08% 42.52% Baron Fifth Avenue Growth Fund 0.87% 45.13% 85.16%** % OF AGGREGATE DOLLAR AMOUNT OF TRANSACTIONS INVOLVING PAYMENT OF COMMISSIONS TO BCI^ Baron Asset Fund 2.31% 51.27% 71.34% Baron Growth Fund 1.41% 46.69% 49.44% Baron Small Cap Fund 1.31% 28.39% 37.16% Baron iOpportunity Fund 1.30% 46.52% 48.52% Baron Fifth Avenue Growth Fund 0.77% 68.35% 88.42%** % oF TOTAL TRANSACTIONS (PRINCIPAL & Agency) Where BCI Acted as Broker^ Baron Asset Fund 2.31% 48.81% 70.49% Baron Growth Fund 1.41% 43.95% 47.17% Baron Small Cap Fund 1.31% 26.53% 35.19% Baron iOpportunity Fund 1.30% 42.05% 45.44% Baron Fifth Avenue Growth Fund 0.77% 66.98% 87.81%** - -------
^ For the Period October 1, 2005 to October 14, 2005. After October 14, 2005, BCI ceased its brokerage activities. ** For the Period April 30, 2004 (Commencement of Operations) to September 30, 2004. 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 Funds to pay a broker-dealer which provides brokerage and other services to the Adviser an amount of commission for effecting a securities transaction for the Funds 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 Funds' policies and is reasonable in relation to the value of the brokerage and other services provided by the executing broker-dealer viewed in terms of either a particular transaction or the Adviser's overall responsibilities to the Funds or to its other clients. The term "brokerage and other services" includes advice as to the value of securities, the advisability of investing in, purchasing, or selling securities, and the availability of securities or -26- 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 Funds 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. 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 Funds. 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 Funds for investment accounts managed by BCM and BAMCO 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 account 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 Funds, but may have a beneficial effect. DISTRIBUTOR DISTRIBUTION OF SECURITIES The Funds have a distribution agreement with Baron Capital, an affiliate of the Adviser. The Distributor acts as the agent for the Funds for the continuous public offering of their 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 Funds to pay the Distributor a distribution or service fee equal on an annual basis to 0.25% of the Funds' average daily net assets. The fee was reduced to 0.25% from 0.50% on July 12, 1993. 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 Funds in programs that make the Funds' 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 Funds 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 of 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 -27- 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 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 Funds 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 Funds 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 the fiscal year ended September 30, 2006, BARON ASSET FUND paid distribution fees to the Distributor of $7,682,384 (an additional $2,326,433 was absorbed by the Distributor and/or its affiliates and not paid by the Fund pursuant to the 0.25% limitation); BARON GROWTH FUND paid distribution fees to the Distributor of $13,305,762 (an additional $6,736,361 was absorbed by the Distributor and/or its affiliates and not paid by the Fund pursuant to the 0.25% limitation); BARON SMALL CAP FUND paid distribution fees to the Distributor of $7,561,240 (an additional $2,710,919 was absorbed by the Distributor and/or its affiliates and not paid by the Fund pursuant to the 0.25% limitation); BARON IOPPORTUNITY FUND paid distribution fees to the Distributor of $384,687 (an additional $93,325 was absorbed by the Distributor and/or its affiliates and not paid by the Fund pursuant to the 0.25% limitation); and BARON FIFTH AVENUE GROWTH FUND paid distribution fees to the Distributor of $326,903 (an additional $93,719 was absorbed by the Distributor and/or its affiliates and not paid by the Fund pursuant to the 0.25% limitation). -28- COMPENSATION TABLE The following table discloses compensation received by Baron Capital from the Funds for the fiscal year ended September 30, 2006:
- --------------------------------------------------------------------------------------------------------------- Net Underwriting Compensation on Discounts and Redemptions and Brokerage Other Series Commissions Repurchases Commissions Compensation* - --------------------------------------------------------------------------------------------------------------- Baron Asset Fund $0 $0 $8,403 $ 7,682,384 - --------------------------------------------------------------------------------------------------------------- Baron Growth Fund $0 $0 $14,768 $13,305,762 - --------------------------------------------------------------------------------------------------------------- Baron Small Cap Fund $0 $0 $12,521 $ 7,561,240 - --------------------------------------------------------------------------------------------------------------- Baron iOpportunity Fund $0 $0 $886 $ 384,687 - --------------------------------------------------------------------------------------------------------------- Baron Fifth Avenue Growth Fund $0 $0 $985 $ 326,903 - ---------------------------------------------------------------------------------------------------------------
* Fees received pursuant to Distribution Plan. Trustees of the Funds who were not interested persons of the Funds had no direct or indirect financial interest in the operation of the Distribution Plan or any agreement thereunder. All the interested Trustees had such an interest. The Distribution Plan has been approved by the Funds' Board of Trustees, including a majority of the Trustees who are not interested persons of the Funds 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 Funds and their shareholders. The anticipated benefits include the following: (i) the likelihood of attracting and retaining investments in the Funds 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 Funds 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 Funds 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 until, and from year to year thereafter if, such continuance is specifically approved at least annually by the Funds' Trustees and by 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, 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 Funds' Board of Trustees who are not interested persons of the Funds 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 Funds' shareholders. All material amendments must be approved by a vote of the Trustees and of the Trustees -29- who are not interested persons of the Funds 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 In July 2007, State Street Bank and Trust Company, One Lincoln Street, Boston, MA 02111 will become the custodian for the Funds' cash and securities. The Funds are in the process of transferring their accounts from their former custodian The Bank of New York State Street bank and Trust Company, One Lincoln Street, Boston, MA 02111 as Administrator to the Funds provides certain accounting and bookkeeping services and assistance in preparation of filing tax returns and reports to shareholders and the SEC. DST Systems, Inc., 430 West 7th Street, Kansas City, MO 64105, is the transfer agent and dividend agent for the Funds' shares. Neither institution assists in or is responsible for investment decisions involving assets of the Funds. REDEMPTION OF SHARES The Funds expect to make all redemptions in cash, but have 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 Funds' Board of Trustees determines that economic conditions exist which would make payment wholly in cash detrimental to a particular fund's best interests. Portfolio securities to be so distributed, if any, would be selected in the discretion of the Funds' Board of Trustees and priced as described under "Determining Your Share Price" herein and in the Prospectus. BARON IOPPORTUNITY FUND imposes a short-term trading fee on redemptions and exchanges of its shares held for less than 6 months. The fee is 1% of the redemption value and is deducted from the redemption proceeds. The Fund uses the "first-in, first-out" method to determine the holding period, so if you bought shares on different days, the shares purchased first will be redeemed first for determining whether the fee applies. The fee is retained by the Fund for the benefit of the remaining shareholders to offset the administrative costs associated with processing redemptions and to offset the portfolio transactions and facilitate portfolio management. The Fund waives the fee for defined contribution plans and may waive the fee for other redemptions if it is in the best interest of the Fund 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. NET ASSET VALUE As more fully set forth in the Prospectus under "Determining Your Share Price," the net asset value per share of each 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, -30- 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 Each 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 Funds of Federal income taxes on the portion of their net investment income and net realized capital gains distributed to shareholders. The Funds intend to distribute virtually all of their net investment income and net realized capital gains at least annually to their respective shareholders. A non-deductible 4% excise tax will be imposed on a 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, 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 the 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 a 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 that 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 Funds 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 Funds are organized as a Massachusetts business trust. Under current law, so long as the Funds qualify for the Federal income tax treatment described above, it is believed that they will not be liable for any income or franchise tax imposed by Massachusetts. Investors are urged to consult their own tax advisers regarding the application of Federal, state and local tax laws. -31- ORGANIZATION AND CAPITALIZATION GENERAL BARON INVESTMENT FUNDS TRUST (formerly known as BARON ASSET FUND) is an open-end investment company organized as a series fund and established under the business trust law of The Commonwealth of Massachusetts. The five series currently available are BARON ASSET FUND, BARON GROWTH FUND, BARON SMALL CAP FUND, BARON IOPPORTUNITY FUND and BARON FIFTH AVENUE GROWTH FUND. Shares entitle their holders to one vote per share on all matters submitted to a vote of shareholders. The Trust'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. SHAREHOLDER AND TRUSTEE LIABILITY Under Massachusetts law, shareholders of a Massachusetts business trust may, under certain circumstances, be held personally liable as partners for the obligations of the trust. The Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Fund or any series thereof. Notice of such disclaimer will normally be given in each agreement, obligation or instrument entered into or executed by the Funds or Trustees. The Declaration of Trust provides for indemnification by a Fund for any loss suffered by a shareholder as a result of an obligation of that Fund. The Declaration of Trust also provides that a Fund shall, upon request, assume the defense of any claim made against any shareholder for an act or obligation of that Fund and satisfy any judgment thereon. Thus, the risk of a shareholder incurring financial loss on account or shareholder liability is limited to circumstances in which the Fund itself would be unable to meet its obligations. The Trustees believe that, in view of the above, the risk of personal liability of shareholders is remote. The Declaration of Trust further provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law, but nothing in the Declaration of trust protects a trustee against liability to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. OTHER INFORMATION REGISTERED PUBLIC ACCOUNTANTS PricewaterhouseCoopers LLP, 300 Madison Avenue, New York, New York 10017, has been selected as the independent registered public accounting firm of the Funds. LEGAL PROCEEDINGS Two individual plaintiffs have a filed a class action complaint, captioned Mintz and Spear v. Ronald Baron, et al., 05 CV 4904, on behalf of shareholders of BARON GROWTH FUND and BARON SMALL CAP FUND (the "Funds") (the "Lawsuit"). The Complaint, pending in the United States District Court for the Southern District of New York, names multiple individual and entity defendants, including trustees of the Funds, Baron Capital, Inc. and BAMCO, Inc. Plaintiffs allege -32- that defendants permitted the Funds to overcharge their shareholders for marketing and distribution related expenses pursuant to Rule 12b-1 under the 1940 Act. A memorandum Opinion and Order ("Order") of the United States District Court for the Southern District of New York (the "Court") was issued on September 18, 2006, granting in part and denying in part Baron Capital's motion to dismiss the complaint. Shortly thereafter, and in response to a recent Second Circuit decision, Baron Capital filed a motion for reconsideration. In response, the plaintiff filed an amended complaint and requested that a conference be held. The Court refused the plaintiff's request for a conference. The Court's decision in response to the motion for reconsideration is currently being awaited. 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. The performance data used in advertisements does not give effect to a 2% contingent deferred sales charge that is no longer applicable. 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 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 ATV = P (1+T) D Where: P = a hypothetical initial payment of $1,000 T = average annual total return (after taxes on distriubtions) n = number of years ATV = ending redeemable value of a hypothetical D $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. -33- Average Annual Total Return (After Taxes on Distributions and Sale of Fund Shares) is computed as follows: n ATV = P (1+T) DR Where: P = a hypothetical initial payment of $1,000 T = average annual total return (after taxes on distributions and redemption) n = number of years ATV = ending redeemable value of a hypothetical $1,000 DR 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. Computed in the manner described above, the performance, as of September 30, 2006, for BARON ASSET FUND, BARON GROWTH FUND, BARON SMALL CAP FUND, BARON IOPPORTUNITY FUND AND BARON FIFTH AVENUE GROWTH FUND has been:
AVERAGE AVERAGE AVERAGE AVERAGE ANNUAL CUMULATIVE ANNUAL ANNUAL CUMULATIVE ANNUAL CUMULATIVE SINCE SINCE 1 YR 5 YR 5 YR 10 YR 10 YR INCEPTION INCEPTION ---------------------------------------------------------------------------- BARON ASSET FUND (INCEPTION DATE: 06/11/87) Return before taxes 11.54% 13.57% 88.98% 8.81% 132.62% 13.08% 972.31% Return after taxes on distributions 10.76% 12.66% 81.47% 8.19% 119.77% 12.31% 839.39% Return after taxes on distributions & sale of Fund shares 8.47% 11.57% 72.86% 7.59% 107.75% 11.68% 743.73% S&P 500 (reflects no deductions for fees, expenses or taxes) 10.77% 6.96% 39.99% 8.57% 127.53% 10.57% 595.47% Russell 2000 (reflects no deductions for fees, expenses or taxes)* 9.92% 13.78% 90.65% 9.06% 138.05% 9.70% 497.53% Russell 2500 (reflects no deductions for fees, expenses or taxes)* 8.80% 14.44% 96.25% 10.94% 182.28% 11.46% 711.30% Russell MidCap Growth (reflects no deductions for fees, expenses or taxes)* 7.03% 12.01% 76.32% 8.20% 119.85% 10.38%^ 568.82%^ - ------------------------------------------------------------------------------------------------------------------- -34- AVERAGE AVERAGE AVERAGE AVERAGE ANNUAL CUMULATIVE ANNUAL ANNUAL CUMULATIVE ANNUAL CUMULATIVE SINCE SINCE 1 YR 5 YR 5 YR 10 YR 10 YR INCEPTION INCEPTION ---------------------------------------------------------------------------- BARON GROWTH FUND (INCEPTION DATE: 12/31/94) Return before taxes 7.36% 13.96% 92.20% 13.16% 244.42% 17.11% 539.74% Return after taxes on distributions 6.67% 13.52% 88.50% 12.49% 224.44% 16.48% 500.39% Return afer taxes on distributions & sale of Fund shares 5.66% 12.08% 76.89% 11.51% 197.29% 15.39% 437.51% Russell 2000 (reflects no deductions for fees, expenses or taxes) 9.92% 13.78% 90.65% 9.06% 138.05% 10.94% 238.60% Russell 2000 Growth (reflects no deductions for fees, expenses or taxes) 5.88% 10.15% 62.15% 4.03% 48.44% 6.77% 115.86% S&P 500 (reflects no deductions for fees, expenses or taxes) 10.77% 6.96% 39.99% 8.57% 127.53% 11.39% 255.21% - ------------------------------------------------------------------------------------------------------------------ BARON SMALL CAP FUND (INCEPTION DATE: 09/30/97) Return before taxes 5.53% 15.16% 102.53% 11.38% 163.84% Return after taxes on distributions 5.03% 14.84% 99.71% 11.14% 158.82% Return after taxes on distributions & sale of Fund shares 4.22% 13.26% 86.41% 10.09% 137.60% Russell 2000 (reflects no deductions for fees, expenses or taxes) 9.92% 13.78% 90.65% 6.67% 78.73% Russell 2000 Growth (reflects no deductions for fees, expenses or taxes) 5.88% 10.15% 62.15% 2.08% 20.34% S&P 500 (reflects no deductions for fees, expenses or taxes) 10.77% 6.96% 39.99% 5.51% 62.02% - ------------------------------------------------------------------------------------------------------------------- -35- AVERAGE AVERAGE AVERAGE AVERAGE ANNUAL CUMULATIVE ANNUAL ANNUAL CUMULATIVE ANNUAL CUMULATIVE SINCE SINCE 1 YR 5 YR 5 YR 10 YR 10 YR INCEPTION INCEPTION ---------------------------------------------------------------------------- BARON IOPPORTUNITY FUND (INCEPTION DATE: 02/29/00) Return before taxes 9.72% 19.70% 145.72% 0.13% 0.86% Return after taxes on distributions 9.72% 19.70% 145.72% 0.11% 0.72% Return after taxes on distributions & sale of Fund shares 6.32% 17.49% 123.86% 0.10% 0.63% Nasdaq Composite (reflects no deductions for fees, expenses or taxes) 4.96% 8.55% 50.68% -10.53% -51.92% S&P 500 (reflects no deductions for fees, expenses or taxes) 10.77% 6.96% 39.99% 1.27% 8.65% - ------------------------------------------------------------------------------------------------------------------ BARON FIFTH AVENUE GROWTH FUND (INCEPTION DATE: 04/30/04) Return before taxes 5.71% 8.65% 22.20% Return after taxes on distributions 5.71% 8.65% 22.20% Return after taxes on distributions & sale of Fund shares 3.71% 7.41% 18.87% S&P 500 (reflects no deductions for fees, expenses or taxes) 10.77% 10.05% 26.05% - -------------------------------------------------------------------------------------------------------------------
* The Adviser believes that the Russell 2000 and the Russell 2500 are no longer appropriate comparison indexes for Baron Asset Fund (BAF). The Russell 2000 measures the performance of small companies and the Russell 2500 of small and mid-sized companies. Prior to February 15, 2007, BAF's strategy was to invest in small- and mid-sized companies. Since then, BAF's investment strategy has shifted to mid-sized companies. The Adviser believes that the Russell MidCap Growth is more representative of the Fund's current investment objective. We will continue to provide the comparison to the smaller cap indexes until March 31, 2008. ^ For the period 06-30-87 to 09-30-06. 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 Funds, 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 -36- 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 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, The Daily Deal, Baltimore Sun 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, 1500, or Midcap 400, Value Line Index, Wilshire 4, 500, 5000, or Small Cap, NASDAQ/OTC Composite, New York Stock Exchange, Morgan Stanley Internet Index 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, large-cap funds, growth funds, equity income funds, and any combination of the above listed categories. FINANCIAL STATEMENTS The Funds' financial statements for the year ended September 30, 2006 appearing in the 2006 Annual Financial Report to Shareholders and the report thereon of PricewaterhouseCoopers LLP, registered public accounting firm, appearing therein, are incorporated by reference in this Statement of Additional Information. EX-99.G 3 finalmastercustagreement0307.txt FORM OF CUSTODY AGREEMENT MASTER CUSTODIAN AGREEMENT -------------------------- This Agreement is made as of April 13, 2007 by and among each management investment company identified on Appendix A hereto (each such investment company and each management investment company made subject to this Agreement in accordance with Section 18.5 below, shall hereinafter be referred to as (the "FUND"), and State Street Bank and Trust Company, a Massachusetts trust company (the "CUSTODIAN"), WITNESSETH: WHEREAS, each Fund may or may not be authorized to issue shares of common stock or shares of beneficial interest in separate series ("Shares"), with each such series representing interests in a separate portfolio of securities and other assets; WHEREAS, each Fund so authorized intends that this Agreement be applicable to each of its series set forth on Appendix A hereto (such series together with all other series subsequently established by the Fund and made subject to this Agreement in accordance with Section 18.6 below, shall hereinafter be referred to as the "Portfolio(s)"). WHEREAS, each Fund not so authorized intends that this Agreement be applicable to it and all references hereinafter to one or more "Portfolio(s)" shall be deemed to refer to such Fund(s); and NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto agree as follows: SECTION 1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT Each Fund hereby employs the Custodian as a custodian of assets of the Portfolios, including securities which the Fund, on behalf of the applicable Portfolio, desires to be held in places within the United States ("DOMESTIC SECURITIES") and securities it desires to be held outside the United States ("FOREIGN SECURITIES"). Each Fund, on behalf of its Portfolio(s), agrees to deliver to the Custodian all securities and cash of the Portfolios, and all payments of income, payments of principal or capital distributions received by it with respect to all securities owned by the Portfolio(s) from time to time, and the cash consideration received by it for such Shares as may be issued or sold from time to time. The Custodian shall not be responsible for any property of a Portfolio which is not received by it or which is delivered out in accordance with Proper Instructions (as such term is defined in Section 7 hereof) including, without limitation, Portfolio property (i) held by brokers, private bankers or other entities on behalf of the Portfolio (each a "LOCAL AGENT"), (ii) held by Special Sub-Custodians (as such term is defined in Section 5 hereof), (iii) held by entities which have advanced monies to or on behalf of the Portfolio and which have received Portfolio property as security for such advance(s) (each a "PLEDGEE"), or (iv) delivered or otherwise removed from the custody of the Custodian (a) in connection with any Free Trade (as such term is defined in Sections 2.2(14) and 2.6(7) hereof) or (b) pursuant to Special Instructions (as such term is defined in Section 7 hereof). With respect to uncertificated shares (the "UNDERLYING SHARES") of registered "investment companies" (as defined in Section 3(a)(1) of the Investment Company Act of 1940, as amended from time to time (the "1940 ACT")), whether in the same "group of investment companies" (as defined in Section 12(d)(1)(G)(ii) of the 1940 Act) or otherwise, including pursuant to Section 12(d)(1)(F) of the 1940 Act (hereinafter sometimes referred to as the "UNDERLYING PORTFOLIOS") the holding of confirmation statements that identify the shares as being recorded in the Custodian's name on behalf of the Portfolios will be deemed custody for purposes hereof. Upon receipt of Proper Instructions, the Custodian shall on behalf of the applicable Portfolio(s) from time to time employ one or more sub-custodians located in the United States, but only in accordance with an applicable vote by the Board of Trustees or the Board of Directors of the Fund (as appropriate, and in each case, the "BOARD") on behalf of the applicable Portfolio(s), and provided that the Custodian shall have no more or less responsibility or liability to any Fund on account of any actions or omissions of any sub-custodian so employed than any such sub-custodian has to the Custodian. The Custodian may place and maintain each Fund's foreign securities with foreign banking institution sub-custodians employed by the Custodian and/or foreign securities depositories, all as designated in Schedules A and B hereto, but only in accordance with the applicable provisions of Sections 3 and 4 hereof. SECTION 2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE PORTFOLIOS TO BE HELD IN THE UNITED STATES SECTION 2.1 HOLDING SECURITIES. The Custodian shall hold and physically segregate for the account of each Portfolio all non-cash property, to be held by it in the United States, including all domestic securities owned by such Portfolio other than (a) securities which are maintained pursuant to Section 2.8 in a clearing agency which acts as a securities depository or in a book-entry system authorized by the U.S. Department of the Treasury (each, a "U.S. SECURITIES SYSTEM") and (b) Underlying Shares owned by each Fund which are maintained pursuant to Section 2.10 hereof in an account with State Street Bank and Trust Company or such other entity which may from time to time act as a transfer agent for the Underlying Portfolios and with respect to which the Custodian is provided with Proper Instructions (the "UNDERLYING TRANSFER AGENT"). SECTION 2.2 DELIVERY OF SECURITIES. The Custodian shall release and deliver domestic securities owned by a Portfolio held by the Custodian, in a U.S. Securities System account of the Custodian or in an account at the Underlying Transfer Agent, only upon receipt of Proper Instructions on behalf of the applicable Portfolio, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases: 1) Upon sale of such securities for the account of the Portfolio and receipt of payment therefor; 2) Upon the receipt of payment in connection with any repurchase agreement related to such securities entered into by the Portfolio; 3) In the case of a sale effected through a U.S. Securities System, in accordance with the provisions of Section 2.8 hereof; 4) To the depository agent in connection with tender or other similar offers for securities of the Portfolio; 5) To the issuer thereof or its agent when such securities are called, redeemed, retired or otherwise become payable; provided that, in any such case, the cash or other consideration is to be delivered to the Custodian; 6) To the issuer thereof, or its agent, for transfer into the name of the Portfolio or into the name of any nominee or nominees of the Custodian or into the name or nominee name of any agent appointed pursuant to Section 2.7 or into the name or nominee name of any sub-custodian appointed pursuant to Section 1; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new securities are to be delivered to the Custodian; 7) Upon the sale of such securities for the account of the Portfolio, to the broker or its clearing agent, against a receipt, for examination in accordance with "street delivery" custom; provided that in any such case, the Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Custodian's own negligence or willful misconduct; 8) For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 9) In the case of warrants, rights or similar securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 10) For delivery in connection with any loans of securities made by the Portfolio (a) against receipt of collateral as agreed from time to time by the Fund on behalf of the Portfolio, except that in connection with any loans for which collateral is to be credited to the Custodian's account in the book-entry system authorized by the U.S. Department of the Treasury, the Custodian will not be held liable or responsible for the delivery of securities owned by the Portfolio prior to the receipt of such collateral or (b) to the lending agent, or the lending agent's custodian, in accordance with written Proper Instructions (which may not provide for the receipt by the Custodian of collateral therefor) agreed upon from time to time by the Custodian and the Fund; 11) For delivery as security in connection with any borrowing by a Fund on behalf of a Portfolio requiring a pledge of assets by the Fund on behalf of such Portfolio; 12) For delivery in accordance with the provisions of any agreement among the Fund on behalf of the Portfolio, the Custodian and a broker-dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a member of The National Association of Securities Dealers, Inc. (the "NASD"), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund on behalf of a Portfolio; 13) For delivery in accordance with the provisions of any agreement among a Fund on behalf of the Portfolio, the Custodian, and a futures commission merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission (the "CFTC") and/or any contract market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Fund on behalf of a Portfolio; 14) Upon the sale or other delivery of such investments (including, without limitation, to one or more (a) Special Sub-Custodians or (b) additional custodians appointed by the Fund, and communicated to the Custodian from time to time via a writing duly executed by an authorized officer of the Fund, for the purpose of engaging in repurchase agreement transactions(s), each a "Repo Custodian"), and prior to receipt of payment therefor, as set forth in written Proper Instructions (such delivery in advance of payment, along with payment in advance of delivery made in accordance with Section 2.6(7), as applicable, shall each be referred to herein as a "Free Trade"), provided that such Proper Instructions shall set forth (a) the securities of the Portfolio to be delivered and (b) the person(s) to whom delivery of such securities shall be made; 15) Upon receipt of instructions from the Fund's transfer agent (the "Transfer Agent") for delivery to such Transfer Agent or to the holders of Shares in connection with distributions in kind, as may be described from time to time in the currently effective prospectus and statement of additional information of the Fund related to the Portfolio (the "Prospectus"), in satisfaction of requests by holders of Shares for repurchase or redemption; 16) In the case of a sale processed through the Underlying Transfer Agent of Underlying Shares, in accordance with Section 2.10 hereof; 17) For delivery as initial or variation margin in connection with futures or options on futures contracts entered into by the Fund on behalf of the Portfolio; and 18) For any other purpose, but only upon receipt of Proper Instructions from the Fund on behalf of the applicable Portfolio specifying (a) the securities of the Portfolio to be delivered and (b) the person or persons to whom delivery of such securities shall be made. SECTION 2.3 REGISTRATION OF SECURITIES. Domestic securities held by the Custodian (other than bearer securities) shall be registered in the name of the Portfolio or in the name of any nominee of a Fund on behalf of the Portfolio or of any nominee of the Custodian which nominee shall be assigned exclusively to the Portfolio, unless the Fund has authorized in writing the appointment of a nominee to be used in common with other registered management investment companies having the same investment adviser as the Portfolio, or in the name or nominee name of any agent appointed pursuant to Section 2.7 or in the name or nominee name of any sub-custodian appointed pursuant to Section 1. All securities accepted by the Custodian on behalf of the Portfolio under the terms of this Agreement shall be in "street name" or other good delivery form. If, however, a Fund directs the Custodian to maintain securities in "street name", the Custodian shall utilize its best efforts only to timely collect income due the Fund on such securities and to notify the Fund on a best efforts basis only of relevant corporate actions including, without limitation, pendency of calls, maturities, tender or exchange offers. SECTION 2.4 BANK ACCOUNTS. The Custodian shall open and maintain a separate bank account or accounts in the United States in the name of each Portfolio of each Fund, subject only to draft or order by the Custodian acting pursuant to the terms of this Agreement, and shall hold in such account or accounts, subject to the provisions hereof, all cash received by it from or for the account of the Portfolio, other than cash maintained by the Portfolio in a bank account established and used in accordance with Rule 17f-3 under the 1940 Act. Funds held by the Custodian for a Portfolio may be deposited by it to its credit as Custodian in the banking department of the Custodian or in such other banks or trust companies as it may in its discretion deem necessary or desirable; provided, however, that every such bank or trust company shall be qualified to act as a custodian under the 1940 Act and that each such bank or trust company and the funds to be deposited with each such bank or trust company shall on behalf of each applicable Portfolio be approved by vote of a majority of the Board. Such funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity. Section 2.5 Collection of Income. Except with respect to Portfolio property released and delivered pursuant to Section 2.2(14) or purchased pursuant to Section 2.6(7), and subject to the provisions of Section 2.3, the Custodian shall collect on a timely basis all income and other payments with respect to registered domestic securities held hereunder to which each Portfolio shall be entitled either by law or pursuant to custom in the securities business, and shall collect on a timely basis all income and other payments with respect to bearer domestic securities if, on the date of payment by the issuer, such securities are held by the Custodian or its agent thereof and shall credit such income, as collected, to such Portfolio's custodian account. Without limiting the generality of the foregoing, the Custodian shall detach and present for payment all coupons and other income items requiring presentation as and when they become due and shall collect interest when due on securities held hereunder. Income due each Portfolio on securities loaned pursuant to the provisions of Section 2.2 (10) shall be the responsibility of the applicable Fund. The Custodian will have no duty or responsibility in connection therewith, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Portfolio is properly entitled. SECTION 2.6 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions on behalf of the applicable Portfolio, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out monies of a Portfolio in the following cases only: 1) Upon the purchase of domestic securities, options, futures contracts or options on futures contracts for the account of the Portfolio but only (a) against the delivery of such securities or evidence of title to such options, futures contracts or options on futures contracts to the Custodian (or any bank, banking firm or trust company doing business in the United States or abroad which is qualified under the 1940 Act to act as a custodian and has been designated by the Custodian as its agent for this purpose) registered in the name of the Portfolio or in the name of a nominee of the Custodian referred to in Section 2.3 hereof or in proper form for transfer; (b) in the case of a purchase effected through a U.S. Securities System, in accordance with the conditions set forth in Section 2.8 hereof; (c) in the case of a purchase of Underlying Shares, in accordance with the conditions set forth in Section 2.10 hereof; (d) in the case of repurchase agreements entered into between the applicable Fund on behalf of a Portfolio and the Custodian, or another bank, or a broker-dealer which is a member of NASD, (i) against delivery of the securities either in certificate form or through an entry crediting the Custodian's account at the Federal Reserve Bank with such securities or (ii) against delivery of the receipt evidencing purchase by the Portfolio of securities owned by the Custodian along with written evidence of the agreement by the Custodian to repurchase such securities from the Portfolio; or (e) for transfer to a time deposit account of the Fund in any bank, whether domestic or foreign; such transfer may be effected prior to receipt of a confirmation from a broker and/or the applicable bank pursuant to Proper Instructions from the Fund as defined herein; 2) In connection with conversion, exchange or surrender of securities owned by the Portfolio as set forth in Section 2.2 hereof; 3) For the redemption or repurchase of Shares issued as set forth in Section 6 hereof; 4) For the payment of any expense or liability incurred by the Portfolio, including but not limited to the following payments for the account of the Portfolio: interest, taxes, management, accounting, transfer agent and legal fees, and operating expenses of the Fund whether or not such expenses are to be in whole or part capitalized or treated as deferred expenses; 5) For the payment of any dividends on Shares declared pursuant to the Fund's articles of incorporation or organization and by-laws or agreement or declaration of trust, as applicable, and Prospectus (collectively, "Governing Documents"); 6) For payment of the amount of dividends received in respect of securities sold short; 7) Upon the purchase of domestic investments including, without limitation, repurchase agreement transactions involving delivery of Portfolio monies to Repo Custodian(s), and prior to receipt of such investments, as set forth in written Proper Instructions (such payment in advance of delivery, along with delivery in advance of payment made in accordance with Section 2.2(14), as applicable, shall each be referred to herein as a "Free Trade"), provided that such Proper Instructions shall also set forth (a) the amount of such payment and (b) the person(s) to whom such payment is made; 8) For payment as initial or variation margin in connection with futures or options on futures contracts entered into by the Fund on behalf of the Portfolio; and 9) For any other purpose, but only upon receipt of Proper Instructions from the Fund on behalf of the Portfolio specifying (a) the amount of such payment and (b) the person or persons to whom such payment is to be made. SECTION 2.7 APPOINTMENT OF AGENTS. The Custodian may at any time or times in its discretion appoint (and may at any time remove) any other bank or trust company which is itself qualified under the 1940 Act to act as a custodian, as its agent to carry out such of the provisions of this Section 2 as the Custodian may from time to time direct; provided, however, that the appointment of any agent shall not relieve the Custodian of its responsibilities or liabilities hereunder. The Underlying Transfer Agent shall not be deemed an agent or sub-custodian of the Custodian for purposes of this Section 2.7 or any other provision of this Agreement. SECTION 2.8 DEPOSIT OF FUND ASSETS IN U.S. SECURITIES SYSTEMS. The Custodian may deposit and/or maintain securities owned by a Portfolio in a U.S. Securities System in compliance with the conditions of Rule 17f-4 under the 1940 Act, as amended from time to time. SECTION 2.9 SEGREGATED ACCOUNT. The Custodian shall upon receipt of Proper Instructions on behalf of each applicable Portfolio, establish and maintain a segregated account or accounts for and on behalf of each such Portfolio, into which account or accounts may be transferred cash and/or securities, including securities maintained in an account by the Custodian pursuant to Section 2.8 hereof, (a) in accordance with the provisions of any agreement among the Fund on behalf of the Portfolio, the Custodian and a broker-dealer registered under the Exchange Act and a member of the NASD (or any futures commission merchant registered under the Commodity Exchange Act), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange (or the CFTC or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Portfolio, (b) for purposes of segregating cash or government securities in connection with options purchased, sold or written by the Portfolio or commodity futures contracts or options thereon purchased or sold by the Portfolio, (c) for the purposes of compliance by the Portfolio with the procedures required by Investment Company Act Release No. 10666, or any subsequent release of the U.S. Securities and Exchange Commission (the "SEC"), or interpretative opinion of the staff of the SEC, relating to the maintenance of segregated accounts by registered management investment companies, and (d) for any other purpose in accordance with Proper Instructions. SECTION 2.10 DEPOSIT OF FUND ASSETS WITH THE UNDERLYING TRANSFER AGENT. Underlying Shares beneficially owned by the Fund, on behalf of a Portfolio, shall be deposited and/or maintained in an account or accounts maintained with an Underlying Transfer Agent and the Custodian's only responsibilities with respect thereto shall be limited to the following: 1) Upon receipt of a confirmation or statement from an Underlying Transfer Agent that such Underlying Transfer Agent is holding or maintaining Underlying Shares in the name of the Custodian (or a nominee of the Custodian) for the benefit of a Portfolio, the Custodian shall identify by book-entry that such Underlying Shares are being held by it as custodian for the benefit of such Portfolio. 2) In respect of the purchase of Underlying Shares for the account of a Portfolio, upon receipt of Proper Instructions, the Custodian shall pay out monies of such Portfolio as so directed, and record such payment from the account of such Portfolio on the Custodian's books and records. 3) In respect of the sale or redemption of Underlying Shares for the account of a Portfolio, upon receipt of Proper Instructions, the Custodian shall transfer such Underlying Shares as so directed, record such transfer from the account of such Portfolio on the Custodian's books and records and, upon the Custodian's receipt of the proceeds therefor, record such payment for the account of such Portfolio on the Custodian's books and records. The Custodian shall not be liable to the Fund for any loss or damage to the Fund or any Portfolio resulting from the maintenance of Underlying Shares with an Underlying Transfer Agent except for losses resulting directly from the fraud, negligence or willful misconduct of the Custodian or any of its agents or of any of its or their employees. SECTION 2.11 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to domestic securities of each Portfolio held by it and in connection with transfers of securities. SECTION 2.12 PROXIES. Except with respect to Portfolio property released and delivered pursuant to Section 2.2(14), or purchased pursuant to Section 2.6(7), the Custodian shall, with respect to the domestic securities held hereunder, cause to be promptly executed by the registered holder of such securities, if the securities are registered otherwise than in the name of the Portfolio or a nominee of the Portfolio, all proxies, without indication of the manner in which such proxies are to be voted, and shall promptly deliver to the Fund such proxies, all proxy soliciting materials and all notices relating to such securities. SECTION 2.13 COMMUNICATIONS RELATING TO PORTFOLIO SECURITIES. Except with respect to Portfolio property released and delivered pursuant to Section 2.2(14), or purchased pursuant to Section 2.6(7), and subject to the provisions of Section 2.3, the Custodian shall transmit promptly to the applicable Fund for each Portfolio all written information (including, without limitation, pendency of calls and maturities of domestic securities and expirations of rights in connection therewith and notices of exercise of call and put options written by the Fund on behalf of the Portfolio and the maturity of futures contracts purchased or sold by the Fund on behalf of the Portfolio) received by the Custodian from issuers of the securities being held for the Portfolio. With respect to tender or exchange offers, the Custodian shall transmit promptly to the applicable Fund all written information received by the Custodian from issuers of the securities whose tender or exchange is sought and from the party (or its agents) making the tender or exchange offer. The Custodian shall not be liable for any untimely exercise of any tender, exchange or other right or power in connection with domestic securities or other property of the Portfolios at any time held by it unless (i) the Custodian is in actual possession of such domestic securities or property and (ii) the Custodian receives Proper Instructions with regard to the exercise of any such right or power, and both (i) and (ii) occur at least three business days prior to the date on which the Custodian is to take action to exercise such right or power. The Custodian shall also transmit promptly to the applicable Fund for each Portfolio all written information received by the Custodian regarding any class action or other litigation in connection with Portfolio securities or other assets issued in the United States and then held, or previously held, during the term of this Agreement by the Custodian for the account of the Fund for such Portfolio, including, but not limited to, opt-out notices and proof-of-claim forms. For avoidance of doubt, upon and after the effective date of any termination of this Agreement, with respect to a Fund or its Portfolio(s), as may be applicable, the Custodian shall have no responsibility to so transmit any information under this Section 2.13. SECTION 3. PROVISIONS RELATING TO RULES 17F-5 AND 17F-7 SECTION 3.1. DEFINITIONS. As used throughout this Agreement, the capitalized terms set forth below shall have the indicated meanings: "COUNTRY RISK" means all factors reasonably related to the systemic risk of holding Foreign Assets in a particular country including, but not limited to, such country's political environment, economic and financial infrastructure (including any Eligible Securities Depository operating in the country), prevailing or developing custody and settlement practices, and laws and regulations applicable to the safekeeping and recovery of Foreign Assets held in custody in that country. "ELIGIBLE FOREIGN CUSTODIAN" has the meaning set forth in section (a)(1) of Rule 17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as defined in Rule 17f-5), a bank holding company meeting the requirements of an Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate action of the SEC), or a foreign branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the requirements of a custodian under Section 17(f) of the 1940 Act; the term does not include any Eligible Securities Depository. "ELIGIBLE SECURITIES DEPOSITORY" has the meaning set forth in section (b)(1) of Rule 17f-7. "FOREIGN ASSETS" means any of the Portfolios' investments (including foreign currencies) for which the primary market is outside the United States and such cash and cash equivalents as are reasonably necessary to effect the Portfolios' transactions in such investments. "FOREIGN CUSTODY MANAGER" has the meaning set forth in section (a)(3) of Rule 17f-5. "RULE 17f-5" means Rule 17f-5 promulgated under the 1940 Act. "RULE 17f-7" means Rule 17f-7 promulgated under the 1940 Act. SECTION 3.2. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER. 3.2.1 DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER. Each Fund, by resolution adopted by its Board, hereby delegates to the Custodian, subject to Section (b) of Rule 17f-5, the responsibilities set forth in this Section 3.2 with respect to Foreign Assets of the Portfolios held outside the United States, and the Custodian hereby accepts such delegation as Foreign Custody Manager with respect to the Portfolios. 3.2.2 COUNTRIES COVERED. The Foreign Custody Manager shall be responsiblefor performing the delegated responsibilities defined below only with respect to the countries and custody arrangements for each such country listed on Schedule A to this Agreement, which list of countries may be amended from time to time by any Fund with the agreement of the Foreign Custody Manager. The Foreign Custody Manager shall list on Schedule A the Eligible Foreign Custodians selected by the Foreign Custody Manager to maintain the assets of the Portfolios, which list of Eligible Foreign Custodians may be amended from time to time in the sole discretion of the Foreign Custody Manager. The Foreign Custody Manager will provide amended versions of Schedule A in accordance with Section 3.2.5 hereof. Upon the receipt by the Foreign Custody Manager of Proper Instructions to open an account or to place or maintain Foreign Assets in a country listed on Schedule A, and the fulfillment by each Fund, on behalf of the applicable Portfolio(s), of the applicable account opening requirements for such country, the Foreign Custody Manager shall be deemed to have been delegated by such Fund's Board on behalf of such Portfolio(s) responsibility as Foreign Custody Manager with respect to that country and to have accepted such delegation. Execution of this Agreement by each Fund shall be deemed to be a Proper Instruction to open an account, or to place or maintain Foreign Assets, in each country listed on Schedule A. Following the receipt of Proper Instructions directing the Foreign Custody Manager to close the account of a Portfolio with the Eligible Foreign Custodian selected by the Foreign Custody Manager in a designated country, the delegation by the Board on behalf of such Portfolio to the Custodian as Foreign Custody Manager for that country shall be deemed to have been withdrawn and the Custodian shall immediately cease to be the Foreign Custody Manager with respect to such Portfolio with respect to that country. The Foreign Custody Manager may withdraw its acceptance of delegated responsibilities with respect to a designated country upon written notice to the Fund. Thirty days (or such longer period to which the parties agree in writing) after receipt of any such notice by the Fund, the Custodian shall have no further responsibility in its capacity as Foreign Custody Manager to the Fund with respect to the country as to which the Custodian's acceptance of delegation is withdrawn. 3.2.3 SCOPE OF DELEGATED RESPONSIBILITIES: (a) SELECTION OF ELIGIBLE FOREIGN CUSTODIANS. Subject to the provisions of this Section 3.2, the Foreign Custody Manager may place and maintain the Foreign Assets in the care of the Eligible Foreign Custodian selected by the Foreign Custody Manager in each country listed on Schedule A, as amended from time to time. In performing its delegated responsibilities as Foreign Custody Manager to place or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign Custody Manager shall determine that the Foreign Assets will be subject to reasonable care, based on the standards applicable to custodians in the country in which the Foreign Assets will be held by that Eligible Foreign Custodian, after considering all factors relevant to the safekeeping of such assets, including, without limitation the factors specified in Rule 17f-5(c)(1). (b) CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS. The Foreign Custody Manager shall determine that the contract governing the foreign custody arrangements with each Eligible Foreign Custodian selected by the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2). (c) MONITORING. In each case in which the Foreign Custody Manager maintains Foreign Assets with an Eligible Foreign Custodian selected by the Foreign Custody Manager, the Foreign Custody Manager shall establish a system to monitor (i) the appropriateness of maintaining the Foreign Assets with such Eligible Foreign Custodian and (ii) the contract governing the custody arrangements established by the Foreign Custody Manager with the Eligible Foreign Custodian. In the event the Foreign Custody Manager determines that the custody arrangements with an Eligible Foreign Custodian it has selected are no longer appropriate, the Foreign Custody Manager shall notify the Board in accordance with Section 3.2.5 hereunder. 3.2.4 GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY. For purposes of this Section 3.2, the Board shall be deemed to have considered and determined to accept such Country Risk as is incurred by placing and maintaining the Foreign Assets in each country for which the Custodian is serving as Foreign Custody Manager of the Portfolios. 3.2.5 REPORTING REQUIREMENTS. The Foreign Custody Manager shall report the withdrawal of the Foreign Assets from an Eligible Foreign Custodian and the placement of such Foreign Assets with another Eligible Foreign Custodian by providing to the Board an amended Schedule A at the end of the calendar quarter in which an amendment to such Schedule has occurred. The Foreign Custody Manager shall make written reports notifying the Board of any other material change in the foreign custody arrangements of the Portfolios described in this Section 3.2 after the occurrence of the material change. 3.2.6 STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF A PORTFOLIO. In performing the responsibilities delegated to it, the Foreign Custody Manager agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of assets of management investment companies registered under the 1940 Act would exercise. 3.2.7 REPRESENTATIONS WITH RESPECT TO RULE 17f-5. The Foreign Custody Manager represents to each Fund that it is a U.S. Bank as defined in section (a)(7) of Rule 17f-5. Each Fund represents to the Custodian that its Board has determined that it is reasonable for such Board to rely on the Custodian to perform the responsibilities delegated pursuant to this Agreement to the Custodian as the Foreign Custody Manager of the Portfolios. 3.2.8 EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN CUSTODY MANAGER. Each Board's delegation to the Custodian as Foreign Custody Manager of the Portfolios shall be effective as of the date hereof and shall remain in effect until terminated at any time, without penalty, by written notice from the terminating party to the non-terminating party. Termination will become effective thirty (30) days after receipt by the non-terminating party of such notice. The provisions of Section 3.2.2 hereof shall govern the delegation to and termination of the Custodian as Foreign Custody Manager of the Portfolios with respect to designated countries. Section 3.3 ELIGIBLE SECURITIES DEPOSITORIES. 3.3.1 ANALYSIS AND MONITORING. The Custodian shall (a) provide the Fund (or its duly-authorized investment manager or investment adviser) with an analysis of the custody risks associated with maintaining assets with the Eligible Securities Depositories set forth on Schedule B hereto in accordance with section (a)(1)(i)(A) of Rule 17f-7, and (b) monitor such risks on a continuing basis, and promptly notify the Fund (or its duly-authorized investment manager or investment adviser) of any material change in such risks, in accordance with section (a)(1)(i)(B) of Rule 17f-7. 3.3.2 STANDARD OF CARE. The Custodian agrees to exercise reasonable care, prudence and diligence in performing the duties set forth in Section 3.3.1. SECTION 4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE PORTFOLIOS TO BE HELD OUTSIDE THE UNITED STATES SECTION 4.1 DEFINITIONS. As used throughout this Agreement, the capitalized terms set forth below shall have the indicated meanings: "FOREIGN SECURITIES SYSTEM" means an Eligible Securities Depository listed on Schedule B hereto. "FOREIGN SUB-CUSTODIAN" means a foreign banking institution serving as an Eligible Foreign Custodian. SECTION 4.2. HOLDING SECURITIES. The Custodian shall identify on its books as belonging to the Portfolios the foreign securities held by each Foreign Sub-Custodian or Foreign Securities System. The Custodian may hold foreign securities for all of its customers, including the Portfolios, with any Foreign Sub-Custodian in an account that is identified as belonging to the Custodian for the benefit of its customers, provided however, that (i) the records of the Custodian with respect to foreign securities of the Portfolios which are maintained in such account shall identify those securities as belonging to the Portfolios and (ii), to the extent permitted and customary in the market in which the account is maintained, the Custodian shall require that securities so held by the Foreign Sub-Custodian be held separately from any assets of such Foreign Sub-Custodian or of other customers of such Foreign Sub-Custodian. SECTION 4.3. FOREIGN SECURITIES SYSTEMS. Foreign securities shall be maintained in a Foreign Securities System in a designated country through arrangements implemented by the Custodian or a Foreign Sub-Custodian, as applicable, in such country. SECTION 4.4. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT. 4.4.1. DELIVERY OF FOREIGN ASSETS. The Custodian or a Foreign Sub-Custodian shall release and deliver foreign securities of the Portfolios held by the Custodian or such Foreign Sub-Custodian, or in a Foreign Securities System account, only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases: (i) Upon the sale of such foreign securities for the Portfolio in accordance with commercially reasonable market practice in the country where such foreign securities are held or traded, including, without limitation: (A) delivery against expectation of receiving later payment; or (B) in the case of a sale effected through a Foreign Securities System, in accordance with the rules governing the operation of the Foreign Securities System; (ii) In connection with any repurchase agreement related to foreign securities; (iii)To the depository agent in connection with tender or other similar offers for foreign securities of the Portfolios; (iv) To the issuer thereof or its agent when such foreign securities are called, redeemed, retired or otherwise become payable; (v) To the issuer thereof, or its agent, for transfer into the name of the Custodian (or the name of the respective Foreign Sub-Custodian or of any nominee of the Custodian or such Foreign Sub-Custodian) or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; (vi) To brokers, clearing banks or other clearing agents for examination or trade execution in accordance with market custom; provided that in any such case, the Foreign Sub-Custodian shall have no responsibility or liability for any loss arising from the delivery of such foreign securities prior to receiving payment for such foreign securities except as may arise from the Foreign Sub-Custodian's own negligence or willful misconduct; (vii)For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement; (viii) In the case of warrants, rights or similar foreign securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities; (ix) For delivery as security in connection with any borrowing by a Fund on behalf of a Portfolio requiring a pledge of assets by the Fund on behalf of such Portfolio; (x) In connection with trading in options and futures contracts, including delivery as original margin and variation margin; (xi) Upon the sale or other delivery of such foreign securities (including, without limitation, to one or more Special Sub-Custodians or Repo Custodians) as a Free Trade, provided that applicable Proper Instructions shall set forth (A) the foreign securities to be delivered and (B) the person or persons to whom delivery shall be made; (xii) In connection with the lending of foreign securities; and (xiii) For any other purpose, but only upon receipt of Proper Instructions specifying (A) the foreign securities to be delivered and (B) the person or persons to whom delivery of such securities shall be made. 4.4.2. PAYMENT OF PORTFOLIO MONIES. Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out, or direct the respective Foreign Sub-Custodian or the respective Foreign Securities System to pay out, monies of a Portfolio in the following cases only: (i) Upon the purchase of foreign securities for the Portfolio, unless otherwise directed by Proper Instructions, by (A) delivering money to the seller thereof or to a dealer therefor (or an agent for such seller or dealer) against expectation of receiving later delivery of such foreign securities; or (B) in the case of a purchase effected through a Foreign Securities System, in accordance with the rules governing the operation of such Foreign Securities System; (ii) In connection with the conversion, exchange or surrender of foreign securities of the Portfolio; (iii)For the payment of any expense or liability of the Portfolio, including but not limited to the following payments: interest, taxes, investment advisory fees, transfer agency fees, fees under this Agreement, legal fees, accounting fees, and other operating expenses; (iv) For the purchase or sale of foreign exchange or foreign exchange contracts for the Portfolio, including transactions executed with or through the Custodian or its Foreign Sub-Custodians; (v) In connection with trading in options and futures contracts, including delivery as original margin and variation margin; (vi) Upon the purchase of foreign investments including, without limitation, repurchase agreement transactions involving delivery of Portfolio monies to Repo Custodian(s), as a Free Trade, provided that applicable Proper Instructions shall set forth (A) the amount of such payment and (B) the person or persons to whom payment shall be made; (vii)For payment of part or all of the dividends received in respect of securities sold short; (viii) In connection with the borrowing or lending of foreign securities; and (ix) For any other purpose, but only upon receipt of Proper Instructions specifying (A) the amount of such payment and (B) the person or persons to whom such payment is to be made. 4.4.3. MARKET CONDITIONS. Notwithstanding any provision of this Agreement to the contrary, settlement and payment for Foreign Assets received for the account of the Portfolios and delivery of Foreign Assets maintained for the account of the Portfolios may be effected in accordance with the customary established securities trading or processing practices and procedures in the country or market in which the transaction occurs, including, without limitation, delivering Foreign Assets to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) with the expectation of receiving later payment for such Foreign Assets from such purchaser or dealer. The Custodian shall provide to each Board the information with respect to custody and settlement practices in countries in which the Custodian employs a Foreign Sub-Custodian described on Schedule C hereto at the time or times set forth on such Schedule. The Custodian may revise Schedule C from time to time, provided that no such revision shall result in a Board being provided with substantively less information than had been previously provided hereunder. SECTION 4.5. REGISTRATION OF FOREIGN SECURITIES. The foreign securities maintained in the custody of a Foreign Sub-Custodian (other than bearer securities) shall be registered in the name of the applicable Portfolio or in the name of the Custodian or in the name of any Foreign Sub-Custodian or in the name of any nominee of the foregoing, and the applicable Fund on behalf of such Portfolio agrees to hold any such nominee harmless from any liability as a holder of record of such foreign securities. The Custodian or a Foreign Sub-Custodian shall not be obligated to accept securities on behalf of a Portfolio under the terms of this Agreement unless the form of such securities and the manner in which they are delivered are in accordance with reasonable market practice. SECTION 4.6 BANK ACCOUNTS. The Custodian shall identify on its books as belonging to the applicable Fund cash (including cash denominated in foreign currencies) deposited with the Custodian. Where the Custodian is unable to maintain, or market practice does not facilitate the maintenance of, cash on the books of the Custodian, a bank account or bank accounts shall be opened and maintained outside the United States on behalf of a Portfolio with a Foreign Sub- Custodian. All accounts referred to in this Section shall be subject only to draft or order by the Custodian (or, if applicable, such Foreign Sub-Custodian) acting pursuant to the terms of this Agreement to hold cash received by or from or for the account of the Portfolio. Cash maintained on the books of the Custodian (including its branches, subsidiaries and affiliates), regardless of currency denomination, is maintained in bank accounts established under, and subject to the laws of, The Commonwealth of Massachusetts. SECTION 4.7. COLLECTION OF INCOME. The Custodian shall use reasonable commercial efforts to collect all income and other payments with respect to the Foreign Assets held hereunder to which the Portfolios shall be entitled and shall credit such income, as collected, to the applicable Portfolio. In the event that extraordinary measures are required to collect such income, the Fund and the Custodian shall consult as to such measures and as to the compensation and expenses of the Custodian relating to such measures. SECTION 4.8 SHAREHOLDER RIGHTS. With respect to the foreign securities held pursuant to this Section 4, the Custodian shall use reasonable commercial efforts to facilitate the exercise of voting and other shareholder rights, subject always to the laws, regulations and practical constraints that may exist in the country where such securities are issued. Each Fund acknowledges that local conditions, including lack of regulation, onerous procedural obligations, lack of notice and other factors may have the effect of severely limiting the ability of such Fund to exercise shareholder rights. SECTION 4.9. COMMUNICATIONS RELATING TO FOREIGN SECURITIES. The Custodian shall transmit promptly to the applicable Fund written information with respect to materials received by the Custodian via the Foreign Sub-Custodians from issuers of the foreign securities being held for the account of the Portfolios (including, without limitation, pendency of calls and maturities of foreign securities and expirations of rights in connection therewith). With respect to tender or exchange offers, the Custodian shall transmit promptly to the applicable Fund written information with respect to materials so received by the Custodian from issuers of the foreign securities whose tender or exchange is sought or from the party (or its agents) making the tender or exchange offer. The Custodian shall not be liable for any untimely exercise of any tender, exchange or other right or power in connection with foreign securities or other property of the Portfolios at any time held by it unless (i) the Custodian or the respective Foreign Sub- Custodian is in actual possession of such foreign securities or property and (ii) the Custodian receives Proper Instructions with regard to the exercise of any such right or power, and both (i) and (ii) occur at least three business days prior to the date on which the Custodian is to take action to exercise such right or power. The Custodian shall also transmit promptly to the applicable Fund all written information received by the Custodian via the Foreign Sub- Custodians from issuers of the foreign securities being held for the account of the Portfolios regarding any class action or other litigation in connection with Portfolio foreign securities or other assets issued outside the United States and then held, or previously held, during the term of this Agreement by the Custodian via a Foreign Sub-Custodian for the account of the Fund for such Portfolio, including, but not limited to, opt-out notices and proof-of-claim forms. For avoidance of doubt, upon and after the effective date of any termination of this Agreement, with respect to a Fund or its Portfolio(s), as may be applicable, the Custodian shall have no responsibility to so transmit any information under this Section 4.9. SECTION 4.10. LIABILITY OF FOREIGN SUB-CUSTODIANS. Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian shall, to the extent possible, require the Foreign Sub-Custodian to exercise reasonable care in the performance of its duties, and to indemnify, and hold harmless, the Custodian from and against any loss, damage, cost, expense, liability or claim arising out of or in connection with the Foreign Sub-Custodian's performance of such obligations. At a Fund's election, the Portfolios shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against a Foreign Sub-Custodian as a consequence of any such loss, damage, cost, expense, liability or claim if and to the extent that the Portfolios have not been made whole for any such loss, damage, cost, expense, liability or claim. SECTION 4.11 TAX LAW. The Custodian shall have no responsibility or liability for any obligations now or hereafter imposed on any Fund, the Portfolios or the Custodian as custodian of the Portfolios by the tax law of the United States or of any state or political subdivision thereof. It shall be the responsibility of each Fund to notify the Custodian of the obligations imposed on such Fund with respect to the Portfolios or the Custodian as custodian of the Portfolios by the tax law of countries other than those mentioned in the above sentence, including responsibility for withholding and other taxes, assessments or other governmental charges, certifications and governmental reporting. The sole responsibility of the Custodian with regard to such tax law shall be to use reasonable efforts to assist the Fund with respect to any claim for exemption or refund under the tax law of countries for which such Fund has provided such information. SECTION 4.12. LIABILITY OF CUSTODIAN. The Custodian shall be liable for the acts or omissions of a Foreign Sub-Custodian to the same extent as set forth with respect to sub- custodians generally in this Agreement and, regardless of whether assets are maintained in the custody of a Foreign Sub-Custodian or a Foreign Securities System, the Custodian shall not be liable for any loss, damage, cost, expense, liability or claim resulting from nationalization, expropriation, currency restrictions, or acts of war or terrorism, or any other loss where the Sub- Custodian has otherwise acted with reasonable care. SECTION 5. SPECIAL SUB-CUSTODIANS Upon receipt of Special Instructions (as such term is defined in Section 7 hereof), the Custodian shall, on behalf of one or more Portfolios, appoint one or more banks, trust companies or other entities designated in such Special Instructions to act as a sub-custodian for the purposes of effecting such transaction(s) as may be designated by a Fund in Special Instructions. Each such designated sub-custodian is referred to herein as a "SPECIAL SUB-CUSTODIAN." Each such duly appointed Special Sub-Custodian shall be listed on Schedule D hereto, as it may be amended from time to time by a Fund, with the acknowledgment of the Custodian. In connection with the appointment of any Special Sub-Custodian, and in accordance with Special Instructions, the Custodian shall enter into a sub-custodian agreement with the Fund and the Special Sub- Custodian in form and substance approved by such Fund, provided that such agreement shall in all events comply with the provisions of the 1940 Act and the rules and regulations thereunder and the terms and provisions of this Agreement. SECTION 6. PAYMENTS FOR SALES OR REPURCHASES OR REDEMPTIONS OF SHARES The Custodian shall receive from the distributor of the Shares or from the Transfer Agent and deposit into the account of the appropriate Portfolio such payments as are received for Shares thereof issued or sold from time to time by the applicable Fund. The Custodian will provide timely notification to such Fund on behalf of each such Portfolio and the Transfer Agent of any receipt by it of payments for Shares of such Portfolio. From such funds as may be available for the purpose, the Custodian shall, upon receipt of instructions from the Transfer Agent, make funds available for payment to holders of Shares who have delivered to the Transfer Agent a request for redemption or repurchase of their Shares. In connection with the redemption or repurchase of Shares, the Custodian is authorized upon receipt of instructions from the Transfer Agent to wire funds to or through a commercial bank designated by the redeeming shareholders. In connection with the redemption or repurchase of Shares, the Custodian shall honor checks drawn on the Custodian by a holder of Shares, which checks have been furnished by a Fund to the holder of Shares, when presented to the Custodian in accordance with such procedures and controls as are mutually agreed upon from time to time between such Fund and the Custodian. SECTION 7. PROPER INSTRUCTIONS AND SPECIAL INSTRUCTIONS "PROPER INSTRUCTIONS," which may also be standing instructions, as such term is used throughout this Agreement shall mean instructions received by the Custodian from a Fund, a Fund's duly authorized investment manager or investment adviser, or a person or entity duly authorized by either of them. Such instructions may be in writing signed by the authorized person or persons or may be in a tested communication or in a communication utilizing access codes effected between electro-mechanical or electronic devices or may be by such other means and utilizing such intermediary systems and utilities as may be agreed from time to time by the Custodian and the person(s) or entity giving such instruction, provided that the Fund has followed any security procedures agreed to from time to time by the applicable Fund and the Custodian including, but not limited to, the security procedures selected by the Fund via the form of Funds Transfer Addendum hereto. Oral instructions will be considered Proper Instructions if the Custodian reasonably believes them to have been given by a person authorized to provide such instructions with respect to the transaction involved; the Fund shall cause all oral instructions to be confirmed in writing. For purposes of this Section, Proper Instructions shall include instructions received by the Custodian pursuant to any multi-party agreement which requires a segregated asset account in accordance with Section 2.9 hereof. "SPECIAL INSTRUCTIONS," as such term is used throughout this Agreement, means Proper Instructions countersigned or confirmed in writing by the Treasurer or any Assistant Treasurer of the applicable Fund or any other person designated in writing by the Treasurer of such Fund, which countersignature or confirmation shall be (a) included on the same instrument containing the Proper Instructions or on a separate instrument clearly relating thereto and (b) delivered by hand, by facsimile transmission, or in such other manner as the Fund and the Custodian agree in writing. Concurrently with the execution of this Agreement, and from time to time thereafter, as appropriate, each Fund shall deliver to the Custodian, duly certified by such Fund's Treasurer or Assistant Treasurer, a certificate setting forth: (i) the names, titles, signatures and scope of authority of all persons authorized to give Proper Instructions or any other notice, request, direction, instruction, certificate or instrument on behalf of the Fund and (ii) the names, titles and signatures of those persons authorized to give Special Instructions. Such certificate may be accepted and relied upon by the Custodian as conclusive evidence of the facts set forth therein and shall be considered to be in full force and effect until receipt by the Custodian of a similar certificate to the contrary. SECTION 8. EVIDENCE OF AUTHORITY The Custodian shall be protected in acting upon any instructions, notice, request, consent, certificate or other instrument or paper believed by it to be genuine and to have been properly executed by or on behalf of the applicable Fund. The Custodian may receive and accept a copy of a resolution certified by the Secretary or an Assistant Secretary of any Fund as conclusive evidence (a) of the authority of any person to act in accordance with such resolution or (b) of any determination or of any action by the applicable Board as described in such resolution, and such resolution may be considered as in full force and effect until receipt by the Custodian of written notice to the contrary. SECTION 9. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY The Custodian may in its discretion, without express authority from the applicable Fund on behalf of each applicable Portfolio: 1) Make payments to itself or others for minor expenses of handling securities or other similar items relating to its duties under this Agreement; provided that all such payments shall be accounted for to the Fund on behalf of the Portfolio; 2) Surrender securities in temporary form for securities in definitive form; 3) Endorse for collection, in the name of the Portfolio, checks, drafts and other negotiable instruments; and 4) In general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and property of the Portfolio except as otherwise directed by the applicable Board. SECTION 10. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND CALCULATION OF NET ASSET VALUE AND NET INCOME The Custodian shall cooperate with and supply necessary information to the entity or entities appointed by the applicable Board to keep the books of account of each Portfolio and/or compute the net asset value per Share of the outstanding Shares or, if directed in writing to do so by a Fund on behalf of a Portfolio, shall itself keep such books of account and/or compute such net asset value per Share. If so directed, the Custodian shall also calculate daily the net income of the Portfolio as described in the Prospectus and shall advise the Fund and the Transfer Agent daily of the total amounts of such net income and, if instructed in writing by an officer of the Fund to do so, shall advise the Transfer Agent periodically of the division of such net income among its various components. Each Fund acknowledges and agrees that, with respect to investments maintained with the Underlying Transfer Agent, the Underlying Transfer Agent is the sole source of information on the number of shares of a fund held by it on behalf of a Portfolio and that the Custodian has the right to rely on holdings information furnished by the Underlying Transfer Agent to the Custodian in performing its duties under this Agreement, including without limitation, the duties set forth in this Section 10 and in Section 11 hereof; provided, however, that the Custodian shall be obligated to reconcile information as to purchases and sales of Underlying Shares contained in trade instructions and confirmations received by the Custodian and to report promptly any discrepancies to the Underlying Transfer Agent. The calculations of the net asset value per Share and the daily income of each Portfolio shall be made at the time or times described from time to time in the Prospectus. Each Fund acknowledges that, in keeping the books of account of the Portfolio and/or making the calculations described herein with respect to Portfolio property released and delivered pursuant to Section 2.2(14), or purchased pursuant to Section 2.6(7) hereof, the Custodian is authorized and instructed to rely upon information provided to it by the Fund, the Fund's counterparty(ies), or the agents of either of them. SECTION 11. RECORDS The Custodian shall with respect to each Portfolio create and maintain all records relating to its activities and obligations under this Agreement in such manner as will meet the obligations of each Fund under the 1940 Act, with particular attention to section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of such Fund and employees and agents of the SEC. The Custodian shall, at a Fund's request, supply the Fund with a tabulation of securities owned by each Portfolio and held by the Custodian and shall, when requested to do so by the Fund and for such compensation as shall be agreed upon between the Fund and the Custodian, include certificate numbers in such tabulations. Each Fund acknowledges that, in creating and maintaining the records as set forth herein with respect to Portfolio property released and delivered pursuant to Section 2.2(14), or purchased pursuant to Section 2.6(7) hereof, the Custodian is authorized and instructed to rely upon information provided to it by the Fund, the Fund's counterparty(ies), or the agents of either of them. SECTION 12. OPINION OF FUND'S INDEPENDENT ACCOUNTANT The Custodian shall take all reasonable action, as a Fund with respect to a Portfolio may from time to time request, to obtain from year to year favorable opinions from the Fund's independent accountants with respect to its activities hereunder in connection with the preparation of the Fund's Form N-1A or Form N-2, as applicable, and Form N-SAR or other annual reports to the SEC and with respect to any other requirements thereof. SECTION 13. REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS The Custodian shall provide the applicable Fund, on behalf of each of the Portfolios at such times as such Fund may reasonably require, with reports by independent public accountants on the accounting system, internal accounting control and procedures for safeguarding securities, futures contracts and options on futures contracts, including securities deposited and/or maintained in a U.S. Securities System or a Foreign Securities System (either, a "Securities System"), relating to the services provided by the Custodian under this Agreement; such reports, shall be of sufficient scope and in sufficient detail, as may reasonably be required by the Fund to provide reasonable assurance that any material inadequacies would be disclosed by such examination, and, if there are no such inadequacies, the reports shall so state. SECTION 14. COMPENSATION OF CUSTODIAN The Custodian shall be entitled to reasonable compensation for its services and expenses as Custodian, as agreed upon from time to time between each Fund on behalf of each applicable Portfolio and the Custodian. SECTION 15. RESPONSIBILITY OF CUSTODIAN So long as and to the extent that it is in the exercise of reasonable care, the Custodian shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Agreement and shall be held harmless in acting upon any notice, request, consent, certificate or other instrument reasonably believed by it to be genuine and to be signed by the proper party or parties, including any futures commission merchant acting pursuant to the terms of a three-party futures or options agreement. The Custodian shall be held to the exercise of reasonable care in carrying out the provisions of this Agreement, but shall be kept indemnified by and shall be without liability to any Fund for any action taken or omitted by it in good faith without negligence, including, without limitation, acting in accordance with any Proper Instruction. It shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Fund) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. The Custodian shall be without liability to any Fund or Portfolio for any loss, liability, claim or expense resulting from or caused by anything which is part of Country Risk (as defined in Section 3 hereof), including without limitation nationalization, expropriation, currency restrictions, or acts of war, revolution, riots or terrorism. Except as may arise from the Custodian's own negligence or willful misconduct or the negligence or willful misconduct of a sub-custodian or agent, the Custodian shall be without liability to any Fund for any loss, liability, claim or expense resulting from or caused by; (i) events or circumstances beyond the reasonable control of the Custodian or any sub-custodian or Securities System or any agent or nominee of any of the foregoing, including, without limitation, the interruption, suspension or restriction of trading on or the closure of any securities market, power or other mechanical or technological failures or interruptions, computer viruses or communications disruptions, work stoppages, natural disasters, or other similar events or acts; (ii) errors by any Fund or its duly authorized investment manager or investment adviser in their instructions to the Custodian provided such instructions have been in accordance with this Agreement; (iii) the insolvency of or acts or omissions by a Securities System; (iv) any act or omission of a Special Sub-Custodian including, without limitation, reliance on reports prepared by a Special Sub-Custodian; (v) any delay or failure of any broker, agent or intermediary, central bank or other commercially prevalent payment or clearing system to deliver to the Custodian's sub-custodian or agent securities purchased or in the remittance or payment made in connection with securities sold; (vi) any delay or failure of any company, corporation, or other body in charge of registering or transferring securities in the name of the Custodian, any Fund, the Custodian's sub-custodians, nominees or agents or any consequential losses arising out of such delay or failure to transfer such securities including non-receipt of bonus, dividends and rights and other accretions or benefits; (vii) delays or inability to perform its duties due to any disorder in market infrastructure with respect to any particular security or Securities System; and (viii) any provision of any present or future law or regulation or order of the United States of America, or any state thereof, or any other country, or political subdivision thereof or of any court of competent jurisdiction. The Custodian shall be liable for the acts or omissions of a Foreign Sub-Custodian (as such term is defined in Section 4 hereof) to the same extent as set forth with respect to sub-custodians generally in this Agreement. If a Fund on behalf of a Portfolio requires the Custodian to take any action with respect to securities, which action involves the payment of money or which action may, in the opinion of the Custodian, result in the Custodian or its nominee assigned to the Fund or the Portfolio being liable for the payment of money or incurring liability of some other form, such Fund on behalf of the Portfolio, as a prerequisite to requiring the Custodian to take such action, shall provide indemnity to the Custodian in an amount and form satisfactory to it. If a Fund requires the Custodian, its affiliates, subsidiaries or agents, to advance cash or securities for any purpose (including but not limited to securities settlements, foreign exchange contracts and assumed settlement) or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Agreement, except such as may arise from its or its nominee's own negligent action, negligent failure to act or willful misconduct, any property at any time held for the account of the applicable Portfolio shall be security therefor and should the Fund fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of such Portfolio's assets to the extent necessary to obtain reimbursement. Except as may arise from the Custodian's own negligence or willful misconduct, each Fund shall indemnify and hold the Custodian harmless from and against any and all costs, expenses, losses, damages, charges, counsel fees, payments and liabilities which may be asserted against the Custodian (a) acting in accordance with any Proper Instruction or Special Instruction including, without limitation, any Proper Instruction with respect to Free Trades including, but not limited to, cost, expense, loss, damage, liability, tax, charge, assessment or claim resulting from (i) the failure of the applicable Fund to receive income with respect to purchased investments, (ii) the failure of the applicable Fund to recover amounts invested on maturity of purchased investments, (iii) the failure of the Custodian to respond to or be aware of notices or other corporate communications with respect to purchased investments, or (iv) the Custodian's reliance upon information provided by the applicable Fund, such Fund's counterparty(ies) or the agents of either of them with respect to Fund property released, delivered or purchased pursuant to either of Section 2.2(14) or Section 2.6(7) hereof; (b) for the acts or omissions of any Special Sub- Custodian; or (c) for the acts or omissions of any Local Agent or Pledgee. In no event shall the Custodian be liable for indirect, special or consequential damages. SECTION 16. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT This Agreement shall become effective as of its execution, shall continue in full force and effect until terminated as hereinafter provided, may be amended at any time by mutual agreement of the parties hereto and may be terminated by either party by an instrument in writing delivered or mailed, postage prepaid to the other party, such termination to take effect not sooner than sixty (60) days after the date of such delivery or mailing; provided, however, that no Fund shall amend or terminate this Agreement in contravention of any applicable federal or state regulations, or any provision of such Fund's Governing Documents, and further provided, that any Fund on behalf of one or more of the Portfolios may at any time by action of its Board (i) substitute another bank or trust company for the Custodian by giving notice as described above to the Custodian, or (ii) immediately terminate this Agreement in the event of the appointment of a conservator or receiver for the Custodian by the Comptroller of the Currency or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction. Termination of this Agreement with respect to any one particular Fund or Portfolio shall in no way affect the rights and duties under this Agreement with respect to any other Fund or Portfolio. Upon termination of the Agreement, the applicable Fund on behalf of each applicable Portfolio shall pay to the Custodian such compensation as may be due as of the date of such termination and shall likewise reimburse the Custodian for its costs, expenses and disbursements. SECTION 17. SUCCESSOR CUSTODIAN If a successor custodian for one or more Portfolios shall be appointed by the applicable Board, the Custodian shall, upon termination and receipt of Proper Instructions, deliver to such successor custodian at the office of the Custodian, duly endorsed and in the form for transfer, all securities of each applicable Portfolio then held by it hereunder and shall transfer to an account of the successor custodian all of the securities of each such Portfolio held in a Securities System or at the Underlying Transfer Agent. If no such successor custodian shall be appointed, the Custodian shall, in like manner, upon receipt of Proper Instructions, deliver at the office of the Custodian and transfer such securities, funds and other properties in accordance with such resolution. In the event that no Proper Instructions designating a successor custodian or alternative arrangements shall have been delivered to the Custodian on or before the date when such termination shall become effective, then the Custodian shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the 1940 Act, doing business in Boston, Massachusetts or New York, New York, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $25,000,000, all securities, funds and other properties held by the Custodian on behalf of each applicable Portfolio and all instruments held by the Custodian relative thereto and all other property held by it under this Agreement on behalf of each applicable Portfolio, and to transfer to an account of such successor custodian all of the securities of each such Portfolio held in any Securities System or at the Underlying Transfer Agent. Thereafter, such bank or trust company shall be the successor of the Custodian under this Agreement. In the event that securities, funds and other properties remain in the possession of the Custodian after the date of termination hereof owing to failure of any Fund to provide Proper Instructions as aforesaid, the Custodian shall be entitled to fair compensation for its services during such period as the Custodian retains possession of such securities, funds and other properties and the provisions of this Agreement relating to the duties and obligations of the Custodian shall remain in full force and effect. SECTION 18. GENERAL SECTION 18.1 MASSACHUSETTS LAW TO APPLY. This Agreement shall be construed and the provisions thereof interpreted under and in accordance with laws of The Commonwealth of Massachusetts. SECTION 18.2 PRIOR AGREEMENTS. This Agreement supersedes and terminates, as of the date hereof, all prior Agreements between each Fund on behalf of each of the Portfolios and the Custodian relating to the custody of such Fund's assets. SECTION 18.3 ASSIGNMENT. This Agreement may not be assigned by (a) any Fund without the written consent of the Custodian or (b) by the Custodian without the written consent of each applicable Fund. SECTION 18.4 INTERPRETIVE AND ADDITIONAL PROVISIONS. In connection with the operation of this Agreement, the Custodian and each Fund on behalf of each of the Portfolios, may from time to time agree on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. Any such interpretive or additional provisions shall be in a writing signed by all parties and shall be annexed hereto, provided that no such interpretive or additional provisions shall contravene any applicable federal or state regulations or any provision of a Fund's Governing Documents. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Agreement. SECTION 18.5 ADDITIONAL FUNDS. In the event that any management investment company in addition to those listed on Appendix A hereto desires to have the Custodian render services as custodian under the terms hereof, it shall so notify the Custodian in writing, and if the Custodian agrees in writing to provide such services, such management investment company shall become a Fund hereunder and be bound by all terms and conditions and provisions hereof including, without limitation, the representations and warranties set forth in Section 18.7 below. SECTION 18.6 ADDITIONAL PORTFOLIOS. In the event that any Fund establishes one or more series of Shares in addition to those set forth on Appendix A hereto with respect to which it desires to have the Custodian render services as custodian under the terms hereof, it shall so notify the Custodian in writing, and if the Custodian agrees in writing to provide such services, such series of Shares shall become a Portfolio hereunder. SECTION 18.7 THE PARTIES. All references herein to the "Fund" are to each of the management investment companies listed on Appendix A hereto, and each management investment company made subject to this Agreement in accordance with Section 18.5 above, individually, as if this Agreement were between such individual Fund and the Custodian. In the case of a series corporation, trust or other entity, all references herein to the "Portfolio" are to the individual series or portfolio of such corporation, trust or other entity, or to such corporation, trust or other entity on behalf of the individual series or portfolio, as appropriate. Any reference in this Agreement to "the parties" shall mean the Custodian and such other individual Fund as to which the matter pertains. Each Fund hereby represents and warrants that (a) it is duly incorporated or organized and is validly existing in good standing in its jurisdiction of incorporation or organization; (b) it has the requisite power and authority under applicable law and its Governing Documents to enter into and perform this Agreement; (c) all requisite proceedings have been taken to authorize it to enter into and perform this Agreement; (d) this Agreement constitutes its legal, valid, binding and enforceable agreement; and (e) its entrance into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of the Fund or any law or regulation applicable to it. SECTION 18.8 REMOTE ACCESS SERVICES ADDENDUM. The Custodian and each Fund agree to be bound by the terms of the Remote Access Services Addendum hereto. SECTION 18.9 NOTICES. Any notice, instruction or other instrument required to be given hereunder may be delivered in person to the offices of the parties as set forth herein during normal business hours or delivered prepaid registered mail or by telex, cable or telecopy to the parties at the following addresses or such other addresses as may be notified by any party from time to time. To any Fund: c/o BARON CAPITAL, INC. 767 Fifth Avenue, 19th Floor New York, NY 10153 Attention: General Counsel Telephone: 212-583-2000 Telecopy: 212-583-2014 To the Custodian: STATE STREET BANK AND TRUST COMPANY 1200 Crown Colony Drive Crown Colony Office Park Quincy, MA 02169 Attention: Scott E. Johnson Telephone: 617-537-4601 Telecopy: 617-537-4779 Such notice, instruction or other instrument shall be deemed to have been served in the case of a registered letter at the expiration of five business days after posting, in the case of cable twenty-four hours after dispatch and, in the case of telex, immediately on dispatch and if delivered outside normal business hours it shall be deemed to have been received at the next time after delivery when normal business hours commence and in the case of cable, telex or telecopy on the business day after the receipt thereof. Evidence that the notice was properly addressed, stamped and put into the post shall be conclusive evidence of posting. SECTION 18.10 COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, and all such counterparts taken together shall constitute one and the same Agreement. SECTION 18.11 SEVERABILITY. If any provision or provisions of this Agreement shall be held to be invalid, unlawful or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired. SECTION 18.12 REPRODUCTION OF DOCUMENTS. This Agreement and all schedules, addenda, exhibits, appendices, attachments and amendments hereto may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties hereto all/each agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. SECTION 18.13 SHAREHOLDER COMMUNICATIONS ELECTION. SEC Rule 14b-2 requires banks which hold securities for the account of customers to respond to requests by issuers of securities for the names, addresses and holdings of beneficial owners of securities of that issuer held by the bank unless the beneficial owner has expressly objected to disclosure of this information. In order to comply with the rule, the Custodian needs each Fund to indicate whether it authorizes the Custodian to provide such Fund's name, address, and share position to requesting companies whose securities the Fund owns. If a Fund tells the Custodian "no," the Custodian will not provide this information to requesting companies. If a Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the Custodian is required by the rule to treat the Fund as consenting to disclosure of this information for all securities owned by the Fund or any funds or accounts established by the Fund. For a Fund's protection, the Rule prohibits the requesting company from using the Fund's name and address for any purpose other than corporate communications. Please indicate below whether the Fund consents or objects by checking one of the alternatives below. YES [ ] The Custodian is authorized to release the Fund's name, address, and share positions. NO [X] The Custodian is not authorized to release the Fund's name, address, and share positions. SIGNATURE PAGE -------------- IN WITNESS WHEREOF, each of the parties has caused this instrument to be executed in its name and behalf by its duly authorized representative under seal as of the date first above- written. FUND SIGNATURE ATTESTED TO BY: BARON INVESTMENT FUNDS TRUST, ON BEHALF OF EACH OF ITS SERIES By: /s/Peggy Wong By: /s/ Linda S. Martinson ------------- ---------------------- Name: Peggy Wong Name: Linda S. Martinson Title: CFO Title: COO & General Counsel FUND SIGNATURE ATTESTED TO BY: BARON SELECT FUNDS, ON BEHALF OF ITS SERIES By: /s/Peggy Wong By: /s/ Linda S. Martinson ------------- ---------------------- Name: Peggy Wong Name: Linda S. Martinson Title: CFO Title: COO & General Counsel SIGNATURE ATTESTED TO BY: STATE STREET BANK AND TRUST COMPANY By: /s/ Michael R. Harrington By: /s/ Joseph L. Hooley ------------------------- -------------------- Michael R. Harrington Joseph L. Hooley Vice President Executive Vice President APPENDIX A TO MASTER CUSTODIAN AGREEMENT MANAGEMENT INVESTMENT COMPANIES REGISTERED WITH THE SEC AND PORTFOLIOS THEREOF, IF ANY Baron Investment Funds Trust Baron Asset Fund Baron Growth Fund Baron Small Cap Fund Baron iOpportunity Fund Baron Fifth Avenue Growth Fund Baron Select Funds Baron Partners Fund SCHEDULE A STATE STREET GLOBAL CUSTODY NETWORK SUBCUSTODIANS COUNTRY SUBCUSTODIAN Argentina Citibank, N.A. Australia Westpac Banking Corporation Citibank Pty. Limited .. Austria Erste Bank der Osterreichischen Sparkassen AG Bahrain HSBC Bank Middle East (as delegate of the Hongkong and Shanghai Banking Corporation Limited) Bangladesh Standard Chartered Bank Belgium BNP Paribas Securities Services, S.A. , , , , ^ Benin via Societe Generale de Banques en Cote d'Ivoire, Abidjan, Ivory Coast Bermuda The Bank of Bermuda Limited Botswana Barclays Bank of Botswana Limited Brazil Citibank, N.A. Bulgaria ING Bank N.V. , , , , ^ Burkina Faso via Societe Generale de Banques en Cote d'Ivoire, Abidjan, Ivory Coast Canada State Street Trust Company Canada Cayman Islands Scotiabank & Trust (Cayman) Limited Chile BankBoston, N.A. People's Republic of The Hongkong and Shanghai Banking Corporation Limited, China Shanghai and Shenzhen branches Colombia Cititrust Colombia S.A. Sociedad Fiduciaria Costa Rica Banco BCT S.A. Croatia Privredna Banka Zagreb d.d Cyprus Marfin Popular Bank Public Company Ltd. Czech , , Republic Ceskoslovenska Obchodni Banka, A.S. Denmark Skandinaviska Enskilda Bankken AB, Sweden (operating through its Copenhagen branch) , Ecuador Banco de la Produccion S.A. PRODUBANCO Egypt HSBC Bank Egypt S.A.E. (as delegate of The Hongkong and Shanghai Banking Corporation Limited) Estonia AS Hansabank Finland Skandinaviska Enskilda Bankken AB, Sweden (operating through its Helsinki branch) France BNP Paribas Securities Services, S.A. Deutsche Bank AG, Netherlands (operating through its Paris branch) Germany Deutsche Bank AG Ghana Barclays Bank of Ghana Limited Greece National Bank of Greece S.A. Guineas- , , , , ^ Bissau via Societe Generale de Banques en Cote d'Ivoire, Abidjan, Ivory Coast Hong Kong Standard Chartered Bank (Hong Kong) Limited Hungary HVB Bank Hungary Rt. Iceland Kaupthing Bank hf. India Deutsche Bank AG The Hongkong and Shanghai Banking Corporation Limited Indonesia Deutsche Bank AG Ireland Bank of Ireland Israel Bank Hapoalim B.M. Italy BNP Paribas Securities Services, S.A. Deutsche Bank S.p.A. , , , , ^ Ivory Coast via Societe Generale de Banques en Cote d'Ivoire, Abidjan, Ivory Coast Jamaica Bank of Nova Scotia Jamaica Ltd. Japan Mizuho Corporate Bank Ltd. Sumitomo Mitsui Banking Corporation Jordan HSBC Bank Middle East (as delegate of the Hongkong and Shanghai Banking Corporation Limited) Kazakhstan HSBC Bank Kazakhstan (as delegate of the Hongkong and Shanghai Banking Corporation Limited) Kenya Barclays Bank of Kenya Limited Republic of Korea Deutsche Bank AG The Hongkong and Shanghai Banking Corporation Limited Latvia A/s Hansabanka Lebanon HSBC Bank Middle East (as delegate of The Hongkong and Shanghai Banking Corporation Limited) Lithuania SEB Vilniaus Bankas AB Malaysia Standard Chartered Bank Malaysia Berhad , , , , ^ Mali via Societe Generale de Banques en Cote d'Ivoire, Abidjan, Ivory Coast Malta The Hongkong and Shanghai Banking Corporation Limited Mauritius The Hongkong and Shanghai Banking Corporation Limited , Mexico Banco Nacional de Mexico S.A. Morocco Attijariwafa bank Namibia Standard Bank Namibia Limited Netherlands Deutsche Bank AG New Zealand Westpac Banking Corporation , , , , ^ Niger via Societe Generale de Banques en Cote d'Ivoire, Abidjan, Ivory Coast Nigeria Stanbic Bank Nigeria Limited Norway Skandinaviska Enskilda Bankken AB, Sweden (operating through its Oslo branch) Oman HSBC Bank Middle East Limited (as delegate of The Hongkong and Shanghai Banking Corporation Limited) Pakistan Deutsche Bank AG Palestine HSBC Bank Middle East Limited (as delegate of The Hongkong and Shanghai Banking Corporation Limited) Panama HSBC Bank (Panama) S.A. , Peru Citibank del Peru, S.A. Philippines Standard Chartered Bank Poland Bank Handlowy w Warszawie S.A. ^ Portugal Banco Comercial Portugues S.A. Puerto Rico Citibank N.A. Qatar HSBC Bank Middle East Limited (as delegate of The Hongkong and Shanghai Banking Corporation Limited) Romania ING Bank N.V. Russia ING Bank (Eurasia) ZAO, Moscow , , , , ^ Senegal via Societe Generale de Banques en Cote d'Ivoire, Abidjan, Ivory Coast Serbia HVB Bank Serbia and Montenegro a.d. Singapore DBS Bank Limited United Overseas Bank Limited Slovak , , Republic Ceskoslovenska Obchodni Banka, A.S., pobocka zahranicnej banky v SR Slovenia Bank Austria Creditanstalt d.d. - Ljubljana South Africa Nedbank Limited Standard Bank of South Africa Limited Spain Deutsche Bank S.A.E. Sri Lanka The Hongkong and Shanghai Banking Corporation Limited Swaziland Standard Bank Swaziland Limited Sweden Skandinaviska Enskilda Banken AB Switzerland UBS AG Taiwan - R.O.C. Central Trust of China Thailand Standard Chartered Bank (Thai) Public Company Limited , , , , ^ Togo via Societe Generale de Banques en Cote d'Ivoire, Abidjan, Ivory Coast Trinidad & Tobago Republic Bank Limited Tunisia Banque Internationale Arabe de Tunisie Turkey Citibank, A.S. Uganda Barclays Bank of Uganda Limited Ukraine ING Bank Ukraine United Arab Emirates HSBC Bank Middle East Limited (as delegate of The Hongkong and Shanghai Banking Corporation Limited) United Kingdom State Street Bank and Trust Company, United kingdom Branch Uruguay BankBoston, N.A. Venezuela Citibank, N.A. Vietnam The Hongkong and Shanghai Banking Corporation Limited Zambia Barclays Bank of Zambia Plc. Zimbabwe Barclays Bank of Zimbabwe Limited SCHEDULE B STATE STREET GLOBAL CUSTODY NETWORK DEPOSITORIES OPERATING IN NETWORK MARKETS COUNTRY DEPOSITORIES Argentina Caja de Valores S.A. Australia Austraclear Limited Austria Oesterreichische Kontrollbank AG (Wertpapiersammelbank Division) Bahrain Clearing, Settlement, and Depository System of the Bahrain Stock Exchange Bangladesh Central Depository Bangladesh Limited Belgium Banque Nationale de Belgique Euroclear Belgium , ` Benin Depositaire Central Banque de Reglement Bermuda Bermuda Securities Depository , ~ Brazil Central de Custodia e de Liquidacao Financeira , de Titulos Privados (CETIP) ~ , Companhia Brasileira de Liquidacao e Custodia ~ , Sistema Especial de Liquidacao e de Custodia (SELIC) Bulgaria Bulgarian National Bank Central Depository AD , ` Burkina Faso Depositaire Central - Banque de Reglement Canada The Canadian Depository for Securities Limited , Chile Deposito Central de Valores S.A. People's Republic China Securities Depository and Clearing of China Corporation Limited Shanghai Branch China Securities Depository and Clearing Corporation Limited Shenzhen Branch , Colombia Deposito Central de Valores , Deposito Centralizado de Valores de Colombia S..A. (DECEVAL) Costa Rica Central de Valores S.A. Croatia Sredisnja Depozitarna Agencija d.d. Cyprus Central Depository and Central Registry Czech Republic Czech National Bank , , , Stredisko cennych papiru - Ceska republika Denmark Vaerdipapircentralen (Danish Securities Center) Egypt Misr for Clearing, Settlement, and Depository S.A.E. Central Bank of Egypt .... Estonia AS Eesti Vaartpaberikeskus Finland Suomen Arvopaperikeskus Oy France Euroclear France Germany Clearstream Banking AG, Frankfurt Greece Apothetirion Titlon AE - Central Securities Depository Bank of Greece, System for Monitoring Transactions in Securities in Book-Entry Form , ` Guinea-Bissau Depositaire Central - Banque de Reglement Hong Kong Central Moneymarkets Unit Hong Kong Securities Clearing Company Limited .. , , , , , , , Hungary Kozponti Elszamolohaz es Ertektar (Budapest) Rt. (KELER) Iceland Icelandic Securities Depository Limited India Central Depository Services (India) Limited National Securities Depository Limited Reserve Bank of India Indonesia Bank Indonesia PT Kustodian Sentral Efek Indonesia Israel Tel Aviv Stock Exchange Clearing House Ltd. (TASE Clearinghouse) Italy Monte Titoli S.p.A. , ` Ivory Coast Depositaire Central - Banque de Reglement Jamaica Jamaica Central Securities Depository Japan Bank of Japan - Net System Japan Securities Depository Center (JASDEC) Incorporated Jordan Securities Depository Center Kazakhstan Central Securities Depository Kenya Central Depository and Settlement Corporation Limited Central Bank of Kenya Republic of Korea Korea Securities Depository Latvia Latvian Central Depository Lebanon Banque du Liban Custodian and Clearing Center of Financial Instruments for Lebanon and the Middle East (Midclear) S.A.L. Lithuania Central Securities Depository of Lithuania Malaysia Bank Negara Malaysia Bursa Malaysia Depository Sdn. Bhd. , ` Mali Depositaire Central - Banque de Reglement Malta Central Securities Depository of the Malta Stock Exchange Mauritius Bank of Mauritius Central Depository and Settlement Co. Ltd. Mexico S.D. INDEVAL, S.A. de C.V. Morocco Maroclear Namibia Bank of Namibia Netherlands Euroclear Nederland New Zealand New Zealand Central Securities Depository Limited , ` Niger Depositaire Central - Banque de Reglement Nigeria Central Securities Clearing System Limited Norway Verdipapirsentralen (Norwegian Central Securities Depository) Oman Muscat Depository & Securities Registration Company, SAOC Pakistan Central Depository Company of Pakistan Limited State Bank of Pakistan Palestine Clearing, Depository and Settlement, a department of the Palestine Stock Exchange Panama Central Latinoamericana de Valores, S.A. (LatinClear) , Peru Caja de Valores y Liquidaciones, Institucion de , , Compensacion y Liquidacion de Valores S.A Philippines Philippine Depository & Trust Corporation Registry of Scripless Securities (ROSS) of the Bureau of Treasury , , Poland Rejestr Papierow Wartosciowych , , Krajowy Depozyt Papierow Wartosciowych S.A. Portugal INTERBOLSA Sociedade Gestora de Sistemas de ~ Liquidacao e de Sistemas Centralizados de , Valores Mobiliarios, S.A. Qatar Central Clearing and Registration (CCR), a department of the Doha Securities Market Romania Bucharest Stock Exchange Registry Division National Bank of Romania Russia Vneshtorgbank, Bank for Foreign Trade of the Russian Federation , ` Senegal Depositaire Central - Banque de Reglement Serbia Central Registrar and Central Depository for Securities Singapore The Central Depository (Pte) Limited Monetary Authority of Singapore , , Slovak Republic Naodna banka slovenska , Centralny depozitar cennych papierov SR, a.s. Slovenia KDD Centralna klirinsko depotna druzba d.d. South Africa Share Transactions Totally Electronic (STRATE) Ltd. Spain IBERCLEAR Sri Lanka Central Depository System (Pvt) Limited .. Sweden Vardepapperscentralen VPC AB (Swedish Central Securities Depository) Switzerland SegaIntersettle AG (SIS) Taiwan - R.O.C. Taiwan Depository and Clearing Corporation Thailand Thailand Securities Depository Company Limited , ` Togo Depositaire Central - Banque de Reglement Trinidad and Tobago Trinidad and Tobago Central Bank , , Tunisia Societe Tunisienne Interprofessionelle pour la , ^ Compensation et de Depots des Valeurs ` Mobilieres (STICODEVAM) Turkey Central Bank of Turkey Central Registry Agency Uganda Bank of Uganda Ukraine Mizhregionalny Fondovy Souz National Bank of Ukraine United Arab Emirates Clearing and Depository System, a department of the Dubai Financial Market United Kingdom CrestCo. Uruguay Banco Central del Uruguay Venezuela Banco Central de Venezuela Caja Venezolana de Valores Vietnam Vietnam Securities Depository Zambia Bank of Zambia LuSE Central Shares Depository Limited TRANSNATIONAL Euroclear Clearstream Banking, S.A. SCHEDULE C MARKET INFORMATION
PUBLICATION/TYPE OF INFORMATION BRIEF DECSRIPTION THE GUIDE TO CUSTODY IN WORLD MARKETS An overview of settlement and safekeeping procedures, (hardcopy annually and regular custody practices and foreign investor considerations for the website updates) markets in which State Street offers custodial services. GLOBAL CUSTODY NETWORK REVIEW Information relating to Foreign Sub-Custodians in State Street's (annually) Global Custody Network. The Review stands as an integral part of the materials that State Street provides to its U.S. mutual fund clients to assist them in complying with SEC Rule 17f-5. The Review also gives insight into State Street's market expansion and Foreign Sub-Custodian selection processes, as well as the procedures and controls used to monitor the financial condition and performance of our Foreign Sub-Custodian banks. Securities Depository Review Custody risk analyses of the Foreign Securities Depositories presently (annually) operating in Network markets. This publication is an integral part of the materials that State Street provides to its U.S. mutual fund clients to meet informational obligations created by SEC Rule 17f-7. Global Legal Survey With respect to each market in which State Street offers custodial (annually) services, opinions relating to whether local law restricts (i) access of a fund's independent public accountants to books and records of a Foreign Sub-Custodian or Foreign Securities System, (ii) a fund's ability to recover in the event of bankruptcy or insolvency of a Foreign Sub-Custodian or Foreign Securities System, (iii) a fund's ability to recover in the event of a loss by a Foreign Sub-Custodian or Foreign Securities System, and (iv) the ability of a foreign investor to convert cash and cash equivalents to U.S. dollars. Subcustodian Agreements Copies of the contracts that State Street has entered into with each (annually) Foreign Sub-Custodian that maintains U.S. mutual fund assets in the markets in which State Street offers custodial services. Global Market Bulletin Information on changing settlement and custody conditions in (daily or as necessary) markets where State Street offers custodial services. Includes changes in market and tax regulations, depository developments, dematerialization information, as well as other market changes that may impact State Street's clients. Foreign Custody Advisories For those markets where State Street offers custodial (as necessary) services that exhibit special risks or infrastructures impacting custody, State Street issues market advisories to highlight those unique market factors which might impact our ability to offer recognized custody service levels. Material Change Notices Informational letters and accompanying materials confirming (presently on a quarterly basis or State Street's foreign custody arrangements, including a as otherwise necessary) summary of material changes with Foreign Sub-Custodians that have occurred during the previous quarter. The notices also identify any material changes in the custodial risks associated with maintaining assets with Foreign Securities Depositories.
SCHEDULE D SPECIAL SUB-CUSTODIANS None FUNDS TRANSFER ADDEDUM OPERATING GUIDELINES 1. OBLIGATION OF THE SENDER: State Street is authorized to promptly debit Client's account(s) upon the receipt of a payment order in compliance with the selected Security Procedure chosen for funds transfer and in the amount of money that State Street has been instructed to transfer. State Street shall execute payment orders in compliance with the Security Procedure and with the Client's instructions on the execution date provided that such payment order is received by the customary deadline for processing such a request, unless the payment order specifies a later time. All payment orders and communications received after this time will be deemed to have been received on the next business day. 2. SECURITY PROCEDURE: The Client acknowledges that the Security Procedure it has designated on the Selection Form was selected by the Client from Security Procedures offered by State Street. The Client agrees that the Security Procedures are reasonable and adequate for its wire transfer transactions and agrees to be bound by any payment orders, amendments and cancellations, whether or not authorized, issued in its name and accepted by State Street after being confirmed by any of the selected Security Procedures. The Client also agrees to be bound by any other valid and authorized payment order accepted by State Street. The Client shall restrict access to confidential information relating to the Security Procedure to authorized persons as communicated in writing to State Street. The Client must notify State Street immediately if it has reason to believe unauthorized persons may have obtained access to such information or of any change in the Client's authorized personnel. State Street shall verify the authenticity of all instructions according to the Security Procedure. 3. ACCOUNT NUMBERS: State Street shall process all payment orders on the basis of the account number contained in the payment order. In the event of a discrepancy between any name indicated on the payment order and the account number, the account number shall take precedence and govern. Financial institutions that receive payment orders initiated by State Street at the instruction of the Client may also process payment orders on the basis of account numbers, regardless of any name included in the payment order. State Street will also rely on any financial institution identification numbers included in any payment order, regardless of any financial institution name included in the payment order. 4. REJECTION: State Street reserves the right to decline to process or delay the processing of a payment order which (a) is in excess of the collected balance in the account to be charged at the time of State Street's receipt of such payment order; (b) if initiating such payment order would cause State Street, in State Street's sole judgment, to exceed any volume, aggregate dollar, network, time, credit or similar limits upon wire transfers which are applicable to State Street; or (c) if State Street, in good faith, is unable to satisfy itself that the transaction has been properly authorized. 5. CANCELLATION OR AMENDMENT: State Street shall use reasonable efforts to act on all authorized requests to cancel or amend payment orders received in compliance with the Security Procedure provided that such requests are received in a timely manner affording State Street reasonable opportunity to act. However, State Street assumes no liability if the request for amendment or cancellation cannot be satisfied. 6. ERRORS: State Street shall assume no responsibility for failure to detect any erroneous payment order provided that State Street complies with the payment order instructions as received and State Street complies with the Security Procedure. The Security Procedure is established for the purpose of authenticating payment orders only and not for the detection of errors in payment orders. 7. INTEREST AND LIABILITY LIMITS: State Street shall assume no responsibility for lost interest with respect to the refundable amount of any unauthorized payment order, unless State Street is notified of the unauthorized payment order within thirty (30) days of notification by State Street of the acceptance of such payment order. In no event shall State Street be liable for special, indirect or consequential damages, even if advised of the possibility of such damages and even for failure to execute a payment order. 8. AUTOMATED CLEARING HOUSE ("ACH") CREDIT ENTRIES/PROVISIONAL PAYMENTS: When a Client initiates or receives ACH credit and debit entries pursuant to these Guidelines and the rules of the National Automated Clearing House Association and the New England Clearing House Association, State Street will act as an Originating Depository Financial Institution and/or Receiving Depository Institution, as the case may be, with respect to such entries. Credits given by State Street with respect to an ACH credit entry are provisional until State Street receives final settlement for such entry from the Federal Reserve Bank. If State Street does not receive such final settlement, the Client agrees that State Street shall receive a refund of the amount credited to the Client in connection with such entry, and the party making payment to the Client via such entry shall not be deemed to have paid the amount of the entry. 9. CONFIRMATION STATEMENTS: Confirmation of State Street's execution of payment orders shall ordinarily be provided within 24 hours. Notice may be delivered through State Street's proprietary information systems, such as, but not limited to Horizon and GlobalQuest , account statements, advices, or by facsimile or callback. The Client must report any objections to the execution of a payment order within 30 days. 10. LIABILITY ON FOREIGN ACCOUNTS: State Street shall not be required to repay any deposit made at a non-U.S. branch of State Street, or any deposit made with State Street and denominated in a non-U.S. dollar currency, if repayment of such deposit or the use of assets denominated in the non-U.S. dollar currency is prevented, prohibited or otherwise blocked due to: (a) an act of war, insurrection or civil strife; (b) any action by a non-U.S. government or instrumentality or authority asserting governmental, military or police power of any kind, whether such authority be recognized as a defacto or a dejure government, or by any entity, political or revolutionary movement or otherwise that usurps, supervenes or otherwise materially impairs the normal operation of civil authority; or(c) the closure of a non-U.S. branch of State Street in order to prevent, in the reasonable judgment of State Street, harm to the employees or property of State Street. The obligation to repay any such deposit shall not be transferred to and may not be enforced against any other branch of State Street. The foregoing provisions constitute the disclosure required by Massachusetts General Laws, Chapter 167D, Section 36. While State Street is not obligated to repay any deposit made at a non-U.S. branch or any deposit denominated in a non-U.S. currency during the period in which its repayment has been prevented, prohibited or otherwise blocked, State Street will repay such deposit when and if all circumstances preventing, prohibiting or otherwise blocking repayment cease to exist. 11. MISCELLANEOUS: State Street and the Client agree to cooperate to attempt to recover any funds erroneously paid to the wrong party or parties, regardless of any fault of State Street or the Client, but the party responsible for the erroneous payment shall bear all costs and expenses incurred in trying to effect such recovery. These Guidelines may not be amended except by a written agreement signed by the parties. FUNDS TRANSFER ADDEDUM SECURITY PROCEDURE(S) SELECTION FORM Please select one or more of the funds transfer security procedures indicated below. [ ] SWIFT SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a cooperative society owned and operated by member financial institutions that provides telecommunication services for its membership. Participation is limited to securities brokers and dealers, clearing and depository institutions, recognized exchanges for securities, and investment management institutions. SWIFT provides a number of security features through encryption and authentication to protect against unauthorized access, loss or wrong delivery of messages, transmission errors, loss of confidentiality and fraudulent changes to messages. SWIFT is considered to be one of the most secure and efficient networks for the delivery of funds transfer instructions. SELECTION OF THIS SECURITY PROCEDURE WOULD BE MOST APPROPRIATE FOR EXISTING SWIFT MEMBERS. [X] STANDING INSTRUCTIONS Standing Instructions may be used where funds are transferred to a broker on the Client's established list of brokers with which it engages in foreign exchange transactions. Only the date, the currency and the currency amount are variable. In order to establish this procedure, State Street will send to the Client a list of the brokers that State Street has determined are used by the Client. The Client will confirm the list in writing, and State Street will verify the written confirmation by telephone. Standing Instructions will be subject to a mutually agreed upon limit. If the payment order exceeds the established limit, the Standing Instruction will be confirmed by telephone prior to execution. [ ] REMOTE BATCH TRANSMISSION Wire transfer instructions are delivered via Computer-to-Computer (CPU-CPU) data communications between the Client and State Street. Security procedures include encryption and or the use of a test key by those individuals authorized as Automated Batch Verifiers. CLIENTS SELECTING THIS OPTION SHOULD HAVE AN EXISTING FACILITY FOR COMPLETING CPU-CPU TRANSMISSIONS. THIS DELIVERY MECHANISM IS TYPICALLY USED FOR HIGH-VOLUME BUSINESS. [ ] GLOBAL HORIZON INTERCHANGESM FUNDS TRANSFER SERVICE Global Horizon Interchange Funds Transfer Service (FTS) is a State Street proprietary microcomputer-based wire initiation system. FTS enables Clients to electronically transmit authenticated Fedwire, CHIPS or internal book transfer instructions to State Street. THIS DELIVERY MECHANISM IS MOST APPROPRIATE FOR CLIENTS WITH A LOW-TO-MEDIUM NUMBER OF TRANSACTIONS (5-75 PER DAY), ALLOWING CLIENTS TO ENTER, BATCH, AND REVIEW WIRE TRANSFER INSTRUCTIONS ON THEIR PC PRIOR TO RELEASE TO STATE STREET. [ ] TELEPHONE CONFIRMATION (CALLBACK) Telephone confirmation will be used to verify all non-repetitive funds transfer instructions received via untested facsimile or phone. This procedure requires Clients to designate individuals as authorized initiators and authorized verifiers. State Street will verify that the instruction contains the signature of an authorized person and prior to execution, will contact someone other than the originator at the Client's location to authenticate the instruction. SELECTION OF THIS ALTERNATIVE IS APPROPRIATE FOR CLIENTS WHO DO NOT HAVE THE CAPABILITY TO USE OTHER SECURITY PROCEDURES. [ ] REPETITIVE WIRES For situations where funds are transferred periodically (minimum of one instruction per calendar quarter) from an existing authorized account to the same payee (destination bank and account number) and only the date and currency amount are variable, a repetitive wire may be implemented. Repetitive wires will be subject to a mutually agreed upon limit. If the payment order exceeds the established limit, the instruction will be confirmed by telephone prior to execution. Telephone confirmation is used to establish this process. Repetitive wire instructions must be reconfirmed annually. THIS ALTERNATIVE IS RECOMMENDED WHENEVER FUNDS ARE FREQUENTLY TRANSFERRED BETWEEN THE SAME TWO ACCOUNTS. [ ] TRANSFERS INITIATED BY FACSIMILE The Client faxes wire transfer instructions directly to State Street Mutual Fund Services. Standard security procedure requires the use of a random number test key for all transfers. Every six months the Client receives test key logs from State Street. The test key contains alpha-numeric characters, which the Client puts on each document faxed to State Street. This procedure ensures all wire instructions received via fax are authorized by the Client. WE PROVIDE THIS OPTION FOR CLIENTS WHO WISH TO BATCH WIRE INSTRUCTIONS AND TRANSMIT THESE AS A GROUP TO STATE STREET MUTUAL FUND SERVICES ONCE OR SEVERAL TIMES A DAY. [ ] INSTRUCT Instruct is a State Street web-based application designed to provide internet-enabled remote access that allows for the capturing, verification and processing of various instruction types, including securities, cash and foreign exchange transactions. Instruct is designed using industry standard formats to facilitate straight-through processing. Instruct provides a number of security features through user entitlements, industry standard encryption protocols, digital security certificates and multiple tiers of user authentication requirements. [ ] SECURE TRANSPORT Secure Transport is a file transfer application based upon the Secure File Transfer Protocol standard that is designed to enable State Street clients/ investment managers to send file based transfer and transaction instructions over the internet. Secure Transport features multi-factor authenticators such as SecurID and digital certificates, and incorporates industry-standard encryption protocols. [ ] AUTOMATED CLEARING HOUSE (ACH) State Street receives an automated transmission or a magnetic tape from a Client for the initiation of payment (credit) or collection (debit) transactions through the ACH network. The transactions contained on each transmission or tape must be authenticated by the Client. Clients using ACH must select one or more of the following delivery options: [ ] GLOBAL HORIZON INTERCHANGE AUTOMATED CLEARING HOUSE SERVICE Transactions are created on a microcomputer, assembled into batches and delivered to State Street via fully authenticated electronic transmissions in standard NACHA formats. [ ] Transmission from Client PC to State Street Mainframe with Telephone Callback [ ] Transmission from Client Mainframe to State Street Mainframe with Telephone Callback [ ] Transmission from DST Systems to State Street Mainframe with Encryption [ ] Magnetic Tape Delivered to State Street with Telephone Callback State Street is hereby instructed to accept funds transfer instructions only via the delivery methods and security procedures indicated. The selected delivery methods and security procedure(s) will be effective --------------- for payment orders initiated by our organization. KEY CONTACT INFORMATION Whom shall we contact to implement your selection(s)? CLIENT OPERATIONS CONTACT ALTERNATE CONTACT Peggy Wong Anabela Capitaz - ---------------------------- -------------------------- Name Name 767 Fifth Avenue, 49th Floor SAME - ---------------------------- -------------------------- Address Address New York, NY 10153 SAME - ---------------------------- -------------------------- City/State/Zip Code City/State/Zip Code 212-583-2059 212-583-2066 - ---------------------------- -------------------------- Telephone Number Telephone Number 212-583-2014 212-583-2014 - ---------------------------- -------------------------- Facsimile Number Facsimile Number - ---------------------------- SWIFT Number - ---------------------------- Telex Number INSTRUCTION(S) TELEPHONE CONFIRMATION Fund Baron Investment Funds Trust and Baron Select Funds ---------------------------------------------------- Investment Adviser BAMCO, Inc. --------------------------------------- Authorized Initiators Please Type or Print Please provide a listing of Fund officers or other individuals who are currently authorized to initiate wire transfer instructions to State Street: NAME TITLE (Specify whether position SPECIMEN SIGNATURE is with Fund or Investment Adviser) Peggy Wong CFO and Treasurer /s/ Peggy Wong - ------------------ ------------------------------- ---------------------- Linda S. Martinson COO and General Counsel /s/ Linda S. Martinson - ------------------ ------------------------------- ---------------------- Ronald Baron CEO /s/ Ronald Baron - ------------------ ------------------------------- ---------------------- Authorized Verifiers Please Type or Print Please provide a listing of Fund officers or other individuals who will be CALLED BACK to verify the initiation of repetitive wires of $10 million or more and all non-repetitive wire instructions: NAME CALLBACK PHONE NUMBER DOLLAR LIMITATION (IF ANY) Peggy Wong 212-583-2059 - ------------------ ----------------------- ------------------------------ Linda S. Martinson 212-583-2013 - ------------------ ----------------------- ------------------------------ Ronald Baron 212-583-2010 - ------------------ ----------------------- ------------------------------- REMOTE ACCESS SERVICES ADDENDUM TO MASTER CUSTODIAN AGREEMENT ADDENDUM to that certain Master Custodian Agreement dated as of April 13, 2007 (the "Custodian Agreement") by and among each management investment company identified on Appendix A thereto or made subject thereto pursuant to Section 18.5 thereof (each, a "Customer") and State Street Bank and Trust Company, including its subsidiaries and affiliates ("State Street"). State Street has developed and utilizes proprietary accounting and other systems in conjunction with the custodian services which State Street provides to the Customer. In this regard, State Street maintains certain information in databases under its control and ownership which it makes available to its customers (the "Remote Access Services"). THE SERVICES State Street agrees to provide the Customer, and its designated investment advisors, consultants or other third parties authorized by State Street ("Authorized Designees") with access to In~SightSM as described in Exhibit A or such other systems as may be offered from time to time (the "System") on a remote basis. SECURITY PROCEDURES The Customer agrees to comply, and to cause its Authorized Designees to comply, with remote access operating standards and procedures and with user identification or other password control requirements and other security procedures as may be issued from time to time by State Street for use of the System and access to the Remote Access Services. The Customer agrees to advise State Street immediately in the event that it learns or has reason to believe that any person to whom it has given access to the System or the Remote Access Services has violated or intends to violate the terms of this Addendum and the Customer will cooperate with State Street in seeking injunctive or other equitable relief. The Customer agrees to discontinue use of the System and Remote Access Services, if requested, for any security reasons cited by State Street. FEES Fees and charges for the use of the System and the Remote Access Services and related payment terms shall be as set forth in the custody fee schedule in effect from time to time between the parties. The Customer shall be responsible for any tariffs, duties or taxes imposed or levied by any government or governmental agency by reason of the transactions contemplated by this Addendum, including, without limitation, federal, state and local taxes, use, value added and personal property taxes (other than income, franchise or similar taxes which may be imposed or assessed against State Street). Any claimed exemption from such tariffs, duties or taxes shall be supported by proper documentary evidence delivered to State Street. PROPRIETARY INFORMATION/INJUNCTIVE RELIEF The System and Remote Access Services described herein and the databases, computer programs, screen formats, report formats, interactive design techniques, formulae, processes, systems, software, know- how, algorithms, programs, training aids, printed materials, methods, books, records, files, documentation and other information made available to the Customer by State Street as part of the Remote Access Services and through the use of the System and all copyrights, patents, trade secrets and other proprietary rights of State Street related thereto are the exclusive, valuable and confidential property of State Street and its relevant licensors (the "Proprietary Information"). The Customer agrees on behalf of itself and its Authorized Designees to keep the Proprietary Information confidential and to limit access to its employees and Authorized Designees (under a similar duty of confidentiality) who require access to the System for the purposes intended. The foregoing shall not apply to Proprietary Information in the public domain or required by law to be made public. The Customer agrees to use the Remote Access Services only in connection with the proper purposes of this Addendum. The Customer will not, and will cause its employees and Authorized Designees not to, (i) permit any third party to use the System or the Remote Access Services, (ii) sell, rent, license or otherwise use the System or the Remote Access Services in the operation of a service bureau or for any purpose other than as expressly authorized under this Addendum, (iii) use the System or the Remote Access Services for any fund, trust or other investment vehicle without the prior written consent of State Street, or (iv) allow or cause any information transmitted from State Street's databases, including data from third party sources, available through use of the System or the Remote Access Services, to be published, redistributed or retransmitted for other than use for or on behalf of the Customer, as State Street's customer. The Customer agrees that neither it nor its Authorized Designees will modify the System in any way; enhance or otherwise create derivative works based upon the System, nor will the Customer or its Authorized Designees reverse engineer, decompile or otherwise attempt to secure the source code for all or any part of the System. The Customer acknowledges that the disclosure of any Proprietary Information, or of any information which at law or equity ought to remain confidential, will immediately give rise to continuing irreparable injury to State Street inadequately compensable in damages at law and that State Street shall be entitled to obtain immediate injunctive relief against the breach or threatened breach of any of the foregoing undertakings, in addition to any other legal remedies which may be available. LIMITED WARRANTIES State Street represents and warrants that it is the owner of and has the right to grant access to the System and to provide the Remote Access Services contemplated herein. Because of the nature of computer information technology including, but not limited to, the use of the Internet, and the necessity of relying upon third party sources, and data and pricing information obtained from third parties, the System and Remote Access Services are provided "AS IS", and the Customer and its Authorized Designees shall be solely responsible for the investment decisions, results obtained, regulatory reports and statements produced using the Remote Access Services. State Street and its relevant licensors will not be liable to the Customer or its Authorized Designees for any direct or indirect, special, incidental, punitive or consequential damages arising out of or in any way connected with the System or the Remote Access Services, nor shall either party be responsible for delays or nonperformance under this Addendum arising out of any cause or event beyond such party's control. State Street will take reasonable steps to ensure that its products (and those of its third-party suppliers) reflect the available state of the art technology to offer products that are Year 2000 compliant, including, but not limited to, century recognition of dates, calculations that correctly compute same century and multi century formulas and date values, and interface values that reflect the date issues arising between now and December 31, 2099, and if any changes are required, State Street will make the changes to its products at no cost to the Customer and in a commercially reasonable time frame and will require third- party suppliers to do likewise. The Customer will do likewise for its systems. EXCEPT AS EXPRESSLY SET FORTH IN THIS ADDENDUM, STATE STREET, FOR ITSELF AND ITS RELEVANT LICENSORS, EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES CONCERNING THE SYSTEM AND THE SERVICES TO BE RENDERED HEREUNDER, WHETHER EXPRESS OR IMPLIED INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTIBILITY OR FITNESS FOR A PARTICULAR PURPOSE. INFRINGEMENT State Street will defend or, at its option, settle any claim or action brought against the Customer to the extent that it is based upon an assertion that access to the System or use of the Remote Access Services by the Customer under this Addendum constitutes direct infringement of any patent or copyright or misappropriation of a trade secret, provided that the Customer notifies State Street promptly in writing of any such claim or proceeding and cooperates with State Street in the defense of such claim or proceeding. Should the System or the Remote Access Services or any part thereof become, or in State Street's opinion be likely to become, the subject of a claim of infringement or the like under any applicable patent or copyright or trade secret laws, State Street shall have the right, at State Street's sole option, to (i) procure for the Customer the right to continue using the System or the Remote Access Services, (ii) replace or modify the System or the Remote Access Services so that the System or the Remote Access Services becomes noninfringing, or (iii) terminate this Addendum without further obligation. TERMINATION Either party to the Custodian Agreement may terminate this Addendum (i) for any reason by giving the other party at least one-hundred and eighty (180) days prior written notice in the case of notice of termination by State Street to the Customer or thirty (30) days notice in the case of notice from the Customer to State Street of termination, or (ii) immediately for failure of the other party to comply with any material term and condition of the Addendum by giving the other party written notice of termination. This Addendum shall in any event terminate within ninety (90) days after the termination of the Custodian Agreement. In the event of termination, the Customer will return to State Street all copies of documentation and other confidential information in its possession or in the possession of its Authorized Designees. The foregoing provisions with respect to confidentiality and infringement will survive termination for a period of three (3) years. MISCELLANEOUS This Addendum and the exhibit hereto constitute the entire understanding of the parties to the Custodian Agreement with respect to access to the System and the Remote Access Services. This Addendum cannot be modified or altered except in a writing duly executed by each of State Street and the Customer and shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. By its execution of the Custodian Agreement, the Customer (a) confirms to State Street that it informs all Authorized Designees of the terms of this Addendum; (b) accepts responsibility for its and its Authorized Designees' compliance with the terms of this Addendum; and (c) indemnifies and holds State Street harmless from and against any and all costs, expenses, losses, damages, charges, counsel fees, payments and liabilities arising from any failure of the Customer or any of its Authorized Designees to abide by the terms of this Addendum. EXHIBIT A to REMOTE ACCESS SERVICES ADDENDUM TO CUSTODIAN AGREEMENT IN~SIGHTSM System Product Description In~SightSM provides bilateral information delivery, interoperability, and on-line access to State Street. In~SightSM allows users a single point of entry into State Street's diverse systems and applications. Reports and data from systems such as Investment Policy MonitorSM, Multicurrency HorizonSM, Securities Lending, Performance & Analytics and Electronic Trade Delivery can be accessed through In~SightSM. This Internet-enabled application is designed to run from a Web browser and perform across low-speed data lines or corporate high-speed backbones. In~SightSM also offers users a flexible toolset, including an ad-hoc query function, a custom graphics package, a report designer, and a scheduling capability. Data and reports offered through In~SightSM will continue to increase in direct proportion with the customer roll out, as it is viewed as the information delivery system will grow with State Street's customers. EX-99.GA 4 feeschedule.txt FEE SCHEDULE TO CUSTODY AGREEMENT STATE STREET BANK AND TRUST COMPANY BARON INVESTMENT FUNDS TRUST AND BARON SELECT FUNDS FEE SCHEDULE This Fee Schedule relates to the services provided pursuant to the Master Custodian Agreement dated as of March 21, 2007, as amended, by and among each management investment company made subject thereto and State Street Bank and Trust Company (the "Custodian Agreement"). DOMESTIC ASSET BASED HOLDING FEE: US ASSETS UNDER CUSTODY BASIS POINTS First $10 billion 0.18 Next $5 billion 0.16 Next $5 billion 0.13 Next $10 billion 0.10 Above $30 billion 0.09 TRANSACTION FEES: PER ITEM DTC Book Entry $4.00 FBE $4.00 Physical trades $15.00 P&I payments $4.50 Euro CDs $20.00 Maturities $4.50 Wires $5.00 Money Movements $4.50 Special Payment Order $20.00 3rd Party FX Fee $75.00 State Street Sweep No charge Self Directed Money Market Sweep $50.00 Minimum custody relationship charge per annum Waived Note: The transactional fees noted above assume trade instructions are sent via an automated method. Manual instructions will result in an additional fee of $15.00 per trade. GLOBAL CUSTODY SUBCUSTODIAN ASSET BASED HOLDING FEE: Global Custody Fees are divided into two categories: trading and asset charges. The asset based fee shown on the following page is an annual charge, billed and payable monthly based on month end net assets.
COUNTRY * HOLDING TRANSACTION COUNTRY * HOLDING TRANSACTION CHARGES IN CHARGES CHARGES IN CHARGES BASIS POINTS (PER TRADE) BASIS POINTS (PER TRADE) (ANNUAL FEE) (ANNUAL FEE) - ----------------------------------------------------------------------------------------------------------------------------------- Argentina 20.0 $100 Lebanon 40.0 $100 Australia 2.0 $35 Lithuania 35.0 $50 Austria 3.0 $35 Luxembourg 5.0 $35 Bahrain 50.0 $150 Malaysia 5.0 $30 Bangladesh 40.0 $135 Mauritius 45.0 $125 Belgium 3.0 $35 Mexico 8.0 $40 Bermuda 50.0 $150 Morocco 35.0 $100 Bolivia 45.0 $125 Namibia 45.0 $125 Botswana 35.0 $100 Netherlands 3.0 $35 Brazil 12.0 $60 New Zealand 4.0 $40 Bulgaria 50.0 $100 Norway 4.0 $40 Canada 2.0 $15 Oman 65.0 $150 Chile 25.0 $100 Pakistan 30.0 $120 China 25.0 $100 Peru 40.0 $120 Colombia 30.0 $100 Philippines 15.0 $60 Croatia 50.0 $100 Poland 25.0 $60 Cyprus 45.0 $125 Portugal 20.0 $60 Czech Republic 25.0 $50 Romania 75.0 $100 Denmark 3.0 $40 Russia 50.0 $150 Ecuador 35.0 $100 Singapore 4.0 $40 Egypt 35.0 $100 Slovak Republic 40.0 $75 Estonia 50.0 $50 Slovenia 75.0 $100 Euoclear/Clearstream 2.0 $20 South Africa 7.0 $50 Finland 5.0 $50 South Korea 12.0 $45 France 3.0 $30 Spain 6.0 $45 Germany 2.0 $25 Sri Lanka 35.0 $100 Ghana 35.0 $100 Swaziland 75.0 $200 Greece 30.0 $100 Swenden 5.0 $35 Hong Kong 3.0 $40 Switzerland 3.5 $35 Hungary 35.0 $75 Taiwan 20.0 $60 Iceland 35.0 $50 Thailand 8.0 $50 India 25.0 $120 Trinidad & Tobago 35.0 $100 Indonesia 15.0 $100 Tunisia 45.0 $125 Ireland 4.0 $40 Turkey 25.0 $65 Isreal 25.0 $50 Ukraine 75.0 $300 Italy 5.0 $35 United Kingdom 1.75 $20 Ivory Coast 75.0 $150 Uruguay 40.0 $135 Jamaica 45.0 $125 Venezuela 30.0 $75 Japan 2.0 $20 Zambia 35.0 $100 Jordan 45.0 $125 Zimbawe 35.0 $100 Kenya 35.0 $100 Latvia 65.0 $50
FUND ACCOUNTING FEES: US ACCOUNTING ASSETS BASIS POINTS First $10 billion 0.22 Next $5 billion 0.18 Next $5 billion 0.15 Next $10 billion 0.12 Above $30 billion 0.11 Fund Accounting annual minimum $15,000 Multiple Classes: annual per class fee (beyond initial class) $4,800 OUT-OF-POCKET EXPENSES A billing for the recovery of applicable out-of-pocket expenses will be made as of the end of each month. Out-of-pocket expenses include, but are not limited to the following: o Communications costs o Postage and insurance o Courier service o Duplicating o Non-recurring legal, audit fees or other professional fees o Subcustodian out-of-pocket charges (market fees, registration fees, stamp duties, etc.) o SWIFT charges o 17f-5 review o Travel and lodging for Board meetings or operations meetings if attendance is required TERMS OF THE FEE SCHEDULE This Fee Schedule relates to the services provided pursuant to the Custodian Agreement. The parties agree that this Fee Schedule shall remain in effect for one year, and is renewable from year to year thereafter until it is revised as a result of negotiations initiated by either party. BARON INVESTMENT FUNDS TRUST on behalf of each of its series By: /s/Linda S. Martinson ------------------------ Name: Linda S. Martinson Title: Chief Operating Officer & General Counsel Date: April 13, 2007 BARON SELECT FUNDS on behalf of each of it series By: /s/Linda S. Martinson ------------------------ Name: Linda S. Martinson Title: Chief Operating Officer & General Counsel Date: April 13, 2007 STATE STREET BANK AND TRUST COMPANY By: /s/Gary L. French ------------------------- Name: Gary L. French Title: Senior Vice President Date: April 13, 2007 EX-99.H 5 adminagreement.txt FORM OF ADMINISTRATION AGREEMENT EXECUTION COPY ADMINISTRATION AGREEMENT This Administration Agreement ("Agreement") dated and effective as of April 13, 2007, is by and among State Street Bank and Trust Company, a Massachusetts trust company (the "Administrator"), Baron Investment Funds Trust, a Massachusetts business trust, and Baron Select Funds, a Delaware statutory trust (each, a "Trust" and collectively, the "Trusts"). WHEREAS, Baron Investment Funds Trust is an open-end management investment company currently comprised of multiple series and Baron Select Funds is an open-end management investment company currently comprised of a single series (each, a "Fund" and collectively, the "Funds"), and each Trust is registered with the U.S. Securities and Exchange Commission ("SEC") by means of a registration statement ("Registration Statement") under the Securities Act of 1933, as amended ("1933 Act"), and the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Trusts desire to retain the Administrator to furnish certain administrative services to the Trusts, and the Administrator is willing to furnish such services, on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto agree as follows: 1. Appointment of Administrator The Trusts hereby appoint the Administrator to act as administrator to the Trusts for purposes of providing certain administrative services for the period and on the terms set forth in this Agreement. The Administrator accepts such appointment and agrees to render the services stated herein. The Trusts currently consist of the Fund(s) as listed in Schedule A to this Agreement. In the event that either of the Trusts establishes one or more additional Fund(s) with respect to which it wishes to retain the Administrator to act as administrator hereunder, the applicable Trust shall notify the Administrator in writing. Upon written acceptance by the Administrator, such Fund(s) shall become subject to the provisions of this Agreement to the same extent as the existing Fund, except to the extent that such provisions (including those relating to compensation and expenses payable) may be modified with respect to such Fund in writing by the applicable Trust and the Administrator at the time of the addition of such Fund. 2. Delivery of Documents Each Trust will promptly deliver to the Administrator copies of each of the following documents and all future amendments and supplements, if any: a. The Trust's Declaration of Trust and By-laws; b. The Trust's currently effective Registration Statement under the 1933 Act and the 1940 Act and each Prospectus and Statement of Additional Information ("SAI") relating to the Fund(s) and all amendments and supplements thereto as in effect from time to time; c. Certified copies of the resolutions of the Board of Trustees of the Trust (the "Board") authorizing (1) the Trust to enter into this Agreement and (2) certain individuals on behalf of the Trust to take any steps necessary in connection with this Agreement; d. A copy of the investment advisory agreement between the Trust and its investment adviser; and e. Such other certificates, documents or opinions which the Administrator may, in its reasonable discretion, deem necessary or appropriate in the proper performance of its duties. 3. Representations and Warranties of the Administrator The Administrator represents and warrants to the Trust that: a. It is a Massachusetts trust company, duly organized and existing under the laws of The Commonwealth of Massachusetts; b. It has the corporate power and authority to carry on its business in The Commonwealth of Massachusetts; c. All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement; d. No legal or administrative proceedings have been instituted or threatened which would impair the Administrator's ability to perform its duties and obligations under this Agreement; and e. Its entrance into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of the Administrator or any law or regulation applicable to it. 4. Representations and Warranties of the Trusts The Baron Investment Funds Trust represents and warrants to the Administrator that: a. It is a Massachusetts business trust, duly organized, existing and in good standing under the laws of The Commonwealth of Massachusetts; b. It has the requisite power and authority under applicable laws and by its Declaration of Trust and By-laws to enter into and perform this Agreement; c. All requisite proceedings have been taken to authorize it to enter into and perform this Agreement; d. It is an investment company properly registered with the SEC under the 1940 Act; e. The Registration Statement been filed and will be effective and remain effective during the term of this Agreement. The Trust also warrants to the Administrator that as of the effective date of this Agreement, all necessary filings under the securities laws of the states in which the Trust offers or sells its shares have been made; f. No legal or administrative proceedings have been instituted or threatened which would impair the Trust's ability to perform its duties and obligations under this Agreement; g. Its entrance into this Agreement will not cause a material breach or be in material conflict with any other agreement or obligation of the Trust or any law or regulation applicable to it; and h. As of the close of business on the date of this Agreement, the Trust is authorized to issue unlimited shares of beneficial interest. The Baron Select Funds represents and warrants to the Administrator that: a. It is a statutory trust, duly organized, existing and in good standing under the laws of the State of Delaware; b. It has the requisite power and authority under applicable laws and by its Declaration of Trust and By-laws to enter into and perform this Agreement; c. All requisite proceedings have been taken to authorize it to enter into and perform this Agreement; d. It is an investment company properly registered with the SEC under the 1940 Act; e. The Registration Statement been filed and will be effective and remain effective during the term of this Agreement. The Trust also warrants to the Administrator that as of the effective date of this Agreement, all necessary filings under the securities laws of the states in which the Trust offers or sells its shares have been made; f. No legal or administrative proceedings have been instituted or threatened which would impair the Trust's ability to perform its duties and obligations under this Agreement; g. Its entrance into this Agreement will not cause a material breach or be in material conflict with any other agreement or obligation of the Trust or any law or regulation applicable to it; and h. As of the close of business on the date of this Agreement, the Trust is authorized to issue unlimited shares of beneficial interest. 5. Administration Services The Administrator shall provide the following services, subject to the authorization and direction of each Trust and, in each case where appropriate, the review and comment by the Trusts' independent accountants and legal counsel and in accordance with procedures which may be established from time to time between the Trusts and the Administrator: Fund Administration Treasury Services a. Prepare for the review by designated officer(s) of the Trusts financial information regarding the Fund(s) that will be included in the Trusts' semi-annual and annual shareholder reports, Form N-Q reports and other quarterly reports (as mutually agreed upon), including tax footnote disclosures where applicable; b. Coordinate the audit of the Trusts' financial statements by the Trusts' independent accountants, including the preparation of supporting audit workpapers and other schedules, and make such reports and recommendations to the Board (or the Audit Committee of the Board ("Audit Committee")) concerning the performance of the independent accountants as the Board or the Audit Committee may reasonably request; c. Prepare for the review by designated officer(s) of the Trusts the Trusts' periodic financial reports required to be filed with the SEC on Form N-SAR and financial information required by Form N-1A, proxy statements and such other reports, forms or filings as may be mutually agreed upon; d. Provide sub-certificates in connection with the certification requirements of the Sarbanes-Oxley Act of 2002 with respect to the services provided by the Administrator; Fund Administration Tax Services e. Compute tax basis provisions for both excise and income tax purposes; f. Prepare the Fund(s)' federal, state, and local income tax returns and extension requests for review and for execution and filing by the Trusts' independent accountants and execution and filing by the Trust's treasurer, including Form 1120-RIC, Form 8613 and Form 1099-MISC; g. Coordinate Form 1099-DIV mailings; and h. Review and sign off on annual minimum distribution calculations (income and capital gain) prior to their declaration. The Administrator shall perform such other services for the Trusts that are mutually agreed to by the parties from time to time, for which the Trusts will pay such fees as may be mutually agreed upon, including the Administrator's reasonable out-of-pocket expenses. The provision of such services shall be subject to the terms and conditions of this Agreement. The Administrator shall provide the office facilities and the personnel determined by it to perform the services contemplated herein. 6. Fees; Expenses; Expense Reimbursement The Administrator shall receive from the Trusts such compensation for the Administrator's services provided pursuant to this Agreement as may be agreed to from time to time in a written Fee Schedule approved by the parties. The fees are accrued daily and billed monthly and shall be due and payable upon receipt of the invoice. Upon the termination of this Agreement before the end of any month, the fee for the part of the month before such termination shall be prorated according to the proportion which such part bears to the full monthly period and shall be payable upon the date of termination of this Agreement. In addition, the Trusts shall reimburse the Administrator for its out-of-pocket costs incurred in connection with this Agreement. All rights of compensation and expense reimbursement under this Agreement for services performed as of the termination date shall survive the termination of this Agreement. The Trusts agree promptly to reimburse the Administrator for any equipment and supplies specially ordered by or for the Trusts through the Administrator and for any other expenses not contemplated by this Agreement that the Administrator may incur on the Trusts' behalf, but only, at the Trusts' request or with the Trusts' consent. The Trusts will bear all expenses that are incurred in its operation and not specifically assumed by the Administrator. Expenses to be borne by the Trusts, include, but are not limited to: organizational expenses; cost of services of independent accountants and outside legal and tax counsel (including such counsel's review of the Registration Statement, Form N-CSR, Form N-Q, Form N-PX, From N-SAR, proxy materials, federal and state tax qualification as a regulated investment company and other notices, registrations, reports, filings and materials prepared by the Administrator under this Agreement); cost of any services contracted for by the Trusts directly from parties other than the Administrator; cost of trading operations and brokerage fees, commissions and transfer taxes in connection with the purchase and sale of securities for the Trusts; investment advisory fees; taxes, insurance premiums and other fees and expenses applicable to its operation; costs incidental to any meetings of shareholders including, but not limited to, legal and accounting fees, proxy filing fees and the costs of preparation (e.g., typesetting, page changes and all other print vendor and EDGAR charges, collectively referred to herein as "Preparation"), printing, distribution and mailing of any proxy materials; costs incidental to Board meetings, including fees and expenses of Board members; the salary and expenses of any officer, director\trustee or employee of the Trusts; costs of Preparation, printing, distribution and mailing, as applicable, of the Trusts' Registration Statements and any amendments and supplements thereto and shareholder reports; cost of Preparation and filing of the Trusts' tax returns, Form N-1A, Form N-CSR, Form N-Q, Form N-PX and Form N-SAR, and all notices, registrations and amendments associated with applicable federal and state tax and securities laws; all applicable registration fees and filing fees required under federal and state securities laws; the cost of fidelity bond and D&O/E&O liability insurance; and cost of independent pricing services used in computing the Fund(s)' net asset value. The Administrator is authorized to and may employ, associate or contract with such person or persons as the Administrator may deem desirable to assist it in performing its duties under this Agreement; provided, however, that the compensation of such person or persons shall be paid by the Administrator and that the Administrator shall be as fully responsible to the Trusts for the acts and omissions of any such person or persons as it is for its own acts and omissions. 7. Instructions and Advice a. At any time, the Administrator may apply to any officer of the Trusts or his or her designee for instructions and may consult with its own legal counsel or outside counsel for the Trusts or the independent accountants for the Trusts at the expense of the Trusts, with respect to any matter arising in connection with the services to be performed by the Administrator under this Agreement. b. The Administrator shall not be liable, and shall be indemnified by the Trusts, for any action taken or omitted by it in good faith in reliance upon any such instructions or advice or upon any paper or document believed by it to be genuine and to have been signed by the proper person or persons. The Administrator shall not be held to have notice of any change of authority of any person until receipt of written notice thereof from the Fund(s). Nothing in this section shall be construed as imposing upon the Administrator any obligation to seek such instructions or advice, or to act in accordance with such advice when received. 8. Limitation of Liability and Indemnification The Administrator shall be responsible for the performance only of such duties as are set forth in this Agreement and, except as otherwise provided under Section 6, shall have no responsibility for the actions or activities of any other party, including other service providers. The Administrator shall have no liability in respect of any loss, damage or expense suffered by the Trusts insofar as such loss, damage or expense arises from the performance of the Administrator's duties hereunder in reliance upon records that were maintained for the Trusts by entities other than the Administrator prior to the Administrator's appointment as administrator for the Trusts. The Administrator shall have no liability for any error of judgment or mistake of law or for any loss or damage resulting from the performance or nonperformance of its duties hereunder unless solely caused by or resulting from the gross negligence or willful misconduct of the Administrator, its officers or employees. The Administrator shall not be liable for any special, indirect, incidental, punitive or consequential damages, including lost profits, of any kind whatsoever (including, without limitation, attorneys' fees) under any provision of this Agreement or for any such damages arising out of any act or failure to act hereunder, each of which is hereby excluded by agreement of the parties regardless of whether such damages were foreseeable or whether either party or any entity had been advised of the possibility of such damages. In any event, the Administrator's cumulative liability for each calendar year (a "Liability Period") with respect to the Trusts under this Agreement regardless of the form of action or legal theory shall be limited to its total annual compensation earned with respect to the Trusts and fees payable hereunder during the preceding Compensation Period, as defined herein, for any liability or loss suffered by the Trusts including, but not limited to, any liability relating to qualification of the Trusts as a regulated investment company or any liability relating to the Trusts' compliance with any federal or state tax or securities statute, regulation or ruling during such Liability Period. "Compensation Period" shall mean the calendar year ending immediately prior to each Liability Period in which the event(s) giving rise to the Administrator's liability for that period have occurred. Notwithstanding the foregoing, the Compensation Period for purposes of calculating the annual cumulative liability of the Administrator for the Liability Period commencing on the date of this Agreement and terminating on December 31, 2007 shall be the date of this Agreement through December 31, 2007, calculated on an annualized basis, and the Compensation Period for the Liability Period commencing January 1, 2008 and terminating on December 31, 2008 shall be the date of this Agreement through December 31, 2007, calculated on an annualized basis. The Administrator shall not be responsible or liable for any failure or delay in performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its control, including without limitation, work stoppage, power or other mechanical failure, computer virus, natural disaster, governmental action or communication disruption. The Trusts shall indemnify and hold the Administrator and its directors, officers, employees and agents harmless from all loss, cost, damage and expense, including reasonable fees and expenses for counsel, incurred by the Administrator resulting from any claim, demand, action or suit in connection with the Administrator's acceptance of this Agreement, any action or omission by it in the performance of its duties hereunder, or as a result of acting upon any instructions reasonably believed by it to have been duly authorized by the Trusts or upon reasonable reliance on information or records given or made by the Trusts or their investment adviser, provided that this indemnification shall not apply to actions or omissions of the Administrator, its officers or employees in cases of its or their own gross negligence or willful misconduct. The limitation of liability and indemnification contained herein shall survive the termination of this Agreement. 9. Confidentiality The Administrator agrees to treat all Confidential Information communicated to it by the Trusts in connection with the activities contemplated by this Agreement as confidential. "Confidential Information" shall mean all records and information in the Administrator's possession relating to the Trusts and their shareholders and shareholder accounts. The Administrator will not use or disclose Confidential Information for purposes other than the activities contemplated by this Agreement or except as required by law, court process or pursuant to the lawful requirement of a governmental agency, or if the Administrator is advised by counsel that it may incur liability for failure to make a disclosure, or except at the request or with the written consent of the Trusts. Confidential Information will not include information which: (a) is or becomes available to the general public through no fault of the Administrator; (b) is independently developed by the Administrator; or (c) is rightfully received by the Administrator from a third party without a duty of confidentiality. Notwithstanding the foregoing, the Trusts acknowledge that the Administrator may provide access to and use of Confidential Information relating to the Trusts to the Administrator's respective employees, contractors, agents, professional advisors, auditors or persons performing similar functions. In addition, the Administrator may aggregate Fund data with similar data of other customers of the Administrator ("Aggregated Data") and may use Aggregated Data for purposes of constructing statistical models so long as such Aggregated Data represents such a sufficiently large sample that no Fund data can be identified either directly or by inference or implication. 10. Compliance with Governmental Rules and Regulations; Records The Trusts assume full responsibility for complying with all securities, tax, commodities and other laws, rules and regulations applicable to it. In compliance with the requirements of Rule 31a-3 under the 1940 Act, the Administrator agrees that all records which it maintains for the Trusts shall at all times remain the property of the Trusts, shall be readily accessible during normal business hours, and shall be promptly surrendered upon the termination of the Agreement or otherwise upon written request. The Administrator further agrees that all records that it maintains for the Trusts pursuant to Rule 31a-1 under the 1940 Act will be preserved for the periods prescribed by Rule 31a-2 under the 1940 Act unless any such records are earlier surrendered as provided above. Records may be surrendered in either written or machine-readable form, at the option of the Administrator. 11. Services Not Exclusive The services of the Administrator are not to be deemed exclusive, and the Administrator shall be free to render similar services to others. The Administrator shall be deemed to be an independent contractor and shall, unless otherwise expressly provided herein or authorized by the Trusts from time to time, have no authority to act or represent the Trusts in any way or otherwise be deemed an agent of the Trusts. 12. Term, Termination and Amendment (a) This Agreement shall become effective as of the date first above written. The Agreement shall remain in effect unless terminated by either party on sixty (60) days' prior written notice. In the event other Fund(s) are added to this Agreement as set forth herein, termination of this Agreement with respect to any given Fund shall in no way affect the continued validity of this Agreement with respect to any other Fund. (b) Upon termination of this Agreement, the Trusts shall pay to the Administrator such compensation and any reimbursable expenses as may be due under the terms hereof as of the date of such termination, including reasonable out-of-pocket expenses associated with such termination. (c) This Agreement may be modified or amended from time to time by mutual written agreement of the parties hereto. 13. Notices Any notice or other communication authorized or required by this Agreement to be given to either party shall be in writing and deemed to have been given when delivered in person or by confirmed facsimile, or posted by certified mail, return receipt requested, to the following address (or such other address as a party may specify by written notice to the other): if to the Trusts: Baron Capital, Inc., 767 Fifth Avenue, 49th Floor, New York, NY 10153 Attn: General Counsel, fax: 212-583-2014; if to the Administrator: State Street Bank and Trust Company, P.O. Box 5049, Boston, MA 02206-5049, Attn: Fund Administration Legal Department, fax: 617-662- 3805. 14. Non-Assignability This Agreement shall not be assigned by either party hereto without the prior consent in writing of the other party, except that the Administrator may assign this Agreement to a successor of all or a substantial portion of its business, or to a party controlling, controlled by or under common control with the Administrator. 15. Successors This Agreement shall be binding on and shall inure to the benefit of the Trusts and the Administrator and their respective successors and permitted assigns. 16. Entire Agreement This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof and supersedes all previous representations, warranties or commitments regarding the services to be performed hereunder whether oral or in writing. 17. Waiver The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver nor shall it deprive such party of the right thereafter to insist upon strict adherence to that term or any term of this Agreement. Any waiver must be in writing signed by the waiving party. 18. Severability If any provision of this Agreement is invalid or unenforceable, the balance of the Agreement shall remain in effect, and if any provision is inapplicable to any person or circumstance it shall nevertheless remain applicable to all other persons and circumstances. 19. Governing Law This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of The Commonwealth of Massachusetts. 20. Reproduction of Documents This Agreement and all schedules, exhibits, attachments and amendments hereto may be reproduced by any photographic, xerographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties hereto all/each agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. 21. Counterparts This Agreement may be executed by the parties hereto on any number of counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below as of the date first written above. BARON INVESTMENT FUNDS TRUST By: /s/Linda S. Martinson ------------------------ Name: Linda S. Martinson Title: Chief Operating Officer & General Counsel BARON SELECT FUNDS By: /s/Linda S. Martinson ------------------------ Name: Linda S. Martinson Title: Chief Operating Officer & General Counsel STATE STREET BANK AND TRUST COMPANY By: /s/Gary L. French ------------------------- Name: Gary L. French Title: Senior Vice President ADMINISTRATION AGREEMENT SCHEDULE A Listing of Fund(s) Fund Baron Investment Funds Trust - ---------------------------- Baron Asset Fund Baron Growth Fund Baron Small Cap Fund Baron iOpportunity Fund Baron Fifth Avenue Growth Fund Baron Select Funds - ------------------ Baron Partners Fund STATE STREET BANK AND TRUST COMPANY ADMINISTRATION AGREEMENT FEE SCHEDULE FOR BARON INVESTMENT FUNDS TRUST AND BARON SELECT FUNDS - ------------------------------------------------------------------------------- I. FEE FOR TAX ADMINISTRATION SERVICES: The annual fee for the tax administration services as set forth in the Administration Agreement for the Baron Investment Funds Trust and Baron Select Funds will be $12,500 per Fund. II. FINANCIAL STATEMENT SERVICES: The annual fee for the financial statement services as set forth in the Administration Agreement for the Baron Investment Funds Trust and Baron Select Funds will be $14,000 per Fund. III. OUT-OF-POCKET EXPENSES: A billing for the recovery of appliacable out-of-pocket expenses will be made as of the end of each month. Out-of-pocket expenses include, but are not limited to the following: o Communications costs o Postage and insurance o Courier service o Duplicating o Non-recurring legal, audit fees or other professional fees o Travel and lodging for Board meetings or operations meetings if attendance is required IV. TERM: The parties agree that this fee schedule shall remain in effect for one year, and is renewable from year to year thereafter until it is revised as a result of negotiations initiated by either party. BARON INVESTMENT FUNDS TRUST By: /s/Linda S. Martinson ------------------------ Name: Linda S. Martinson Title: Chief Operating Officer & General Counsel Date: April 13, 2007 BARON SELECT FUNDS By: /s/Linda S. Martinson ------------------------ Name: Linda S. Martinson Title: Chief Operating Officer & General Counsel Date: April 13, 2007 STATE STREET BANK AND TRUST COMPANY By: /s/Gary L. French ------------------------- Name: Gary L. French Title: Senior Vice President Date: April 13, 2007 -----END PRIVACY-ENHANCED MESSAGE-----