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Needham Aggressive Growth Fund: 3Q20 Commentary

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MARKET REVIEW

  • U.S. equities rallied for the second quarter in a row; S&P 500 returned 8.93%; Russell 2000 returned 4.93%. YTD at September 30, the S&P 500 returned 5.57%; Russell 2000 returned -8.69%.
  • 3Q20 U.S. GDP estimates called for 32% quarter-on-quarter growth, well ahead of the initial 12% estimate on July 311. 
  • In late August, the Federal Reserve adopted new policy that allows inflation over 2%, providing a tailwind to equities2. 
  • The Federal Reserve’s balance sheet increased to $7T in late September, up from $4.2T in early March, providing another tailwind to asset prices. After the 2008 Great Financial Crisis, it took five years for the balance sheet to expand by $3T.
  • During the 3rd quarter, high-quality and long-term momentum factors outperformed, while small-size, high-yield and value factors underperformed3. 
  • The top industry contributors were software and tech hardware. Utilities, telecommunications and energy were underperforming sectors.

PORTFOLIO REVIEW

  • In 3Q20, Institutional (NEAIX) and Retail classes (NEAGX) returned 10.27% and 10.07%, respectively. YTD at September 30, NEAIX returned 24.56% and NEAGX 24.02%, considerably outperforming the S&P 500’s 5.57% and Russell 2000’s -8.69% YTD results. 
  • The Fund’s allocation and selection effect in IT (semiconductor capital equipment and IT hardware) were the primary contributors in 3Q20. Electric equipment and healthcare stock selection also contributed, as did the Fund’s underweights in energy, telecommunications and utilities.
  • Greater-than-benchmark exposure to high quality stocks helped the Fund’s third quarter performance. We believe our portfolio companies’ high profitability, return-on-capital and moderate leverage are a cause for Morningstar’s high quality ranking4.
  • Consumer Discretionary stocks, led by the hospitality industry, accelerated in 3Q20 as the market anticipated a return to normalcy. These stocks rarely match our quality investment criteria, so the Fund was underweight.
  • The Fund’s top two contributors were two of the largest positions, Apple, Inc. (AAPL) and Entegris Inc. (ENTG). Apple reported a strong June quarter for Mac, iPad, iPhone and Services. Entegris provides technology for advanced semiconductor manufacturing.
  • Aspen Aerogels Inc. (ASPN) and Cryoport, Inc. (CYRX) were also major contributors. The market began to recognize Aspen Aerogel’s potential to supply aerogels for use in thermal control in lithium ion batteries. Cryoport furthered its position in cold chain logistics by acquiring Chart Industries Inc.’s. (GTLS) container business.
  • None of the Fund’s positions were material detractors in 3Q20.
    NEAIX Morningstar Factor Profile

THE OPPORTUNITY

  • We target companies we perceive to have significant, unrecognized growth opportunities. COVID-19 is hastening revolutionary development in technology and life sciences; the Fund is a long-term investor in companies that build the infrastructure necessary to bring these developments to market.
  • For years, we have been underweight financials, utilities, commodity and consumer-facing companies. We believe the underlying technology infrastructure is less vulnerable to economic cycles.
  • Greater-than-benchmark exposure to high quality stocks positions the Fund for outperformance in future periods of market weakness.
  • We seek current and growing profitability and sound balance sheets in the stocks we hold, and believe that during times of uncertainty, this may continue to benefit our shareholders.
Next Insight

1 - https://www.cbo.gov/publication/56368#:~:text=During%20the%20second%20quarter%20of,the%20fourth%20quarter
2 - https://www.marketwatch.com/story/fed-unanimously-adopts-new-strategy-widely-seen-as-leading-to-easier-policy-2020-08-27
3 - https://research.ftserussell.com/products/downloads-research/FTSE_Russell_Monthly_Performance_Report_LCY.pdf?
4 - https://www.morningstar.com/funds/xnas/neaix/portfolio

The Needham Aggressive Growth Fund inception date is 9/4/01.
**Performance for any periods prior to the inception date of Institutional Class Shares are based on the historical performance of the Retail Class Shares adjusted to assume the expenses associated with Institutional Class Shares.

The Needham Aggressive Growth Fund's Gross Expense Ratio is 2.17% for the Retail Class and 1.90% for the Institutional Class. The Needham Aggressive Growth Fund's Net Expense Ratio is 1.92% for the Retail Class and 1.24% for the Institutional Class. The Net Expense Ratio reflects a contractual agreement by the Fund’s investment adviser to waive its fee and/or reimburse the Fund through May 1, 2021 to the extent the Gross Expense Ratio exceeds 1.85% and 1.18% of the average daily net assets of Retail Class Shares and Institutional Class Shares (Expense Cap). The Expense Cap excludes taxes, interest, brokerage, dividends on short positions, fees and expenses of “acquired funds,” extraordinary items and shareholder redemption fees but includes the management fee.

The information presented in this commentary is not intended as personalized investment advice and does not constitute a
recommendation to buy or sell a particular security or other investments.
This message is not an offer of the Needham Growth Fund, the Needham Aggressive Growth Fund or the Needham Small Cap Growth
Fund. Shares are sold only through the currently effective prospectus. Please read the prospectus or summary prospectus and
consider the investment objectives, risks and charges and expenses of the Funds carefully before you invest. The prospectus and
summary prospectus contain this and other information about the Funds and can be obtained on our website,
www.needhamfunds.com.
Investment returns and principal value will fluctuate, and when redeemed, shares may be worth more or less than their original cost.
Performance data quoted represents past performance, and does not guarantee future results. Current performance may be higher or
lower than these results. Performance current to the most recent month-end may be obtained by calling our transfer agent at 1-800-
625-7071. Total return figures include reinvestment of all dividends and capital gains.
All three of the Needham Funds have substantial exposure to small and micro capitalized companies. Funds holding smaller capitalized
companies are subject to greater price fluctuation than those of larger companies.
Needham & Company, LLC, member FINRA/SIPC, is the distributor of The Needham Funds, Inc.
Portfolio holdings are subject to change. Needham Aggressive Growth Fund's ownership as a percentage of net assets in the stated
securities as of 9/30/20: AAPL: 10.66%; ENTG: 11.37%; ASPN: 2.49%; CYRX: 2.38%.

The source of the data for each of the Russell 2000 Index and the Russell 3000 Index (together, the "Indexes") is the London Stock
Exchange Group plc and its group undertakings (collectively, the "LSE Group"). © LSE Group 2019. All rights in the Indexes vest in
the relevant LSE Group company which owns the Index. The Indexes are calculated by or on behalf of FTSE International Limited or
its affiliate, agent or partner. Neither the LSE Group nor its licensors accept any liability for any errors or omissions in the Indexes; no
party may rely on the Index returns shown; and the LSE Group makes no claim, prediction, warranty or representation about the
Fund or the suitability of the Indexes with respect to the Fund. No further distribution of data from the LSE Group is permitted
without the relevant LSE Group company's express written consent. The LSE Group is not connected to the Fund and does not
promote, sponsor or endorse the Fund or the content of this prospectus.