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Needham Growth Fund – 1Q26

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Market Review & Macro Observations

  • In 1Q26, the Bloomberg Midcap Growth, Russell Midcap Growth and Russell 3000 returned -3.02%, -6.35%, and -3.96% respectively. Many industries detracted including software, autos, consumer durables, financials, health care equipment, and pharmaceuticals.
  • The major development in 1Q26 was the war with Iran. Following the execution of over 30,000 Iranian protestors by the Iranian government, the United States and Israel initiated a joint war against the military facilities of Iran. The war increased oil prices to over $100/barrel and introduced volatility and uncertainty to the markets.
  • Inflation remains above the Federal Reserve’s 2.0% target. Core inflation was 2.4% in January and February, with a forecast of 2.6% for March, which is below the December’s 2.7%[1]. The war with Iran has led to higher energy prices, however, energy prices are not part of Core CPI.
  • In March, the Bureau of Labor Statistics showed unemployment of 4.4% in February, compared to 4.3% in January, and 4.4% in December [2].
  • The Atlanta Fed’s GDPNow model forecasts 2.0% annualized GDP Growth for 1Q26, down from over 3.0% just a few weeks ago[3] due to soft construction and consumer spending[4]. Preliminary estimates for 4Q25 GDP growth are 1.4% as the economy suffered from the government shutdown in October and November[5].
  • As expected, at its January and March 2026 meetings, the Fed Open Market Committee maintained interest rates at 3.50 – 3.75%[6]. The market expects one interest rate cut in 2026[7].

 

 

Impacts on Performance

  • In 1Q26, the Fund’s Institutional (NEEIX) and Retail (NEEGX) classes returned 15.79% and 15.68% respectively, significantly outperforming the Bloomberg and Russell Midcap and 2000 Growth indices. Our performance was strong due to our investments in traditional, technology, and defense infrastructure.
  • The Fund’s top contributors for 1Q26:
    • Form Factor, Inc. (FORM) provides test and measurement technologies for semiconductor design and manufacturing. It reported strong 4Q25 results and raised their guidance for 1Q26. The company benefits from the rapid adoption of High-Bandwidth Memory, which is used in AI applications. They also benefitted from product qualifications at AMD and Nvidia (NVDA)
    • Vicor Corporation (VICR) designs and manufactures modular power conversion devices. The company reported strong 4Q25 revenue, earnings and outlook. Importantly, it also announced that its new Gen-5 vertical power delivery solution was exceeding technical expectations for its leading AI customer[8].
    • Nova Ltd. (NVMI) designs and manufactures metrology equipment used in manufacturing semiconductors. Nova reported strong 4Q25 results and raised guidance for 1Q26. It is benefitting from its use in High Bandwidth Memory, advanced packaging and other AI related uses.
  • The Fund’s top detractors were:
    • Super Micro Computer Inc. (SMCI) reported strong revenues including progress with strategically important, leading edge customers. However, gross margins suffered from large customers and expedited shipping costs. On March 25, Wally Liu, a co-founder and executive vice president, and an executive in Taiwan were named in a Federal criminal case of illegal exports to China. Importantly the company was not named, but the stock suffered.
    • Thermo Fisher Scientific Ltd. (TMO) guided for organic revenue growth of 1%, below its full-year target of 3-4%. Academic and government markets remain soft due to uncertain funding.
    • CoStar Group, Inc. (CSGP) fell as management lowered its adjusted EBITDA guidance due to continuing its aggressive investment in Homes.com.
  • With 12% trailing 12-month turnover, the Fund does not rotate into or out of sectors but invests in companies we believe may outperform over the long term.

Portfolio Changes

  • The Fund ended the quarter with an 11.6% cash position up from 1.7% as we reduced sizes of some of our smaller cap positions.
  • The largest new investments were AeroVironment Inc. (AVAV), HEICO Corporation (HEI), MasTec, Inc. (MTZ) and Tennant Company (TNC).
  • Among the largest additions to established positions were CoStar Group, Generac Holdings, Inc.. (GNRC), Veeco Instruments, Inc. (VECO) and Vishay Intertechnology, Inc. (VSH).
  • Among the positions reduced included Coherent Corp. (COHR), Entegris, Inc. (ENTG), Form Factor, Nova Ltd., PDF Solutions, Inc. (PDFS), Photronics, Inc. (PLAB), TTM Technologies Inc. (TTMI), and Vicor Corporation. By reducing the size of these long-term winners, we look to potentially reduce the fund’s volatility in times of market turmoil

Opportunities & Looking Forward

  • History in the United States is on the side of the optimist. One can consider the news and the bear cases but in the end, we assume that over time, the U.S. economy will be fine. As long-term investors, we have the luxury of looking beyond short-term macro issues.
  • Our major investment theme remains the importance of U.S. infrastructure—the lesser-known “pick and shovel” providers. Our portfolio companies sell into data centers, life sciences labs, semiconductor and other manufacturing plants, roads, airports, power plants, and more. Despite the current uncertainty, the U.S. has underinvested in these areas, so there may be long tailwinds. We continue to believe there may be compelling valuations in our small-cap “picks and shovels” universe.
  • Four areas present throughout our investments are: semiconductor manufacturing, data centers/AI processing, U.S. manufacturing and defense technology.
  • We believe the AI buildout is still in an early stage. Economic returns on AI projects could be a big deal for productivity and the economy.
Next Insight

[1] https://www.bls.gov/opub/ted/2026/consumer-prices-up-2-4-percent-over-the-year-ended-january-2026.htm

[2] Bureau of Labor Statistics, The Employment Situation February 2026, released 3/6/26

[3] https://www.atlantafed.org/-/media/Project/Atlanta/FRBA

[4] Federal Reserve Bank of Atlanta, Current and Past GDPNow Commentaries, 3/23/26

[5] 22V Research, 2/20/26

[6] https://www.federalreserve.gov/newsevents/pressreleases/monetary20260318a.htm

[7] https://finance.yahoo.com/economy/policy/articles/many-fed-rate-cuts-now-220500797.html

 

Definitions and Disclosures

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 (each a “Fund” and collectively, “the Funds”). Shares are sold only through the currently effective prospectus. Please read the prospectus carefully and consider the investment objectives, risks, and charges and expenses of the Fund carefully before you invest. The prospectus contains this and other information about the Fund.

 

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. Portfolio holdings are subject to change. Needham Growth Fund’s ownership as a percentage of net assets in the stated securities as of March 31, 2026: FORM: 3.89%, NVDA: 0.00%, VICR: 2.34%, NVMI: 2.45%, SMCI: 3.37%, TMO: 3.51%, CSGP: 0.98%, AVAV: 0.47%, HIE: 0.37%, MTZ: 0.46%, TNC: 0.63%, GNRC: 0.54%, VECO: 1.81%, VSH: 1.89%, COHR: 2.31%, ENTG: 2.05%, PDFS: 4.17%, PLAB: 1.96 AND TMMI: 0.92%.

 

The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and Standard & Poor’s Financial Services LLC (“S&P”). GICS is a service mark of MSCI and S&P and has been licensed for use by U.S. Bancorp FundServices, LLC.

 

The S&P 500 Index and the S&P 400 Index are both broad unmanaged measures of the U.S. stock market. The Russell 3000® Index measures the performance of the largest 3,000 U.S. companies representing approximately 96% of the investable U.S. equity market, as of the most recent reconstitution. The Russell 3000 Index is constructed to provide a comprehensive, unbiased and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are included. The Russell Midcap® Growth Index measures the performance of the midcap growth segment of the US equity universe. The Russell Midcap Growth Index includes those Russell Midcap Index companies with relatively higher price-to-book ratios and higher forecasted growth values. An investor cannot invest directly in an index. Needham & Company, LLC is a wholly owned subsidiary of The Needham Group, Inc. Needham & Company, LLC, member FINRA/SIPC, is the distributor of The Needham Funds, Inc.

 

The source of the data for each of the Russell Midcap Growth 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 2026. 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.