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Needham Growth Fund: 2Q20 Commentary

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MARKET REVIEW

  • In 2Q20, U.S. equities rallied from their worst quarter since 2008; S&P 500 returned 20.54%; Russell 2000 returned 25.42%. YTD at June 30, the S&P 500 returned -3.08%; Russell 2000 returned -12.98%.
  • The March 23 market bottom was coincident with the Fed’s announcement of unlimited quantitative easing and the House’s passage of The CARES Act. The S&P 500 returned 41.28% since this bottom through June 30.
  • The U.S. healthcare system held up to a peak of hospitalizations in mid-April. The world’s ability to adapt to COVID-19 has steadily improved.
  • 1Q20 earnings and 2Q20 guidance were better than expected.
  • During the quarter, low leverage and high quality factors outperformed, while small size, low volatility, high yield and value factors underperformed1. The top industry contributors were software and tech hardware2.

PORTFOLIO REVIEW

  • In 2Q20 and year-to-date, the Fund significantly outperformed, due to almost all of its top holdings outperforming their
    sectors. The Fund’s overweight in information technology and its underweights in consumer staples, financials, energy,
    retail and utilities were all contributors to performance.
  • The Fund’s Institutional (NEEIX) and Retail classes (NEEGX) returned 30.81%% and 30.69%, respectively, in 2Q20. YTD as of June 30, NEEIX returned 6.47% and NEEGX returned 6.19%, considerably outperforming the S&P 500’s -3.08% YTD results.
  • The Fund’s four largest positions – PDF Solutions Inc. (PDFS), CarMax, Inc. (KMX), Entegris Inc. (ENTG) and Thermo Fisher Scientific, Inc. (TMO) – were its top four contributors and all outperformed their sectors. PDF Solutions and Entegris provide technology for advanced semiconductor manufacturing. CarMax hit a 9-year low in March, rebounding in the quarter as investors recognized the resilience of its online and in-store business model.
  • Thermo Fisher reported better than expected spending from its life science research customer base. The top ten holdings represented 55.63% of net assets and nine of the top ten holdings outperformed their sectors in the second quarter.
  • None of the Fund’s positions were material detractors in 2Q20.

THE OPPORTUNITY

  • We target companies we perceive to have significant, unrecognized growth opportunities. COVID-19 is hastening revolutionary development in technology and life sciences that will improve our quality of life. 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.
  • The Fund’s greater-than-benchmark exposure to high quality stocks (defined by Morningstar to include profitability and moderate leverage) was helpful for the Fund’s performance this quarter. We seek current and growing profitability and sound balance sheets in stocks we hold, and believe that during a time of significant uncertainty this may continue to provide benefits for our shareholders.

1 – FTSE Russell. Market Maps Monthly Performance Report, June 2020.
2 – FTSE Russell. Market Maps Monthly Performance Report, June 2020.
3 – FactSet, Top Down Attribution, Portfolio Analysis 3.0.

Next Insight

Average annual returns as of 6/30/20 are found at: https://www.needhamfunds.com/mutual-funds/growth-fund/

The Needham Growth Fund inception date is 1/1/96.
**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 Growth Fund's Gross Expense Ratio is 2.01% for the Retail Class and 1.73% for the Institutional Class. The Needham
Growth Fund's Net Expense Ratio is 1.98% for the Retail Class and 1.43% 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 1.95% and 1.40% 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.
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.