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Needham Small Cap Growth Fund: 1Q21 Commentary

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MARKET REVIEW

  • In 1Q21, the Russell 2000 returned 12.70% and the S&P 500 returned 6.17%.  Bullish sentiment continued through early February until inflation fears increased and the long end of the yield curve began to rapidly rise.  This caused a risk-off period for higher growth stocks and a significant rotation out of growth into value late in the quarter – the Russell 2000Value Index returned 21.17% in Q1 while the Russell 2000 Growth Index returned +4.88%.

MACRO OBSERVATIONS

  • We believe accommodative policies have long provided tailwind for equities. In the “Semi-Annual Report on Monetary Policy to the Senate,” Fed. Reserve Chairman Powell said, “following periods when inflation has been running below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time…we will continue to increase our holdings of Treasury securities and agency mortgage-backed securities at least at their current pace…The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.”1
  • In 1Q21, top-performing industries were energy, materials, financials and consumer discretionary.
    The market is anticipating recovery from the pandemic recession as vaccinations, which started in mid-December, have now reached over 30% of the US population.2

  • In mid-March, the $1.9T American Rescue Plan Act became law. Congress and the Biden Administration quickly turned to consideration of a $2.5trillion infrastructure bill. The Administration plans to raise taxes in the fall. It’s possible that $4.4T of stimulus spending may push the equity markets higher despite the pending tax increases.3

PORTFOLIO REVIEW

  • In 1Q20, Institutional (NESIX) and Retail classes (NESGX) returned 7.62% and 7.40%, respectively, compared to the S&P500’s 6.17% and the Russell 2000’s 12.70%.  While the rotation out of growth and into value stocks impacted our Q1 performance, our highest conviction stock picks are well-positioned for the environment that we believe. will be dominated by strength in semiconductor spending for the remainder of the year.
  • In March, the Fund won two 2021 Refinitiv Lipper Fund awards in the Small-Cap Core category for delivering strong risk-adjusted returns the three-year time period ended November 30, 2020 (245 funds in the category) and the five-year time period ended November 30, 2020 (235 funds in the category).  The Fund also won Refinitiv Lipper’s 2020 Awards for three- and five-year performance. We are excited about these recognitions and appreciate the long-term support of our investors.
  • The Fund’s top 1Q21 contributors included Sientra, Inc. (SIEN), AXT, Inc. (AXTI), ViaSat, Inc. (VSAT), Photronics, Inc.(PLAB) and Cambium Networks Corp (CMBM). We reduced our exposure in some of our top holdings and redeployed those cash proceeds, ending the quarter nearly fully invested.
  • In March, Roche Diagnostics announced intent to acquire the Fund’s holding GenMark Diagnostics (GNMK) at a 43% premium. We have already seen three large M&A transactions this year, and we expect further M&A activity.  Cash remains cheap and the threat of higher capital gains tax rates should cause M&A to continue. We believe our portfolio has many viable targets.

OUTLOOK

  • Big news in the semiconductor industry – We’ve long felt the semiconductor industry has moved beyond a cyclical PC-driven industry to one of strategic importance.  In March, Intel Corp. (INTC) announced plans to invest $20B in new plants in Arizona. In early April, Taiwan Semiconductor Manufacturing Co., Ltd. (TSM) announced it will spend $100B of capex over 3 years.  Also, the Biden Administration’s proposed a $2.5T infrastructure bill includes $50B for the semiconductor industry. All of these investments will require advanced semiconductor manufacturing equipment.
  • We are carefully watching the current global semiconductor shortage (a result of pandemic disruptions), and its potential impact on our portfolio.  There is a balance between risks and opportunities in this shortage as we have rarely witnessed such a global supply interruption.
  • At March 31, 2021, 17.9% of Needham Small Cap Growth Fund’s assets were invested in Semiconductor and Semiconductor Equipment companies. 
  • We believe economic growth will continue accelerating in 2021, and that it will benefit a broader array of companies including many with smaller capitalizations.  Generally, small cap stocks do well at the beginning of a new economic cycle, and we believe we are in those early days of a recovery following the devastation brought on by the pandemic.
    The rotation to value is a bullish indicator, as the market broadens out and includes those industries that have underperformed.
  • The technology sector remains strong, with major secular trends firmly in place to support continued growth.  Industries and long-term themes we continue to like are semiconductors, semiconductor capital equipment, communications infrastructure, 5G devices, wireless connectivity, military modernization, software and security and specialty material manufacturing.

FOOTNOTES

1- https://www.federalreserve.gov/newsevents/testimony/powell20210223a.htm
2- https://www.npr.org/sections/health-shots/2021/01/28/960901166/how-is-the-covid-19-vaccination-campaign-going-in-your-state
3- https://www.statista.com/chart/24395/composition-of-the-american-rescue-plan-act/

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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.


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 2021. 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.

About Refinitiv Lipper Awards - The Refinitiv Lipper Fund Awards, granted annually, highlight funds and fund companies that have excelled in delivering consistently strong risk-adjusted performance relative to their peers. The Refinitiv Lipper Fund Awards are based on the Lipper Leader for Consistent Return rating, which is a risk-adjusted performance measure calculated over 36, 60 and 120 months. The fund with the highest Lipper Leader for Consistent Return (Effective Return) value in each eligible classification wins the Refinitiv Lipper Fund Award. For more information, see lipperfundawards.com. Although Refinitiv Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Refinitiv Lipper. The Lipper Fund Awards Methodology: The merit of the winners is based on objective, quantitative criteria. The influential and prestigious Refinitiv Lipper Fund Awards are based on our Lipper Leaders Rating for Consistent Return. Individual classifications of three, five, and 10-year periods, as well as fund families with high average scores for the three-year period, are also recognized. The awards are based on Refinitiv Lipper’s proven proprietary methodology, which can be viewed at www.lipperfundawards.com/methodology