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Needham Small Cap Growth Fund – 1Q25 Commentary

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Macro Observations

  • 2025 began with enthusiasm for a more pro-business administration that would deregulate, establish permanent tax reductions, and promote investment, although tariffs were prioritized throughout their campaign.
  • The threat of tariffs to achieve a more balanced and fair global trading environment was expected to produce near-term headwinds. However, the severity of the tariffs was much larger than the markets had priced into the value of equities.
  • M&A was also expected to face a more favorable and friendly policy stance than the past several years, and this also proved to be overly optimistic.
  • The interest rate curve is higher but healthier, as it has steepened on the long side of the curve. Until policymaking, tariffs and their impacts on the economy, and inflation are more predictable, the Federal Reserve will likely not cut short-term rates unless there is a significant shock to the economy or banking system, which we do not believe is the base case for most investors.
  • Our portfolio companies’ management teams read the same headlines that we all read, and the uncertainty impacts their ability to plan and ultimately provide forward-looking financial guidance. We have observed creativity within guidance, ranging from removing, widening, lowering, and even providing two sets of figures based on macroeconomic outcomes outside of their control.

Portfolio Performance

  • In the first quarter, the Fund’s Institutional (NESIX) and Retail classes (NESGX) returned -18.06% and -18.14%, respectively, compared to the Russell 2000 Growth’s -11.12% and the Russell 3000’s -4.72%.
  • We believe there is significant value within the small-cap asset class after years of selling pressure and investor avoidance. Management teams continue to focus on improving cost structures and margins, accelerating revenue, and strengthening balance sheets.
  • We ended the quarter almost fully invested with a 0.4% cash position.
  • The Fund’s top five performers in 1Q25 were Vicor Corp. (VICR), ADTRAN Holdings, Inc. (ADTN), Calix, Inc. (CALX),Allegro MicroSystems, Inc. (ALGM), and Logility Supply Chain Solutions, Inc. (formerly LGTY).
  • The Fund’s top five detractors on 1Q25 were Aspen Aerogels, Inc. (ASPN), PDF Solutions, Inc. (PDFS), Harmonic, Inc.(HLIT), Rogers Corporation (ROG) and nLight, Inc. (LASR).

Outlook

  • The significantly improved results from the DeepSeek announcement created concerns around technologyinvestment in datacenter and AI. While the DeepSeek results helped to bend the cost curve of AI, hyper-scaler capitalexpenditures have not been reduced and may help to accelerate technological investment in inference and enterprisespending as the benefits of AI move to more practical and application buildout efforts.
  • During the new administration’s redirection of economic and social policies, we expect that economic activity couldslow over 2025 until company management teams gain greater certainty about what the policies mean for their businesses. Federal budget clarity and tax policy should be a positive tailwind for managements who need greatercertainty to begin investment and make operational decisions.
  • We expect a realignment of global trading, with a primary outcome of many U.S.-based companies movinginvestment and operations away from China. One theme we hear from management teams is the phrase “country forcountry” or “region for region” operations that will help to alleviate tariff risk. Many U.S. companies began thisprocess years ago; however, the transition must make economic sense and can take a long time.
  • Technology remains a long-term strength of the economy, and several major secular trends persist firmly in place tosupport continued growth. Areas of long-term investment that we continue to like are data centers, communicationsinfrastructure, defense, AI, cloud computing, wireless connectivity, software and security, and specialty materialmanufacturers. Innovation within our portfolio companies continues, and long term, we believe these investmentswill benefit the Fund.
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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 (each a “Fund” and collectively, the “Funds”). Shares are sold only through the currently effective prospectus, which must precede or accompany this report. Please read the prospectus or summary prospectus and carefully consider the investment objectives, risks and charges and expenses of the Funds before you invest. To obtain a copy of the Fund’s current prospectus, please visit www.needhamfunds.com or contact the Fund’s transfer agent, U.S. Bancorp Fund Services, LLC at 1-800-625-7071.

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 Small Cap Growth Fund’s ownership as a percentage of net assets in the stated securities as of March 31, 2025: VICR: 3.62%, ADTN: 6.57%, CALX: 6.12%, ALGM: 1.02%, LGTY: 0.00%, ASPN: 3.64%, PDFS: 4.90%, HLIT: 4.41%, ROG: 3.02% and LASR: 3.98%.

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 Russell 3000® Index measures the performance of the largest 3,000 US companies representing approximately 96% of the investable US 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 2000 Growth Index includes those Russell 2000 Index companies with higher price-to-value 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 2000 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 2025. 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.