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Needham Small Cap Growth Fund – 2Q25 Commentary

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Market Review & Macro Observations

  • The threat and partial implementation of tariffs caused a sharp sell-out in early April, with U.S. equities losing trillions and bond yields spiking. Volatility persisted until markets reached a bottom in mid-April. Prompted by a partial rollback of tariffs, markets recovered throughout the remainder of the quarter.
  • By the end of June, enthusiasm returned for a more pro-business administration that promised to deregulate, establish permanent tax reductions, and promote investment.
  • M&A activity picked up in Q2 as uncertainty around tariffs cooled and management teams regained confidence for long-term planning.
  • The interest rate curve is higher but healthier, as it has steepened on the long side of the curve. Until policymaking, the economic impacts of tariffs, and inflation are more predictable, the Federal Reserve will likely not cut short-term rates this summer.

Portfolio Performance

  • The Fund’s Institutional (NESIX) and Retail classes (NESGX) returned 18.58% and 18.32%, respectively, in the second quarter, compared to the Russell 2000 Growth’s 11.97% and the Russell 3000’s 10.99%.
  • 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 with a 10.3% cash position following a significant market recovery throughout the quarter.
  • The Fund’s top five performers in 2Q25 were: TTM Technologies, Inc. (TTMI), nLight, Inc. (LASR), Calix, Inc. (CALX), Arteris, Inc. (AIP), and Super Micro Computer, Inc. (SMCI).
  • The Fund’s top five detractors on 2Q25 were: PROS Holdings, Inc. (PRO), BigCommerce Holdings, Inc. (BIGC), CEVA, Inc. (CEVA), Rapid7, Inc. (RPD) and Murphy Oil Corp. (MUR).

Outlook

  • With the U.S. administration’s redirection of economic and social policies, we expect that economic activity could slow 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 greater certainty to begin investment and make operational decisions.
  • Tax certainty should benefit many of our portfolio companies, as accelerated tax benefits will propel capital spending and investment over many years.
  • We expect a realignment of global trade and that many U.S.-based companies will move investment and operations away from China. One theme we hear from management teams is the phrase “country for country” or “region for region” operations that will help to alleviate tariff risk. Many U.S. companies began this process 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 to support continued growth. Areas of long-term investment that we continue to like are data centers, communications infrastructure, defense, AI, cloud computing, wireless connectivity, software and security, and specialty material manufacturers. Innovation within our portfolio companies continues, and long term, we believe these investments will benefit the Fund.

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. Needham Small Cap Growth Fund’s ownership as a percentage of net assets in the stated securities as of June 30, 2025: TTMI: 5.42%, LASR: 2.12%, CALX: 1.53%, AIP: 3.66%, SMCI: 1.93%, PRO: 1.69%, BIGC: 1.52%, CEVA: 1.81%, RPD: 2.66% and MUR: 0.00%.

 

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 2024. 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.