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Quarterly Commentary

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Needham Small Cap Growth Fund – 2Q26

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Market Review & Macro Observations

  • Despite near-term macro volatility, structural tailwinds such as AI infrastructure investment, power generation, automation, military modernization, and digital infrastructure, continue to create opportunities across sectors.
  • Hard assets that support AI growth have outperformed software equities, which have greater exposure to AI’s potential downside risks.
  • Technology sector capital spend continues to drive significant economic activity, broadening revenue opportunities across supply chains.
  • The Treasury yield curve has steepened and remains healthy for capital markets, though geopolitical risks may cause inflation to remain elevated.
  • Continued merger and acquisition activity signals economic confidence, as these deals can reflect investments in future growth.

 

Portfolio Performance

  • The Fund’s Institutional (NESIX) and Retail classes (NESGX) returned 61.99% and 61.77% respectively in the second quarter, compared to the Russell 2000 Growth’s 25.71% and the Russell 3000’s 15.44%.
  • We believe there is significant value within the small-cap asset class, and investor interest in small caps has accelerated so far in 2026. Management teams continue to focus on improving cost structures and margins, accelerating revenue, expansionary planning and strengthening balance sheets.
  • The Fund ended the quarter with a 14.1% cash position following a significant market recovery throughout the quarter.
  • The Fund’s top five performers in 2Q26 were: Arteris, Inc. (AIP), Vishay Intertechnology, Inc. (VSH), Veeco Instruments, Inc. (VECO), CEVA, Inc. (CEVA) and PDF Solutions, Inc. (PDFS).
  • The Fund’s top five detractors on 2Q26 were: Lantronix, Inc. (LTRX), CoStar Group, Inc. (CSGP), Bentley Systems, Inc. (BSY), Red Cat Holdings, Inc. (RCAT) and Primoris Services Corp. (PRIM).

Outlook

  • With the U.S. administration’s redirection of economic and social policies, we expect economic activity to remain healthy through the remainder of 2026.  Management teams have gained greater certainty about how regulatory, tariff and tax policies will impact their businesses.
  • A notable development is the higher long-term Treasury rates, which are the result of inflation risk and bond sales by foreign holders.  The duration of the Iran conflict and its ultimate impact on global inflation may shape future Federal Reserve policy.
  • Mid-term elections in November will heighten headline risk out of Washington, D.C. as specific issues may create uncertainty in future government policies.
  • Control of global trade routes remains central to geopolitical and economic dynamics.  Geopolitical developments in the Middle East and Asia reinforce the need for secure trade networks, which increasingly intersect with supply chain security and national industrial strategy.
  • 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, semiconductors and capital equipment, communications infrastructure, defense, and specialty material manufacturers.  Ongoing innovation within our portfolio companies should benefit the Fund over the long term.
  • Despite recent narratives suggesting turbulence in the technology sector, our direct conversations with management teams tell a different story.  Across more than 100 company visits in recent months, one message stands out: demand remains strong.  Many companies are operating at or near sold-out capacity and are actively expanding.  This signals a healthy capital expenditure cycle and a foundation for momentum.  What may appear as “cooling” from a distance could be strength and disciplined expansion when viewed up close.

 

AIP: 8.71%; VSH: 5.04%; VECO: 2.62%; CEVA: 2.36%; PDFS: 2.36%; LTRX: 1.05%; CSGP: 0.18%; BSY: 1.04%; RCAT: 0.82%; PRIM: 1.18%.

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. Needham Small Cap Growth Fund’s ownership as a percentage of net assets in the stated securities as of June 30, 2026: AIP: 8.71%; VSH: 5.04%; VECO: 2.62%; CEVA: 2.36%; PDFS: 2.36%; LTRX: 1.05%; CSGP: 0.18%; BSY: 1.04%; RCAT: 0.82%; PRIM: 1.18%.

 

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 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 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.