Commentary & Insights

Category

Quarterly Commentary

Topics

Needham Small Cap Growth Fund – 3Q22 Commentary

MACRO OBSERVATIONS

  • Inflation remains stubbornly high, which encourages the Federal Reserve to set higher interest rates that impact risk assets. Global economic growth is slowing, and the inversion of the interest rate yield curve indicates a higher probability of a global recession.
  • Dollar strength is weighing on U.S. equity markets, which will impact the corporate earnings of companies that sell overseas. Until the Dollar weakens, we are cautious about U.S. risk assets. “Don’t fight the Fed,” as the saying goes.
  • Energy costs remain one of the largest contributors to the historic inflation we face, and we have not seen the peak of food inflation. A true long-term, independent energy policy is needed for the U.S.; the recent further release of the Strategic Petroleum Reserve was a short-term benefit at the expense of the future.
  • Volatility continues as the markets digest earnings and future monetary policy risks. Labor issues, logistical transportation, higher commodity prices, and supply chain constraints have hampered earnings and forward guidance for many companies.
  • Unfortunately, geopolitical risks will persist for an extended period.

YEAR-TO-DATE PERFORMANCE AS OF SEPTEMBER 30, 2022

IMPACTS ON PORTFOLIO PERFORMANCE

  • The Fund’s Institutional (NESIX) and Retail classes (NESGX) returned –2.57% and –2.77%, respectively, in 3Q22, underperforming the Russell 2000 Growth’s 0.24%.
  • Small-cap stocks have been in a bear market since March 2021, and near-term caution is necessary because it is not over. After a repricing of the market and multiple contractions, small cap companies should benefit longer-term from improved global growth. Revenue prospects should provide leverage in business models and drive earnings and cash flow.
  • The Fund’s top five performers were: Viewray Inc. (VRAY), AXT Inc. (AXTI), Edgio Inc. (EGIO), Telos Corp. (TLS), and Vicor Corp. (VICR).
  • The Fund’s bottom five performers were: Upland Software Inc. (UPLD), Standard BioTools Inc. (LAB), 8×8 Inc. (EGHT), Benefitfocus Inc. (BNFT), and Zoura Inc. (ZUO).
  • Given the Fund’s under allocation to the energy sector, we were not able to benefit from the tailwinds of surging oil prices. The Fund’s overweight in technology also detracted from performance.

OUTLOOK

  • Component shortages and overall supply chain challenges remain significant issues for technology companies. The shutdowns in China as a result of its “zero-COVID” approach have had significant near-term impacts on company results.
  • If supply chain risks improve and energy costs decrease, inflation may decline more rapidly than currently projected. If we see improvement in these inflationary pressures, it should help alleviate the monetary actions of the Federal Reserve.
  • Semiconductor shortages have had widespread negative implications for many industries, including automotive, medical, industrial, and defense. Recently, we have observed weakness in PC and handsets, which had negative implications for the semiconductor industry. However, we believe that long term, investors will realize value in the industry.
  • Technology remains a long-term strength of the economy, and there are major secular trends that remain firmly in place to support continued growth. Areas of long-term investment that we continue to like are mobile electrification, communications infrastructure, defense, AI, cloud computing, 5G devices and wireless connectivity, software and security, and specialty material manufacturers.

 

Next Insight

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.

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 Small Cap Growth Fund's ownership as a percentage of net assets in the stated securities as of 9/30/22: VRAY: 4.94%, AXTI: 3.06%, EGIO: 0.95%, TLS: 5.32%, VICR: 1.88%, UPLD: 3.36%, LAB: 2.29%, EGHT: 2.36%, BNFT: 4.31% and ZOU: 3.37%.


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 S&P 500 Index is a broad unmanaged measure of the U.S. stock market. The Russell 2000 Index is a broad unmanaged index composed of the smallest 2,000 companies in the Russell 3000 Index. 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 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 2022. 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.