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Needham Small Cap Growth Fund – 4Q24 Commentary

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Macro Observations

  • Economic uncertainty abounds until we have clarity surrounding the pace and intensity of the new Administration’s policies.
  • Global economies will need to adjust to any new U.S. policies; therefore we could see a near-term slowdown in global trade.
  • Significant and swift increases in tariffs will not be good for equities, although company management teams have contingency plans to help mitigate near-term tariff impacts.
  • Deregulation should benefit companies that have been burdened with substantial controls and costs.
  • M&A opportunities should accelerate with a change at the Federal Trade Commission; this should be positive for small-cap stocks, as there are many that could benefit from consolidation.
  • Capital markets should begin to reopen and provide interesting IPO opportunities.
  • Inflation pressures remain a risk and could be a headwind to lower short-term rates.

Portfolio Performance

  • The Fund’s Institutional (NESIX) and Retail classes (NESGX) returned 0.31% and 0.16%, respectively, in the fourth quarter, compared to the Russell 2000 Growth’s 1.70% and the Russell 3000’s 2.63%.
  • 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.
  • The Fund’s top five performers in 4Q24 were ADTRAN Holdings, Inc. (ADTN), TTM Technologies, Inc. (TTMI), ChartIndustries, Inc. (GTLS), Vicor Corporation (VICR), and MaxLinear, Inc. (MXL).
  • The Fund’s top five detractors in 4Q24 were Aspen Aerogels, Inc. (ASPN), PDF Solutions, Inc. (PDFS), Calix, Inc.(CALX), Harmonic, Inc. (HLIT), and Rogers Corporation (ROG).

Outlook

  • Elevated real interest rates will continue to impact economic activity as companies focus on their balance sheets and accumulate cash. We expect the Federal Reserve to pause further rate cuts until inflation shows improvement and the new Administration’s policies are clarified.
  • Automotive and industrial supply chains are still being worked down as end demand has slowed production rates, which may not improve until later in 2025.
  • The Department of Government Efficiency (DOGE) is a concern to companies that benefit from Federal spending programs and until greater clarity is given, government contracts may be at risk.
  • 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, 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 December 31, 2024: ADTN: 5.13%, TTMI: 5.18%, GTLS: 2.82%, VICR: 4.61%, MXL: 2.74%, ASPN: 3.66%, PDFS: 5.26%, CALX: 5.91%, HLIT: 5.30% and ROG: 3.44%.

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 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.