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Needham Small Cap Growth Fund – 3Q24 Commentary

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MACRO OBSERVATIONS

  • The broadening of the equity markets is good for small-cap stocks and something we have been expecting as the economy remains resilient as inflation cools. The Federal Reserve began to cut interest rates, which should support risk asset valuations over the long term.
  • Small-cap company management teams seem more upbeat than they have been over the past few years, and we hope for improved investor sentiment of small-cap companies.
  • Companies continue to adjust inventory levels to meet end-markets’ lower demand and higher cost of capital to retain inventory levels. We expect inventory levels to stabilize, leading to a more balanced supply and demand relationship in 2025.
  • Global economic growth should remain slow as the impact of the higher cost of capital filters throughout the economy. We do not expect a significant recession, and we believe we are closer to the end of the economic slowdown.
  • Geopolitical risks have continued, and we expect these risks to persist for an extended period. The U.S. political environment will also add volatility and uncertainty as investors begin gauging election outcomes in November.

IMPACTS ON PORTFOLIO PERFORMANCE

  • The Fund’s Institutional (NESIX) and Retail classes (NESGX) returned 3.53% and 3.36%, respectively, in the third quarter, compared to the Russell 2000 Growth’s 8.41% and the Russell 3000’s 6.23%.
  • We believe there is significant value within the small-cap asset class after years of selling pressure and investor avoidance. Companies continue to focus on improving cost structures and margins, accelerating revenue, and strengthening balance sheets.
  • The Fund ended the quarter with an 8.0% cash position, and we will look for opportunities to deploy cash during earnings season.
  • The Fund’s top five performers in 3Q24 were: Harmonic, Inc. (HLIT), Aspen Aerogels, Inc. (ASPN), Vicor Corp. (VICR), Frequency Electronics, Inc. (FEIM), and SiTime Corp. (SITM).
  • The Fund’s top five detractors on 3Q24 were: AXT, Inc. (AXTI), Zuora, Inc. (ZUO), PDF Solutions, Inc. (PDFS), Veeco Instruments, Inc. (VECO), and BigCommerce Holdings, Inc. (BIGC).

OUTLOOK

  • Elevated real interest rates will continue to impact economic activity as companies focus on their balance sheets and accumulate cash. However, we expect further Fed Funds rate cuts over the coming months, which will help to lower the real interest rate.
  • We expect capital markets to continue to show signs of improvement, and we also expect a more favorable M&A environment and a potentially less confrontational approval process if there is a political party change in the White House.
  • Technology remains a long-term strength of the economy, and several major secular trends persist to support continued growth. Areas of long-term investment that we continue to like are data centers, mobile electrification, 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.
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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 September 30, 2024: HLIT: 5.19%, ASPN: 7.40%, VICR: 4.63%, FEIM: 0.47%, SITM: 2.65%, AXTI: 1.58%, ZUO: 4.23%, PDFS: 5.65%, VECO: 1.38% and BIGC: 1.39%.

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.