- In 1Q21, the S&P 500 returned 6.17% and the Russell 2000 returned 12.70%. There was a significant rotation out of growth into value late in the quarter – the Russell 2000 Value Index returned 21.17% in Q1 while the Russell 2000 Growth Index finished up +4.88%.
Source: Zephyr Informais
- We believe accommodative policies have long provided tailwind for equities. In the “Semi-Annual Report on Monetary Policy to the Senate,” Fed. Reserve Chairman Powell said, “following periods when inflation has been running below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time…we will continue to increase our holdings of Treasury securities and agency mortgage-backed securities at least at their current pace…The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.”1
- In 1Q21, top-performing industries were energy, materials, financials and consumer discretionary.
The market is anticipating recovery from the pandemic recession as vaccinations, which started in mid-December, have now reached over 30% of the US population.2
- In mid-March, the $1.9T American Rescue Plan Act became law. Congress and the Biden Administration quickly turned to consideration of a $2.5trillion infrastructure bill. The Administration plans to raise taxes in the fall. It’s possible that $4.4T of stimulus spending may push the equity markets higher despite the pending tax increases.3
IMPACTS ON PORTFOLIO PERFORMANCE
- The Fund’s Institutional (NEAIX) and Retail classes (NEAGX) returned 7.23% and 7.06%, respectively, in 1Q21, outperforming the S&P 500’s 6.17% and underperforming the Russell 2000’s 12.70%.
- For the 2nd quarter in a row, the Fund’s greater-than-benchmark exposure to high quality and low exposure to value factors hurt the Fund’s relative performance.4 It was value’s largest outperformance vs. growth in 2 decades.5
- The Fund’s 1Q21 underperformance relative to the Russell 2000 was a result of underexposure to the strong consumer discretionary, financial services, industrials, materials, real estate and energy sectors. This same underexposure contributed to the Fund’s outperformance in 2020.
- At 10% turnover, the Fund does not rotate in or out of sectors, but invests in companies we believe can outperform over the long-term.
- The Fund’s top 3 contributors, Entegris Inc. (ENTG), Nova Measuring Instruments Ltd. (NVMI) and MKS Instruments, Inc.(MKSI), provide technology for advanced semiconductor manufacturing. All reported strong 4Q20 results and the stocks benefited from the Intel’s $20B manufacturing investment announcement and a recognition of the importance of U.S.-based advanced semiconductor manufacturing. CarMax, Inc. (KMX) and KVH Industries, Inc. (KVHI) were also major contributors. PDF Solutions, Inc. (PDFS) and Apple, Inc, (AAPL) were the leading detractors in 1Q21.
LOOKING AHEAD & OPPORTUNITIES
- Big news in the semiconductor industry – We’ve long felt the semiconductor industry has moved beyond a cyclical, PC-driven industry to one of strategic importance. In March, Intel Corp. (INTC) announced plans to invest $20B in new plants in Arizona. In early April, Taiwan Semiconductor Manufacturing Co., Ltd. (TSM) announced it will spend $100B of capex over 3 years. Also, the Biden Administration’s proposed a $2.5T infrastructure bill includes $50B for the semiconductor industry. All of these investments will require advanced semiconductor manufacturing equipment.
- At March 31, 2021, 35.4% of Needham Aggressive Growth Fund’s assets were invested in Semiconductor and Semiconductor Equipment companies, including 4 of its top 10 holdings.
- The Fund targets investments we perceive to have significant, unrecognized growth opportunities. COVID-19 is hastening revolutionary development in technology and life sciences; the Fund is a long-term investor in companies that enable the research and manufacturing to bring these developments to market. Semiconductor manufacturing is an important example.
- Greater-than-benchmark exposure to high quality stocks might position the Fund for outperformance in future periods of market weakness.
4 – https://www.morningstar.com/funds/xnas/neagx/portfolio
5 – https://on.spdji.com/rs/838-LDP-483/images/dashboard-sp-500-factor-2021-03.pdf?mkt_tok=ODM4LUxEUC00ODMAAAF8LZpNDm5JAptod3ony9ed5LobGYtWkGHjXk0Q41dIszR0rA90o3dSkah2qdbaki_bl9SZh1zyGR6aotqCxSztuqExC7lpjbILiIFNKYgC