MARKET REVIEW & MACRO OBSERVATIONS
- In 2Q24, the S&P MidCap 400 declined -3.45%, the Russell MidCap Growth declined -3.21%, and the Russell 3000 increased 3.22%.
- The Russell 3000 provides exposure to the largest 3,000 U.S.-listed companies. Effective June 30, mutual funds are required by the SEC to issue Tailored Shareholder Reports (TSR). As part of the TSR, funds must compare themselves to a broad-based market index. Needham chose the Russell 3000, which includes the largest 3,000 investable U.S. equities. We note the ten largest companies total about 1/3 of the index and include Microsoft Corp. (MSFT), Apple Inc. (AAPL), NVIDIA Corp. (NVDA), Alphabet Inc. (GOOGL), Amazon.com Inc. (AMZN) and Meta Platforms Inc. (META).
- As in 1Q24, inflation in April and May was over 3.0%, above the Federal Reserve’s 2.0% target. In May, the Federal Reserve held rates at 5.25-5.50%.
- 10-year Treasury yields increased to a peak of 4.7% in late April and closed the quarter at 4.2%. In October 2023, the 10- year hit 5.0%, which was the highest level since 2007.
IMPACTS ON PORTFOLIO PERFORMANCE
- In 2Q24, the Fund’s Institutional (NEEIX) and Retail (NEEGX) classes declined -0.58% and -0.65%, respectively, outperforming the S&P MidCap 400 and Russell MidCap Growth, but underperforming the Russell 3000.
- The Fund’s top contributors in 2Q24 were:
- Aspen Aerogels, Inc. (ASPN) reported strong earnings and outlook for its aerogel-based insulation. Aspen serves the electric vehicle (EV) and energy industrial markets. Both markets are experiencing strong demand. Aspen’s products are standard on General Motors Ultium EV platform. We are watching GM’s Equinox EV, which lists at $43,295, with a lower-priced model expected later in 2024. This is the first GM EV to address a large market.
- Nova, Ltd. (NVMI) supplies optical components, materials and chemical metrology equipment used by semiconductor manufacturers. The company reported solid 1Q24 results. Nova had particular strength from metrology for HBM (high bandwidth memory), which is used for AI processing, and from logic companies working on mature nodes used in industrial and many consumer applications.
- FormFactor Inc. (FORM) supplies probe cards used to test semiconductor wafers. Like Nova, it saw strong results from memory customers, including those making HBMs.
- Super Micro Computer, Inc. (SMCI), was the Fund’s leading detractor for 2Q24, despite reporting a strong quarter and guidance in 1Q24. The stock price fell as investors worried about how long AI spending will last and about Super Micro’s competitive position. We remain positive on both. The Fund has owned Super Micro since 2009.
- With 15% turnover, the Fund does not rotate into or out of sectors but invests in companies we believe can outperform over the long term
PORTFOLIO CHANGES
- The Fund continued to have inflows and ended the quarter with a 15.5% cash position, up from 13.2% on March 28. We had a productive quarter with additions to existing positions and new investments.
- The Fund’s new holdings:
- Hammond Power Solutions Inc. (HPS.A-CAN) manufactures dry-type transformers used by industrial, utility and data center customers. It is seeing strong demand from its data center customers.
- Centuri Holdings, Inc. (CTRI) was spun out of Southwest Gas Holdings, Inc. (SWX) with an IPO in April. Centuri is a utility infrastructure services company, with Gas Utility Services, Electric Utility Services segments.
- DuPont de Nemours, Inc. (DD) makes a broad range of chemicals, synthetic fibers, lubricants, building materials and much more. It has announced plans to spin-off its semiconductor products and water businesses. The spin-offs are expected in late 2025/early 2026.
- MDU Resources Group, Inc. (MDU) has an electric utility business serving Montana, North Dakota, South Dakota, and Wyoming. MDU also distributes natural gas in Montana, North Dakota, South Dakota, Wyoming, Idaho, Minnesota, Oregon, and Washington. Like Southwest Gas, MDU announced plans to spin-out its Construction Services business. The spin-out, named Everus Construction Group, Inc, is expected later in 2024. We believe the grid needs investment and Centuri and MDU could be beneficiaries.
- Major additions:
- The Fund’s largest additions to existing positions were to Vishay Intertechnology, Inc. (VSH), Huntington Ingalls Industries, Inc. (HII), Akamai Technologies Inc. (AKAM), and nVent Electric plc (NVT).
- Positions Sold:
- The Fund completed its sale of Vacasa, Inc. Class A (VCSA). Vacasa uses data analytics and technology to provide vacation property management services.The company excels on the Oregon Coast, but failed to scale the business with quality and financial returns. We exited the very small position and realized tax losses.
- Position Reduced:
- The Fund sold approximately 20% of its position in KVH Industries, Inc. (KVHI).
OPPORTUNITIES & LOOKING FORWARD
- Our major investment theme remains the importance of U.S. infrastructure—the lesser known “pick and shovel” providers. Our companies sell into data centers, life sciences labs, semiconductor and other manufacturing plants, roads, airports, airbases, power plants, and more. The U.S. has underinvested in these areas, so there could be long tail winds.
- I’d like to highlight four areas present throughout our investments:
- Semiconductor manufacturing
- Data Centers/AI processing
- U.S. Manufacturing
- Defense technology
- We believe the AI buildout is still in an early stage. Economic returns on AI projects could be a big deal for productivity and the economy. We are hearing from companies about increases in sales from the application of AI.