MARKET REVIEW
- In 3Q21, the Russell 2000 returned -4.36%, and the S&P 500 returned 0.58%. The market was particularly weak in late September, after the Federal Open Market Committee Statement. YTD as of September 30, 2021, the Russell 2000 returned 12.41%, and the S&P 500 returned 15.92%.
MACRO OBSERVATIONS
- 10-year U.S. Treasury rates rose 35 bps from their August 2 low to end the quarter where they started at 1.5%.
- Inflation – crude oil rose 4.5% in the quarter, resulting in a 51.7% YTD increase. Copper fell 4.4%, and CPI growth slowed to 0.1% in August. Labor and inventory shortages (including semiconductors) and supply chain disruptions remain prevalent.
- On September 22, the Federal Reserve wrote, “If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.” Other than Paul Volcker, we believe that Federal Reserve Board Governors have a history of accommodative policies that have long provided a tailwind for equities and are unlikely to change.
- In 3Q21, top-performing industries were technology, medical equipment and services, and financials.
- For the quarter, quality factors slightly outperformed, while the small-cap factor was the most significant detractor. In late September, value factors outperformed. For the year, value has been the leading factor, while momentum is the top detractor.
IMPACTS ON PERFORMANCE
- The Fund’s Institutional (NEEIX) and Retail classes (NEEGX) returned 3.91% and 3.81% respectively in 3Q21,outperforming the S&P 500’s 0.58% and the S&P 400 MidCap’s -1.76%. (The Fund’s standardized performance is at www.needhamfunds.com/mutual-funds/growth-fund)
- The Fund’s 3Q21 outperformance was a result of stock selection and the strong performance from concentrated positions in Aspen Aerogels Inc. (ASPN), Vicor Corporation (VICR), PDF Solutions, Inc. (PDFS), and Thermo FisherScientific, Inc. (TMO). These companies have small weightings in the indices relative to our positions. Aspen Aerogels was by far the top contributor.
- The Fund has a high quality factor, and quality factors outperformed in 3Q21.
- KVH Industries (KVHI) was the only significant detractor, and its loss was less than each of the contributors mentioned above. Many holdings with higher valuations were detractors 3Q21.
- With 14% 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
- We did not add any new positions during the quarter. We took advantage of market weakness to add to several holdings. The most significant additions were to Big Commerce Holdings Inc. (BIGC), G1 Therapeutics, Inc. (GTHX), and ParsonsCorporation (PSN).
- The Fund exited three small positions. We trimmed the position in Thermo Fisher Scientific, Inc (TMO) and cut the Datadog, Inc. Class A (DDOG) position by over half.
LOOKING AHEAD AND OPPORTUNITIES
- Many of our top small-cap portfolio holdings have made multi-year investments that we believe position them to deliver growth and positive returns over the next few years.
- We believe that if these investments succeed, they could provide a hedge to macroeconomic factors such as inflation. Aspen Aerogels, FormFactor, Inc. (FORM), KVH Industries Inc., PDF Solutions, Inc. (PDFS), Super Micro Computer Inc.(SMCI), Telos Corp. (TLS), and Vicor (VICR) are some of the Fund’s significant holdings with such plans.
- We are also optimistic about the Fund’s short- and long-term opportunities in semiconductor manufacturing technology.
- The Fund targets investments that we perceive to have significant, unrecognized growth opportunities. COVID-19 hastened the 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.