Quarterly Commentary

3Q 2022


  • In 3Q22, the S&P 500 returned -4.88%, the S&P 400 Index returned –2.46%, and the Russell 2000 Index returned –2.19%.
  • In July, when investors believed the Federal Reserve might end its rate-raising cycle, the Russell 2000 returned 10.50% and the S&P 500 returned 9.22%. In late July, the Federal Reserve raised interest rates 75 basis points (bps). The markets were down moderately in August. In September, the markets gave back their July gains. The Federal Reserve raised rates another 75 bps in late September to 3.00%-3.25%. The Fed has indicated plans to increase rates to 4.25%-4.50% by yearend.


  • 3Q22 was shocking in many ways. We continued to see atrocities from the Russian assault on civilians in Ukraine. European countries sought to end their dependence on Russian natural gas, which resulted in electricity price spikes. Countries and regions must shorten supply chains and become self-sufficient in energy and manufacturing.
  • Year-over-year inflation was 8.5% in July 2022 and 8.3% in August. After June 2022, these are the highest levels since 1981.1
  • Real gross domestic product (GDP) decreased by 0.6% in 2Q22 after declining by 1.6% in 1Q22.2 A slow economy should rein in inflation. However, as Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”3 U.S. government spending over the last four years has led to an increase in the money supply.


  • The Fund’s Institutional (NEEIX) and Retail (NEEGX) classes returned -4.26% and -4.41%, respectively, in 3Q22, outperforming the S&P 500 and S&P 400, but underperforming the Russell 2000.
  • Eight of the Fund’s top ten contributors were outside its top ten holdings. The top contributor was PDF Solutions, Inc. (PDFS). PDFS supplies data analytics Software-as-a-Service (SaaS) for the semiconductor manufacturing and design supply chain. PDFS reported strong revenue and bookings for its Analytics segment. PDFS also announced more details about its Exensio data analytics partnerships including with SAP SE (SAP). PDFS and SAP are working to connect factory data to the enterprise resource planning (ERP) data in SAP S/4HANA® to enable greater efficiencies in semiconductor manufacturing. This connection moves Exensio from engineering and manufacturing to a high value-added enterprise tool.
  • Super Micro Computer, Inc. (SMCI), was the second largest contributor. Super Micro designs and manufactures servers and communications equipment for enterprise markets. Super Micro reported very strong earnings. It is gaining market share from Lenovo Group Limited (LNVGY-ADR), Hewlett Packard Enterprise Co. (HPE), Dell Technologies (DELL) and smaller competitors.
  • The Fund’s top detractor was long-time holding CarMax, Inc. (KMX). CarMax reported disappointing earnings due to a weakening consumer.
  • FormFactor, Inc. (FORM) makes probe cards used to electrically test semiconductors, was the second leading detractor. It reported disappointing guidance. Intel (INTC) is one of its largest customers and continues to suffer from competition from Advanced MicroDevices, Inc. (AMD) and from its own engineering challenges.
  • 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.


  • We’d like to highlight nLight, Inc. (LASR) as a new holding in the quarter. nLight manufactures fiber lasers for industrial and defense applications. It is adding manufacturing capacity in its Camas, WA facility and focusing on business outside of China. China now comprises 10% of its revenue, down from over 25% a few years ago.
  • We took advantage of market weakness to add to many of the Fund’s positions, including:
    • Photronics, Inc. (PLAB), which manufactures photomasks to fabricate semiconductors and flat-panel displays. Photronics announced a strong quarter ending July 31. However, it slightly reduced guidance and the stock fell as a power outage in Korea caused a large customer to defer some deliveries. We estimate Photronics is trading at 5 x earnings, excluding its $6 per share cash position.
    • Veeco Instruments, Inc. (VECO) supplies equipment used to manufacture leading-edge semiconductors for highperformance computing, data storage, consumer and other applications. Veeco is a small-cap with unique products not offered by its larger peers.
  • The Fund exited NeoPhotonics (formerly NPTN) through takeover by Lumentum Holdings, Inc. (LITE).


  • Many of our largest portfolio holdings have made multi-year investments that position them to deliver growth and positive returns over the next few years. We believe if these investments succeed, they could provide a hedge against macroeconomic factors such as inflation.
  • 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.