Quarterly Commentary

3Q 2024

MARKET REVIEW & MACRO OBSERVATIONS

In 3Q24, the Russell 3000 returned 6.23%, the Russell Midcap Growth returned 6.54%, and the S&P MidCap 400 returned 6.94% with positive contributions from most sectors. For the year-to-date ended September 30, the Russell 3000 returned 20.63%, the Russell Midcap Growth returned 12.91%, and the S&P MidCap 400 returned 13.54%.
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).
The third quarter included volatility in U.S. equities from the Japanese Yen carry trade. In a surprise move, the Bank of Japan raised interest rates in late July to 0.25%, and the Yen strengthened to 143 to the dollar, from 160¹. Speculators had been borrowing in Yen and buying securities, including U.S. equities and bonds with a higher return. As long as the Yen remained stable, it was a good trade. The rapid strengthening of the Yen led these speculators to margin calls and required selling.
The Federal Reserve cut rates by 50 bps to 4.75% to 5.25%², stating its confidence that inflation was moving toward 2.0%. The Federal Reserve dot plots of future expectations indicate another 50 bps of interest rate cuts by the end of 2024.

IMPACTS ON PORTFOLIO PERFORMANCE

In 3Q24, the Fund’s Institutional (NEEIX) and Retail (NEEGX) classes declined -3.66% and -3.80%, respectively, underperforming the indices.
The Fund’s top contributors in 3Q24 were:
- Parson’s Corporation (PSN) – reported strong revenue, EBITDA, and earnings. Key areas included critical infrastructure protection, cyber, and urban development markets.
- Aspen Aerogels Inc. (ASPN) – reported strong earnings and outlook. Aspen serves the electric vehicle (EV) and energy/industrial markets with aerogel-based insulation. Both markets are seeing strong demand. Aspen’s products are standard on General Motors’ (GM) Ultium battery platform. We are watching GM’s Equinox EV, which starts at $33,600. This is the first GM EV to address a large market. Early sales are encouraging.
- Vicor Corporation (VICR) – manufactures power conversion devices used in computing, automotive, and broad industrial markets. The company is in transition as it ramps a new manufacturing facility in Andover, MA, and it introduces its Gen-5 product starting in 2H25. Vicor reported revenue above expectations and a positive book-to-bill ratio. Earnings were below expectations, and gross margins were light due to manufacturing and product mix. Importantly, at the end of September, Vicor announced that the U.S. International Trade Commission (ITC) issued an Initial Determination of a violation of Vicor’s intellectual property. Subject to its Final Determination, the ITC may issue an exclusion order precluding importation into the United States of computing systems containing infringing modules, as well as cease and desist orders barring their sales in the United States. Vicor’s results over the last few years have suffered from the competition’s infringement of its intellectual property.
The Fund’s top detractors in 3Q24 were:
- Super Micro Computer, Inc. (SMCI) – reported strong revenue, but gross margin was below expectations. We believe
  the margin was low in order to capture the largest yet installation of a liquid cooled data center. Super Micro reported strong guidance for FY25. The company was also hit with a short report from Hindenburg Research, citing ideas already in the public domain. Finally, Super Micro reported a delay in filing its 10-K to “assess its controls over financial reporting.” Importantly, it does not expect audited financials to be different than previously reported. We remain positive on Super Micro’s prospects and the future of spending for AI compute.
- Entegris, Inc. (ENTG) – supplies micro-contamination control, materials handling, and specialty materials and chemicals products. Entegris reported a positive 2Q24, but guided revenue and earnings were lower for 3Q24, as it saw slower wafer starts from its semiconductor customers serving automotive and industrial markets. Entegris’ earnings report coincided with the sell-off associated with the Japanese Yen carry trade blowing up.
- FormFactor Inc. (FORM) – supplies probe cards used to test semiconductor wafers. It reported strong revenue, margins, and earnings. Guidance for 3Q24 was largely in-line. The stock suffered the day after FormFactor’s earnings release, which was at the same time as the Yen carry trade sell-off. We believe FormFactor is well-positioned to outperform due to its presence with high-bandwidth memory, advanced packaging, and other strong semiconductor manufacturing trends.
With 13% annualized turnover, the Fund does not rotate into or out of sectors but invests in companies we believe may outperform over the long term.

PORTFOLIO CHANGES

The Fund ended the quarter with an 11% cash position. We had a productive quarter with additions to existing positions and new investments.
The Fund’s new holdings were Bentley Systems, Inc. (BSY), CrowdStrike Holdings, Inc. (CRWD), DataDog, Inc. (DDOG), Jacobs Solutions, Inc. (J), Lineage, Inc. (LINE), and Rogers Corp. (ROG).
The largest additions to existing positions were to Bruker Corp. (BRKR), Akamai Technologies, Inc. (AKAM), Markel Group, Inc. (MKL), Altair Engineering, Inc. (ALTR), and Huntington Ingalls Industries, Inc. (HII).

OPPORTUNITIES & LOOKING FORWARD

Our major investment theme remains the importance of U.S. infrastructure—the lesser-known “pick and shovel” providers. Our portfolio 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 we believe there could be long tailwinds.
Four areas present throughout our investments:
1. Semiconductor manufacturing
2. Data Centers/AI processing
3. U.S. Manufacturing
4. 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.