MARKET REVIEW
- Despite the market’s terrible angst and performance in 2022, the major indices were all higher in the second half of 2022. In Q4, the S&P 500 returned 7.56% and the Russell 2000 Growth returned 4.13%.
- As anticipated, the Federal Reserve raised interest rates by 75 bps to 3.75 – 4.00% on November 2nd and by 50 bps to 4.25 – 4.50% on December 14th. The Fed has indicated plans to increase rates by another 25bps in February. The Fund’s Institutional (NEAIX) and Retail (NEAGX) classes returned 4.63% and 4.44%, respectively, in 4Q22, outperforming the Russell 2000 Growth’s 4.13% return. As manufacturing continues its process of reshoring to the U.S., over half of the Fund’s top contributors are positioned well to continue to benefit.1 2
MACRO OBSERVATIONS
- Economic announcements in 4Q22 went largely as expected. Year-over-year inflation dropped below 8.0% – historically a very high level, but below the level of Q3. Unemployment remained very low, below 4.0%, as it has all year. Manufacturing and healthcare were areas of strength in the labor market. Real GDP increased at an annual rate of 3.2% in Q3 after a negative Q2.3
- During 4Q22 the dollar was weak. The DXY index, which measures the U.S. dollar versus a basket of foreign currencies, declined by 7.38% during the quarter.4 Foreign central banks spoke of raising interest rates just as the United States is approaching the end of its rate hike cycle. A weak dollar makes it less expensive for customers in foreign countries to buy goods priced in U.S. dollars.
- We continue to see atrocities from the Russian assault on civilians in Ukraine. Given the conflict does not seem to have an end insight, countries and regions must shorten supply chains and become self-sufficient in energy and manufacturing.
IMPACTS ON PORTFOLIO PERFORMANCE
- The Fund’s Institutional (NEEIX) and Retail (NEEGX) classes returned 4.06% and 3.97%, respectively, in 4Q22, underperforming the S&P 500’s 7.56% return.
- The top contributor was long-time holding Super Micro Computer, Inc. (SMCI). Super Micro designs and manufactures servers. It reported very strong Q3 results, sustained by growth from the large internet companies, which operate their own large data centers.
- PDF Solutions, Inc. (PDFS) was the second-best contributor and is the second largest position in the Fund at 8.02% of net assets. PDF Solutions saw strong orders for its Exensio® big data analytics software. Exensio® helps customers across the electronics manufacturing industry improve manufacturing yield. PDF Solutions is benefitting from the resurgence of activity in building semiconductor manufacturing plants in the United States.
- The Fund’s top detractor was Entegris, Inc. (ENTG). Entegris supplies filters, specialty materials, chemicals, and delivery systems used primarily for semiconductor manufacturing. Entegris reported an earnings and guidance shortfall partially due to the United States’ federal restrictions on trade with China.
- AXT, Inc. (AXTI) was the second largest detractor. AXT manufactures Gallium Arsenide (GaAs) and Indium Phosphide (InP) wafers used to make compound semiconductors. Electrons move much faster in these semiconductors, which enables applications such as high-speed processing for silicon photonics and facial recognition. AXT’s end markets suffered in 3Q22, and the company reported weak earnings and 4Q22 guidance.
- 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
- 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 research and manufacturing to bring these developments to market.
- The most significant changes to the portfolio were reductions in position sizes. The largest sale was PDF Solutions, where we sold 65,200 shares to end at 338,900. This sale was to manage the position size. The second largest sale was in small cap company Telos Corporation (TLS). Telos has struggled to execute its new product sales. We sold 140,000 shares to end at 120,000. We reduced about 10 other positions for tax planning and strategic reasons.
- The Fund exited a few of its smaller holdings, including Taiwan Semiconductor Manufacturing Co., Ltd. (TSM). Over the
long term, we think TSMC may experience challenges as it builds out manufacturing capacity outside of Taiwan. - The Fund did not add any new positions in 4Q22 but took advantage of market weakness to add to a few existing positions. The largest addition was to Aspen Aerogels, Inc. (ASPN), which was a very disappointing stock in 2022. The company was selected by General Motors Company (GM), Toyota Motor Corp. (TM), and other electric vehicle makers to provide aerogel insulation to prevent fires in lithium-ion batteries. However, the company needs to build a plant to meet the demand and needed to raise capital to build the plant. We added 35,000 shares in the company’s secondary stock offering in November.
LOOKING AHEAD & OPPORTUNITIES
- We continue to see opportunities in the reshoring of manufacturing in the United States. We recommend reading The Titanium Economy: How Industrial Technology Can Create a Better, Faster and Stronger America by Asutosh Padhi, Gaurav Batra, and Nick Santhaman of McKinsey and Company.5 Portfolio holding Clean Harbors, Inc. (CLH) is featured in the book. Over half of the Fund’s top contributors in 4Q22 are part of the industrial technology universe.
- Many of our largest portfolio holdings have made multi-year investments that we believe positions 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.