- In 1Q21, the Russell 2000 returned 12.70% and the S&P 500 returned 6.17%. Bullish sentiment continued through early February until inflation fears increased and the long end of the yield curve began to rapidly rise. This caused a risk-off period for higher growth stocks and a significant rotation out of growth into value late in the quarter – the Russell 2000Value Index returned 21.17% in Q1 while the Russell 2000 Growth Index returned +4.88%.
- We believe accommodative policies have long provided tailwind for equities. In the “Semi-Annual Report on Monetary Policy to the Senate,” Fed. Reserve Chairman Powell said, “following periods when inflation has been running below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time…we will continue to increase our holdings of Treasury securities and agency mortgage-backed securities at least at their current pace…The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.”1
- In 1Q21, top-performing industries were energy, materials, financials and consumer discretionary.
The market is anticipating recovery from the pandemic recession as vaccinations, which started in mid-December, have now reached over 30% of the US population.2
- In mid-March, the $1.9T American Rescue Plan Act became law. Congress and the Biden Administration quickly turned to consideration of a $2.5trillion infrastructure bill. The Administration plans to raise taxes in the fall. It’s possible that $4.4T of stimulus spending may push the equity markets higher despite the pending tax increases.3
- In 1Q20, Institutional (NESIX) and Retail classes (NESGX) returned 7.62% and 7.40%, respectively, compared to the S&P500’s 6.17% and the Russell 2000’s 12.70%. While the rotation out of growth and into value stocks impacted our Q1 performance, our highest conviction stock picks are well-positioned for the environment that we believe. will be dominated by strength in semiconductor spending for the remainder of the year.
- In March, the Fund won two 2021 Refinitiv Lipper Fund awards in the Small-Cap Core category for delivering strong risk-adjusted returns the three-year time period ended November 30, 2020 (245 funds in the category) and the five-year time period ended November 30, 2020 (235 funds in the category). The Fund also won Refinitiv Lipper’s 2020 Awards for three- and five-year performance. We are excited about these recognitions and appreciate the long-term support of our investors.
- The Fund’s top 1Q21 contributors included Sientra, Inc. (SIEN), AXT, Inc. (AXTI), ViaSat, Inc. (VSAT), Photronics, Inc.(PLAB) and Cambium Networks Corp (CMBM). We reduced our exposure in some of our top holdings and redeployed those cash proceeds, ending the quarter nearly fully invested.
- In March, Roche Diagnostics announced intent to acquire the Fund’s holding GenMark Diagnostics (GNMK) at a 43% premium. We have already seen three large M&A transactions this year, and we expect further M&A activity. Cash remains cheap and the threat of higher capital gains tax rates should cause M&A to continue. We believe our portfolio has many viable targets.
- Big news in the semiconductor industry – We’ve long felt the semiconductor industry has moved beyond a cyclical PC-driven industry to one of strategic importance. In March, Intel Corp. (INTC) announced plans to invest $20B in new plants in Arizona. In early April, Taiwan Semiconductor Manufacturing Co., Ltd. (TSM) announced it will spend $100B of capex over 3 years. Also, the Biden Administration’s proposed a $2.5T infrastructure bill includes $50B for the semiconductor industry. All of these investments will require advanced semiconductor manufacturing equipment.
- We are carefully watching the current global semiconductor shortage (a result of pandemic disruptions), and its potential impact on our portfolio. There is a balance between risks and opportunities in this shortage as we have rarely witnessed such a global supply interruption.
- At March 31, 2021, 17.9% of Needham Small Cap Growth Fund’s assets were invested in Semiconductor and Semiconductor Equipment companies.
- We believe economic growth will continue accelerating in 2021, and that it will benefit a broader array of companies including many with smaller capitalizations. Generally, small cap stocks do well at the beginning of a new economic cycle, and we believe we are in those early days of a recovery following the devastation brought on by the pandemic.
The rotation to value is a bullish indicator, as the market broadens out and includes those industries that have underperformed.
- The technology sector remains strong, with major secular trends firmly in place to support continued growth. Industries and long-term themes we continue to like are semiconductors, semiconductor capital equipment, communications infrastructure, 5G devices, wireless connectivity, military modernization, software and security and specialty material manufacturing.