Quarterly Commentary

2Q 2019

Needham Small Cap Growth Fund: Review of the Second Quarter 2019

In the second quarter, the Needham Small Cap Growth Fund Institutional and Retail classes returned
11.07% and 10.88%, respectively. The Russell 2000 Index returned 2.10% and the S&P 500 Index returned

We are very pleased with the Fund’s second quarter performance, as headline and market volatility
returned. We were able to reduce specific positions that achieved our price targets while deploying capital
into new and existing positions. While volatility may seem to be a bad word for the overall markets, it is a
great chance for active managers to find buying opportunities. It is in these volatile markets when a cash
position is truly strategic for small cap fund managers. Many small cap investment opportunities “trade by
appointment” and we like to capitalize on these opportunities when liquidity is available to both buy and
sell stock positions. The Fund continued its lean toward a concentrated portfolio of stocks, with the top 10
holdings representing 53.99% of net assets at June 30, 2019.

Top holdings at June 30, 2019 included Photronics, Inc. (PLAB), PDF Solutions, Inc. (PDFS), Aspen Aerogels,
Inc. (ASPN), Zuora, Inc. (ZUO) and MACOM Technology Solutions Holdings, Inc. (MTSI). The Fund’s top
second quarter contributors included Aspen Aerogels, Inc. (ASPN), Amber Road, Inc. (AMBR), Ultra Clean
Holdings, Inc. (UCTT), Electronics For Imaging, Inc. (EFII) and Aquantia Corp. (AQ). The Fund’s largest
second quarter detractors were Neophotonics Corp. (NPTN), Photonics, Inc. (PLAB), and Zuora, Inc. (ZUO).

After a very strong start to the year, the markets were due for a pause and pullback, and we experienced that
weakness in March. The increased volatility continued throughout the second quarter due to headlines
focused on trade disputes and restrictions, with particular attention paid to the Huawei ban, both on the
supply chain and end-customer markets. While we recognize these impacts are meaningful and will have
negative consequences for industries such as semiconductors, optical and communications, we also believe
that companies have creative plans to balance their exposure to such headwinds. As the market digested
daily updates from trade uncertainties, our patience paid off, and we were able to deploy a significant
amount of our cash position into stocks at good value points. The Fund ended the quarter with a cash
position of 17.1%, and we will remain patient as we deploy the remaining capital.

After our investments in Amber Road, Inc. (AMBR), Electronics for Imaging, Inc. (EFII), Aquantia Corp.
(AQ) and Quantenna Communications, Inc. (QTNA) announced their intentions to be acquired, we had the
challenge of redeploying a significant amount of capital that was returned along with investment inflows
into the Fund. We added to some of our larger positions, such as Photronics, Inc. (PLAB), TTM
Technologies, Inc. (TTMI), EMCORE Corp. (EMKR) and Intevac, Inc. (IVAC), and remain excited about the
remainder of the summer to find good points of entry to investments.

Our outlook for 2019 remains positive, with the possibilities of a U.S.-China trade deal, an accommodative
Federal Reserve, and value recognition in our small cap companies that lagged in 2018. We look forward to
a year of patience rewarded. We continue to believe that a good environment remains for investment in
equities. Three themes we are focused on include: 1) continuation of the growth in the semiconductor
capital equipment industry; 2) 5G communication infrastructure build-outs; and 3) military and defense
modernization. These three areas of investment impact much of our portfolio, and we believe that long
term, they should create shareholder value.

We expect the increased volatility to continue throughout 2019 and into 2020. We expect at least one or
probably two rate cuts this year from the Federal Reserve unless the economy returns to very strong and
sustained growth rates. While the global trade negotiations have been painful headlines for many, any
resolution to these disagreements should provide a nice tailwind to the global economy as we enter the
general election of 2020. The high-yield markets remain strong, which is also supportive of the small cap
asset class valuations. We reiterate from past quarterly letters that mergers and acquisitions continued in
the small cap universe. We expect to see increased M&A activity to improve and benefit our portfolio of
stocks in 2019.

We believe the U.S. remains the best place in the world to be investing, and we continue to see an
opportunity to invest in small and mid-cap stocks. Most importantly, we see a revolution happening in
technology that has created and continues to create investment opportunities. We see opportunity in our
strategy of investing in companies that we know well and that we believe are positioned with secular
growth drivers.

We welcome our new investors and thank all of our investors for their continued support. If you have any
questions, thoughts or concerns, please contact us at (800) 625-7071 or at cretzler@needhamco.com. For
information about the funds, please visit our website at www.needhamfunds.com.


Chris Retzler
Portfolio Manager