MACRO OBSERVATIONS
- The broadening of the equity markets is good for small-cap stocks and something we have been expecting as the economy remains resilient as inflation cools. The Federal Reserve began to cut interest rates, which should support risk asset valuations over the long term.
- Small-cap company management teams seem more upbeat than they have been over the past few years, and we hope for improved investor sentiment of small-cap companies.
- Companies continue to adjust inventory levels to meet end-markets’ lower demand and higher cost of capital to retain inventory levels. We expect inventory levels to stabilize, leading to a more balanced supply and demand relationship in 2025.
- Global economic growth should remain slow as the impact of the higher cost of capital filters throughout the economy. We do not expect a significant recession, and we believe we are closer to the end of the economic slowdown.
- Geopolitical risks have continued, and we expect these risks to persist for an extended period. The U.S. political environment will also add volatility and uncertainty as investors begin gauging election outcomes in November.
IMPACTS ON PORTFOLIO PERFORMANCE
- The Fund’s Institutional (NESIX) and Retail classes (NESGX) returned 3.53% and 3.36%, respectively, in the third quarter, compared to the Russell 2000 Growth’s 8.41% and the Russell 3000’s 6.23%.
- We believe there is significant value within the small-cap asset class after years of selling pressure and investor avoidance. Companies continue to focus on improving cost structures and margins, accelerating revenue, and strengthening balance sheets.
- The Fund ended the quarter with an 8.0% cash position, and we will look for opportunities to deploy cash during earnings season.
- The Fund’s top five performers in 3Q24 were: Harmonic, Inc. (HLIT), Aspen Aerogels, Inc. (ASPN), Vicor Corp. (VICR), Frequency Electronics, Inc. (FEIM), and SiTime Corp. (SITM).
- The Fund’s top five detractors on 3Q24 were: AXT, Inc. (AXTI), Zuora, Inc. (ZUO), PDF Solutions, Inc. (PDFS), Veeco Instruments, Inc. (VECO), and BigCommerce Holdings, Inc. (BIGC).
OUTLOOK
- Elevated real interest rates will continue to impact economic activity as companies focus on their balance sheets and accumulate cash. However, we expect further Fed Funds rate cuts over the coming months, which will help to lower the real interest rate.
- We expect capital markets to continue to show signs of improvement, and we also expect a more favorable M&A environment and a potentially less confrontational approval process if there is a political party change in the White House.
- Technology remains a long-term strength of the economy, and several major secular trends persist to support continued growth. Areas of long-term investment that we continue to like are data centers, mobile electrification, communications infrastructure, defense, AI, cloud computing, wireless connectivity, software and security, and specialty material manufacturers. Innovation within our portfolio companies continues, and long-term, we believe these investments will benefit the Fund.