Quarterly Commentary

4Q 2022


  • Inflation expectations have improved significantly, which encourages the Federal Reserve to slow the pace of future interest rate hikes. While energy, food, and labor costs remain a significant headwind to lower inflation, we expect this interest rate rising cycle to end in early 2023. Global economic growth should continue to slow, and the inversion of the interest rate yield curve indicates a higher probability of a global recession.
  • Recent dollar weakness will positively impact corporate earnings of companies that sell overseas, which may lift U.S. equity markets. As we mentioned last year, we needed the dollar to weaken to improve the outlook for U.S. risk assets.
  • Corporate layoffs have accelerated as management teams prepare for a weaker economy and slower business opportunities. While this process is painful for those directly impacted by employment reductions, it is necessary to improve the financial health of the companies and lay the groundwork for the next economic cycle. We expect mergers and acquisitions to increase as companies recognize the impact of higher capital costs and the need for consolidation.
  • Volatility continues as the markets digest earnings and future monetary policy risks. Labor issues, logistical transportation, higher commodity prices, and supply chain constraints have hampered earnings and forward guidance for many companies.
  • Unfortunately, geopolitical risks will persist for an extended period.


  • The Fund’s Institutional (NESIX) and Retail classes (NESGX) returned 9.90% and 9.68%, respectively, in the fourth quarter, outperforming the Russell 2000 Growth’s 4.13%.
  • Small cap stocks have been in a bear market since March 2021. However, we became more constructive on equities in the fourth quarter of 2022 as equity valuations collapsed, the dollar weakened, and tax loss selling abated in 2023. As we have mentioned previously, small-cap companies should benefit long term as the global economy recovers from its rolling slowdown.
  • Company management teams that can capitalize on revenue prospects should provide leverage in business models and drive earnings and cash flow. Strong balance sheets are extremely important during economic downturns.
  • The Fund’s top five performers were: Benefitfocus, Inc. (BNFT), Infinera Corp. (INFN), Intevac, Inc. (IVAC), Yext, Inc. (YEXT), and Cambium Networks Corp. (CMBM).
  • The Fund’s bottom five performers were: Telos Corp. (TLS), AXT, Inc. (AXTI), Edgio, Inc. (EGIO), Sientra, Inc. (SIEN), and Zuora, Inc. (ZUO).
  • In November 2022, the Fund’s long-time holding Benefitfocus (BNFT) announced its acquisition by Voya Financial. This is a perfect example of a management team that was improving their operations; however, they realized that it is more prudent to consolidate based on economic circumstances and higher costs of capital. We expect more transactions like this one in 2023.


  • While many companies still highlight the missing “Golden Screw” to fully finish products, component shortages and overall supply chain challenges have significantly improved. The global economic slowdown has helped improve these headwinds as inventories recover and management teams adjust production lines to minimize future operational disruptions. The reopening of China and the end of the “zero-COVID” approach should also help.
  • We expect the market to ultimately settle out. More reasonable prices should provide interesting entry points for long-term investors to buy high-quality companies with good management and strong balance sheets, earnings, and cash flows. Investment patience and conviction are needed in these volatile and uncertain times.
  • Inflation expectations have substantially improved, which should help alleviate the monetary actions of the Federal Reserve.
  • Semiconductor shortages have had widespread negative implications for many industries, including automotive, medical, industrial, and defense. Recently, we have observed weakness in PC and handsets, which had negative effects on the semiconductor industry. However, we believe that long term, investors will realize value in the sector.
  • The July 2022 passage of the CHIPS and Science Act should drive investment in the semiconductor industry and should also benefit semiconductor capital equipment suppliers.
  • Technology remains a long-term strength of the economy, and there are major secular trends that remain firmly in place to support continued growth in mobile electrification, communications infrastructure, defense, AI, cloud computing, 5G devices and wireless connectivity, software and security, and specialty material manufacturers.