Portfolio managers John Barr and Chris Retzler of Needham Growth Fund, Needham Aggressive Growth Fund,  and Needham Small Cap Growth Fund have released their Q2 commentary. In the piece, they review the funds’ performance and look at some of the macro factors affecting growth investing.

The team continues to see opportunities for growth equities, noting:

  • Monetary policy remains accommodative
  • Small caps contract in 2014
  • International developments are unsettling but must be put in perspective
  • There is a technological revolution underway

Needham Funds’ letter to shareholders

August 2014

Dear Shareholders, Friends of Needham and Prospective Shareholders,

We are pleased to report results for the second quarter and for the half-year ending June 30, 2014 for the Needham Growth Fund, Needham Aggressive Growth Fund and Needham Small Cap Growth Fund. Our mission is to create wealth for long-term investors.

Needham Funds’ Second Quarter and Semiannual Review

In the second quarter, the Needham Growth Fund (MUTF:NEEGX) returned 3.1%, the Needham Aggressive Growth Fund (MUTF:NEAGX) returned 5.1%, and the Needham Small Cap Growth Fund (MUTF:NESGX) returned 0.3%. The Russell 2000 Total Return Index returned 2.1%, the S&P 500 Total Return Index returned 5.2% and the NASDAQ Composite returned 5.3%.

For the half-year, the Needham Growth Fund (NEEGX) returned 4.0%, the Needham Aggressive Growth Fund (NEAGX) returned 2.3%, and the Needham Small Cap Growth Fund (NESGX) was down 1.5%. The Russell 2000 Total Return Index returned 3.2%, the S&P 500 Total Return Index returned 7.1%, and the NASDAQ Composite returned 6.2%.

The Funds outperformed in January as our more valuation-sensitive growth holdings were not hit as hard as the broader markets. In February, the Funds had positive returns, but trailed the averages, which were led by defensive sectors, including utilities, telecommunications services, food & beverage, tobacco, real estate and energy. March and April were difficult months for the Funds and small-cap stocks as the economic weakness of the first quarter became known. May brought stabilization and June was very good for the markets with outperformance by the Needham Funds.

Needham Funds Continue to See Opportunities for Growth Equities

Monetary policy remains accommodative and we continue to find opportunities. In her semiannual report, Janet Yellen wrote, “A high degree of monetary accommodation remains appropriate… Too many Americans remain unemployed… Inflation remains below our longer-run objective.” On the other hand, by October the Federal Reserve will complete its Quantitative Easing program of buying Treasuries and mortgage-backed securities. We believe they will continue to find ways to keep policy accommodative.

In September, European Central Bank President Draghi will initiate a program of negative interest rates and $1 trillion of cheap loans for European banks. Japan’s Prime Minister Abe and the Japan Central Bank President Kuroda are driven to depreciate the yen using all types of monetary tools. These central bank policies should be positive for equities.

First quarter United States GDP came in at a weather-induced -2.1%. Second quarter growth is estimated at 4.0%. This first half makes it likely the U.S. economy will grow at approximately 2% for the year; 2% growth supports the Federal Reserve’s continued accommodative monetary policies. During the second quarter, we added new positions to the Funds, including iRobot Corporation (NASDAQ:IRBT), Aruba Networks, Inc. (NASDAQ:ARUN), Discovery Communications Inc. (NASDAQ:DISCA), Life Time Fitness, Inc. (NYSE:LTM), World Wrestling Entertainment, Inc. (NYSE:WWE) and Bruker Corporation (NASDAQ:BRKR).

Needham Funds: Small caps contract in the first half of 2014

2013 was a robust year for small-cap stocks. In the first half of 2014, small -cap stocks have retreated; we think the pullback in January was a necessary correction as the
excess valuations were reduced.

To read the piece on Needham Funds in its entirety, please click here.

About Needham Funds: http://www.needhamfunds.com/

Fund Facts:

Needham Growth

Needham Aggressive Growth

Needham Small Cap Growth