What is the fund’s objective?
Needham Growth Fund’s (NEEGX) stated objective is long-term capital appreciation. Generally speaking, management attempts to invest in companies with above-average long-term growth rates at reasonable valuations—often referred to as growth at a reasonable price or GARP. In particular, management seeks to purchase shares of companies exhibiting P/E ratios equal to or less than half the long-term growth rate of earnings per share. The end goal is to find shares in which management believes there is the potential for price appreciation of 25%-50% over a 12-18 month period.
How does the fund meet its objective?
To meet its objective, management uses a combination of a top-down and bottom-up approach. First, it focuses on macroeconomic trends on a global scale. The goal is to find sectors of the global economy that are likely to experience strong growth. Once identified, the valuations of the strongest companies within these sectors are examined. Often, the most desirable sectors include technology and healthcare, which can lead to a portfolio heavily weighted toward a small number of industries.
On the bottom-up side of the approach, management looks for growth companies that are trading at attractive valuation levels. These companies and their sectors are examined using various quantitative tools and ratios to determine if an investment is desirable. Due diligence, including visiting customers, competitors, and management, is conducted before making an investment decision. Although the portfolio contains stocks across the market-cap spectrum, it often has a large weighting in small and micro-cap companies.
Needham Growth focuses on, above all, the quality of a company’s management team, believing that leadership is the most important factor in determining the potential success of a business. Therefore, the fund invests in the “people” not just a company’s products/services.
Moreover, management focuses on the long-term prospects of a business, and not short-term gyrations. For example, while negative earnings surprises may depress stock prices, these events can be buying opportunities and may lead to investments or expanded positions in an attractively valued stock that has good long-term prospects. Management believes that, often, the market is short sighted and will oversell a good investment, and that the real underlying value will eventually come through.
Risk management is also an integral part of the investment process. The focus is mainly on protecting the fund’s gains while reducing downside risk. Management uses derivatives to hedge the underlying positions in the fund by buying or selling options to reduce downside potential or to lock in gains.
How has the fund performed?
While Needham Growth fund had an excellent year in 2009, over the past three years through June 30, 2010 the fund lost 5.2%, besting the S&P 500 Index by 4.8 percentage points and similar funds Value Line covers by 3.8 percentage points. It ranks in the top 20% of Growth funds over all of the trailing time periods through the end of June.
The fund’s standard deviation, a measure of price fluctuation, is 23.4 over the trailing three years, a touch above that of the objective group, which has an average standard deviation of 20.75. The fund’s beta, a measure of relative volatility, compared to the S&P 500 is just above 1, which suggests the fund will move slightly more than the market in both the up and down directions.
How much does it cost to own the fund?
Needham Growth Fund is a no-load fund. The minimum initial investment is $5,000, which is on the high side for a mutual fund. Its expense ratio is 1.98%, which is also on the high side for this particular mutual fund segment. In fact, historically, the fund’s expenses have been above average relative to the Growth objective group. That said, so, too, has performance.
What type of investor should consider the fund?
The fund would be most suitable for investors with above-average risk tolerance levels. Indeed, Needham Growth Fund invests a material percentage of its assets in the micro- to mid-cap range, which is a more volatile segment of the overall market. Also, the portfolio tends to be concentrated in the technology and healthcare sectors, increasing the overall risk level of the fund. Still, strong long-term performance may make this an interesting selection for those willing to deal with the inevitable ups and downs of investing.