MARKET REVIEW & MACRO OBSERVATIONS
- In 1Q24 the S&P 500 returned 10.56%, the S&P MidCap 400 returned 9.95%, and the Russell 2000 returned 5.18%.
- Inflation in January and February was over 3.0%, above the Federal Reserve’s 2.0% target.1
- Expectations for GDP growth increased slightly in 1Q24. At the beginning of the year, the Atlanta Fed’s consensus of Blue-Chip economists was 1% for 1Q24 GDP. By the end of March, estimates were over 2%, which still represents a slowdown from 4Q23’s GDP growth of 3.4%.2
- In 1Q24 the Federal Reserve held rates at 5.25-5.50% and indicated that it needed to see progress toward its 2% inflation target before cutting rates. In late March, the market rallied as the Fed indicated it still forecasts three rate cuts in 2024, despite the surprising pickup in inflation in January and February.
- 10-year Treasury yields increased to 4.2% in March, from 3.9% on December 29. In October 2023, the 10-year hit 5.0%, which was the highest level since 2007.
IMPACTS ON PORTFOLIO PERFORMANCE
- In 1Q24, the Fund’s Institutional (NEEIX) and Retail (NEEGX) classes returned 28.86% and 28.75%, respectively, significantly outperforming the indexes.
- The Fund’s top contributors in 1Q24 were:
- Super Micro Computer, Inc. (SMCI) experienced strong growth in 4Q23 and guidance for 1Q24. Super Micro was added to the S&P 500 in March. It raised $3.5 billion from an equity and convertible offering during the quarter. Super Micro is now frequently in the press with all kinds of opinions offered. The Fund has owned SMCI since 2009.
- Nova Ltd. (NVMI) supplies metrology equipment used by semiconductor manufacturers. It reported solid 4Q23 results with increased guidance for 1Q24.
- Entegris, Inc. (ENTG) supplies filters and chemicals used in advanced semiconductor manufacturing processes. We believe semiconductors will continue to increase as a percentage of industrial output, and that Entegris’ filtration and specialty materials products will grow faster than the semiconductor industry.3 Entegris reported a strong close to 2023, guided 1Q24 lower, and provided an in-line 2024 outlook. The stock appreciated as the market anticipated the end of the semiconductor downturn.
- The Fund’s top detractor in 1Q24 was Vicor Corporation (VICR). Vicor manufactures power conversion chips used in data centers, cars, and other industrial products. We have been awaiting the opening of Vicor’s new plant in Andover, MA, and we believe it will start to contribute in 2024. The plant delays limited capacity and hurt earnings over the last year. In 1Q24, Vicor reported disappointing guidance and the loss of an important customer. We believe the market is moving in Vicor’s direction with the high-power requirements of EVs and data centers. Thus, we wait with patience for Vicor to produce better results.
- With 11% turnover, the Fund does not rotate into or out of sectors but invests in companies we believe can outperform
over the long term.
PORTFOLIO CHANGES
- The Fund had significant inflows and ended the quarter with a 13% cash position.
- The three largest new holdings are:
- Klaviyo, Inc. Class A (KVYO) has a SaaS marketing platform for small and medium-sized businesses. It has a strong relationship with Shopify, Inc. (SHOP).
- Vertiv Holdings Co. (VRT) supplies systems for power and thermal management for data centers.
- Equinix, Inc. (EQIX) is a leading provider of digital infrastructure for data centers around the world.
- Major additions:
- The Fund’s largest additions were to nVent Electric plc (NVT), Teradyne, Inc. (TER), Vicor, and Cognex Corporation (CGNX).
- Positions Sold:
- The Fund completed its sale of Alteryx, Inc. (formerly AYX). Alteryx was acquired by Clearlake Capital and Insight Partners.
- Position Reduced:
- We sold nearly 40% of the Fund’s holding in Super Micro to manage the position size. As of March 29, Super Micro remained the largest holding at 14.94% of assets.
OPPORTUNITIES & LOOKING FORWARD
- Our major investment theme remains the importance of U.S. infrastructure—the lesser known “pick and shovel” providers. Our companies sell into data centers, life sciences labs, semiconductor and other manufacturing plants, roads, airports, airbases, power plants, and more. The U.S. has underinvested in these areas, so there could be long tail winds.
- I’d like to highlight four areas present throughout our investments:
- Semiconductor manufacturing
- Data Centers/AI processing
- U.S. Manufacturing
- Defense technology
- We believe the AI buildout is still in an early stage. Economic returns on AI projects could be a big deal for productivity and the economy. We are hearing from companies about increases in sales from the application of AI.