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This five-star fund manager keeps beating -2-

Another stock Barr discussed that is not among the top 10 holdings of the Needham Aggressive Growth Fund is nLight Inc. (LA)(S)(R), which makes fiber laser components and systems. The stock closed at $12.77 Monday, well below its initial public offering at $16 in 2018.

The company was established in 2000 and its founder, Scott Keeney, still serves as chief executive. Its legacy business has been making fiber lasers using optical components for industrial uses, to replace older and less-efficient carbon-dioxide lasers.

More recently, nLight has been developing lasers for use by the U.S. armed forces to shoot down enemy drones. Acquisitions over recent years have positioned the company to compete with other defense contractors - including Lockheed Martin Corp. (LMT), General Atomics and Northrop Grumman Corp. (NOC) - for new business with the U.S. Department of Defense, Barr said.

In May, nLight entered into an $86 million contract with the DoD to make a high-energy laser prototype. The DoD exercised options to increase the total value of the contract to $171 million in November.

With annual revenue of $210 million in 2023, this is a very important contract for nLight.

Over the past three years, nLight's stock has dropped 62%. Barr said this reflected the revenue declines in 2022 and 2023 as the company's business in China declined and as it geared up its new defense business.

He doesn't expect the new defense laser contracts to bear fruit in the company's financial performance for the next year and a half, putting nLight "beyond the scope of most investors."

But he believes nLight "has a good prospect" to be "a multibagger years out."

Remarkable performance

All of the following total returns assume the reinvestment of dividends, and are after funds' expenses.

The Needham Aggressive Growth Fund has two share classes. The Class R shares have annual expenses of 1.88% of assets under management and have been available since the fund was launched in September 2001. The Class I shares have been available since the end of 2016. For most investors considering the fund, the Institutional shares are the ones to buy because they have a lower expense ratio of 1.21%. They are available through advisers and large brokerage platforms for a $50 transaction fee. Morningstar considers both expense ratios to be "high."

Here's a comparison of performance for the fund's two share classes for various periods through Monday, against those of several exchange-traded funds that track broad indexes, with detailed explanations below:

   Fund or index ETF                          Ticker   12-month return  three-year return  Five-year return  10-year return  15-year return  20-year return 
   Needham Aggressive Growth Fund - Class R   NEAGX                43%                53%              200%            279%           1035%            943% 
   Needham Aggressive Growth Fund - Class I   NEAIX                43%                56%              209%             N/A             N/A             N/A 
   iShares Russell 2000 Growth ETF             IWO                 12%                -9%               37%             99%            669%            379% 
   iShares S&P Small-Cap 600 Growth ETF        IJT                  9%                 4%               45%            128%            801%            525% 
   SPDR S&P 500 ETF Trust                      SPY                 27%                38%               97%            224%            882%            539% 
                                                                                                                                            Source: FactSet 

We can also look at average annual returns for the same time periods:

   Fund or index ETF                          Ticker   12-month return  three-year average return  Five-year average return  10-year average return  15-year average return  20-year average return 
   Needham Aggressive Growth Fund - Class R   NEAGX                43%                      15.3%                     24.6%                   14.2%                   17.6%                   12.4% 
   Needham Aggressive Growth Fund - Class I   NEAIX                43%                      16.0%                     25.3%                     N/A                     N/A                     N/A 
   iShares Russell 2000 Growth ETF             IWO                 12%                      -3.2%                      6.5%                    7.1%                   14.6%                    8.1% 
   iShares S&P Small-Cap 600 Growth ETF        IJT                  9%                       1.2%                      7.7%                    8.6%                   15.8%                    9.6% 
   SPDR S&P 500 ETF Trust                      SPY                 27%                      11.4%                     14.6%                   12.5%                   16.5%                    9.7% 
                                                                                                                                                                                    Source: FactSet 

In these performance comparisons, the indexes are all represented by large exchange-traded funds that track them. These make for more useful comparisons because the index funds' performance reflects their own expenses.

The fund's performance benchmark is the Russell 2000 Growth Index XX:RUO, which is a subset of the full Russell 2000 Index RUT. The Russell 2000 is made up of the smallest 2000 companies by market capitalization in the Russell 3000 Index RUA, which itself is designed to track 98% of the U.S. stock market.

The Russell 2000 Growth Index includes companies in the Russell 2000 that have higher price-to-book values, have achieved higher five-year growth rates for sales per share and have higher projected growth rates going out two years. You can read about this index's selection criteria here.

It is also fair to compare the Needham Aggressive Growth Fund's performance to that of the S&P 600 SmallCap Growth Index XX:SP600G, which can be considered a higher-quality index than the Russell 2000 Growth Index because initial inclusion in the S&P Small Cap 600 SML requires companies to report four subsequent quarters of profitability, among other criteria.

Then we might as well compare the fund's performance with that of the S&P 500 SPX, the large-cap index, because it has performed so well over recent years and looms so large in coverage of the stock market as a whole. This benchmark is represented in the table by the SPDR S&P 500 ETF Trust SPY, the largest and oldest ETF, with $496 billion in assets under management.

Read: Passive funds have overtaken active. What's next for the long-running trend?

In an industry in which it is difficult for any active manager to outperform a broad stock index, this type of consistent outperformance is unusual. The Needham Aggressive Growth Fund's Class R shares (the ones with the higher expenses) rank within the first percentile among more than 500 funds within Morningstar's "Small Growth" category for one, three and five years. They rank within the first percentile among more than 400 funds in the category for 10 years, and within the fifth percentile among more than 300 funds for 15 years.

Don't miss: 25 of the best-performing stocks in the S&P 500 appear to be better values than they were a year ago. Nvidia is one of them.

-Philip van Doorn

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.


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03-09-24 0546ET

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