Chris Retzler was working as an investment banker at Merrill Lynch in New York in late 2002 when he left to help his father, who was ill, manage the family’s orthopedic-device manufacturing company. “It gave me a new perspective on how difficult running a business can be,” says Retzler. “It’s a very different experience signing paychecks for employees than getting one from a large investment bank.”
After his family sold the fourth-generation business, Retzler decided that he wanted to go into something in which he could “have ownership in business decisions, but not have to be operational every day.” In 2005, the former Fulbright scholar connected with George Needham, a fellow Bucknell University alumnus and chief executive officer of Needham Investment Management, about working as an analyst for Needham Asset Management, which launched its first mutual fund in 1996. The firm now oversees $762 million in assets.
Today, Retzler is manager of the $290 million Needham Small Cap Growth fund (ticker: NESGX), a position he has held since 2008. The fund’s retail shares carry an above-average expense ratio of 1.9%, but its performance ranks it in the top 10% of its small-growth peers in every major trailing period going back more than a decade. Over the past three years, it has returned 39.6% a year on average, better than 98% of its peers. And over that period, it has trounced the Russell 2000 Growth Inde x by more than 26 percentage points annually.
Needham Small Cap Growth
|Total 1-Yr||Return 5-Year||Return 10-Year|
|Russell 2000 Growth||40.4||16.6||15.6|
Top 10 Holdings
|Company / Ticker||% of Net Assets|
|Fluidigm / FLDM||7.4%|
|Photronics / PLAB||6.6|
|Aspen Aerogels / ASPN||5.2|
|ViewRay / VRAY||4.4|
|Intevac / IVAC||4.1|
|PDF Solutions / PDFS||4.1|
|Vishay Precision Group / VPG||4.0|
|Veeco Instruments / VECO||3.9|
|Akoustis Technologies / AKTS||3.9|
|Cornerstone OnDemand / CSOD||3.9|
Note: Holdings as of June 30. Returns through September 3; five- and 10-year returns are annualized.
Sources: Morningstar; Needham Asset Management
What’s behind this performance? “Being patient with our concentrated, high-conviction ideas,” says Retzler, 49. His portfolio has around 50 holdings with an average market cap of less than $1 billion. Retzler is a growth-at-a-reasonable-price investor who tries to buy growing, but misunderstood, companies at a discount. The fund’s healthy cash position—recently 10.7%—is by design. “As a small-cap investor, we view cash as a strategic asset,” he says. “I hate to sell something to buy something, and I will not put money into the market just because money comes into the fund.”
Needham’s offices are in New York City, but Retzler has been working from his home in Connecticut since the pandemic began, and he isn’t complaining. Fewer hours spent commuting and traveling for in-person meetings frees up time for other interactions that can bring perspective to his investment decisions, he says.
Many of Needham Small Cap Growth’s holdings have also benefited from the migration to remote work and the acceleration of all things digital. “We hear about the big companies that have done well because of rapid digital adoption, but it filters down to the companies that are supplying those businesses and providing the infrastructure and connectivity behind them,” he says, pointing to such holdings as optical networking companies Infinera (INFN) and NeoPhotonics (NPTN), and voice-over-IP specialist 8×8 (EGHT).
Good growth companies can be mispriced for any number of reasons, he says, and at any point in their development—often relating to poorly timed public offerings, complex turnaround stories, uncertainty around mergers and acquisitions, or fluctuations in cash flow related to investments. While the industries and situations he examines vary, a common theme among his investments is a large technological moat and growth via multiple channels.
One common entry point is what Retzler calls “broken IPOs.” Example: Aspen Aerogels (ASPN), which specializes in thermal insulation and initially was focused on energy infrastructure. It started work on an IPO in 2011, but withdrew the filing. It finally went public in 2014 at $11 a share, but the oil-price collapse weighed on its stock and business.
In 2016, Retzler added Aspen at around $5 a share, thinking that the market wasn’t giving it credit for new revenue streams, including sustainable buildings and electric vehicles; its products can mitigate thermal runaway in EV and battery energy storage systems. “The size of the EV side of the business is expected to double between the end of 2021 and 2023,” says Retzler. The stock recently traded around $44.
Ripples in deals can also present buying opportunities. In the spring of 2021, three semiconductor-equipment makers— MKS Instruments (MKS), II-VI (IIVI), and Lumentum Holdings (LITE)—entered a bidding war for Coherent (COHR), which makes lasers for chip manufacturing. The fund bought shares of all three suitors.
Although II-VI won the prize, Retzler thinks MKS offers the most upside. At a recent $146, it was trading at 17 times expected current earnings and about 12 times likely forward earnings. “It has an incredible technological moat and products that are critical to the semiconductor industry,” he says. “And its multiple is half that of some of the bigger software or internet names.”
When small companies offer something special, they often become takeover targets. This was the case for GenMark Diagnostics, a molecular diagnostics company acquired by Roche (RHHBY) in May. When regulatory approval of GenMark’s Covid test sent its shares soaring in the spring of 2020, Retzler lightened the fund’s position and put the proceeds into Fluidigm (FLDM), a biological-research equipment maker that also does Covid-19 diagnostics. Then, when the GenMark deal closed, Retzler significantly increased the fund’s position to Fluidigm at $4 a share. “The stock fell when Covid testing rates dropped this spring, but that’s just one part of the business,” he says. Fluidigm was recently the fund’s largest position, accounting for more than 7% of its assets.
Another company Retzler favors is ViewRay (VRAY), which specializes in MRI-guided oncology radiation, which is very precise and can reduce the number of treatments a patient needs. The pandemic has hampered sales of medical equipment, but Retzler is willing to be patient. Ongoing studies showing MRI-guided radiation’s benefits, plus pent-up demand for new equipment, bode well for ViewRay. So does its potential as an acquisition target.