Small Cap Growth Fund Commentary – Q4 2024
We hope all of our readers had a wonderful holiday season and wish you a Happy New Year. The fourth quarter of 2024 was characterized by continued volatility in the U.S. small-cap growth sector. Building on the momentum from the third quarter, when the Russell 2000® Growth Index rose by +8.41%, the market faced both opportunities and challenges in the final quarter of 2024. Factors such as the election, the Fed’s monetary policy, and geopolitical tensions played significant roles in shaping market dynamics. Despite pulling back from intra-quarter gains as high as +11.00%, the Russell 2000® Growth Index still ended in the black, rising +1.70% in the fourth quarter. This brings the index’s 2024 total gains to +15.15% for the year. Hood River’s bottom-up, fundamental research process continued to demonstrate its resilience in the quarter despite the volatile markets – the Hood River Small Cap Growth Fund institutional share class gained +3.22% in the fourth quarter, outpacing the benchmark by +152 basis points (“bps”). This brings the fund’s institutional share class 2024 performance to +35.56%, or +2,041 bps ahead of the benchmark. A table of longer-term fund performance is provided below.
Annualized, as of 12/31/24 |
|||||
1 Year |
3 Year |
5 Year |
10 Year |
Since Inception |
|
Small-Cap Growth Fund (Inst) |
35.56% |
5.86% |
18.73% |
14.18% |
13.37% |
Russell 2000® Growth Index |
15.15% |
0.21% |
6.85% |
8.09% |
10.03% |
HRSMX vs Benchmark |
20.41% |
5.65% |
11.88% |
6.09% |
3.34% |
Performance quoted represents past performance for the Fund’s institutional class shares and there is no guarantee of future results. Short-term performance may reflect conditions that are unsustainable and may not be repeated or consistently achieved in the future. The investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than the original cost. Current performance may be higher or lower than the performance data quoted above. Please call 800-497-2960 to obtain current and the most recent month-end performance data. The gross expense ratio: 1.07%; net expense ratio (contractual through 11/30/25): 1.07%. Performance would have been lower without limitations in effect. Fund inception: 01/02/2003
The fund’s outperformance in the fourth quarter was primarily driven by stock selection, with the health care, energy, and financial sectors representing the most significant contributors. Conversely, information technology, consumer discretionary, and communication services were the largest detractors. As is typical given our research process, the full year’s outperformance was also driven by stock selection. The largest contributing sectors for 2024 included industrials, consumer discretionary, and health care. Detracting sectors over the last twelve months included information technology, communication services, and financials. Sector weightings for both Q4 and 2024 overall were also additive to alpha.
Expanding on the fourth quarter volatility mentioned earlier, the pullback in the last few weeks of 2024 was similar to the rotation we witnessed in July: lower market cap, cyclical, and lower momentum names outperformed while positive earnings revision stories were out of favor.
One of the most significant market-affecting events of the quarter was undoubtedly the U.S. elections. As mentioned in our Q3 commentary, we did not specifically adjust our portfolio based on any election outcomes. However, we remained vigilant in avoiding any implicit biases. While we did slightly underperform the day after the election, we regained the lost ground in the subsequent weeks.
The Federal Reserve also influenced market movements in the fourth quarter by hinting at a more gradual decrease in interest rates than previously anticipated. The Fed’s approach is grounded in data, and currently, the data does not support a more rapid rate cut. Despite a recent decline from previous highs, inflation remains moderately above the central bank’s targeted rate of 2%. With the economy performing well and the yield curve showing a positive slope, there is no immediate pressure to decrease rates, in our view. Additionally, potential tariffs on imports from certain countries proposed by the new administration could spur inflationary pressures, prompting the Fed to await further developments and their potential effects.
Portfolio positioning heading into 2025 is fairly tight to the benchmark’s sector weights. Our largest overweight is information technology (+612 bps) — all other sectors are within +/- 300 bps of the Russell 2000® Growth Index. This is not a reflection of attempting to stay tight to the benchmark but merely a reflection of where we are finding ideas.
After speaking with 100s of management teams during the quarter, it is evident that many companies are optimistic about the potential opportunities in 2025. The incoming administration in Washington is expected to prioritize deregulation which should streamline permitting processes and cut through bureaucratic red tape. This shift is anticipated to have positive impacts broadly on the economy. Some examples could include increasing energy supply, improving merger and acquisition activity, and accelerating commercial loan growth. Overall, there is a noticeable improvement in sentiment and we are eager to see how this translates into tangible results for the year 2025.
Lastly, regarding valuations, the S&P 500® Index (“S&P 500”) is getting pricey in our view: it is trading at 23.9x 2025 and 21.2x 2026 earnings, which are top-quartile multiples for the index. Large cap stocks also look expensive on other metrics, such as cyclically-adjusted P/E ratios. Conversely, although the Russell 2000® Growth Index’s absolute valuation of 17.7x ’26 earnings is slightly higher than normal, it is not too far from normal. In relative terms, small cap growth appears much more attractive than the S&P 500, trading at a 17% discount to the S&P 500 for 2026 compared to a typical 20% premium. Additionally, we expect the deregulation mentioned earlier to benefit small businesses, further supporting our favorable outlook on small caps as we head into 2025.
We sincerely appreciate your ongoing trust and partnership with Hood River. We look forward to connecting with many of you in the upcoming months. Please do not hesitate to contact our marketing team with any inquiries or assistance — thank you again for your support.
Brian Smoluch & David Swank
Basis Points (“bps”) is a unit of measure used to describe the percentage change in the value of an investment. Price/Earnings Ratio (“P/E”) is defined as the proportion of a company’s share price to its earnings per share. Alpha is defined as the excess return versus the benchmark when adjusted for risk. Earnings are a company’s profit after taxes. Yield curve is a line that pots the yields or interest rates of bonds that have equal credit quality but different maturity dates. The slope of the yield curve predicts the direction of interest rates and the economic expansion or contraction that could result. The S&P 500 Index is a market-capitalization weighted index of 500 leading publicly traded companies in the U.S.
Investment Considerations:
All investing includes risk, including the loss of principal. There can be no guarantee that any strategy (risk management or otherwise) will be successful. The Fund invests in small-cap securities which present a greater risk of loss than large-cap securities, and in growth companies which can be more sensitive to the company’s earnings and more volatile than the stock market in general. The Fund also invests in foreign securities which are subject to risks including currency fluctuations, economic and political change and differing accounting standards. The Fund may invest in derivatives and IPOs, which are highly volatile. Additional risk information may be found in the prospectus.
All information in this report is as of December 31, 2024 unless otherwise indicated. The benchmark is the Russell 2000 Growth Index, defined as an unmanaged, capitalization weighted index of those Russell 2,000 companies with higher price-to-book ratios and higher forecasted growth values. Index returns include dividends and/or interest income and do not reflect fees or expenses. In addition, unlike the composite, which periodically maintains a cash position, the Russell 2000® Growth Index is fully invested. Investors cannot directly invest in an index.
Investors should carefully consider the Fund’s investment objective, risks, charges, and expenses before investing. For a prospectus, which contains this and other important information about the Fund, please call 800-497-2960. Please read the prospectus carefully before investing or sending money.
The Hood River Small Cap Growth Fund is distributed by Quasar Distributors, LLC. Hood River Capital Management LLC serves as the advisor to the Hood River Small Cap Growth Fund.
NOT FDIC INSURED-NO BANK GUARANTEE-MAY LOSE VALUE