U.S. stocks continued their upward climb in the second quarter as investors grew more confident in the prospect of Fed rate cuts. Combined with a strong first quarter 2019, this was a terrific start to the year for many indexes, including the S&P 500® Index, which was up 17% through the first half of the year, marking its best first half performance in over 20 years (since 1997). The Russell 2000® Growth Index was up +2.74% for the quarter and up +20.36% for the first half of the year. For the second quarter, the Hood River Small-Cap Growth strategy returned +4.15% net of fees, outperforming the benchmark by 141 basis points. Year-to-date, the Hood River Small-Cap Growth portfolio was up +23.67% net of fees, outperforming the benchmark by 331 basis points.
The markets achieved these gains in the face of an escalating trade spat between the U.S. and China, which has been a roller coaster ride over the past year. Most recently, in early July Presidents Trump and Jinping seemed to be playing slightly nicer again. Beyond trade, investors have also been filled with angst over economic prospects given that the U.S. is now in the longest expansion in its history. Looking across asset classes, concerns regarding an economic slowdown have depressed bond yields globally, with the ten-year Treasury yield ending at 2.0%, which left many investors unenthused over the future returns available in the fixed-income markets. Between unattractive returns in fixed-income markets, and the prospect of further rate cuts as suggested recently by Fed Chairman Powell, investors have been receptive to the prospects of stocks. The attractiveness of stocks has been bolstered by recent strong earnings, with April being the best month of the second quarter for the Russell 2000® Growth Index as companies in aggregate reported attractive first quarter results.
Within the Russell 2000® Growth Index, the biggest performance drivers in the most recent quarter were industrials (+9.27%), information technology (+3.58%), financials (+4.73%), and consumer discretionary (+1.68%). The sectors that detracted the most from the benchmark included energy (-8.97%) and communication services (-4.52%).
The Hood River Small-Cap Growth portfolio’s quarterly performance was driven primarily by bottom-up stock selection, led by information technology (+125 bps), financials (+83 bps) and real estate (+49 bps). Our weakest stock selection sectors in the quarter were healthcare (-103 bps) and energy (-41 bps). Our largest contributors to performance in the quarter included Globant, Kinsale Capital, Harsco Corp., Kratos Defense & Security and Sage Therapeutics. Our largest detractors were Biotelemetry, BioCryst Pharmaceuticals, TPI Composites, Chart Industries, and Glu Mobile. The top contributors generally benefited from posting stronger than expected earnings, with the exception of Sage Therapeutics, which posted strong performance as its latest stage infusible drug for depression was approved and investors interpreted that approval as positive for its more important earlier-stage oral depression drug. Harsco was strong on a well-received divestiture of one business and acquisition of another that may create better growth going forward. Amongst our underperformers, Biotelemetry was hurt by speculation regarding a reimbursement cut for one of its smaller product lines, and BioCryst fell as pivotal clinical data for its lead drug was unimpressive even if potentially approvable.
As we start the third quarter, the Small-Cap Growth portfolio is positioned slightly tighter to the benchmark’s sector weightings than normal, with no sector more than 400 basis points over- or under-weight versus the index, with the exception of information technology, which is approximately 500 basis points overweight. We continue to be underweight biotech. As of early July, we estimate our current portfolio’s beta is similar to that of the Russell 2000® Growth Index, although we would caution investors that predictions regarding beta can be significantly off relative to actual outcomes.
We are pleased to announce that we have enhanced our investment team with the addition of Scott Kintz, who joined Hood River in June as an analyst. Prior to joining Hood River, Scott was a portfolio manager at Ascend Capital, where he led an industrials team. He previously was an associate at Citadel Investment Group and began his career as a financial analyst at Goldman Sachs. Scott’s many years of fundamental research experience will be a great addition to the team.
Thank you for your ongoing support,
David Swank, Brian Smoluch & Rob Marvin
Investors in Hood River’s Small-Cap Growth strategy acknowledge and agree that (I) any information provided by the Firm is not a recommendation to invest in the strategy and that the Firm is not undertaking to provide any investment advice to the investor (impartial or otherwise), or to give advice to the investor in a fiduciary capacity in connection with an investment in the strategy and, accordingly, no part of any compensation received by the Firm is for the provision of investment advice to the investor and (II) Hood River has a financial interest in the investor’s investment in the strategy on account of the fees and other compensation the Firm expects to receive from the client.
Hood River Capital Management LLC, a Delaware limited liability company, offers investment advisory services to individuals, pension and profit sharing plans, trusts, estates, corporations, as well as other institutional clients. Hood River has an arms-length service level agreement with mar Vista Investment Partners, a registered investment adviser, to provide back and middle office services. For purposes of compliance with GIPS®, Hood River has defined itself to not include bundled/WRAP fee accounts in the firm’s assets. Hood River maintains a complete list and description of firm composites, which is available upon request.
On 01/01/13, Brian Smoluch, Robert Marvin and David Swank formed Hood River to manage a small-cap growth strategy. Brian Smoluch, Robert Marvin and David Swank were dual employees until 05/31/13 when all of the assets under their management at Roxbury transitioned to Hood River through a sub-advisory arrangement. On 1/20/15, Hood River finalized an agreement that put 100% of its equity in the hands of Hood River’s three Principals, divided equally among them. All assets under management are managed by Hood River. Information provided for the period from June 2002 through December 2012 represents the performance of portfolios managed by Mr. Smoluch, Mr. Marvin and Mr. Swank while employed by Roxbury. Hood River claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS® standards. Hood River has been independently verified for the periods 01/01/13 through 12/31/18. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS® standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS® standards. The Small-Cap Growth composite has been examined for the periods 6/30/02 through 12/31/18. The verification and performance examination reports are available upon request. Benchmark returns are not covered by the report of independent verifiers. For the entire period presented, Mr. Smoluch, Mr. Marvin and Mr. Swank have been substantially responsible for the all the investment decisions of the small-cap growth strategy. Performance prior to 01/01/13 meets GIPS® portability requirements. ACA served as the verifier, conducted a verification and examined the composite’s performance history that was ported over to Hood River prior to 1/1/13.
The Small-Cap Growth composite was created in 2002 with an inception date of 06/30/02. On 01/01/13 the name of the composite changed from Small-Cap Growth (Portland Team) to Small-Cap Growth. All returns are based in U.S. dollars and are computed using a time-weighted total rate of return. The composite is defined to include all fully discretionary, fee paying, taxable and tax-exempt portfolios with a minimum portfolio value of $500,000 managed in accordance with Hood River’s Small-Cap Growth strategy and that paid for execution on a transaction basis. Any account crossing over the composite’s minimum threshold due to contributions shall be included in the composite at the end of the month it increased in value. Any account which drops below 65% of the composite’s minimum threshold because of considerable cash withdrawals and not due to manager performance will be removed from the composite at the beginning of the month it declines in market value.
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.
The dispersion in composite returns shown herein was measured using an asset-weighted standard deviation formula. For returns presented gross of fees, results were calculated prior to a deduction for investment management fees. Client returns will be reduced by Hood River’s investment management fees. The fee schedule is disclosed in Part 2A of Form ADV filed with the Securities and Exchange Commission. Over a period of years, deductions for annual investment management fees will reduce the compounding effect on portfolio growth. For example, assuming 8% annual return for five years and application of the maximum annual fee of 1%, a total gross return of 46.9% and a total net return of 40.3% would be generated. Performance results presented reflect the reinvestment of dividends and other earnings. Gross performance is net of all transaction costs. Net performance is net of transaction costs, the maximum performance-based fees if applicable and actual management fees, but before any custodial fees. All returns are calculated net of withholding taxes on dividends and interest. Actual results may differ from composite results depending upon the size of the portfolio, investment objectives and restrictions, the amount of transaction and related costs, the inception date of the portfolio and other factors. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.
Attribution information is as of 6/30/2019 in an account of a client that Hood River believes to be representative of the Small-Cap Growth accounts Hood River manages. Clients of Hood River managed with different investment objectives or restrictions may have different sector performance and daily beta than those listed. Information is provided for supplemental purposes only. A complete list of portfolio holdings and specific securities transactions for the investment strategy during the preceding 12 months, the top contributors and underperformers calculation methodology, and a list of every holding’s contribution to the overall performance during the period is available upon request. The securities listed in this letter should not be considered a recommendation to purchase or sell any particular security. The reader should not assume that investments in the specific securities identified herein were or will be profitable. Past performance is no guarantee of future results. Not FDIC insured, no bank guarantee, may lose value.