Small-Cap Growth – March 31, 2015

The first quarter of 2015 was another good one for small cap stocks, with the Russell 2000® Growth Index up 6.6%. Hood River’s Small-Cap Growth strategy outperformed the index for the quarter, driven primarily by our bottom-up stock picking. Small cap stocks benefited from sustained favorable economic conditions during the period. Labor markets continued to edge toward normalcy, with the headline unemployment number at 5.5%, down a point from a year ago, and inflation has remained low. This has created a backdrop in which the consumer has continued to gain confidence and is increasingly willing to spend, which has provided a firm environment for many companies that sell more discretionary items. Small cap stocks, which tend to have less international exposure than their larger peers, were also helped during the quarter by the dollar’s pronounced strength.

Within the Russell 2000® Growth Index, performance was driven by a very narrow range of companies. Healthcare, up 12.9% in the quarter, was the only sector to outperform the overall index. Virtually all of healthcare’s outperformance was driven by the biopharma industry, which was up roughly 18% in the quarter. “Non-biopharma healthcare” was roughly in-line with the index. Technology was also roughly in-line up 6.5%, consumer discretionary was up 5.3% and industrials were down 0.8%.

For many small cap growth managers, biopharma was a significant headwind in the quarter, and we were no exception, with our average weighting significantly lower than the index. Despite our significant underweight position in biopharma we still managed to eke out positive stock selection and overall impact within healthcare during the quarter. Holdings in the healthcare services area including Centene, which experienced strong fundamental growth in the quarter and also benefited from the ongoing expansion of Medicaid eligibility under Obamacare, contributed to returns. As always, we remain interested in the biopharma area, but we believe current valuations are stretched and it is difficult to find compelling long ideas at current prices. While we hope to find opportunities to become less underweight biopharma, industry valuations would likely need to be reset for us to dramatically increase our biopharma weighting.

While we “survived” healthcare this quarter, our biggest wins came elsewhere. Technology was our strongest sector during the quarter, adding over 140 basis points of stock selection thanks to few significant losers and a number of winners. Within technology, we continued to do well in solar with companies such as SunEdison and JinkoSolar, and we also benefited from semiconductor names including Microsemi and Skyworks Solutions. Other strong sectors in the quarter included materials, industrials, consumer staples, and healthcare. The toughest sector for us during the quarter was consumer discretionary, where we were hurt by LifeLock and Tuesday Morning. In addition, our positions in Rentrak, TrueCar and PRA Group detracted from returns.

Looking forward, our portfolio positioning represents a relatively normal stance for us. We believe that our overall market exposure is roughly in-line with the index. Our sector weights don’t have dramatic absolute deviations from the index, with the exception of healthcare, where we are underweight by approximately 800 basis points, which is due to our underweight in biotech. In addition, we are overweight technology and industrials by 400 and 700 basis points, respectively. While we are underweight energy by 300 basis points, our solar exposure, which is included in the technology sector, serves to mitigate this underweight.

We are as excited as ever to be managing our small cap portfolios, and are looking forward to another productive quarter of researching companies by talking to as many management teams, competitors, customers and suppliers as we can. We know there are companies out there that will positively surprise investors, and we look forward to finding our share of them. We appreciate your ongoing support, and look forward to speaking with you soon.

Attribution information is as of 3/31/15 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.