The first quarter was a roller-coaster ride as global equity markets sold-off sharply in January and early February on concerns of slowing global growth, plunging oil prices, and stress in credit markets. Stocks rebounded in late February and March as those concerns abated and the Fed stressed that it would take a patient approach to raising interest rates. The Russell 2000® Growth Index was down as much as 19% intra-quarter, before rebounding to end the quarter down only 5%. The biggest damage was seen in the biotech industry which troughed at -38% year-to-date in early February as investor concerns around excessive valuations and political pressure on drug prices caused buyers to vanish. When the dust had settled on March 31, the Russell 2000® Growth Index had lost 4.7%, and the Hood River Small Cap Growth strategy outperformed, losing 3.9% in the quarter net of fees.
The Hood River Small-Cap Growth portfolio performed well for the quarter in healthcare, where we added 168 basis points of stock selection, and also picked up 100 basis points via our underweight in the sector. Healthcare stocks that performed well included AMN Healthcare, AmSurg, and Charles River Labs. The technology sector was also strong, adding 139 basis points of stock selection thanks to positions including Oclaro and Fabrinet, both of which make components for optical networks and are benefiting from an upgrade cycle. Industrials was our worst sector in the quarter, giving up 224 basis points of stock selection on names including SolarCity, Barrett Business Services, and On Assignment. Although stock selection is normally responsible for the vast majority of our returns, this quarter the bulk of our outperformance was attributable to allocation, primarily driven by our biotech underweight.
While Fabrinet and Oclaro were good performers in the first quarter, we recently added Finisar to the portfolio. It also benefits from the uptick in optical network spending. Finisar is a stock we have owned in the past and is a leader in the optical component market. As a leader, they still have a significant portion of their sales that are “older” (10 gig and 40 gig) technology. Recently, Finisar’s sales of their newest 100 gig technology have begun to overtake sales of their older products. Our history with Finisar dates back to the IPO in 1999 and our continued research on the company, despite not owning it, allowed us to be in a position to buy the stock when the time was right. Finisar helped our performance by approximately 21 basis points in the first quarter and we look forward to the possibility of further upside in the future.
Portfolio Positioning and Team Update
As we enter April, our portfolio’s positioning is a strong reflection of our time-tested investment process. We anticipate that our beta, or overall market exposure, will continue to be similar to that of the Russell 2000® Growth Index. Our sector exposures are all within roughly 300 basis points of the index, except for technology, where we are approximately 800 basis points overweight. In addition, although our overall healthcare exposure is within 300 basis points of the index, we are meaningfully underweight biotech and overweight non-biotech healthcare. Our weighted average market cap is at a slight premium to that of the benchmark.
We continue to build the Hood River team and we are happy to announce that Bret Hokkanen has joined the firm as Director of Sales. Bret is a Portland native who has worked in the industry for over two decades providing sales and client service expertise at firms including Columbia Management and, most recently, Tygh Capital Management.
Quarters like the one that just ended can easily be distracting as investors deal with the emotions that can accompany market gyrations. At Hood River, we remain focused on conducting original research that helps us identify winners and losers, and create a portfolio of reasonably valued companies whose fundamentals will favorably surprise other investors. Such an approach has succeeded in the past, and we believe it is the best route to building long-term value for our clients.
Thank you for your continued support.
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 jointly owns its back office service provider, Roxbury Capital Management, with Mar Vista Investment Partners, a registered investment advisor. Roxbury provides various administrative, operational, and business services, including trading, marketing, client service, compliance, accounting and IT. 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 12/31/15. 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 12/31/15. 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. One non-fee paying portfolio is included in the composite for the following period: 0.2% of the composite assets year end 12/31/03.
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.
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. Past performance is no guarantee of future results.
Attribution information is as of3/31/16 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.