Small-Cap Growth – March 31, 2017

Small-cap growth stocks started out 2017 firmly as the Russell 2000® Growth Index posted a 5.4% gain, and the Hood River Small-Cap Growth portfolio returned 6.3% net of fees in the first quarter. Investors showed sustained enthusiasm regarding the state of the U.S. economy and the potential for Washington to deliver tax and regulation relief, and consumer confidence continued to spike upward. With that said, many so-called “Trump Trades” seemed to run out of gas toward the end of the quarter as the market interpreted Congress’s failure to move on fixing Obamacare as a bad omen for the enactment of other aspects of his agenda.

Within the index, the strongest sector was healthcare, which rallied 13.2% as biotech stocks posted strong gains and other healthcare industries bounced back as the “repeal & replace” of Obamacare floundered. Materials continued to do well, +9.6%, as the economy continued to clip along and commodities prices held up. Other positive sectors included technology (+5.7%), financials (+3.1%), real estate (+2.6%) and consumer discretionary (+2.2%). Energy was the worst performing sector (-14.5%), as oil prices plunged in March before basically recouping all their losses in early April.

The Hood River Small-Cap Growth portfolio beat the index by 99 basis points (net) in the quarter, with the majority of that coming from stock selection and a minority of it coming from sector allocation effect. Information technology was our strongest sector, contributing 250 basis points of stock selection, accounting for nearly all of the total outperformance. Our strong technology results were driven by Applied Optoelectronics, Advanced Micro Devices, and Callidus Software. Applied Optoelectronics, an optical component maker, announced in January that it expected to beat the Street’s earnings projections by about 60%. AMD’s new chips and architecture are doing well and Callidus, a maker of sales commission software, reported its strongest quarter of the year. On the negative side, healthcare cost us 43 basis points of stock selection as biotech rallied and we were hurt by our underweight. Other soft spots for stock selection in the quarter included industrials (-41 basis points), financials (-40 basis points) and materials (-27 basis points).

While we do not usually have much to report regarding our portfolio positioning, our current positioning is even more boring than usual. We continue to be fully invested in small-cap stocks and believe that our portfolio currently has market exposure in-line with the Russell 2000® Growth Index, consistent with the goal we typically mention of “in-line with to slightly more conservative than” the index. Our sector weightings are about as close as we have ever been to the index, with every sector in our portfolio within 500 basis points of the index’s weighting as of early April, which is tighter than the 700-800 basis points we typically run. Given our focus on bottom-up stock picking as well as the seemingly greater potential for macro “noise” in the early days of the new administration, the tighter sector weightings make sense for now. There are no organizational changes to report.

After a politically tumultuous fourth quarter of 2016, we were happy to have a quieter 1Q17 where we could focus more on company-specific fundamentals. Going into the second quarter, we are pleased with our portfolio and remain excited to find the next great growth company.

Thank you for your continued support,

The Investment Team
David Swank, Brian Smoluch, Rob Marvin

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 12/31/16. 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 12/31/16. 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 of 3/31/17 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.