The first quarter of 2019 brought strong returns to most major asset classes, as the excesses of the fourth quarter 2018 sell-off were reversed. The Russell 2000® Growth Index returned 17.14% for the quarter. The Hood River Small-Cap Growth product returned 18.75% net of fees, outperforming the benchmark by 161 basis points (“bps”).
The year got off to a strong start in January as investor concerns regarding an overly aggressive Fed were largely put to rest. After contributing to a mini-crash in the fourth quarter, Chairman Powell seems to have been appropriately chastened as demonstrated by the dovish commentary in January in which he said “We’re in a place where we can be patient and flexible and wait and see what does evolve, and I think for the meantime we’re waiting and watching.” This attitude persisted through February, and March brought a further softening of the Fed’s stance as it signaled it was likely finished raising rates for the remainder of the year. While the economy still appears to be growing, the inverted yield curve does suggest the Fed’s current policy may be too restrictive, with possible negative implications for the economy. On a bottom-up basis, our recent calls with company management teams have been more broadly upbeat than calls we conducted late last year, and we continue to find attractive opportunities to buy.
Within the Russell 2000® Growth Index, the biggest performance drivers were healthcare (+17.96%), technology (+24.31%), industrials (+13.46%), and consumer discretionary (+15.94%). Every sector in the benchmark ended the quarter with a gain.
Hood River’s quarterly performance was driven almost entirely by positive bottom-up stock selection, which was strongest in information technology (+115), industrials (+70), and consumer discretionary (+49). Top contributors in the quarter were Amarin Corp, El Dorado Resorts, Chart Industries, Innovative Industrial Properties, and CyberArk Software. Amarin rallied as prescriptions of Vascepa, its drug to treat high triglycerides, continued to grow, it received an endorsement from the American Diabetes Association, and the company filed an application to expand the drug’s label in the U.S.
Stock selection in healthcare detracted from returns in the quarter, as a result of our underweight in biotech, as well as a few company-specific issues. During the quarter, Ligand Pharmaceuticals, Tabula Rasa Healthcare, Vanda Pharmaceuticals, Biotelemetry Inc., and Select Medical detracted from results. Ligand was hurt by a deal in which it sold a large asset for roughly fair value. However, this potentially leaves them with cash burning a hole in their pocket, which could lead to overpaying for a bigger deal, as opposed to smaller, off-the-radar acquisitions they have typically done. We exited our Ligand position in the quarter.
Entering the second quarter, our portfolio is positioned slightly tighter to the benchmark’s sector weightings than normal, with no sector more than 400 bps over- or under-weight versus the index. We continue to be underweight biotech. As of early April, 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.
In company news, Brad Carpenter, one of the analysts that joined us last year, has left the firm. Prior to business school over twelve years ago, Brad flew commercial airplanes as a first officer. He has a tremendous passion for flying and he notified us in early April that he was offered the opportunity to become a captain for a regional carrier. We encouraged him to take the offer and we wish him the best of luck in his flying career. Hood River is currently looking to hire a fourth analyst to supplement the throughput that Lance Cannon, Rohan Kumar, and Brennan Long are providing the portfolio managers.
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 3/31/2019 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.