Small-Cap Growth – September 30, 2018

Small-cap growth stocks had a strong third quarter, buoyed by continued solid economic growth. The Russell 2000® Growth Index returned 5.5% for the period and was up 15.8% year-to-date. The Hood River Small-Cap Growth product returned 11.8% net of fees for the quarter, beating the benchmark by 630 basis points (“bps”). Year-to-date, Hood River’s Small-Cap Growth strategy was up 22.9% net of fees, ahead of the benchmark by 710 bps.

The bulk of the benchmark’s returns came in the month of August, with the index adding over 6% on the heels of a generally good second-quarter reporting season and continued strong economic data. Meanwhile, stocks largely shrugged off an additional Fed rate hike and longer-term interest rates drifting upward as the ten-year yield again breached 3% by quarter-end. Despite the strong performance, small-cap stock valuations have fallen from a peak late last year as earnings have risen, driven in part by tax cuts.

Within the benchmark, the biggest drivers of return were healthcare (+7.7%) and information technology (+8.2%). Tech’s biggest gains came in the software and services space, which has been hot this year. Industrials (+4.0%) slightly trailed the index as concerns around higher input prices and the durability of the expansion persisted. Energy was the sole negative sector as oil prices softened for much of the quarter.

Hood River’s quarterly performance was driven by positive bottom-up stock picking. Of our 630 bps of net outperformance, 600 bps was the result of stock selection. During the quarter, our best sector was healthcare (+408 stock selection), followed by information technology (+143 stock selection), consumer discretionary and communication services (each +47 stock selection), while industrials (-40 stock selection) and consumer staples (-19 stock selection) detracted from returns. Top contributors during the quarter were BioTelemetry, Teladoc Health, NuVasive, Advanced Micro Devices and Tilray. The common theme among the winners was that they each reported strong 2Q results and presented solid outlooks for the remainder of the year. Tilray was an exception to that theme, as it benefited from investors contemplating the future potential magnitude of a legal cannabis industry; we exited the position in the quarter on valuation as trading in the stock began to get a bit frenzied. During the period United Natural Foods, MasTec, LogMeIn, Korn/Ferry International and Magellan Health detracted from results.

As we enter the fourth quarter, our portfolio positioning remains consistent with the Russell 2000® Growth Index. All sector allocations were within 500 bps of the benchmark, with the exception of information technology (roughly 800 bps overweight), and industrials (just over 500 bps overweight). We continue to be underweight biotech. Our best estimate is that our beta remains roughly in-line with to slightly more conservative than the benchmark.

There were no changes to our investment team this quarter. In our first quarter letter, we noted that early this year Lance Cannon and Brad Carpenter joined Hood River, bringing our total investment team to six. Now, as we enter the final quarter of the year, we are pleased with how the team has come together, and with the new level of research throughput we are achieving. While we know that not every quarter will be as successful as the one we just completed – and some will be down – the strength of our team makes us optimistic about the future.

Thank you for your continued 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 12/31/17. 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 12/31/17. 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 9/30/18 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.