‘Small-caps have a great opportunity ahead of themselves’: Needham Small Cap Growth Fund Portfolio Manager

Although many investors are optimistic for the coming months, many people are more hesitant to put money into the market in fear of a correction. Needham Small Cap Growth Fund Portfolio Manager Chris Retzler joins the Final Round panel to discuss his views on small caps and what growth

Video transcript

- Let's shift our focus to small caps. Now, they've been a major underperformer for the market this year. Russell 2000 ending in the red today, off nearly 8% since January 1st. But for more on this, we want to bring in Chris Retzler. He's with Needham Small Cap Growth Fund, a portfolio manager there. And Chris, we've seen a little bit of a rotation of some of those large-cap names that Jared was just mentioning. Some of those sectors that have been outperforming and have been leading the way have now been under some selling pressure over the last couple of weeks. So with the economic numbers, I guess, improving a little bit, although they stalled over the last couple of weeks, do you think we're going to see small caps at least come back into favor here? Or do you think that they're a good investment at this point?

CHRIS RETZLER: Thanks for having me on. And we do think that small caps have a great opportunity ahead of themselves right now. Coming out of the seasonally slower, lower volume summer months, small caps tend to do better during the next stretch. The next kind of eight months generally are a good period. But we also, behind that, have economic recovery.

Clearly, we're going to have a good third quarter snapping back from where we were in the first and second quarter. The question is, can that sustain itself into 2021? And we think, with the amount of stimulus that the central banks and potentially fiscal stimulus, which, we do think we're going to get something done by the end of the month, that's really going to help propel economic growth. Now, the quality of that growth can be argued because of all of this stimulus.

But within small caps, what we're looking at are those companies that are really potentially servicing a lot of those large cap companies that have done very well. You know, for example, Apple announced a whole bunch of new products this week and probably will later this year as well. So we look at those supply chains. How do these new features that they're providing get executed? And there's technology behind it. It's new materials.

And a lot of that exists within small cap companies. So where we invest, we think there's still a lot of great opportunities out there for investors there with a little bit longer view point.

- Hi. I just want to ask you, within the small cap sector, what industry groups you like? And specifically, I'm kind of thinking about some of the value plays, like banks, when we've seen banks really outperform. And it hasn't been long that they've been doing that. The regionals seem to really do much better.

CHRIS RETZLER: Well, the yield curve is certainly very low. So it is a difficult environment for the banks to make money. I think where you want, and where we spend more of our time is around the GARP, right, Growth At a Reasonable Price. And so if you're going to look in the value area, we would probably stick closer to more technology, medical, health care, industrials, military, things that have a little bit higher growth rate than GDP.

You know, areas that we probably wouldn't spend much time on is energy. I mean, they have some structural issues that they need to work through. So while small caps are a good place to be, I don't think you need to be in all areas of small cap at this point in time.

- Hey, Chris how does the election play into all this? Because we talked about it more just broadly speaking when it comes to the markets. But specifically, for small caps, is a Biden or a Trump presidency better for that sector of the market?

CHRIS RETZLER: I would think that what's best for small caps is the group that is going to drive the highest growth rates. And I think, right now, you've got so much stimulus in the marketplace that it's probably going to work under both. But what I would be careful with is if there is a change in the White House, we're probably going to be looking for a change in tax policy, maybe not the first year in, but maybe the second year. And I think that that could spook investors where they might want to realize some gains once the election is over and kind of lock in those cap tax rates that are there now.

So I could see some of the real winners be sold off after the election. But generally, I think small caps that have good secular growth stories, those things are going to happen under either presidency. For example 5G, build out, right? That is something that's coming. It's going to be here for a while. So we think that those types of investments still would do well under either presidency.

- And Chris, real quick, earlier, you said that you expect another stimulus bill. But of course, the question is the magnitude of that, though. What do you think needs to be included, just at least from a small cap perspective?

CHRIS RETZLER: Look, I think they need to support main street. We want main street to be there 12 months from now. Those that are being most affected by this health crisis need to be helped. I also would go as far as the airlines. We want to have that system in place 12 months from now. Because everyone who's been stuck at home is going to want to travel somewhere if they can. And you don't want to be spending $2,000 a plane ticket to fly to Florida for a week.

So I do think there are institutions and industries that need to get some support. Because I do think, although it's temporary, it's been a long temporary, probably 18 months to 2 years. And they do need support to get through there. So I think that if they can construct a bill that's helpful to those groups, that would be great.

- All right, Chris Retzler of Needham, great to have you back.

CHRIS RETZLER: Thank you.