April 16, 2020
Dear Fellow Oberweis Funds Shareholder:
First and foremost, we hope that this letter finds you and your families healthy and adequately navigating this most unique and challenging period. We are thinking of you – our investors and friends – and are sending to you and your loved ones our best wishes for your continued safety and good health.
The first quarter of 2020 will go down as one of the most turbulent in market history, as the COVID-19 pandemic brought the world’s economy to a near standstill. Never before in our lifetimes have we seen such a rapid contraction in economic activity. Still, in my 25-year career I’ve seen a number of volatility surges, including the Asian financial crisis in July 1997, the Internet bubble implosion in 2000 and the housing market collapse in 2008. Even before my time, investors had to navigate the crash of 1987, the OPEC oil shock of 1973, and, going way back, the Great Depression of 1929. None of these events was quite like what we are facing today, but then again, historically each crisis varied from those preceding it. Each market panic, while differing in characteristics, causes, and orders of magnitude, was similarly unpredictable and scary at the time. Indeed, it is the various crises’ unique details – the feeling of being in unchartered waters filled with sharks and mines – that breeds fear and leads investors to flee en masse from risky asset classes. The investment-panic causes differ. Panicked investors’ responses, however, look very familiar. In this regard, the current situation seems quite comparable to those of the past.
The carnage in equities in the first quarter was broad-based, violent, and resembled a blitzkrieg. At the recent low on March 23rd, the S&P 500 Index was down over 35% from its high just one month prior, while the Russell 2000 Growth Index dropped 42% and the foreign small-cap benchmark, the World ex-USA MSCI Small-Cap Growth Index, fell 35%. The magnitude of these moves – and the speed at which they occurred – represents an extreme when examining historical annual downdrafts in equities. COVID-19 will have a material adverse impact on the economy, but we believe investment returns from the lows are likely to be materially above-normal when viewed several years from now.
Many near-term uncertainties remain. We do not know when countries will reopen for business, when a vaccine will be available, if other treatments will be discovered, and if reinfection is a significant risk. We also don’t know what impact low interest rates and fiscal stimulus will have on asset prices, nor how quickly the world economy can bounce back from a massive increase in unemployment in such a short period of time. We do not have all the answers, but frankly, nobody does. Beyond the current haze, however, what we do know for certain is that the US economy has historically demonstrated resilience and a propensity to strongly rebound after periods of turbulence. We expect this time will be no different.
COVID-19 poses many longer-term investment questions. How much will companies adapt their supply chains to reduce dependence on China? How will the ensuing recession change the course of the upcoming presidential election? To what degree will employers permanently curtail corporate travel and shun large office footprints in favor of virtual alternatives like Zoom? Will the US gravitate toward a single-payer universal health insurance system? Periods of crisis can create and accelerate trends, and these and other structural changes will open doors to innovators who can solve the new problems associated with such shifts. Smaller companies are more likely to be the agitators that unsettle incumbents during times of change, which may offer incremental opportunities for the types of agile small-cap companies owned in most of our funds.
What should we expect for future small-cap equity returns? The bottom of the fear pit isn’t a pleasant place to be, but such periods of fear and uncertainty, in retrospect, often turn out to be good places to hunt for tomorrow’s opportunities, mostly because of exceptionally low prices. Stock prices can be forced down to valuations that reflect not only the perils of the crisis but also include a discount due to fear of the unknown. To a certain extent the future is always unknown, so we’d much rather be buying when skepticism is high and when those unknown risks are being well-discounted in stock prices. More often than not, it turns out that stocks bought in times of panic more than appropriately compensate the investor for tomorrow’s risks.
Moreover, market chaos is often accompanied by rising return correlations of stocks against each other. That is, stocks tend to move much tighter as a group during a crisis. But in reality, while a tough macroeconomic environment will broadly affect future corporate earnings adversely, the punishment will be unequally distributed. In fearful times, investors throw out the babies with the bath water, and it’s our job to find those unfairly punished. This is particularly true for small-caps, whose long-term prospects are often determined more by innovation and execution than by the broader macroeconomic environment. Our experience has been that we are even more successful in finding pricing dislocations when stocks are trading together as a group than when investors are paying close attention to fundamentals at an individual stock level.
The bottom line is that the market is not predictable, and equity markets could certainly get worse before they get better. But historically, buying stocks when valuations are considerably below their historical averages has often worked out well for those with a long-term investment horizon, and we believe that dollar-cost averaging throughout this period of high uncertainty is likely to pay dividends a few years hence.
FIRST QUARTER PERFORMANCE
While all the funds experienced declines, returns in China Opportunities and Emerging Markets fared better than the developed market funds, seemingly because China is further along in the COVID-19 cycle. On a relative basis, the Emerging Markets and Global Opportunities funds fared best against their benchmarks. The International Opportunities Fund returned -24.96% versus -25.13% for the MSCI World ex-US Small-Cap Growth Index. The China Opportunities Fund returned -10.06% compared to -10.22% for the MSCI China Index. The Emerging Markets Fund returned -17.79% versus -31.37% for the MSCI EM Small-Cap Index. For the domestic funds, the Micro-Cap Fund and Small-Cap Opportunities Fund returned -32.41% and -25.70%, respectively, compared to -26.59% for the Russell Micro-Cap Growth and -25.76% for the Russell 2000 Growth Index. The Small-Cap Value Fund returned -39.26% versus -35.66% for the Russell 2000 Value Index. The Global Opportunities Fund returned -18.57% versus -30.19% for the MSCI ACWI Small-Cap Index.
As of March 31, 2020, the price/earnings (P/E) ratio was 21.8 times for the Global Opportunities Fund (versus 16.7 last quarter), 14.8 times for the Small-Cap Opportunities Fund (versus 19.2 last quarter), 13.5 times for the Micro-Cap Fund (versus 14.4 last quarter), 20.1 times for the International Opportunities Fund (versus 18.3 last quarter), 23.2 times for the China Opportunities Fund (versus 19.5 last quarter), and 19.1 times for the Emerging Markets Fund (versus 17.9 times last quarter). Each of these funds invests in companies with expected earnings growth rates that are higher than that of the broader market, and in companies expected to grow faster than current market expectations. For the Small-Cap Value Fund, the average P/E ratio was 10.3 times (versus 14.0 last quarter). As of March 31, 2020, the weighted-average market capitalization was $2.7 billion for the Global Opportunities Fund, $2.1 billion for the Small-Cap Opportunities Fund, $0.7 billion for the Micro-Cap Fund, $2.0 billion for the Small-Cap Value Fund, $3.3 billion for the International Opportunities Fund, $2.2 billion for the Emerging Markets Fund, and $94.7 billion for the China Opportunities Fund. Note that the China Opportunities Fund’s market cap is skewed upward due to two mega-cap holdings; the median market cap of the fund was $8.3 billion.
We appreciate your investment in The Oberweis Funds and are grateful for the trust you have shown us with your valuable investments. One of the many reasons I love my job is its dynamic nature. Just when things are going great, the unexpected can trample us. But similarly, from the darkest days of a fearful panic, a new bull market can be born. Given enough time, investing tends to humble the pretentious and reward the stoic. The ever-present challenge, however, is keep perspective in the heat of the moment, to look out far enough to keep the present in context of the future.
If you have any questions about your account, please contact shareholder services at (800) 245-7311. Thank you for investing with us in The Oberweis Funds.
For current performance information, please visit www.oberweisfunds.com.
1Institutional Class shares OBGIX, OMCIX, OBSIX and OCHIX performance information was calculated using the historical performance of Investor Class shares for periods prior to May 1, 2017.
2Life of Fund returns are from commencement of operations on 01/07/87 for the Global Opportunities Fund, 01/01/96 for the Micro-Cap Fund, 09/15/96 for the Small-Cap Opportunities Fund, 10/01/05 for the China Opportunities Fund, 02/01/07 for the International Opportunities Fund, 05/01/17 for the Institutional Share Classes and 05/01/18 for the Emerging Markets Fund Share Classes.
3December 31, 2019 data. Expense ratio is the total net annualized fund operating expense ratio. The expense ratio gross of expense offset arrangements and expense reimbursements was 1.58%, 1.33%, 1.60%, 1.34%, 2.21%, 1.96%, 1.74%, 1.49%, 1.95%, 1.70%,1.82%, 3.86% and 3.61% for OBEGX, OBGIX, OBMCX, OMCIX, OBSOX, OBSIX,OBIVX, OBVLX, OBCHX, OCHIX, OBIOX, OBEMX and OIEMX respectively. Oberweis Asset Management, Inc. (OAM), the Fund’s investment advisor is contractually obligated through April 30, 2021 to reduce its management fees or reimburse OBEGX and OBMCX to the extent that total ordinary operating expenses, as defined, exceed in any one year the following amounts expressed as a percentage of each Fund’s average daily net assets: 1.8% of the first $50 million; plus 1.6% of average daily net assets in excess of $50 million and for OBGIX and OMCIX 1.55% of the first $50 million; plus 1.35% of average daily net assets in excess of $50 million. OAM is also contractually obligated through April 30, 2021 to reduce its management fees or reimburse OBSOX, OBVLX, OBCHX, OBIOX and OBEMX to the extent that total ordinary operating expenses exceed in any one year 1.55%, 1.30%, 2.24%, 1.60% and 1.75% expressed as a percentage of each Fund’s average daily net assets, respectively, and for OBSIX, OCHIX and OIEMX 1.30%, 1.99% and 1.50%, respectively.
4On October 2, 2017, the Cozad Small Cap Value Fund was reorganized into OBVLX, and adopted the performance history of the Cozad Small Cap Value Fund’s Class I shares. Performance shown before October 2, 2017 is for the Cozad Small Cap Value Fund’s Class I shares. The Cozad Small Cap Value Fund acquired all of the assets and liabilities of the Cozad Small Cap Value Fund I, L.P., from its inception on September 30, 2010, in a tax free reorganization on July 1, 2014. Investor Class share OBIVX performance information was calculated using the historical performance of Institutional Class share for periods prior to May 1, 2018.
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate, so that you may have gain or loss when shares are sold. Current performance may be higher or lower than quoted. Visit us online at oberweisfunds.com for most recent month-end performance. The Oberweis Funds invest in rapidly growing smaller and medium sized companies which may offer greater return potential. However, these investments often involve greater risks and volatility. Foreign investments involve greater risks than U.S investments, including political and economic risks and the risk of currency fluctuations. There is no guarantee that the funds can achieve their objectives. Holdings in the Funds are subject to change. Before investing, consider the fund’s investment objectives, risks, charges, and expenses. To obtain a copy of the prospectus or summary prospectus containing this and other information please visit our website at oberweisfunds.com or call 800-323-6166. Read it carefully before investing. The Oberweis Funds are distributed by Oberweis Securities, Inc. Member: FINRA & SIPC.
The MSCI World ex-US Small Cap Growth Index (Net) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of small cap growth developed markets excluding the US, with minimum dividends reinvested net of withholding tax. The MSCI ACWI Small Cap Index (Net) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of small cap developed and emerging markets with dividends reinvested net of withholding tax. The MSCI Emerging Markets Small Cap Index is a free float-adjusted, market capitalization-weighted index that measures the performance of small-cap stocks in 24 emerging markets. The MSCI China Net Index is a free float-adjusted market capitalization-weighted Index of Chinese equities that include China-affiliated corporations and H shares listed on the Hong Kong Exchange, and B shares listed on the Shanghai and Shenzhen exchanges and P chips and foreign listings with minimum dividends reinvested net of withholding tax.
The Russell 2000 Index measures the performance of approximately 2,000 companies with small-market capitalizations. The Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted earnings growth rates. The Russell Microcap Growth Index measures the performance of those Russell Micro Cap companies with higher price-to-book ratios and higher forecasted growth values. The performance data includes reinvested dividends. The Russell Microcap Index is represented by the smallest 1,000 securities in the small cap Russell 2000 Index plus the next 1,000 securities. Each index is an unmanaged group of stocks, whose performance does not reflect the deduction of fees, expenses or taxes. The Russell 2000 Value Index is an unmanaged market capitalization-weighted index of value-oriented stocks of U.S. domiciled companies that are included in the Russell 2000 Index. Value-oriented stocks tend to have lower price-to-book ratios and lower forecasted growth values.