October 19, 2017
Dear Fellow Oberweis Funds Shareholder:
YEAR-TO-DATE PERFORMANCE THROUGH SEPTEMBER 30, 2017
I’m pleased to report an exceptional first nine months for the Oberweis Funds. Among our U.S.
funds, the Micro-Cap Fund returned 23.61% (compared to 15.58% for the Russell Micro-Cap Growth
Index) and the Small-Cap Opportunities Fund returned 19.58% (compared to 16.81% for the Russell
2000 Growth Index). Our global small-cap fund, the Emerging Growth Fund, returned 29.05%
(compared to 20.7% for the MSCI ACWI Small-Cap Growth Index). The International Opportunities
Fund returned 31.01% (compared to 26.16% for the MSCI World ex-US Small-Cap Growth Net Index).
The China Opportunities Fund returned 47.35% (compared to 10.96% for the MSCI Zhong Hua Small-
Cap Growth Net Index). Results for this nine-month period, relative to their benchmarks, rank
among the best ever in the history of the Oberweis Funds. In my view, these returns stem from
a combination of a favorable market environment for our investment style and hard work by our
fantastic team, who fervently and diligently applied our disciplined investment process to hunt
for undervalued opportunities for the portfolios.
Global equities continued to march higher in the most recent quarter, attributable to strong
global employment, steady manufacturing, and a stream of positive analyst earnings revisions.
The MSCI All-Country World Index jumped another 5.3% in Q3 for a year-to-date return of 17.8%.
Thus far in 2017, equities almost everywhere have rallied. International equities outperformed
those of the United States, while emerging markets were strongest of all. MSCI Europe ex-UK
returned 26.6% while the U.S. returned 14.2% (as measured by the S&P 500). Germany (+25.0%)
and France (+27.9%) were the strongest performers within developed Europe. Japan (+14.6%) and
the UK (+15.7%) underperformed Europe but still posted respectable gains. Emerging markets
have led the world, with a 28.1% year-to-date gain. Emerging markets benefitted from
appreciation in China (+44.2%), India (+24.1%) and Brazil (+26.9%), offset by meager returns in
In the U.S., small growth stocks again outperformed value stocks during the quarter and have
now bested their value cousins by over 1,100 basis points year-to-date, although value stocks
did rebound somewhat on a relative basis during the month of September#. From a capitalization
perspective, small-cap stocks slightly outperformed large-cap stocks during the quarter but
continue to lag by nearly 400 basis points year-to-date*. Our Micro-Cap and Small-Cap
Opportunities Funds tend to benefit when growth stocks beat value stocks, which has been the
case in 2017.
By most metrics, global equity valuations appear to be above-average. The forward P/E of the
S&P 500 at 17.7x is higher than the October 2007 level (15.7x) but much lower than the March
2000 peak (27.2x). For every major region except Japan, forward P/E’s within that region
exceed the 15-year average. By some metrics, the United States appears to be the most expensive
region relatively speaking (forward P/E, price/book, price/cash flow, etc). However, valuation
data alone is not enough. It has to be viewed through the prism of interest rates and expected
growth in corporate earnings.
One might expect higher-than-average valuations given interest rates, which have remained well
below-average for a decade. However, the Fed has begun to increase interest rates, with four
advances in the last 18 months. Further, as the Fed refrains from purchasing treasuries and
mortgage-backed securities with the proceeds from maturing securities on its balance sheet,
investors should expect further upward pressure on interest rates. Lastly, while even 2%
inflation hasn’t happened so far, how long can today’s “Goldilocks” conditions continue in the
face of a tight labor market? In short, we expect interest rates to increase. But rates are
coming up off a very low base. So the real question is this: how much of a move will it take
for equity markets to care?
On the earnings side of the equation, data in the third quarter has shown solid growth, not
just in the U.S. but globally. In the U.S., however, a meaningful catalyst remains on the
horizon – tax reform. Should Congress pass legislation supported by President Trump that
reduces the corporate tax rate to 20%, corporate earnings will surge, especially for small-cap
stocks. Research by Credit Suisse’s chief U.S. equity strategist Lori Calvasina estimates that
the effective tax rate is currently 32% for the Russell 2000 Index and 26% for the S&P 500
Index. A reduction to 20% would essentially boost earnings for the Russell 2000 Index by over
17% and effectively reduce the index P/E by 15%. Tax reform expectations are high and are
already at least somewhat priced into U.S. small-cap equities. But given the Trump
administration’s multiple failures with healthcare reform, we believe there is a reasonable
probability of disappointment that might lead to a short-term disruption in small-cap equity
All these concerns play a role in shaping short-term market returns. Longer term, however,
prudent stock-picking tends to be the most important driver of benchmark-beating small-cap
returns. Rather than focus on macro factors or geopolitical events, we instead focus our
research effort on a company-by-company basis to identify individual businesses where we
believe something is misunderstood or underestimated by the average investor, resulting in
proprietary earnings expectations that differ materially from consensus. While the earnings
multiple investors are willing to pay may vary in the near-term, we believe that companies
beating expectations tend to lead to excess investment performance over the long-term.
The average forward P/E ratio as of September 30, 2017 was 17.4 times for the Emerging Growth
Fund (versus 18.3 last quarter), 19.6 times for the Small-Cap Opportunities Fund (versus 20.8
last quarter), 19.6 times for the Micro-Cap Fund (versus 18.5 last quarter), 15.1 times for the
International Opportunities Fund (versus 14.9 last quarter), and 16.1 times for the China
Opportunities Fund (versus 16.6 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. As of September 30, 2017,
the weighted average market capitalization was $3.7 billion for the Emerging Growth Fund, $2.5
billion for the Small-Cap Opportunities Fund, $901 million for the Micro-Cap Fund, $4.0 billion
for the International Opportunities Fund, and $60.5 billion for the China Opportunities Fund.
Note the China Opportunities Fund’s market cap is skewed upward due to two mega-cap holdings,
even though the majority of holdings are small/mid-cap firms (the median market cap for China
was $8.2 billion).
This year has been an exciting one for the Oberweis Funds. In May, we began offering
institutional share classes of our existing funds at lower fees and higher minimums. These
shares are available on certain advisory platforms and to individual shareholders with $1
million or more (see tickers below). Also, on October 2nd, David Wetherell and Umesh Nathani
joined OAM to help launch and manage the Oberweis Small-Cap Value Fund (ticker: OBVLX),
inspired by the research of behavioral finance professor Dr. David Ikenberry, who serves as an
advisor to the fund. This new fund seeks to invest in smaller companies experiencing potential
value-increasing events, such as insider buying and corporate repurchases, and which appear to
be overlooked and potentially underappreciated by the market. The fund’s strategy and risks are
more fully explained in the prospectus available at www.oberweisfunds.com. Academics have long
documented market inefficiencies within both small-cap growth and value stocks and, by adding a
small-cap value fund to our lineup, we are now able to exploit behavioral-finance signaling
across both styles. Currently this new fund is only available as an institutional share class.
We appreciate your investment in The Oberweis Funds and are grateful for the trust you have
shown us with your valuable investments. 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
# The Russell 2000 Growth Index returned 6.22%, 16.81%, and 5.45% for the quarter, year-to-date,
and month (ended September 30, 2017), respectively. The Russell 2000 Value Index returned
5.11%, 5.68%, and 7.08% for the quarter, year-to-date, and month (ended September 30, 2017),
* The Russell 1000 Growth Index returned 5.90% during the quarter and 20.72% year-to-date.
1 Institutional Class shares OBGIX, OMCIX, OBSIX and OCHIX performance information was
calculated using the historical performance of Investor Class shares for periods prior to May
2 Life of Fund returns are from commencement of operations on 01/07/87 for the Emerging Growth
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 and
05/01/17 for the Institutional Share Class.
3 Expense ratio is the total net annualized fund operating expense ratio as of 12/31/16. The
expense ratio gross of expense offset arrangements and expense reimbursement was 1.59%, 1.65%,
2.40%, 1.99% and 1.82% for OBEGX, OBMCX, OBSOX, OBCHX and OBIOX, respectively. Effective May 1,
2017 through April 30, 2018, Oberweis Asset Management, Inc., (OAM), the Fund’s investment
advisor, is contractually obligated 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. OAM is
also contractually obligated through April 30, 2018 to reduce its investment and management
fees or reimburse OBSOX, OBCHX and OBIOX to the extent that total ordinary operating expenses
exceed in any one year 1.55%, 2.24% and 1.60% expressed as a percentage of the Fund’s average
daily net assets, respectively. The annual expense ratio will reflect a blend of both the old
and new expense reimbursement arrangements in effect for 2017.
4 On 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.
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 Zhong Hua Small Cap Growth Index (Net) is a free float-adjusted, market capitalization
weighted index that is designed to measure the performance of small cap stocks in the developed
markets and emerging markets of China and Hong Kong excluding A share classes, with minimum
dividends reinvested net of withholding tax. The MSCI AC Asia Pacific Ex-Japan Small-Cap Growth
Index (Net) is a free float adjusted market capitalization index that is designed to measure
the equity market performance of small cap growth developed and emerging markets in the Pacific
region excluding Japan, with minimum dividends reinvested net of withholding tax. 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 World Index (Net)
is a free float‐adjusted market capitalization weighted index that is designed to measure the
equity market performance of developed markets.
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 1000 Growth Index measures the performance of the large-cap growth
segment of the U.S. equity universe. It includes those Russell 1000 companies with higher
price-to-book ratios and higher forecasted growth values.