July 17, 2020

Dear Fellow Oberweis Funds Shareholder:

YEAR-TO-DATE PERFORMANCE THROUGH JUNE 30, 2020

The second quarter of 2020 proved exceptionally favorable for all of the international funds at Oberweis, completely reversing the first quarter’s decline and delivering solid overall gains for the first half. Returns compared to respective benchmark indices were also strong, as each of the international funds outperformed by more than 1,500 basis points in the first six months of 2020. During the first half, the International Opportunities Fund returned +11.58% compared to -5.33% for the MSCI World ex-US Small-Cap Growth Index. The China Opportunities Fund returned +19.14% compared to +3.51% for the MSCI China Index. The Emerging Markets Fund returned +8.48% versus -12.74% for the MSCI EM Small-Cap Index. The Global Opportunities Fund returned +14.02% versus -12.85% for the MSCI ACWI Small-Cap Index.

For the domestic funds, the Small-Cap Opportunities Fund slightly outperformed its benchmark, returning -2.86% versus -3.06% for the Russell 2000 Growth Index. The Micro-Cap Fund had a difficult first half, returning -10.62% compared to +1.92% for the Russell Micro-Cap Growth Index, partly attributable to a sizable underweight in biotech. Biotech comprised a record 40% of the benchmark versus 8% for the fund, while the sector returned +44% in the first half. The Micro-Cap Fund is consistently underweight biotech, as the success or failure of many micro-cap biotech stocks is driven by binary drug trials versus the revenue and earnings improvement that is sought out through our investment process. Over the longer term, results have been good. For example, over the last five years, the Micro-Cap Fund generated an average annual return of 8.21% compared to 3.10% for the benchmark (and outperformed over trailing 10- and 15-year periods as well).

OUTLOOK

This year of COVID-19 has been truly remarkable, and it’s only half done. In March, global equities experienced one of the fastest and deepest plunges of our careers, only to come roaring back almost as quickly in the second quarter. The rally can be at least partially attributed to the massive monetary support provided by the Federal Reserve and other central banks. Just how extreme has the Fed been? The $2.9 trillion balance sheet increase over three months took nearly five years to accomplish following the Global Financial Crisis. Balance sheet expansion will continue for the foreseeable future and interest rates are expected to remain at current levels well into 2021. Fiscal stimulus has also played a role, with rapid disbursement of CARES Act funds and the White House’s proposal of a sizable infrastructure bill (which stills requires Congressional approval). In short, there’s a lot of money floating around. With short-term interest rates hovering around zero, we assume some of the recent equity rally is attributable to NETGO – Nowhere Else To Go. Interestingly, traditional risk hedges such as gold and bonds have also performed well, implying there is still apparently demand for downside insurance even amid this risk-on rally.

Uncertainty remains high for economic activity over the coming year. If an effective vaccine is approved near the end of 2020, is able to be quickly administered, and no other unexpected events deter the economy, the odds of a strong recovery seem reasonably good. Post-reopening macro data, such as retail sales, have already been surprisingly strong. However, many risks remain. As of mid-July, U.S. infections continue to soar, and the anticipated “back-to-school” fall infection season will soon be upon us. Layoffs and bankruptcies seem increasingly likely as the cushion of government stimulus wears off. But perhaps the biggest risk, as usual, remains the unexpected, which tends to be digested more virulently when equity valuations are high. On the flipside, sustained very low interest rates suggest that high equity valuations may be justifiable; the trouble, of course, is that a strong recovery would make it less likely that rates would stay low. In our experience, it’s a lot easier finding individual stocks positioned to grow their earnings more than other investors expect than it is to correctly predict the outcome of widely-followed macroeconomic variables. That’s why we spend most of our time focusing on the businesses within our portfolios rather than trying to time the market overall. If we can’t predict the short-term, and we know markets rise over the long-term, the appropriate strategy for most investors is to set an asset allocation based on their acceptable risk level and stick with it.

While it may seem like a tough time to be a fund manager, we think this is an ideal environment for our bottom-up, stock selection process. We thrive on finding companies that are creating new markets or taking market share from incumbents. Periods of massive change, such as the current COVID era, produce many more opportunities than a normal period, as change occurs at an accelerated pace. While investors are usually slow to recognize the magnitude and persistence of such changes, we believe identifying profound change and the resulting economic benefit is our specialty. As businesses adapt and new ideas emerge, we believe that the opportunity for smaller companies to unsettle markets through innovative products or services is considerably above-average.

VALUATION RECAP

As of June 30, 2020, the price/earnings (P/E) ratio was 21.6 times for the Global Opportunities Fund (versus 21.8 last quarter), 15.7 times for the Small-Cap Opportunities Fund (versus 14.8 last quarter), 16.7 times for the Micro-Cap Fund (versus 13.5 last quarter), 28.2 times for the International Opportunities Fund (versus 20.1 last quarter), 33.2 times for the China Opportunities Fund (versus 23.2 last quarter), and 24.1 times for the Emerging Markets Fund (versus 19.1 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. As of June 30, 2020, the weighted-average market capitalization was $3.8 billion for the Global Opportunities Fund, $3.3 billion for the Small-Cap Opportunities Fund, $1.0 billion for the Micro-Cap Fund, $4.4 billion for the International Opportunities Fund, $2.9 billion for the Emerging Markets Fund, and $107.4 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 $7.8 billion.

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 Funds.

Sincerely,
James Oberweis
James W. Oberweis, CFA
President & Portfolio Manager

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%, 1.95%, 1.70%,1.82%, 3.86% and 3.61% for OBEGX, OBGIX, OBMCX, OMCIX, OBSOX, OBSIX,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, OBCHX, OBIOX and OBEMX to the extent that total ordinary operating expenses exceed in any one year 1.55%, 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.

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.

 


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