July 18, 2017
Dear Fellow Oberweis Funds Shareholder:
YEAR-TO-DATE PERFORMANCE THROUGH JUNE 30, 2017
We are pleased to report excellent first-half performance for The Oberweis Funds. Each of our international funds reported gains in excess of their respective benchmarks. The International Opportunities Fund gained 20.06% versus 17.31% for the MSCI World ex-US SCG Net Index. The China Opportunities Fund returned 24.86% versus 4.37% for the MSCI Zhong Hua Small-Cap Growth Net Index. Our global fund, the Emerging Growth Fund, returned 16.29% versus 10.36% for the MSCI ACWI Small-Cap Index. Among our domestic funds, the Micro-Cap Fund returned 12.38% versus 8.07% for the Russell Micro-Cap Growth Index, and the Small-Cap Opportunities Fund gained 9.50% versus 9.97% for the Russell 2000 Growth Index.
Equities around the world were strong during the first half of the year, with the MSCI World Index returning 10.66% through June 30. Global economic data appears to be widely supportive of reasonable economic growth levels going forward with manufacturing indices in many geographic areas signaling continued expansion and deflationary fears giving way to signs of modest inflation. European equities, as measured by the MSCI Europe Index, returned 15.36% and were among the best performers year-to-date in response to incrementally stronger economic growth and a stabilizing political situation following the victory of Emmanuel Macron in the recent French presidential election. Emerging Markets, with the MSCI Emerging Markets Index returning 18.43%, were even stronger, led by China and the MSCI China Index’s return of 24.86%. Chinese equity strength was driven by solid macroeconomic data, strong corporate earnings growth and fund flows into Hong Kong-listed Chinese equities from mainland investors. Japanese equities slightly underperformed other global equity markets, with the MSCI Japan Index returning 9.92%. In the U.S., the S&P 500 Index returned 9.34%.
Economic growth and corporate earnings have accelerated world-wide, led by emerging markets such as China and India and developed markets including France and Germany. Manufacturing Purchasing Managers Indexes (PMI) remained solidly above 50 in Canada, the Eurozone, Australia, Japan, and most emerging markets, signaling continued economic expansion. In the U.S., the PMI also remained above 50, while consumer confidence is at 10-year highs and wages are showing signs of increasing as unemployment flirts with structural cycle lows. Additionally, year-over-year headline inflation has accelerated globally and in the U.S. is around the Fed’s 2% target, likely putting to rest the sustained fears of deflation that dogged global economies – particularly those in Europe – since the Global Financial Crisis.
While the economic news is incrementally positive, our concern is that this is against a backdrop of above-average expectations and that much of this good news is already reflected in equity prices. Higher valuations have been supported thus far by abnormally low interest rates, but our secondary concern is that global central banks will become more hawkish in their words and their actions going forward, ultimately resulting in higher interest rates. The U.S. Federal Reserve has been at the forefront with a fourth rate increase in June, and we believe the Fed’s balance sheet will ultimately begin to decline in 2018. We expect the European Central Bank will increase its hawkish rhetoric going forward as well. Since we have, to a certain extent, been in unchartered territory as Quantitative Easing was unleashed on the world, we believe there exists risk and uncertainty related to how the eventual unwind of QE policies will impact asset prices, and particularly equity P/E’s.
Additionally, we are concerned that the world engine for economic growth – the U.S. – faces some increasing uncertainties both at home and abroad. The simmering Russian election scandal might further diminish the influence of a Trump administration that has been unable, thus far, to deliver on healthcare and tax reforms that were largely anticipated by the market. Rising tensions with North Korea and the ongoing Syrian quagmire also represent material risks that could jolt market volatility at any time.
While macro factors can influence shorter time periods, we believe that investing in companies growing earnings beyond expectations results in superior investment performance over the long-term. Rather than ruminate about macro-economic indicators or geopolitical events, we focus on investing in individual businesses in which we believe something misunderstood or under-estimated that is likely to drive earnings growth in excess of consensus expectations. While the multiple paid for such companies may oscillate in the short-run, we believe building portfolios populated with such companies leads to portfolio performance in excess of the benchmark over the long-term.
Average valuations for the funds at quarter end were, for the most part, slightly lower compared to last quarter. The average forward P/E on June 30, 2017 was 18.5 times for the Micro-Cap Fund (versus 20.0 last quarter), 18.3 times for the Emerging Growth Fund (versus 20.6), 20.8 times for the Small-Cap Opportunities Fund (versus 19.5), 14.9 times for the International Opportunities Fund (versus 15.4), and 16.6 times for the China Opportunities Fund (versus 17.8). Remember, each of the Funds invests in companies with expected earnings growth rates substantially higher than that of the broader market. Sector mix will also affect each Fund’s average P/E. As of 6/30/17, the weighted-average market capitalization was $898 million for Micro-Cap, $3.47 billion for Emerging Growth, $2.50 billion for Small-Cap Opportunities, $4.26 billion for International Opportunities, and $51.44 billion for China Opportunities.
After exceptionally strong inflows, the International Opportunities is now closed to new investments (see prospectus for details). We have always planned to close the strategy at $3 billion in AUM and it reached that level this past quarter. We elected to limit new purchases to ensure that strategy assets will remain at a level that permits our team to remain nimble and take meaningful positions in our favorite ideas. We appreciate your investment in The Oberweis Funds and are grateful for the trust you have shown us with your valuable assets. If you have any questions about your account, please contact shareholder services at (800) 245-7311.
*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 1, 2017.
**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.
***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.
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.