April 18, 2018
Dear Fellow Oberweis Funds Shareholder:
Like that cranky uncle who’s been out of sight but eventually shows up unannounced, volatility is back. The market’s commitment to complacency ended dramatically in February, when volatility, as measured by the CBOE’s VIX Index, spiked to its highest level since August 2015. Investors were suddenly faced with worries of rising interest rates under a new regime at the Federal Reserve, the potential for a trade war with China, and a barrage of “off-the-cuff” Tweets by President Trump on a variety of issues including immigration and the investigation into his potential ties to Russia. Still, despite these concerns, global economic growth remains robust. S&P 500 Index operating earnings hit record levels in the fourth quarter and forecasts point to continued growth in 2018. U.S. manufacturing PMI remains at levels indicative of expansion. U.S. manufacturing employment has accelerated since the start of 2017 in support of this growth and our global outlook for GDP growth continues to be favorable. Clouds may remain on the horizon, but it certainly isn’t raining just yet.
At the macro level, we are watching two signposts quite carefully. First, does the protectionist rhetoric diminish or become entrenched? Globalization has been one of the primary drivers of margin expansion over the past two decades. A recent report by Empirical Research Partners (ERP) notes that since China joined the World Trade Organization in 2001, manufacturers’ net margins have nearly doubled, with most of that margin expansion attributed to the benefits of globalization. Protectionist trade policies have the potential to halt or reverse those margin gains and depress corporate earnings. Tariffs have historically not worked well, neither in improving trade deficits nor stimulating growth. The cloud of protectionist trade policy could have strong negative effects on earnings or fade away with a Tweet from Pennsylvania Ave.
Secondly, our team is carefully watching interest rates relative to market expectations. The Federal Reserve has increased interest rates four times since the beginning of 2017 and is now executing on a balance sheet reduction strategy, which will increasingly represent a monetary headwind as we move through the year. Additionally, we believe policy uncertainty is heightened in the short-term by the leadership change at the Fed to new Chairman Jerome Powell. Incrementally hawkish commentary by the Fed, combined with balance sheet tapering, could elevate interest rates beyond current expectations and put pressure on equity prices. These risks notwithstanding, stock valuations are also more reasonable than they were at the beginning of the year, because earnings have risen faster than stock prices (which are more or less flat). Lower valuations imply a better ability to tolerate higher rates and other exogenous risks. While stock prices will invariably oscillate from quarter to quarter, we believe that prudent stock selection of a diversified portfolio of companies with prospects for better-than-expected earnings growth or better-than-expected value realization is likely to outperform the broader market over the long-term.
FIRST QUARTER PERFORMANCE
In the first quarter of 2018, the International Opportunities Fund returned 1.41% versus 0.77% for the MSCI World ex-US Small-Cap Growth Index. The China Opportunities Fund returned 3.26% compared to 2.16% for the MSCI Zhong Hua Small-Cap Growth Index. The Micro-Cap Fund and Small-Cap Opportunities Fund returned -1.23% and 0.12% respectively. For comparison, the Russell Micro-Cap Growth and Russell 2000 Growth Indices returned 0.99% and 2.30%, respectively. The Small-Cap Value Fund returned -4.85% versus -2.64% for the Russell 2000 Value Index. Our global fund, the Emerging Growth Fund, returned -3.67% while the MSCI ACWI Small-Cap Index returned -0.47%. Overall, our two international funds fared well, but the domestic funds and the global fund faced style headwinds and underperformed in the first quarter.
With respect to our growth-oriented funds, the average forward P/E ratio as of March 31, 2018 was 13.2 times for the Emerging Growth Fund (versus 17.3 last quarter), 17.5 times for the Small-Cap Opportunities Fund (versus 18.6 last quarter), 18.9 times for the Micro-Cap Fund (versus 17.2 last quarter), 13.3 times for the International Opportunities Fund (versus 12.1 last quarter), and 18.2 times for the China Opportunities Fund (versus 19.3 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 16.3 times (versus 15.8 last quarter). As of March 31, 2018, the weighted average market capitalization was $4.1 billion for the Emerging Growth Fund, $2.3 billion for the Small-Cap Opportunities Fund, $865 million for the Micro-Cap Fund, $2.5 billion for the Small-Cap Value Fund, $3.7 billion for the International Opportunities Fund, and $82.1 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 $7.0 billion).
NEW FUND LAUNCH AND NEW FUND NAME
We are pleased to announce that we are planning to launch a new fund, the Oberweis Emerging Markets Fund, on May 1, 2018. The tickers will be OBEMX for the Investor Class and OIEMX for the Institutional Class. Similar to our other funds, this fund will seek to invest primarily in small- and medium size firms where we believe there is a material difference between what we believe a company is worth and the value afforded the company in the stock market. The fund will focus on growth-oriented companies in emerging markets such as China, India, South Korea and Taiwan, markets which we believe are likely to experience above-average growth compared to the rest of the world over the next decade. For more information, please review the preliminary prospectus* available on our website at www.oberweisfunds.com. Additionally, to avoid confusion with the new fund, the Oberweis Emerging Growth Fund will be renamed the Oberweis Global Opportunities Fund on May 1, 2018. There will be no change to its investment strategy or ticker symbol. 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.
Please CLICK HERE for the OBEMX/OIEMX Preliminary Prospectus.
*The information in the prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission becomes effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to completion, dated February 7, 2018.
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 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 December 31, 2017 data. Expense ratio is the total net annualized fund operating expense ratio. The expense ratio gross of expense offset arrangements and expense reimbursements was 1.52%, 1.20%, 1.58%, 1.32%, 2.25%, 1.94%, 1.35%, 1.92%, 1.60%, and 1.79% for OBEGX, OBGIX, OBMCX, OMCIX, OBSOX, OBSIX, OBVLX, OBCHX, OCHIX and OBIOX, respectively. Oberweis Asset Management, Inc. (OAM), the Fund’s investment advisor is contractually obligated through April 30, 2019 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, 2019 to reduce its management fees or reimburse OBSOX, OBVLX, OBCHX, OBIOX and OBIIX to the extent that total ordinary operating expenses exceed in any one year 1.55%, 1.30%, 2.24%, 1.60% and 1.10% expressed as a percentage of each Fund’s average daily net assets, respectively, and for OBSIX and OCHIX 1.30% and 1.99%, respectively. The annual expense ratio will reflect a blend of both the old and new expense reimbursement arrangements in effect for 2017.
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.
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. 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.