October 21, 2024
Dear Fellow Oberweis Funds Shareholder,
PERFORMANCE FOR THE NINE MONTHS AND THIRD QUARTER, 2024
All of the Oberweis Funds have delivered healthy absolute returns thus far in 2024. Our U.S.-focused funds materially exceeded their respective benchmarks. The Small-Cap Opportunities Fund gained 20.43% versus 13.22% for the Russell 2000 Growth Index (R2G). The Micro-Cap Fund gained 19.09% versus 9.29% for the Russell Microcap Growth Index (RMG). Our developed market international funds also fared well, with the International Opportunities Fund gaining 14.47% versus 11.01% for the MSCI World ex-US SCG Net Index, while the Focused International Growth Fund returned 17.67% versus 12.99% for the MSCI EAFE Index. Our two emerging markets funds have underperformed so far this year. The Emerging Markets Fund returned 8.44% versus 12.91% for the MSCI EM Small-Cap Index, while the China Opportunities Fund returned 16.31% versus 29.34% for the MSCI China Net Index. The Global Opportunities Fund has outperformed its benchmark, returning 15.31% versus 11.29% for the MSCI ACWI Small-cap Index.
For the quarter, three of the funds generated returns similar to their benchmarks. Micro-Cap returned 8.16% vs. 8.57% for the RMG Index, Global Opportunities returned 9.00% vs. 8.80% for its benchmark, and the International Opportunities gained 9.20% vs. 9.98% for its benchmark. The Emerging Markets Fund outperformed, gaining 7.04% vs. 5.48%, while China (9.94% vs. 23.49%), Small-Cap Opportunities (4.80% vs. 8.41%) and Focused International Growth (4.77% vs. 7.26%) underperformed for the quarter.
MARKET ENVIRONMENT
Global equity returns in the third quarter of 2024 were solid overall, despite a sharp uptick in volatility. In early August, the Japanese central bank increased interest rates just as economic data hinted at a weakening U.S. economy. This combo killed the popular so-called “carry trade” – borrowing in low-interest Yen to invest in higher yielding markets like the United States. Traders scrambled to cover and the normally docile Yen surged, appreciating the most versus the U.S. dollar since 2008. Japanese stocks plunged and equities globally declined in sympathy. Richly-valued large technology stocks were hit particularly hard. However, the market rout didn’t last long. By September, the Fed executed the first in a series of anticipated interest rate cuts, the Japanese central bank took a less hawkish tone, and China announced a material stimulus program. These developments ignited a rally into the end of the quarter that more-than-erased the August decline, although the gains were skewed toward “lower-quality” unprofitable companies. The explosive rally in China at the end of the quarter was, by far, most acute among the previously downtrodden, such as property developers. These are obviously not the types of companies sought by our post earnings announcement drift (PEAD)-based process, and helps to explain the lighter relative results for the third quarter in a number of our funds.
OUTLOOK
Market returns over the last five years have been shaped by exogenous macro events such as COVID-19, Russia’s invasion of Ukraine and conflict in the Middle East. Even more importantly, changes in interest rate expectations highly correlated with market returns, causing large-caps to outperform their small siblings as interest rates rose. The next five years are likely to be quite different. Despite historical outperformance and underperformance cycles, small-cap returns have clearly exceeded large-caps over the long term. Because of this last cycle of small-cap underperformance, the gap between valuations for small-caps and large-caps is still near a 30-year high. While expectation of mean reversion should alone make for a compelling case for small-caps, the shifting interest rate cycle adds to the case. Declining interest rates – especially when valuations are cheap relative to large-caps – should provide a tailwind for our process. One might argue this is already consensus expectation, but even a neutral influence from the Fed would be healthy for our process, as investors will likely continue 2024’s renewed focus on stock-level fundamentals. Lastly, as small-caps regain leadership, expect it to continue for some time — typically years. Many investors are structurally underweight small-caps, and as small-caps get going, FOMO is likely to keep them going. A simple reversion to historical small-cap allocation levels among institutional investors would be very positive for small-cap returns. While obviously no one knows the future, the current market environment appears finally ripe for a cycle of small-cap leadership. Be patient and wait for it.
VALUATION RECAP
As of September 30, 2024, the price/earnings (P/E) ratio was 17.5 times for the Global Opportunities Fund (versus 18.9 last quarter), 20.0 times for the Small-Cap Opportunities Fund (versus 18.9 last quarter), 16.5 times for the Micro-Cap Fund (versus 15.1 last quarter), 15.7 times for the International Opportunities Fund (versus 15.3 last quarter), 13.7 times for the China Opportunities Fund (versus 13.6 last quarter), 22.4 times for the Emerging Markets Fund (versus 20.0 times last quarter), and 14.1 times for the Focused International Growth Fund (versus 16.7 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, 2024, the weighted-average market capitalization was $6.9 billion for the Global Opportunities Fund, $6.8 billion for the Small-Cap Opportunities Fund, $2.0 billion for the Micro-Cap Fund, $6.9 billion for the International Opportunities Fund, $4.7 billion for the Emerging Markets Fund, $151.5 billion for the China Opportunities Fund, and $126.6 billion for the Focused International Growth Fund.
Thank you for investing with us in The Oberweis Funds.
Sincerely,
James W. Oberweis, CFA
President & Portfolio Manager
For current performance information, please visit www.oberweisfunds.com
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. Unusually high returns may not be sustainable. 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.
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. Institutional Class shares OBIIX performance information was calculated using the historical performance of Investor Class shares for periods prior to December 26, 2023.
2Life of Fund returns are from commencement of operations on 01/07/87 for OBEGX, 01/01/96 for OBMCX, 09/15/96 for OBSOX, 10/01/05 for OBCHX, 02/01/07 for OBIOX, 05/01/18 for OBEMX/OIEMX and 04/01/22 for OFGIX. Inception for the Institutional Class shares of OBGIX, OMCIX, OBSIX, and OCHIX is 05/01/17 and for OBIIX is 12/26/23.
3December 31, 2023 data. Expense ratio is the total net annualized fund operating expense ratio. The expense ratio gross of expense offset arrangements and expense reimbursements was 1.51%, 1.25%, 1.53%, 1.28%, 1.32%, 1.07%, 2.16%, 1.90%, 1.92%,1.17%, 2.71%, 2.46% and 2.51% for OBEGX, OBGIX, OBMCX, OMCIX, OBSOX, OBSIX, OBCHX, OCHIX, OBIOX, OBIIX, OBEMX, OIEMX and OFIGX respectively. Oberweis Asset Management, Inc. (OAM), the Fund’s investment advisor is contractually obligated through April 30, 2025 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, 2025 to reduce its management fees or reimburse OBSOX, OBCHX, OBIOX, OBEMX and OFIGX to the extent that total ordinary operating expenses exceed in any one year 1.25%, 2.24%, 1.35%,1.75% and 0.95% expressed as a percentage of each Fund’s average daily net assets, respectively, and for OBSIX, OCHIX, OBIIX and OIEMX 1.00%,1.99%, 1.10% and 1.50% respectively. Effective May 15, 2023, for OBCHX, OCHIX, OBIOX, OBIIX, OBEMX, OIEMX and OFIGX, respectively, the adviser may recoup the amount of any expenses reimbursed under the contract within three years following the date of the reimbursement if the recoupment does not cause the Fund’s expenses to exceed the expense limitation in place at the time of the recoupment, or the expense limitation in effect at the time of the initial reimbursement, whichever is lower.
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 MSCI EAFE Index is an equity index that captures large and mid-cap representation across 21 developed markets countries around the world, excluding the U.S. and Canada. The index is comprehensive, covering approximately 85% of the free-float-adjusted market capitalization in each country. You cannot invest directly in these indexes.
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. You cannot invest directly in these indexes.
P/E (Price/Earnings Ratio): This is a measure of valuation. It relates the price of the stock to the earnings per share (EPS) of the company. P/E Forward 4 Quarters: Refers to the forward price to earnings ratio estimated over the next 4 quarters. Long-Term Debt to Total Equity: Refers to dividing a company’s total liabilities by its shareholder equity. Weighted Average Market Capitalization: This is a measure of the average market capitalization of the stocks within the portfolio, weighted by the amount of each stock owned.
