July 13, 2022

Dear Fellow Oberweis Funds Shareholder,

YEAR-TO-DATE PERFORMANCE THROUGH JUNE 30, 2022

Global equity markets closed out their worst first half in over fifty years, as surging inflation, interest rate hikes by the U.S. Federal Reserve, and Russia’s war in Ukraine stoked recessionary fears. Not surprisingly, each of the Oberweis Funds declined in the first half of 2022. The Micro-Cap Fund returned -21.91% versus -33.04% for the Russell Micro-Cap Growth Index. The Small-Cap Opportunities Fund returned -22.42% versus -29.45% for the Russell 2000 Growth Index. Among our international funds, the International Opportunities Fund returned -36.68% versus -29.55% for the MSCI World ex-US Small-Cap Growth Index. The China Opportunities Fund returned -21.72% versus -11.26% for the MSCI China Index, and the Emerging Markets Fund returned -23.11% versus -20.03% for the MSCI EM Small-Cap Index. The Global Opportunities Fund returned -34.88% versus -22.27% for the MSCI ACWI Small-Cap Index. Notably, despite significant headwinds for our growth-oriented investment style, the Micro-Cap and Small-Cap Funds still materially outperformed their benchmarks in the first half, primarily due to a focus on profitable companies and favorable stock selection in those funds.

MARKET ENVIRONMENT

Concerns over inflation, and more specifically whether central banks can bring the rate of inflation down without causing a recession, continued to impact equity returns in nearly every geographic region. Additionally, energy concerns remain front and center in Europe, with the EU scrambling to find enough natural gas for this winter to offset a reduction in supply from Russia. In China, lockdowns associated with China’s zero-COVID policy pressured economic growth and political leadership, particularly in Shanghai. In the US, inflation and interest rate hikes by the Fed have curbed economic growth, although the data remains mixed as to the degree.

While virtually all equity asset classes were down significantly in the first half, the pain was particularly acute for “growth” stocks, which were punished much more than their “value” counterparts. Unexpected increases in interest rates have often been the scourge of growth equities. Growth stocks – by definition – are valued based on the potential for significant earnings growth years into the future. When interest rates rise, the present value of future earnings declines, so, all else equal, they should be worth less (assuming the change was not already anticipated). “Value” stocks also suffer from a lower net present value, but with a smaller share of their cash flows far out into the future, the impact of rising rates tends to be less severe.

The real culprit for growth underperformance in the first half was P/E multiple compression. In uncertain times, investors tend to gravitate toward perceived safety and are marginally less interested in pursuing the potential for higher returns from innovation and earnings growth. Instead, they prefer safe, predictable cash flows, which are typically characteristics of “value” stocks. As a result, the valuation gap between “growth” stocks relative to “value” stocks has compressed. Another way of thinking about it is that the multiple of today’s earnings that one must pay to participate in a potentially much larger future earnings stream has markedly declined as risk-aversion has risen.

All of this makes sense, to a point. There are many “unknowns” and we expect that inflation and the potential for recession will continue to drive daily volatility in the near term. It is rational for risk-aversion to be somewhat higher in this environment. But to what degree? Many small growth stocks are already down 30-40% or more, with P/E valuations for some of our funds among the lowest we have ever observed. Our Global Opportunities Fund, for example, has an average P/E today of 13.0x versus 25.1x a year ago. One might argue that valuations today appear very cheap because earnings estimates remain too high. That’s plausible, but it is unlikely that actual earnings will be so far short of estimates to justify the P/E multiple contraction already experienced.

Perhaps counterintuitively, we are very excited about the current opportunity set and the potential for strong prospective returns. Historically, we tend to thrive coming out of environments like this, when expectations and valuations are exceptionally low and risk-aversion is high. Macroeconomic and political turmoil have taken, and may continue to take, their toll on near-term stock prices. However, what matters to investors in the long run is the earnings power of businesses, which is a function of the firm’s sales growth, margins, cash flows and the incremental return on capital reinvested in the business. We look for businesses with strong and growing earnings power protected by robust competitive advantages. The ability of those types of firms to create shareholder value is not permanently impaired by economic cycles, though they often trade as if that is the case. Broadly speaking, we believe many of the headline risks with respect to our holdings have already been discounted, and likely over-discounted. As a result, we are finding what we believe to be tremendous values in small-cap stocks around the world. No one can predict the future, but we believe the odds for above-average prospective returns are in our favor when buying amid valuations this cheap.

VALUATION RECAP

P/E valuations for many of the funds are significantly lower than average. As of June 30, 2022, the weighted-average price/earnings (P/E) ratio was 13.0 times for the Global Opportunities Fund (versus 16.2 last quarter), 10.7 times for the Small-Cap Opportunities Fund (versus 13.5 last quarter), 10.0 times for the Micro-Cap Fund (versus 12.8 last quarter), 13.9 times for the International Opportunities Fund (versus 18.6 last quarter), 24.6 times for the China Opportunities Fund (versus 16.3 last quarter), and 14.3 times for the Emerging Markets Fund (versus 18.2 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, 2022, the weighted-average market capitalization was $4.5 billion for the Global Opportunities Fund, $2.8 billion for the Small-Cap Opportunities Fund, $1.2 billion for the Micro-Cap Fund, $3.7 billion for the International Opportunities Fund, $3.3 billion for the Emerging Markets Fund, and $44.9 billion for the China Opportunities Fund.

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.

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.

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, 2021 data. Expense ratio is the total net annualized fund operating expense ratio. The expense ratio gross of expense offset arrangements and expense reimbursements was 1.38%, 1.13%, 1.48%, 1.23%, 1.59%, 1.34%, 1.87%, 1.62%,1.77%, 2.80% and 2.55% 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, 2023 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, 2022 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 1.25%, 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 1.00%, 1.99% and 1.50%, respectively.

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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