July 11, 2019

Dear Fellow Oberweis Funds Shareholder:

YEAR-TO-DATE PERFORMANCE THROUGH JUNE 30, 2019

In the first half of 2019, I’m pleased to report that all six of our growth-oriented mutual funds posted strong gains that exceeded the returns of their respective benchmarks. The Small-Cap Opportunities Fund returned 20.54% and the Micro-Cap Fund returned 23.79%, compared to 20.36% for the Russell 2000 Growth Index and 16.50% for the Russell Micro-Cap Growth Index. The International Opportunities Fund returned 19.24% versus 15.64% for the MSCI World ex-US Small-Cap Growth Index. The China Opportunities Fund gained 21.50% versus 12.97% for the MSCI China Index. The Emerging Markets Fund returned 14.96% versus 6.70% for the MSCI EM Small-Cap Index. The Small-Cap Value Fund has slightly trailed year-to-date, returning 12.05% versus 13.47% for the Russell 2000 Value Index. The Global Opportunities Fund returned 20.00% versus 15.01% for the MSCI ACWI Small-Cap Index.

US-China trade negotiations, macroeconomic growth and interest rate expectations remain front and center in the minds of many investors. Concerns over these three variables led to a significant correction in the fourth quarter of 2018. In the first quarter of 2019, however, interest rate expectations shifted markedly. Equities rallied sharply as muted inflation data and slowing economic growth in Europe and China curtailed the risk of further interest rate increases. By the end of the second quarter, any residual talk of rising rates was dead, replaced by a new base-case expectation for a cut in interest rates in the second half of the year, with Chairman Powell affirming this bias in his July 10th Congressional testimony. That’s a big positive for stocks and equity market results reflect this.

On the other hand, trade developments and slowing global growth are less soothing. There has been little apparent progress made in the US-China trade dispute. Indeed, President Trump fueled the fire by blacklisting Chinese tech goliath Huawei, a leader in 5G technology, on “national security grounds.” While trade discussions continue, the fundamental issues between the US and China may prove difficult to solve in the near term, particularly without one party losing face in the process. Trade uncertainties have likely contributed to slowing global economic growth, and the economic outlook is mixed but incrementally negative. By many metrics the US economy remains healthy, boasting reasonable GDP growth, muted inflation and the lowest unemployment rate in five decades. On the other hand, many expect weaker growth ahead as global trade headwinds deter business investment. Additionally, throughout Europe and Asia, manufacturing, trade and investment are soft. The effect of tariffs and trade uncertainty casts a long shadow on future growth expectations.

OUTLOOK

Looking forward, we think the inflection point is linked to the U.S.-China trade issue. We believe recent economic weakness and the resulting impact on corporate earnings in early 2019 is tied to the uncertainty regarding the path forward with trade. Discussions we’ve had with management teams suggest caution pending more trade clarity and, hopefully, a favorable outcome. A “win-win” deal between the two countries should reaccelerate economic growth, boosted by some pent-up demand as tentative management teams reverse course. A negative outcome that leads to additional protectionist measures could very well tip the global economy into recession and throw a wet blanket on equities until the smoke clears. We still believe there is ample motivation for both countries to take the high road, but realistically believe resolution may not happen in the near term.

Investing, however, is not a game of absolute outcomes, but rather one of outcomes relative to expectations. Even with the S&P 500 near an all-time high, investor sentiment remains decidedly pessimistic. A recent Merrill Lynch fund flow survey suggests that investors are the most bearish that they have been since the global financial crisis. Cash allocation is among the highest in 16 years, equity allocation the lowest since March 2009 and, helped by falling inflation expectations, bond allocation is near an 8-year high. Money has flowed into “safe havens” such as gold, which gained 9.2% during the second quarter, and government bonds, which roared to multi-year highs. The U.S. 10-year Treasury yield dropped below 2% late in the quarter, down over 120 basis points since last November as rate cuts by the Federal Reserve are expected as soon as July. Ten-year yields are negative again in Germany, and even Greek 10-year bonds have rallied to the point that they inexplicably yield only about 25 basis points more than similarly termed U.S. paper. Historically these measures have proven to be good contrarian indicators, especially when positioned towards the extreme end. Also, at the individual company level, earnings expectations at global small-cap firms have remained conservative, driven by the dual uncertainties of tariffs and soft global manufacturing data. A low bar in earnings guidance makes it easier for companies to beat expectations, even while recognizing the risks ahead.

VALUATION RECAP

With respect to our growth-oriented funds, the average forward P/E ratio as of June 30, 2019 was 16.9 times for the Global Opportunities Fund (versus 16.3 last quarter), 16.6 times for the Small-Cap Opportunities Fund (versus 15.7 last quarter), 14.8 times for the Micro-Cap Fund (versus 12.9 last quarter), 18.5 times for the International Opportunities Fund (versus 18.3 last quarter), 17.8 times for the China Opportunities Fund (versus 16.7 last quarter), and 17.9 times for the Emerging Markets Fund (versus 19.0 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. For the Small-Cap Value Fund, the average P/E ratio was 12.6 times (versus 14.1 last quarter). As of June 30, 2019, the weighted average market capitalization was $3.3 billion for the Global Opportunities Fund, $2.7 billion for the Small-Cap Opportunities Fund, $1.0 billion for the Micro-Cap Fund, $2.9 billion for the Small-Cap Value Fund, $4.3 billion for the International Opportunities Fund, $2.2 billion for the Emerging Markets Fund, and $69.5 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 $5.9 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, 2018 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%, 1.28%, 1.57%, 1.33%, 2.13%, 1.88%, 1.57%, 1.29%, 1.91%, 1.65%,1.77%, 3.99% and 3.74% for OBEGX, OBGIX, OBMCX, OMCIX, OBSOX, OBSIX,OBIVX, OBVLX, OBCHX, OCHIX, OBIOX, OBEMX and OIEMX 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, 2020 to reduce its management fees or reimburse OBSOX, OBVLX, OBCHX, OBIOX and OBEMX to the extent that total ordinary operating expenses exceed in any one year 1.55%, 1.30%, 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.

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. Investor Class share OBIVX performance information was calculated using the historical performance of Institutional Class share for periods prior to May 1, 2018.

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 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. 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.
 


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