January 19, 2024

Dear Fellow Oberweis Funds Shareholder,

2023 PERFORMANCE IN REVIEW

2023 was a mixed year for our funds. The Micro-Cap Fund performed very well, with an 18.87% (based on investor-class returns) compared to 9.11% for the Russell Micro-Cap Growth Index. The Small-Cap Opportunities Fund returned 15.81% versus 18.66% for the Russell 2000 Growth Index. These two U.S.-focused funds have performed exceptionally well over multi-year periods, outperforming their benchmark returns by a wide margin over the trailing 3-, 5-, 10-, and 15-year measurement periods.

The year was more difficult for our international-focused funds. The China Opportunities Fund returned -7.70% compared to -11.20% for the MSCI China Index. Although the China Opportunities Fund has exceeded its benchmark over the trailing 1-, 3-, 5-, 10-, and 15-year periods, the broader decline in Chinese equities has yielded unfavorable absolute returns in recent years. International Opportunities returned 4.89% compared to 10.57% for the MSCI World ex-US SCG Net Index. Global Opportunities gained 6.40% versus 16.84% for the MSCI ACWI Small-Cap Index. The Emerging Markets Fund returned 15.02% versus 23.92% for the MSCI EM Small-Cap Index. The Focused International Growth Fund returned 16.60% versus 18.24% for the MSCI EAFE Index.

The macro environment last year posed challenges for our investment style. First, our strategies generally focus on smaller companies with misunderstood growth potential. To find them, most of our funds begin with the universe of firms reporting positive earnings surprises and/or positive earnings revisions. On average, these types of companies tend to outperform the market, but in 2023 small-caps with the largest negative earnings surprises broadly beat those with the largest positive surprises. Additionally, tighter monetary policy, particularly by the U.S. Federal Reserve, was another headwind and rising rates tend to adversely affect valuations of small-cap growth stocks. Further, since the average growth rate of companies in our funds tends to be higher than those of their respective benchmarks, our funds tend to underperform in a rising interest rate environment. Lastly, rising international risks and slower growth abroad relative to the U.S. made investing outside of the U.S. particularly challenging.

Of course, we aim to deliver long-term results for our shareholders, and over the long-term, the funds have fared well. Over the trailing fifteen years, the Micro-Cap, Small-Cap Opportunities, Global Opportunities, and International Opportunities funds have all beaten their benchmark returns (net of fees). Results have been exceptional for the U.S. funds. The Emerging Markets Fund, which eclipsed its 5-year anniversary in 2023, is well ahead of its benchmark since its inception in 2018.

With respect to the International Opportunities Fund, despite a strong 15-year track record, the fund has underperformed more recently. In our experience, some of the best buying opportunities have occurred after such periods, when valuations tend to be attractive. For example, the International Opportunities Fund lagged in 2018-2019, but then rocketed back with a 63% gain in 2020. Similarly, following a tough year in 2008, the fund rebounded 110% from 2009-2010, well ahead of its benchmark. Although no one can predict the future, we believe it’s worth studying patterns of the past.

Globally, the U.S. economy continues to lead the developed world in terms of economic growth, though valuations of its large-cap stocks are also the highest in the world. Developed markets outside of America face more difficult challenges, but slower growth and geopolitical risks appear to be already factored into less expensive equity valuations. Emerging markets, which one might expect to lag in a year in which rates soared, have outperformed. We attribute this both to greater economic resiliency than in past cycles as well as lower valuations going into 2023. Emerging markets, particularly China, continue to trade at a steep discount to the developed world. A shift in political posture, such as a significant stimulus program in China, has the potential to catalyze emerging market stocks.

THE YEAR AHEAD

We believe that the current environment presents a significantly better-than-average risk/reward opportunity for our small-cap strategies. Small-cap companies are trading for some of the cheapest valuations in recent history, both in the U.S. and in international markets. Also, the valuation gap between U.S. small- and large-cap stocks ranks among the widest in nearly 30 years. This comes after a prolonged multi-year cycle of small-cap underperformance, accentuated by one of the fastest and sharpest cycles of rising interest rates in history. It’s easy to forget that longer cycles favoring large- or small-caps have occurred regularly throughout history. Rising interest rate expectations and increasing recession fears have been two of the classic signposts of a cycle favoring large-cap stocks, but that cycle may have already concluded.

Those with long investment tenure or an affinity for market history will recognize that leadership changes invariably occur when a rising interest rate cycle is expected to conclude, which seems to match the present time. While we cannot pinpoint such a shift to a specific quarter or even a year, the pivot from a rising interest rate environment to a declining one has historically favored small-caps. Generally, after a period of rising interest rates, the market discounts both a higher cost of capital and a likelihood for slower economic conditions. When the cycle comes to an end, the bursts for small-caps can be quite dramatic. In fact, if asked for the ideal conditions to buy our strategies, our answer would be the inflection point of change when the small-caps shift course from depressed valuations, which is typically around the emergence from recession and/or the end of an interest rate cycle. We have not had a recession, and may not have one, but the interest rate cycle has seemingly already shifted. Other variables matter as well, such as investor risk-tolerance, economic growth and global military conflicts. But our experience lends one clear lesson: return potential for small-caps tends to be skewed to the upside when valuations are very low and marginal confidence in the asset class begins to improve. We believe this environment is likely to drive mean reversion of valuation multiples for small-cap stocks over the next few years, though the precise timing is hard to predict.

VALUATION RECAP

As of December 31, 2023, the price/earnings (P/E) ratio was 13.8 times for the Global Opportunities Fund (versus 11.8 last quarter), 17.7 times for the Small-Cap Opportunities Fund (versus 17.0 last quarter), 14.1 times for the Micro-Cap Fund (versus 14.4 last quarter), 16.5 times for the International Opportunities Fund (versus 15.6 last quarter), 14.9 times for the China Opportunities Fund (versus 13.5 last quarter), 21.3 times for the Emerging Markets Fund (versus 16.4 times last quarter), and 14.6 times for the Focused International Growth Fund (versus 14.3 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. As of December 31, 2023, the weighted-average market capitalization was $5.2 billion for the Global Opportunities Fund, $5.0 billion for the Small-Cap Opportunities Fund, $1.5 billion for the Micro-Cap Fund, $6.8 billion for the International Opportunities Fund, $3.6 billion for the Emerging Markets Fund, $79.4 billion for the China Opportunities Fund, and $136.0 billion for the Focused International Growth Fund.

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

MANAGEMENT DISCUSSION ON FUND PERFORMANCE

MARKET ENVIRONMENT

Global equities returned 24.39% in 2023, as measured by the MSCI World Index. Global small-caps, as measured by the MSCI World Small-Cap Index, returned 16.32%, underperforming large-capitalization stocks. International small-caps underperformed U.S. small-caps for the third year, as evidenced by the 10.57% return on the MSCI World ex-USA Small-Cap Index. Within the United States, small-cap growth stocks underperformed large-cap growth stocks by 2,404 basis points, as measured by the respective returns of the Russell 2000 Growth (18.66%) and Russell 1000 Growth (42.67%) indices. Growth stocks significantly outperformed value stocks globally in 2023, with the MSCI World Growth Index (37.31%) returning 2,494 basis points more than the MSCI World Value Index (12.37%). Similarly, small-cap growth stocks outperformed small-cap value stocks, with the MSCI World Small-Cap Growth Index returning 16.45% versus 11.14% for the MSCI World Small-Cap Value Index. Within domestic small-cap, the Russell 2000 Growth Index (18.66%) outperformed the Russell 2000 Value Index (14.58%) by 408 basis points for the year.

DISCUSSION OF THE OBERWEIS FUNDS

The Micro-Cap Fund returned 18.87% versus 9.11% for the Russell Micro-Cap Growth Index. The portfolio benefitted from favorable stock selection in technology, industrials, and consumer discretionary while healthcare detracted from relative performance, primarily due to our underweight position in the sector. At the stock level, Axcelis (ACLS), Camtek (CAMT), and Applied Optoelectronics (AAOI) were among the top contributors to performance. Treace Medical Concepts (TMCI), Model N (MODN), and Nine Energy Service (NINE) were among the top detractors. OBMCX Holdings

The Small-Cap Opportunities Fund returned 15.81% versus 18.66% for the Russell 2000 Growth Index. The portfolio benefitted from favorable stock selection in industrials, energy, and materials. Axcelis (ACLS), Aehr Test Systems (AEHR), and Vertiv (VRT) were among the top contributors to performance. Halozyme (HALO), Amylyx (AMLX), and 2U (TWOU) were among the top detractors. OBSOX Holdings

The International Opportunities Fund returned 4.89% versus 10.57% for the MSCI World ex-US Small Cap Growth Index. At the country level, the Netherlands, Hong Kong, and Israel were the leading contributors to portfolio performance while Japan, the U.K., and Norway were the leading detractors. At the sector level, the portfolio was negatively impacted by stock selection in information technology and industrials, partially offset by positive stock selection in materials and healthcare. At the stock level, Be Semiconductor (BESI NA), Sage Group (SGE LN), and Daiwa Securities (8601 JP) were among the top contributors to performance; M&A Capital Partners (6080 JP), Oxford Instruments (OXIG LN), and Verallia (VRLA FP) were among the top detractors. OBIOX Holdings

The Global Opportunities Fund returned 6.40% versus 16.84% for the MSCI AWCI Small-Cap Index. At the country level, stock selection in the United Kingdom, Taiwan, and China added to portfolio return, while the United States, Japan, and Brazil detracted from portfolio return. At the sector level, industrials, real estate, and financials added to return, while information technology, healthcare, and consumer staples detracted. At the stock level, Ashtead (AHT LN), Axcelis (ACLS US), M31 Technology (6643 TT) were among the top contributors to performance; Halozyme Therapeutics (HALO US), Extreme Networks (EXTR US), and Impinj (PI US) were among the top detractors. OBEGX Holdings

The China Opportunities Fund returned -7.70% versus -11.20% for the MSCI China Index. At the sector level, technology and consumer discretionary contributed to performance while healthcare, communication services, and financials were top detractors. At the stock level, Pinduoduo (PDD US), Wistron (3231 TT), and Alchip Technologies (3661 TT), were among the top contributors to performance; Meituan (3690 HK), Wuxi Biologics (2269 HK), and Longfor (960 HK) were among the top detractors. OBCHX Holdings

The Emerging Markets Fund returned 15.02% versus 23.92% for the MSCI EM Small-Cap Index. At the country level, China, Brazil, and Indonesia were the primary detractors while Thailand, South Korea, and South Africa were the top contributors. At the sector level, the fund was positively impacted by stock selection in consumer discretionary and real estate, while performance was adversely impacted by stock selection in consumer staples and materials. At the stock level, Alchip Technologies (3661 TT), M31 Technology (6643 HK), and KPIT Technologies (KPITTECH IN) were among the top contributors to performance; Chongqing Brewery (600132 CH), OPT Machine Vision (688686 CH), and Hangzhou Robam Appliances (002508 CH) were among the top detractors. OBEMX Holdings

The Focused International Growth Fund returned 16.60% versus 18.24% for the MSCI EAFE Index. At the country level, the U.S., China, and Italy were the top contributors, while the Netherlands, Switzerland, and the U.K. detracted from portfolio return. At the sector level, technology, financials, and healthcare added to return, while materials, consumer staples, and industrials detracted. At the stock level, Cadence Design (CDNS US), Schneider Electric (SU FP), and Sony (6758 JP) were among the top contributors to performance; Adyen (ADYEN NA), Anglo American (AAL LN) and Alcon (ALC SW) were among the top detractors. OFIGX Holdings

For current performance information, please visit www.oberweisfunds.com

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.

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, 2024 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, 2024 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% and1.50% 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.

 


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