January 25, 2021
Dear Fellow Oberweis Funds Shareholder,
2020 IN REVIEW
The International Opportunities, Emerging Markets, China Opportunities and Global Opportunities Funds all exceeded their benchmark returns by a very wide margin in 2020. The International Opportunities Fund returned 62.86% (versus 22.93% for the MSCI World ex-US SCG Index). The China Opportunities Fund returned 56.51% (compared to 29.49% for the MSCI China Index). The Emerging Markets Fund returned 42.81% (versus 19.29% for the MSCI EM Small Cap Index). Among the domestic funds, the Micro-Cap Fund and Small-Cap Opportunities Fund returned 29.91% and 32.47%, respectively (compared to 40.13% and 34.63% for the Russell Micro-Cap Growth and Russell 2000 Growth indices). The Micro-Cap and Small-Cap Opportunities funds faced a material headwind in 2020: both are consistently underweight biotech companies, which posted strong gains in 2020 and have all-time-high exposure within their respective benchmarks. The Global Opportunities Fund, which invests in many of our team’s top ideas around the world, returned 55.55% versus 16.33% for the MSCI ACWI Small-Cap Index.
This year of COVID-19 has been truly remarkable. In March, global equities experienced one of the fastest and deepest plunges of our careers, only to come roaring back in the second quarter, and continued to accelerate upward in the third and fourth quarters. This year’s rally can be at least partially attributable to massive monetary stimulus from the Federal Reserve, as well as fiscal stimulus from governments around the world. To combat the crisis, the Fed quickly reduced interest rates to almost zero and promised to keep them there for a prolonged period. Globally, many central banks followed suit. Meanwhile, fiscal stimulus from the CARES Act provided cash payments to most US taxpayers and significant relief for business owners via the Payroll Protection Program’s forgivable loans. This coordinated stimulus plan flooded the US economy with cash, and some of that cash made it back to the stock market, driving a strong rally in equity prices.
In addition, as the year went on, doomsday scenarios began to fade. Fears of a COVID-19 depression following the explosion in unemployment have greatly abated. Many have already returned to work and the end of (or at least sharp reduction in) the pandemic’s impact is now within sight. In November, Pfizer-BioNTech’s vaccine showed stunning efficacy in clinical trials. Shortly thereafter, Moderna demonstrated similarly high success with its own vaccine. Three more vaccines are now in Phase 3 clinical trials. With President Biden promising 100 million vaccinations in his first 100 days, investors appear to be looking past the end of COVID-19, with experts such as Dr. Anthony Fauci predicting a return to some degree of normalcy by the autumn of 2021. While new variants continue to pose risks, the consensus view is that pandemic economic disruption is likely to sharply fade by the end of 2021.
Political uncertainty in the US was also a concern late in 2020, although with President Biden’s inauguration we now expect the focus to shift to his economic policies, which may be less favorable to investors. Biden will bring a sense of stability and predictability that was absent under Trump. He’ll propose further stimulus and large-scale infrastructure spending. But that will come at a price, namely higher taxes or increased deficits. It surprises us that investors have not reacted more negatively to the prospect of higher personal and corporate income taxes, in addition to the possibility of higher capital gains taxes. Given Biden’s slim majority in Congress, material tax changes are not a given and may take time to procure. It’s hard to predict how and when tax legislation will unfold, but this remains a risk that keeps us up at night, especially given the budget deficit impacts of COVID stimulus.
In Europe, concerns of a chaotic breakup between the UK and the European Union also seem less likely, following the last-minute signing of the Trade and Cooperation Agreement (TCA) in December 2020. The agreement’s title is an ironic misnomer for a divorce pact. Irrespective, the risk of a no-deal EU breakup is far less worrisome. In Asia, China’s remarkable success in containing the virus has permitted its economy to mostly avoid the shutdowns prevalent throughout the US and Europe. Not surprisingly, China’s equity market was among the hottest in 2020. It remains to be seen how the Biden presidency will affect US-China trade tensions, but they probably won’t get worse in the near term.
The relentless equity rally in the final three quarters of 2020 reflects a system flush with liquidity and marginally diminished risks relative to the beginning of the year. The pandemic has ignited innovation, creativity, and change — trends that tend to positively benefit our investment process. Certain niches – like ecommerce, home delivery, and video conferencing – have grown much faster than anticipated. The pandemic will fade in 2021, but we believe the changes and impacts to business will be long lasting, and that our team’s track record of investing in companies at the cusp of material change positions us well.
In the near term, we expect a strong economic rebound in the second half of 2021, which is already the consensus view. Over the longer term, watch inflation, interest rates and tax policy, as we expect these variables to become increasingly important for investor sentiment. Over a full market cycle, we believe our ability to add alpha lies not in macroeconomic forecasting but rather with superior individual stock selection. Accordingly, we will continue to focus on stock fundamentals, seeking to identify companies with long-term earnings power well above the expectations of other analysts and investors.
While valuations for US large cap stocks are near historical highs, US small-cap and international valuations are closer to historical means. As of December 31, 2020, the price/earnings (P/E) ratio was 19.2 times for the Global Opportunities Fund (versus 22.0 last quarter), 15.4 times for the Small-Cap Opportunities Fund (versus 14.9 last quarter), 12.0 times for the Micro-Cap Fund (versus 18.3 last quarter), 18.6 times for the International Opportunities Fund (versus 25.6 last quarter), 24.6 times for the China Opportunities Fund (versus 27.4 last quarter), and 26.1 times for the Emerging Markets Fund (versus 25.1 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 December 31, 2020, the weighted-average market capitalization was $4.8 billion for the Global Opportunities Fund, $3.6 billion for the Small-Cap Opportunities Fund, $1.7 billion for the Micro-Cap Fund, $4.6 billion for the International Opportunities Fund, $3.6 billion for the Emerging Markets Fund, and $129.3 billion for the China Opportunities Fund. Note that the China Opportunities Fund’s market cap is skewed upward due to two mega-cap holdings; the median market cap of the fund was $16.4 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.
MANAGEMENT DISCUSSION ON FUND PERFORMANCE
Global equities returned 15.90% in 2020, as measured by the MSCI World Index. Global small-caps, as measured by the MSCI World Small-Cap Index, performed similarly, returning 15.96%. Foreign small-caps underperformed U.S. small-caps, as evidenced by the 12.78% return on the MSCI World ex-USA Small Cap Index. Internationally, small-cap growth equities outperformed small-cap value by 2035 basis points, with the MSCI World ex-USA Small Cap Growth Index returning 22.93% versus only 2.58% for the MSCI World ex-USA Small Cap Value Index.
Within the United States, large-cap growth stocks outperformed small-cap growth stocks by 386 basis points, as measured by the respective returns of the Russell 1000 Growth (38.49%) and Russell 2000 Growth (34.63%) indices. Within domestic small-cap, growth outperformed value, with the Russell 2000 Growth Index outperforming the Russell 2000 Value Index (4.63%) by 3000 basis points for the year. The Russell Micro-Cap Growth Index (40.13%) outperformed the Russell 2000 Growth Index by 550 basis points.
DISCUSSION OF THE OBERWEIS FUNDS
The International Opportunities Fund returned 62.86% versus 22.93% for the MSCI World ex-US Small-Cap Growth Index. The portfolio benefitted from stock selection in Japan and Sweden while stock selection in Canada and the U.K. detracted from performance. On a sector level, the portfolio benefitted from stock selection in information technology and consumer discretionary while performance was negatively impacted by stock selection in utilities and financials. At the stock level, Sinch AB (SINCH SS), Baycurrent Consulting (6532 JT), and Evolution Gaming Group AB (EVO SS) were among the top contributors to performance; Air Canada (AC CN), Redrow PLC (RDW LN) and Capita PLC (CPI LN) were among the top detractors. OBIOX Holdings
The Global Opportunities Fund returned 55.55% versus 16.33% for the MSCI ACWI Small-Cap Index. At the country level, the portfolio benefitted from favorable stock selection in the USA, Sweden, and Japan, partially offset by adverse stock selection in Canada, Taiwan and Brazil. At the sector level, the Fund was positively impacted by stock selection in industrials, healthcare, and consumer discretionary. The fund also benefitted from an overweight in technology. The fund was slightly adversely affected by stock selection in materials. At the stock level, Upwork (UPWK US), Sinch AB (SINCH SS), and Caredx (CDNA US) were among the top contributors to performance; Skywest Inc (SKYW US), Air Canada (AC CN) and Skyline Champion Corp (SKY US) were among the top detractors. OBEGX Holdings
The China Opportunities Fund returned 56.51% compared to 29.49% for the MSCI China Index. The portfolio benefitted from favorable stock selection in industrials, consumer discretionary, and healthcare. The fund also benefitted from an overweight allocation and favorable stock selection in information technology. The fund’s underweight allocation in financials also helped performance. At the stock level, Nio Inc (NIO US), Tencent Holdings (700 HK) and Meituan (3690 HK) were among the top contributors; Sunac China Holdings (1918 HK), China Life Insurance Co Ltd H (2628 HK), and Jiangsu Yoke Technology (002409 CH) were among the top detractors. OBCHX Holdings
The Emerging Markets Fund returned 42.81% versus 19.29% for the MSCI EM Small Cap Index. At the country level, the portfolio benefitted from stock selection in China, India, and South Korea, slightly offset by detracting stock selection in Taiwan. At the sector level, the fund was positively impacted by stock selection in health care, industrials, and consumer staples, while stock selection in information technology slightly detracted from performance. At the stock level, Seegene Inc (096530 KS), Jiangsu Hengli Hydraulic (601100 CH), and Weimob Inc (2013 HK) were among the top contributors to performance; Linx SA (LINX3 BZ), UPL Ltd (UPLL IN), and IDP Education Ltd (IEL AU) were among the top detractors. OBEMX Holdings
The Micro-Cap Fund returned 29.91% versus 40.13% for the Russell Micro-Cap Growth Index. Performance was adversely impacted by stock selection in consumer discretionary and producer durables. At the stock level, Digital Turbine (APPS), Magnite (MGNI), and CareDx (CDNA) were among the top contributors to performance. Recro Pharma (REPH), Skywest (SKYW), and Cardtronics (CATM) were among the top detractors. OBMCX Holdings
The Small-Cap Opportunities Fund returned 32.47% versus 34.63% for the Russell 2000 Growth Index. The fund benefitted from stock selection in healthcare, while stock selection in energy and consumer discretionary detracted from performance. Livongo (LVGO), Upwork (UPWK), and Bandwidth (BAND) were among the top contributors to performance. Recro Pharma (REPH), Gray Television (GTN), and Cardtronics (CATM) were among the top detractors. OBSOX Holdings
The portfolio turnover rates were 129% for the Global Opportunities Fund, 92% for the Micro-Cap Fund, 147% for the Small-Cap Opportunities Fund, 192% for the China Opportunities Fund, 130% for the International Opportunities Fund and 131% for the Emerging Markets Fund. The net expense ratios for the investor share class of the Funds were 1.53% for Global Opportunities, 1.58% for Micro-Cap, 1.55% for Small-Cap Opportunities, 1.95% for China Opportunities, 1.60% for International Opportunities and 1.75% for Emerging Markets.
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, 2020 data. Expense ratio is the total net annualized fund operating expense ratio. The expense ratio gross of expense offset arrangements and expense reimbursements was 1.53%, 1.28%, 1.59%, 1.34%, 2.03%, 1.78%, 1.95%, 1.69%,1.87%, 3.79% and 3.54% 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, 2021 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, 2021 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 1.55%, 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.
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 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.