January 23, 2020
Dear Fellow Oberweis Funds Shareholder:
What a difference a year can make! Just over a year ago, in the final quarter of 2018, investors were reducing equity exposure at the most frantic pace since 2008, fearing a prolonged US-China trade war, slowing growth, rising interest rates and tighter monetary policy. In last year’s letter, we wrote: “Have investors become worry warts unduly? While we cannot say for certain, fear and great buying opportunities are often neighbors.”
Now we can say for certain. On January 15th, 2020, the U.S. and China signed the much-anticipated “Phase One” trade treaty. To be sure, US-China trade negotiations have a long way to go, but this step marks a sharp directional change from the escalatory feuds that preceded it. On economic growth, recession prognosticators were either wrong or early. US earnings growth has surprised to the upside, at least so far, while still tepid growth outside the U.S. has nonetheless exceeded expectations. In terms of monetary policy trends, the Federal Reserve reversed course in 2019, cutting interest rates three times in 2019. Global central bank bond purchases are again accelerating, and the yield curve has steepened since the inversion fears of early 2019. Instead of rising, interest rates declined in 2019, with the yield on the 10-year US Treasury bond falling 77 basis points in 2019 to 1.92%. And as these developments unfolded, investors turned ravenous on equities — especially for US large-caps – and the S&P 500 jumped 31.49% in 2019. Globally, small-cap stock prices also appreciated, but not by as much as their larger brethren. In terms of US small-cap returns, the Russell 2000 gained 25.53% and international small-caps, as measured by MSCI World ex-USA Small-Cap Core Index, returned 25.41%. Small-cap growth beat small-cap value, both domestically and internationally, continuing one of the longer historical runs for growth over value1. By all accounts, 2019 was quite the rebound year.
2019 IN REVIEW
Among our international funds, the International Opportunities Fund returned 22.85% (versus 28.04% for the MSCI World ex-US SCG Index). The China Opportunities Fund returned 36.33% (compared to 23.46% for the MSCI China Index). The Emerging Markets Fund returned 22.56% (versus 11.50% for the MSCI EM Small Cap Index). Among the domestic funds, the Micro-Cap Fund and Small-Cap Opportunities Fund returned 21.94% and 25.07%, respectively (compared to 23.33% and 28.48% for the Russell Micro-Cap Growth and Russell 2000 Growth indices). The Small-Cap Value Fund returned 19.31% (versus 22.39% for the Russell 2000 Value Index). The Global Opportunities Fund returned 25.67% (versus 24.65% for the MSCI ACWI Small-Cap Index).
On a relative basis, 2019 was an excellent year for the China Opportunities and Emerging Markets Funds. Global Opportunities also outperformed its benchmark. The US funds and the International Opportunities Fund faced headwinds this year. For the International Opportunities Fund, we believe the shortfall was primarily associated with investor preference for highly predictable near-term earnings over favorable long-term earnings growth opportunities, while our process focuses on the latter. At any time, there is a tradeoff between the two, but we believe the relative price for long-term earnings growth is much less than normal (compared to companies with more certain near-term earnings). Similar to other periods of underperformance in the past, it would not surprise us to see the last two years set the stage for reversion to a more normal balance, which would be a positive for the International Opportunities Fund.
As we close out the decade, we are particularly proud of the 10-year track records of the International Opportunities and Micro-Cap Funds. For the trailing 10 years ended 12/31/2019, International Opportunities delivered an annual average return 12.02% versus 8.80% for its benchmark2, and the Micro-Cap Fund returned 12.42% annualized versus 10.69% for its benchmark3.
Many economic indicators reflect more favorable data than last year. Monetary policy is now squarely dovish. The U.S. consumer remains in solid shape, bolstered by a record-low debt-service ratio, record household net worth and record low unemployment. Importantly, inflation worldwide remains under control. Internationally, while growth is not as good as in the US, it has not been as bad as expectations. Trade tensions remain but seem to be on a path of de-escalation, which is a huge difference from last year. On the other hand, expectations are also much higher, as evidence by stock prices that are nominally 20-30% higher than last year. On a Price/Earnings and Price/Free Cash Flow Yield basis, valuations remain reasonable for small-caps, particularly for those in international and emerging markets. Similarly, small-cap value has been out of favor as an asset class for about a decade. While not as cheap as last year, it’s hard to argue stocks are overly expensive in comparison to the meager yield of the risk–free alternative: US treasuries. In short, we believe that small-caps globally remain in a reasonable valuation range, with marginally improving growth prospects.
As of December 31, 2019, the price/earnings (P/E) ratio was 16.7 times for the Global Opportunities Fund (versus 14.2 last quarter), 19.2 times for the Small-Cap Opportunities Fund (versus 14.8 last quarter), 14.4 times for the Micro-Cap Fund (versus 11.9 last quarter), 18.3 times for the International Opportunities Fund (versus 13.8 last quarter), 19.5 times for the China Opportunities Fund (versus 20.1 last quarter), and 17.9 times for the Emerging Markets Fund (versus 17.6 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 14.0 times (versus 12.8 last quarter). As of December 31, 2019, the weighted-average market capitalization was $3.8 billion for the Global Opportunities Fund, $2.7 billion for the Small-Cap Opportunities Fund, $1.0 billion for the Micro-Cap Fund, $3.0 billion for the Small-Cap Value Fund, $4.1 billion for the International Opportunities Fund, $2.4 billion for the Emerging Markets Fund, and $90.3 billion for the China Opportunities Fund. Note the China Opportunities Fund’s market cap is skewed upward due to two mega-cap holdings; the median market cap of the fund was $9.5 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.
1For the USA, the Russell 2000 Growth Index returned 28.48% versus 22.39% for the Russell 2000 Value Index. Internationally, the MSCI World ex-USA Small-Cap Growth Index returned 28.04% versus 22.82% for the MSCI World ex USA Small-Cap Value Index
2Compared to the MSCI World Ex-USA SCG Index
3Compared to the Russell Micro-Cap Growth Index
MANAGEMENT DISCUSSION ON FUND PERFORMANCE
Global equities returned 27.67% in 2019, as measured by the MSCI World Index. Global small-caps, as measured by the MSCI World Small-Cap Index, slightly underperformed large-caps, returning 26.19%. International small-caps underperformed versus U.S. small-caps, as evidenced by the 25.41% return on the MSCI World ex-USA Small-Cap Index. Within the United States, large-cap growth stocks outperformed small-cap growth stocks by 791 basis points, as measured by the respective returns of the Russell 1000 Growth (36.39%) and Russell 2000 Growth (28.48%) indices. Within domestic small-cap, growth outperformed value, with the Russell 2000 Growth Index (28.48%) outperforming the Russell 2000 Value Index (22.39%) by 609 basis points for the year.
DISCUSSION OF THE OBERWEIS FUNDS
The International Opportunities Fund returned 22.85% versus 28.04% for the MSCI World ex-US Small Cap Growth Index. The portfolio benefitted from stock selection in Australia and Sweden while stock selection in Japan and the U.K. detracted from performance. On a sector level, the portfolio benefitted from stock selection in consumer discretionary and consumer staples while performance was negatively impacted by stock selection in health care and financials. At the stock level, Afterpay Ltd. (APT AU), Evolution Gaming Group AB (EVO SS), and Intermediate Capital Group Plc. (ICP LN) were among the top contributors to performance; Burford Capital Ltd. (BUR LN), GW Pharmaceuticals Plc. (GWPH US), and Nearmap Ltd. (NEA AU) were among the top detractors. OBIOX Holdings
The Global Opportunities Fund returned 25.67% versus 24.65% for the MSCI AWCI Small-Cap Index. At the country level, the portfolio benefitted from favorable stock selection in Sweden, Australia, and China, partially offset by adverse stock selection in the US. At the sector level, the Fund was positively impacted by stock selection in technology, industrials and consumer discretionary, partially offset by adverse stock selection in healthcare. At the stock level, A-Living Services (3319 HK), Afterpay (APT AU), and Evolution Gaming Group (EVO SS) were among the top contributors to performance; Caredx (CDNA), Green Dot Corp (GDOT) and GW Pharmaceuticals Plc (GWPH) were among the top detractors. OBEGX Holdings
The China Opportunities Fund returned 36.33% versus 23.46% for the MSCI China Index. The portfolio benefitted from exceptionally favorable stock selection in industrials. It also benefitted from favorable allocation and stock selection to consumer services, information technology and consumer stables. At the stock level, Alibaba Group Holding (BABA), New Oriental Education (EDU), and A-Living Services (3319 HK) were among the top contributors; Ofilm Group (002456 CH), Focused Photonics (300203 CH), and Trip.com Group (TCOM) were among the top detractors. OBCHX Holdings
The Emerging Markets Fund returned 22.56% versus 11.50% for the MSCI EM Small-Cap Index. At the country level, the portfolio benefitted from stock selection in China, India, South Korea, Indonesia, and Chile, while performance was adversely affected by the fund’s holdings in Mexico. At the sector level, the fund was positively impacted by stock selection in consumer discretionary, communication services, financials, energy, and consumer staples, while performance was adversely impacted by selection in information technology. At the stock level, AfreecaTV (067160 KS), Yantai Jereh Oilfield Services (002353 CH), and Nissin Foods (1475 HK) were among the top contributors to performance; Settle Bank (234340 KS), Cafe24 (042000 KS), and Escorts Ltd (ESC IN) were among the top detractors. OBEMX Holdings
The Micro-Cap Fund returned 21.94% versus 23.33% for the Russell Micro-Cap Growth Index. The portfolio benefitted from favorable stock selection in financial services and consumer discretionary, while performance was adversely impacted by stock selection in health care. At the stock level, eHealth, Inc. (EHTH), Veracyte, Inc. (VCYT), and Bandwidth Inc. (BAND) were among the top contributors to performance. Turning Point Brands, Inc. (TPB), LiqTech International, Inc. (LIQT), and Zix Corp. (ZIXI) were among the top detractors. OBMCX Holdings
The Small-Cap Opportunities Fund returned 25.07% versus 28.48% for the Russell 2000 Growth Index. The fund benefitted from stock selection in producer durables, materials & processing, and financial services, while stock selection in health care detracted from performance. Bandwidth Inc. (BAND), Mellanox Technologies, Ltd. (MLNX), and Trex Company (TREX) were among the top contributors to performance. Plantronics Inc. (PLT), Green Dot Corp. (GDOT), and GW Pharmaceuticals PLC (GWPH) were among the top detractors. OBSOX Holdings
The Small-Cap Value Fund returned 19.31% versus 22.39% for the Russell 2000 Value Index. The fund benefitted from stock selection in producer durables and energy while performance was negatively impacted by adverse stock selection in technology and financials. Triumph Group, Inc (TGI), Williams-Sonoma, Inc (WSM), and Oshkosh (OSK) were among the top contributors to performance; Gulfport Energy Corp (GPOR), AMC Entertainment Holdings, Inc (AMC), and Cars.com, Inc (CARS) were among the top detractors. OBVLX Holdings
The portfolio turnover rates were 120% for the Global Opportunities Fund, 112% for the Micro-Cap Fund, 142% for the Small-Cap Opportunities Fund, 68% for the Small-Cap Value Fund, 184% for the China Opportunities Fund, 142% for the International Opportunities Fund and 153% for the Emerging Markets Fund. The net expense ratios for the investor share class of the Funds were 1.55% for Global Opportunities, 1.58% for Micro-Cap, 1.55% for Small-Cap Value, 1.55% for Small-Cap Opportunities, 1.84% 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, 2019 unaudited data. Expense ratio is the total net annualized fund operating expense ratio. The expense ratio gross of expense offset arrangements and expense reimbursements was 1.58%, 1.33%, 1.60%, 1.34%, 2.22%, 1.97%, 1.74%, 1.49%, 1.95%, 1.70%,1.82%, 3.86% and 3.61% 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, 2020 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 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. 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.