July 13, 2018
Dear Fellow Oberweis Funds Shareholder:
YEAR-TO-DATE PERFORMANCE THROUGH JUNE 30, 2018
In the first half of 2018, small-cap equity returns varied considerably depending on geography. US small stocks fared well, with the Russell 2000 Index returning 7.66%. However, international small-cap stocks did not move materially in the first half, with the MSCI World ex-US Small-Cap Index returning -1.44%. Both here and abroad, small-cap growth stocks outperformed their value brethren. Developed markets beat emerging ones. In the US, the Russell 2000 Growth Index (+9.70%) outperformed the Russell 2000 Value Index (+5.44%) by 426 bps. In June, trade war worries reversed a rally earlier this year in Chinese equities. For the first six months, the MSCI China Index had an overall return of -1.75%. Emerging markets were the most challenging area so far this year, with the MSCI Emerging Markets Small-Cap Index returning -8.45% in the first half.
Performance of the Oberweis Funds was similarly stratified by geography. The Micro-Cap and Small-Cap Opportunities funds returned 10.19% and 8.48%, respectively. The Small-Cap Value Fund returned 3.04%. Among our foreign funds, the International Opportunities Fund returned 0.16% (versus 1.04% for the MSCI World ex-US SCG Index). The China Opportunities Fund returned 1.32% (compared to -0.97% for the MSCI Zhong Hua Small-Cap Growth Index). The Global Opportunities Fund, formerly known as the Emerging Growth Fund, returned -0.36% (versus 1.46% for the MSCI ACWI Small-Cap Index).
Our newest fund, the Oberweis Emerging Markets Fund (ticker: OBEMX), commenced operations on May 1st of this year. This fund is managed by the new Oberweis Emerging Markets Team, led by Mark Weber, who has years of experience investing in emerging and international markets. In this partial quarter, the new fund returned -3.75%, a slow start but considerably ahead of its benchmark MSCI Emerging Markets Small Cap Index, which was down 6.56% during the same period (for an outperformance of 281 bps in the fund’s first six weeks).
This year’s relatively minor change in global stock prices (the MSCI World Index returned 0.43%) masks a period of rising uncertainty and greater volatility. On one hand, the world’s economy is experiencing a steady expansion, particularly in the US, where pro-business policies have helped to boost earnings expectations. However, the case for continued global growth is not as strong. Tighter monetary policy in the US hit emerging market currencies, especially those with an abundance of dollar-denominated debt. Industrial activity in China appears to be decelerating and countries such as Germany and Japan remain vulnerable to industrial slowdown in China.
Contentious trade negotiations between the US and China illustrate that the risks of a global trade war are rising. While Trump’s new tariffs (on $34 billion of goods at the time of this writing, with tariffs on $200 billion more slated for the end of August) are not unmanageable, a ratcheting up of the stakes with tit-for-tat retaliation will eventually weigh on global growth. It’s difficult to assess the odds of cooler heads prevailing in a “grand trade compromise” versus the odds of a full-fledged trade war. As it stands today, the market still mostly assumes the former case, although investors in non-US markets appear to be discounting rising odds of the latter. In short, global growth remains positive, but the risks of a slowdown are rising, mostly due to rising trade tensions and tighter US monetary policy.
Despite the difficult-to-predict macro challenges confronting investors, our process is, at its core, focused on individual companies. Our team utilizes a bottom-up fundamental investment process to uncover idiosyncratic situations in which positive fundamental changes appear to still be underestimated by the market. In many cases, it can take several quarters for such misunderstandings to correct. In the short-term, we fully expect our portfolio to be influenced by unpredictable Trump tweets and market noise. But in the long-term, the success of our strategy will primarily be determined by our ability to identify individual stocks whose true earnings potential is misunderstood and underestimated by other market participants.
With respect to our growth-oriented funds, the average forward P/E ratio as of June 30, 2018 was 16.0 times for the Global Opportunities Fund (versus 13.2 last quarter), 17.8 times for the Small-Cap Opportunities Fund (versus 17.5 last quarter), 15.0 times for the Micro-Cap Fund (versus 18.9 last quarter), 13.4 times for the International Opportunities Fund (versus 13.3 last quarter), and 18.7 times for the China Opportunities Fund (versus 18.2 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 13.4 times (versus 16.3 last quarter). As of June 30, 2018, the weighted average market capitalization was $4.2 billion for the Global Opportunities Fund, $2.4 billion for the Small-Cap Opportunities Fund, $893 million for the Micro-Cap Fund, $2.6 billion for the Small-Cap Value Fund, $4.2 billion for the International Opportunities Fund, and $82.2 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 $8.9 billion).
We appreciate your investment in The Oberweis Funds and are grateful for the trust you have shown us with your valuable assets. If you have any questions about your account, please contact shareholder services at (800) 245-7311.
1 Institutional 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.
2 Life 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.
3 December 31, 2017 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%, 1.20%, 1.58%, 1.32%, 2.25%, 1.94%, 1.35%, 1.92%, 1.60%, and 1.79% for OBEGX, OBGIX, OBMCX, OMCIX, OBSOX, OBSIX, OBVLX, OBCHX, OCHIX and OBIOX, 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, 2019 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. The annual expense ratio will reflect a blend of both the old and new expense reimbursement arrangements in effect for 2017.
4 On 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 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.