July 19, 2024
Dear Fellow Oberweis Funds Shareholder,
PERFORMANCE FOR THE SIX MONTHS ENDING JUNE 30, 2024
I’m pleased to report overall excellent results for the first half. Our domestically-focused Micro-Cap Fund and Small-Cap Opportunities Fund materially outperformed their benchmarks. Small-Cap Opportunities gained 14.92% versus 9.14% for the Russell 2000 Growth Index. Micro-Cap returned 10.10% compared to 0.67% for the Russell Microcap Growth Index. Our developed-market international funds also sharply outperformed their respective indices. Focused International Growth returned 12.31% versus 5.34% for the MSCI EAFE Index, while International Opportunities returned 4.82% compared to 0.94% for the MSCI World ex-USA Small Cap Growth Index (net). Global Opportunities gained 5.79% versus 2.29% for the MSCI ACWI Small Cap Index. The sole fund to underperform in the first half was Emerging Markets, which gained 1.31% versus 7.04% for the MSCI EM Small Cap Index. An underweight to India, where we are struggling to find undervalued investment opportunities, hurt fund performance in the first half. The China Opportunities Fund modestly outperformed with a gain of 5.79% compared to 4.74% for the MSCI China Index.
MARKET ENVIRONMENT
U.S. large-cap stocks again outperformed small-caps in the first half, with the Russell 1000 (+14.24%) beating the Russell 2000 (1.73%) by 1,251 basis points year-to-date. Growth stocks beat value stocks, with the Russell 2000 Growth Index beating the Russell 2000 Value Index by 529 bps in the trailing six-month period. Despite the good performance for our U.S. funds, small-cap as an asset class has been out-of-favor for eight years now, ranking this cycle as one of the longest and most extreme in history. Three examples to illustrate: the top three names in the S&P 500 are now larger than the entire Russell 2000 Index, small-caps comprise less than 4% of the U.S. equity market (the lowest level since the 1930’s), and the relative valuation disparity between large-caps and small-caps is the largest since the late 1990’s. Style cycles can shift rapidly, and we believe that those who invest in small-caps after a prolonged large-cap cycle are likely to be well-rewarded. At cyclical extremes, we have found that the risk/reward ratio of investing in the out-of-favor asset class becomes highly favorable. In short, we believe now is the time to buy small-cap stocks and anticipate that small-cap stocks are likely to materially outperform large-caps stock over the next five years. We have heard of many folks “waiting” for the first interest rate cut to make a move (as small-caps tend to soar amid falling rates). That may be a mistake. Savvy investors act in anticipation of catalysts rather than in response to them.
The economic backdrop has dimmed somewhat but is still positive. The Atlanta Fed projects U.S. GDP grew a tepid 1.5% in the second quarter, as rate hikes appear to be taking hold. Core PCE Inflation has moderated to the 2.6% range but whether it can approach the Fed’s 2% target remains to be seen. The American consumer, while less confident, is in good shape; they’re employed, enjoy a historically low debt-service ratio, and still have $600 billion of excess Covid savings. The federal government continues to spend stimulus money earmarked during Covid, providing economic support. The result is a Global Composite Purchasing Managers’ Index reading in the U.S. of 54.6 in June, signaling expansion. Readings were also above 50 in Japan, India, and most of Europe. The unemployment rate edged down in the Euro area and Australia, but increased slightly in the U.K., U.S. and Canada. In most developed markets, however, solid job growth, still-strong wage growth and falling headline inflation are supporting real income growth.
Emerging markets, particularly China, feel more difficult to predict. A strong U.S. dollar has kept a lid on EM stock prices, although at this point that is probably increasingly discounted in stock prices. Outside of India, EM valuations are considerably below-average and we are finding many interesting opportunities. China is a bit of a wildcard. Valuations are exceptionally low. Economic data has been mediocre but expectations were for even worse, which explains why stock prices rose in the first half. Still, we remain concerned about Sino-American relations, especially during an American election cycle where populist rhetoric for more anti-China policies is likely to be the norm.
VALUATION RECAP
As of June 30, 2024, the price/earnings (P/E) ratio was 18.9 times for the Global Opportunities Fund (versus 18.4 last quarter), 18.9 times for the Small-Cap Opportunities Fund (versus 17.7 last quarter), 15.1 times for the Micro-Cap Fund (versus 14.1 last quarter), 15.3 times for the International Opportunities Fund (versus 15.4 last quarter), 13.6 times for the China Opportunities Fund (versus 15.7 last quarter), 20.0 times for the Emerging Markets Fund (versus 15.3 times last quarter), and 16.7 times for the Focused International Growth Fund (versus 16.1 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 June 30, 2024, the weighted-average market capitalization was $5.9 billion for the Global Opportunities Fund, $6.3 billion for the Small-Cap Opportunities Fund, $1.8 billion for the Micro-Cap Fund, $6.0 billion for the International Opportunities Fund, $4.6 billion for the Emerging Markets Fund, $133.1 billion for the China Opportunities Fund, and $145.6 billion for the Focused International Growth Fund.
Thank you for investing with us in The Oberweis Funds.
Sincerely,
James W. Oberweis, CFA
President & Portfolio Manager
For current performance information, please visit www.oberweisfunds.com
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. Unusually high returns may not be sustainable. 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.
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, 2025 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, 2025 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% and 1.50% 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.
