October 15, 2021

Dear Fellow Oberweis Funds Shareholder,

YEAR-TO-DATE PERFORMANCE THROUGH SEPTEMBER 30, 2021

Despite a flurry of news headlines and elevated volatility in September, the third quarter was a period of muted net returns. All of our funds except China ended the quarter with less than a 5% gain or loss. The International Opportunities Fund returned -0.60% versus 1.31% for the MSCI World ex-US SCG Index. Emerging Markets returned -4.99% versus -2.16% for the MSCI EM Small-Cap Index. Global Opportunities returned -2.12% versus -1.52% for the MSCI ACWI Small-Cap Index. I’m pleased to report that all of our other funds exhibited significant outperformance against their benchmarks in the quarter, even though the absolute change in share price was reasonably small. Specifically, the Micro-Cap Fund returned -3.56% versus -9.09% for the Russell Micro-Cap Growth Index. The Small-Cap Opportunities Fund returned +3.18% versus -5.65% for the Russell 2000 Growth Index. China, which was our most challenging geography this quarter in terms of absolute return, was our best in terms of relative performance. The China Fund returned -9.20% versus -18.17% for the MSCI China Index, for an outperformance of 897 basis points.

Year-to-date, returns in all funds except China remain positive and four of our six funds are tracking far ahead of their benchmarks. Micro-Cap and Small-Cap have had an exceptionally positive year; the Micro-Cap Fund returned 34.19% versus 9.61% for Russell Micro-Cap Growth Index, while the Small-Cap Fund returned 29.58% versus 2.82% for the Russell 2000 Growth Index. The Global Opportunities Fund gained 17.69% versus 13.68% for the MSCI ACWI Small-Cap. International Opportunities returned 5.52% versus 8.77% for the MSCI World ex-US SCG Index. Emerging Markets returned 10.28% versus 17.20% for the MSCI EM Small-Cap. The China Fund returned -4.11% versus -16.67% for the MSCI China Index.

MARKET ENVIRONMENT

Through August, investors’ love affair with global equities seemed quite strong. It is debatable whether the affection stemmed from reopening euphoria or a less ebullient feeling of “nowhere else to go.” By September, investors seemed less enamored. Excitement for a post-Covid boom was tempered by inflation fears, the potential for tighter monetary policy at the Federal Reserve, sporadic Covid shutdowns and an extremely tight labor environment, resulting in supply chain bottlenecks and product shortages.

We believe the current labor market and supply chain dislocations will prove temporary. We are less confident that inflation will prove transitory in the near term, but runaway inflation in the long-term is not our base case. All things considered, we are positive on the long-term opportunity set for equities and, in particular, for our investment strategies, which tend to thrive in periods of change. Covid-19 has resulted in one of the most significant changes in consumption patterns in our lives, accelerating opportunities for innovators to unsettle markets and grow market share. For example, as a result of Covid-19, e-commerce adoption is happening much faster than was previously anticipated. Covid-19 greatly increased the propensity of consumers to try food delivery and food preparation services. Video conferencing has become a completely acceptable way of conducting business meetings. Despite some recognition of changing consumption patterns by many investors, we believe that the degree, duration and derivative opportunities are all still being underestimated. For example, as a derivative of food delivery, demand for robots used by supermarkets to automatically pack groceries has exploded. We specialize in finding companies that are quick to adapt and profit from significant change, and we believe that the changes in global consumption are far from over.

While change often creates opportunities, it can also create headaches, as was the case in China this past quarter. In just a few short months, Beijing launched unprecedented regulations in multiple areas, attacking after-school tutoring, big internet companies, fintech, data security and cryptocurrency. All of the new policies are focused on three main themes – common prosperity, financial deleveraging and economic self-sufficiency. Unfortunately, none of them are conducive to promoting economic growth. Additionally, the default of property giant Evergrande drove fears of possible contagion, as the government declined to rescue a company previously believed to be “too big to fail.” Although increased regulation and less favorable government policies will yield enduring headwinds for China, it remains a huge market and we are continuing to find ideas positioned to thrive even in the face of a more difficult regulatory environment. We believe that the idiosyncratic nature of many of our positions helps to explain the strong outperformance of the fund this year when compared to its benchmark.

In terms of valuations, our research indicates a significant disparity in price/earnings ratios among different types of equities. While more reasonable than at the end of the first quarter, the P/E on the S&P 500 still remains considerably higher than average. However, when one looks at equities other than US large-caps, a different story emerges. For example, consider small-cap growth stocks, such as those owned in our Micro-Cap and Small-Cap funds. Since 2003, we have tracked the median P/E of smaller-cap stocks with growth rates of 30% or more. Today that median P/E is noticeably below its longer-term average. Similarly, international stocks appear inexpensive relative to the S&P 500. According to JP Morgan, the forward P/E on US stocks relative to the rest of the world is close to a 20-year high. China is particularly cheap on a P/E basis, although this discount may be appropriate in light of the increased regulatory environment. While no one can predict the future, we believe that the relatively cheaper valuations of small-caps and international stocks increases the odds of favorable returns relative to the S&P 500 in the years to come.

VALUATION RECAP

As of September 30, 2021, the price/earnings (P/E) ratio was 19.0 times for the Global Opportunities Fund (versus 25.1 last quarter), 14.1 times for the Small-Cap Opportunities Fund (versus 17.0 last quarter), 14.2 times for the Micro-Cap Fund (versus 17.8 last quarter), 24.7 times for the International Opportunities Fund (versus 25.3 last quarter), 28.5 times for the China Opportunities Fund (versus 28.9 last quarter), and 26.3 times for the Emerging Markets Fund (versus 26.1 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 September 30, 2021, the weighted-average market capitalization was $6.8 billion for the Global Opportunities Fund, $3.7 billion for the Small-Cap Opportunities Fund, $1.1 billion for the Micro-Cap Fund, $4.5 billion for the International Opportunities Fund, $4.1 billion for the Emerging Markets Fund, and $21.0 billion for the China Opportunities Fund.

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

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.

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.

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, 2022 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.

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.

 


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