April 15, 2022

Dear Fellow Oberweis Funds Shareholder,

FIRST QUARTER PERFORMANCE

After an excellent year in 2021, risk-aversion rose markedly in the first quarter of 2022. Volatility and investor uncertainty increased amid rapidly rising interest rates, exceptionally strong inflation, the migration of the Covid Omicron variant to China, and Russia’s aggressive attack on Ukraine. During periods of rising fear, equities broadly tend to decline but particularly so for growth companies, whose valuations are usually predicated on earnings growth that can stretch many years into the future. Also problematic is that higher interest rates increase the time value of money, which can negatively affect growth stock valuations, since growth equities are expected to derive a larger share of their cash flows further out into the future.

Against this backdrop, global equities sharply declined, especially among small-cap growth stocks, creating a headwind for our growth-focused fund family. The environment was particularly challenging for our international funds, which all lagged their respective benchmarks during the quarter. The International Opportunities Fund returned -17.77% (versus -11.53% for the MSCI World ex-US SCG Net Index), the Global Opportunities Fund returned -19.01% (versus -6.25% for the MSCI AWCI Small-Cap), the China Opportunities Fund returned -26.06% (versus -14.19% for the MSCI China Net), and the Emerging Markets Fund returned -9.32% (versus -4.33% for the MSCI EM Small-Cap). Despite the difficult quarter, all of these funds have delivered returns net of fees ahead of their benchmarks over trailing three-, five- and ten-year periods (except for Emerging Markets Fund, which has only been around a little over three years but is well ahead of its benchmark both for the three-year period and since its inception on May 1, 2018).

Our U.S. funds deserve a special mention. Although they also declined this quarter, they fared very well relative to their benchmarks. After massively outperforming last year in a rising market environment, they are continuing to beat their benchmarks again this year in a down market. The Micro-Cap Fund return -8.47% compared to -13.71% for the Russell Micro-Cap Growth Index, and the Small-Cap Opportunities Fund returned -7.24% versus -12.63% for the Russell 2000 Growth Index. Consistent relative outperformance in both up and down markets is the goal of every fund manager. It can’t be expected in every period, but we are grateful for these favorable relative returns.

MARKET ENVIRONMENT

On the surface, there’s much to worry about. Small-cap growth stocks just finished a brutal quarter. War is raging in Ukraine. Inflation has soared at the fastest pace in more than 40 years and the plan to fight it – increasing interest rates — could push the economy into recession. All of this is true. Yet, to us, the current environment appears to offer an above-average opportunity for the niche asset classes covered by our funds. Here’s why:

• Uncertain macroeconomic conditions are only relevant for us to the degree that they affect the underlying operating businesses owned by funds. For highly innovative small-cap growth businesses, the economic cycle tends to be not as important as the company’s ability to launch disruptive products and take market share from competitors. Of course, even some innovative businesses are sensitive to economic fluctuations, but those cycles are unlikely to determine their long-term fate.

• Cheaper valuations! Uncertain times tend to drive down Price/Earnings (P/E) multiples, and good growth businesses are substantially cheaper today than three months ago. For example, our China fund – which faces real risks from COVID shutdowns to U.S.-China geopolitical tensions to a political environment that is far less friendly to investors – trades for an average P/E that is 44% less than last quarter’s average. Do the incremental risks in China really justify that type of discount? We think not. Pervasive pessimism is not unique to Chinese equities; in fact, we see it across all of our markets, which leaves us much more optimistic about future returns than usual. When fear is high, market participants tend to overly discount risk, and buying small-cap growth stocks in very uncertain times has historically yielded above-average future results, even though it can be emotionally difficult to pull the trigger. Not only do the small-cap stocks in our funds seem cheap on an absolute basis, but we believe they also compare favorably – both in the U.S. and in international markets – with U.S. large-cap growth stocks on a relative basis. U.S. large-cap growth stocks, after a great run over the last decade, remain expensive relative to history, potentially setting the stage for a rotation to U.S. small-cap and/or international equities. While we cannot predict market direction over the short-term and cannot predict the bottom, we do believe today’s extreme fear increases the probability of above-average returns over the next five years.

VALUATION RECAP

As of March 31, 2022, the price/earnings (P/E) ratio was 16.2 times for the Global Opportunities Fund (versus 21.1 last quarter), 13.5 times for the Small-Cap Opportunities Fund (versus 17.0 last quarter), 12.8 times for the Micro-Cap Fund (versus 16.2 last quarter), 18.6 times for the International Opportunities Fund (versus 26.1 last quarter), 16.3 times for the China Opportunities Fund (versus 29.0 last quarter), and 18.2 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 March 31, 2022, the weighted-average market capitalization was $4.9 billion for the Global Opportunities Fund, $3.6 billion for the Small-Cap Opportunities Fund, $1.4 billion for the Micro-Cap Fund, $4.9 billion for the International Opportunities Fund, $3.5 billion for the Emerging Markets Fund, and $42.4 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.

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, 2021 data. Expense ratio is the total net annualized fund operating expense ratio. The expense ratio gross of expense offset arrangements and expense reimbursements was 1.38%, 1.13%, 1.48%, 1.23%, 1.59%, 1.34%, 1.87%, 1.62%,1.77%, 2.80% and 2.55% 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, 2023 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, 2022 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 1.25%, 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 1.00%, 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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