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October 12, 2018

Dear Fellow Oberweis Funds Shareholder:

Global market volatility returned in the third quarter and accelerated in the first two weeks of the fourth quarter. During such periods, our job as your investment manager becomes all the more important – to find companies around the globe which will have the ability to deliver significantly higher profits than the market expects. Our ability to generate alpha typically improves prospectively following market declines, especially when volatility becomes correlated to macroeconomic events rather than individual stock fundamentals. In short, we look to buy when fear is high, valuations are low and stock prices become disconnected with individual company performance and more correlated to investor fear. Nobody knows what the future will bring, but it’s starting to resemble one of those times, especially in emerging markets like China.

YEAR-TO-DATE PERFORMANCE THROUGH SEPTEMBER 30, 2018

Much of 2018 has been dominated by uncertainty over global trade as the Trump administration pressed forward with demands to revise trade agreements with many key trading partners. While politics and trade fears continue to pressure foreign equities, U.S. economic growth and equity prices have remained quite strong. As one might expect, this led to a divergence in performance between our U.S. and international funds. International small-cap growth stocks trailed those in the U.S. by 690 basis points (bps) in 3Q and 1,612 bps for the first nine months of 2018#, generally attributable to trade concerns, stronger U.S. economic growth, an appreciating U.S. dollar, and rising U.S. interest rates. Emerging markets equities suffered the most. Higher U.S. interest rates can cause foreign currency depreciation, while both oil prices and a meaningful slice of emerging market debt is denominated in U.S. dollars. In the third quarter, the MSCI Emerging Markets Small Cap Growth Index significantly underperformed both U.S. and developed international market small cap growth stocks. The big question is whether the turmoil felt in emerging markets will spread to the developed world.

Among our US funds, the Micro-Cap Fund returned 6.11%* (versus 3.15% for the Russell Micro-Cap Growth Index) and the Small-Cap Opportunities Fund gained 8.83% (compared to 5.52% for the Russell 2000 Growth Index). Small-cap value stocks trailed growth stocks for the quarter, and the Small-Cap Value Fund returned a modest 1.15% (versus 1.60% for the Russell 2000 Value Index). Among the international funds, the International Opportunities Fund returned -2.82% (while the MSCI World ex-US Small-Cap Growth Index returned -1.38%). The Emerging Markets Fund was harmed by macro headwinds and returned -9.47% (versus -4.21% for the MSCI Emerging Markets Small-Cap Index). Trade tensions led to a -13.86% return in the China Opportunities Fund (compared to a -12.31% return for the MSCI Zhong Hua Small-Cap Growth Index and -7.51% for the MSCI China Index). The Global Opportunities Fund, formerly known as the Emerging Growth Fund, returned -1.49% (versus 1.36% for the MSCI ACWI Small-Cap Index).

OUTLOOK

Two main questions will shape equity returns in the months to come. First, will the trade tensions between China and the United States become exacerbated or move closer to amicable agreement? Secondly, how will the economy (both here and abroad) handle rising interest rates worldwide? Our views may be less pessimistic than consensus expectations. In our view, the market is now expecting a prolonged trade war with China. One prominent global investment bank suggested that a full-blown trade war had become “their new base case scenario for 2019.” While far from guaranteed, we believe that a trade deal with China is still a reasonable possibility in the next six months. If it happens, it would be a material and unexpected surprise for equity prices, especially in China. And if not, it may not be too far off from what the market already expects. On interest rates, we believe that the base case in the U.S. calls for continued growth, although the rate of economic growth may moderate a bit. Overleveraged businesses may well become caught in a pinch, especially in emerging markets where dollar-denominated debt is becoming increasingly costly against a strong dollar. That said, the consequences will not be equal for all businesses, while EM equity returns reflect indiscriminate punishment. When MOST emerging market stocks have participated in the decline – whether overleveraged or not, whether stuck with dollar-denominated debt or not – some EM stocks have disconnected negatively from underlying company fundamentals, creating numerous investment opportunities. These are environments where stock selection skill can really make a difference. When markets react indiscriminately toward countries and sectors without digging into the weeds at the individual company level, a clever analyst may have the opportunity to add more alpha than would normally be possible.

VALUATION RECAP

With respect to our growth-oriented funds, the average forward P/E ratio as of September 30, 2018 was 15.7 times for the Global Opportunities Fund (versus 16.0 last quarter), 18.9 times for the Small-Cap Opportunities Fund (versus 17.8 last quarter), 14.9 times for the Micro-Cap Fund (versus 15.0 last quarter), 15.6 times for the International Opportunities Fund (versus 13.4 last quarter), 11.8 times for the China Opportunities Fund (versus 18.7 last quarter), and 16.2 times for the Emerging Markets Fund (versus 14.8 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 13.9 times (versus 13.4 last quarter). As of September 30, 2018, the weighted average market capitalization was $3.5 billion for the Global Opportunities Fund, $2.6 billion for the Small-Cap Opportunities Fund, $1.1 billion for the Micro-Cap Fund, $2.7 billion for the Small-Cap Value Fund, $3.9 billion for the International Opportunities Fund, $63.3 billion for the China Opportunities Fund, and $2.0 billion for the Emerging Markets Fund. Note the China Opportunities Fund’s market cap is skewed upward due to two mega-cap holdings.

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.

Sincerely,
James Oberweis
James W. Oberweis, CFA
President & Portfolio Manager

# The MSCI World ex-USA Small-Cap Growth Index returned -1.38% in 3Q and -0.36% YTD, while the Russell 2000 Growth Index returned 5.52% in 3Q and 15.76% YTD.
* All Oberweis Fund returns referenced herein reflect Investor Class returns.


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.