October 19, 2022
Dear Fellow Oberweis Funds Shareholder,
After a rally in the first half of the third quarter, equity markets slumped in the second half, netting an overall decline both in the US and internationally. Inflation was once again the primary culprit. The Federal Reserve, the European Central Bank, and the Bank of England reaffirmed their commitment to increase interest rates to curb aggregate demand and fight inflation. Stock prices dropped in response to rising interest rates and increased expectations for weaker economic growth ahead. US small- and micro-cap growth stocks fared well, relatively speaking, with modest but positive gains for the quarter. On the other hand, emerging market equities fell sharply. China underperformed by a wide margin amid a difficult property market, continued Covid-19 lockdowns, and rising tensions with Taiwan. Developed Eurozone countries fared better than emerging markets but worse than the US. Besides lackluster economic growth, western Europe faces an energy crisis, as its dependence on Russia for natural gas affords Russia an effective weapon to punish those who oppose its invasion of Ukraine.
Overall, this investment climate has been challenging. However, as we look ahead, there is reason for optimism. Ultimately, our ability to generate returns is predicated on the power of our investment companies to generate cash flows, weighed against the price required to acquire those ownership stakes. Without a doubt, some of our holdings will experience slower growth in the near term as the economy slows. However, slower near-term growth offset by a much lower cost of investment may be a return-enhancing tradeoff. Those of you who have invested with us for a long time will surely remember that some of our best years have followed periods of high risk aversion. Our experience suggests that we are in a similar environment today. Valuations are usually cheapest in scary and uncertain times, and we think today’s uncertainty may prove retrospectively to be an above-average buying opportunity. 2008 seemed like the apocalypse but ended up being an incredibly wonderful time to invest in our strategies. US small-caps also soared coming out of the awful 1973-1974 bear market. While no one can predict the future, we believe that there is an above-average opportunity to generate favorable returns for investments made today, when fear is high and valuations are low.
We also believe that the current climate favors active management. For much of the last decade, all one needed to do was to buy an index fund and hold it, as over time virtually everything appreciated. That paradigm, in our view, is dead or at a minimum sub-optimal for small-caps. Investors will likely need to focus much more on stock-level fundamentals and stock-level valuations. Active managers are well suited to search the bear market’s rubble for misunderstood and under-valued small-caps. That is what our team does best, and as hard as it may be to see today, we believe the opportunity ahead is materially better than average.
THIRD QUARTER PERFORMANCE
The Micro-Cap Fund returned 2.39% versus 2.14% for the Russell Micro-Cap Growth Index. The Small-Cap Opportunities Fund returned 4.13% versus 0.24% for the Russell 2000 Growth Index. Among our international funds, the International Opportunities Fund returned -12.40% versus -8.80% for the MSCI World ex-US Small-Cap Growth Index. The China Opportunities Fund returned -23.64% versus -22.50% for the MSCI China Index, and the Emerging Markets Fund returned -10.78% versus -5.25% for the MSCI EM Small-Cap Index. The Global Opportunities Fund returned -0.70% versus -5.27% for the MSCI ACWI Small-Cap Index. The Focused International Growth Fund returned -9.45% versus -9.36% for the MSCI EAFE Index.
P/E valuations for many of the funds remain significantly lower than average. As of September 30, 2022, the weighted-average price/earnings (P/E) ratio was 13.0 times for the Global Opportunities Fund (versus 13.0 last quarter), 11.5 times for the Small-Cap Opportunities Fund (versus 10.7 last quarter), 10.5 times for the Micro-Cap Fund (versus 10.0 last quarter), 12.9 times for the International Opportunities Fund (versus 13.9 last quarter), 18.6 times for the China Opportunities Fund (versus 24.6 last quarter), 17.4 times for the Emerging Markets Fund (versus 14.3 times last quarter), and 13.5 for the Focused International Growth Fund (versus 14.1 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 September 30, 2022, the weighted-average market capitalization was $3.5 billion for the Global Opportunities Fund, $3.1 billion for the Small-Cap Opportunities Fund, $1.2 billion for the Micro-Cap Fund, $3.6 billion for the International Opportunities Fund, $3.1 billion for the Emerging Markets Fund, $26.1 billion for the China Opportunities Fund, and $92.4 for the Focused International Growth Fund.
Thank you for investing with us in The Oberweis Funds.
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, 05/01/18 for the Emerging Markets Fund Share Classes and 04/01/22 for the Focused Growth International Fund.
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, OIEMX and OFIGX 1.00%, 1.99%,1.50% and 0.95%, 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 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.
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.