OBERWEIS INTERNATIONAL OPPORTUNITIES INSTITUTIONAL FUND (OBIIX)
OBERWEIS FOCUSED INTERNATIONAL GROWTH FUND (OFIGX)

August 1, 2022

Dear Fellow Shareholder:

YEAR-TO-DATE PERFORMANCE THROUGH JUNE 30, 2022

For the first six months of 2022, the Oberweis International Opportunities Institutional fund returned -36.38% vs. -29.55% for the benchmark. The Oberweis Focused International Growth Fund, which launched on April 1st, 2022, returned -21.7% vs. -14.51% for the MSCI EAFE Index. While we are not pleased with these six-month returns, market corrections and benchmark dispersion over the short-term are to be expected, particularly in market environments similar to that experienced so far this year, when market movements seem to have been driven far more by macroeconomic worries and negative market sentiment rather than by idiosyncratic company specific fundamentals.

MARKET ENVIRONMENT

Concerns over inflation, and more specifically whether central banks can bring the rate of inflation down without incurring a significant economic slowdown, continued to impact global equities over the quarter. Core sticky-price CPI, a key measure of inflation for the FOMC, continued to increase over the quarter, rising to 7.5% on an annualized basis in May, following a 7.1% increase in April. It now stands at its highest level in 30 years. The issues which we have highlighted in recent quarterly letters remain central to the current investment environment with supply-side limitations placing upward pressure on prices. In particular, the labor market is still historically tight while supply chain cost pressures have yet to diminish in a meaningful manner. Of course, the war in Ukraine has also been a supply shock, with expectations for Russian oil production in 2023 downgraded by almost 2.5 million barrels per day. This potential missing supply approximates to current expectations for worldwide consumption growth. Perhaps the most important question in the equity markets today is whether the Fed is able to align demand with supply without bringing about a US and global recession.

Whether the US and developed markets end up in recession is difficult to predict. Given the unprecedented path to the current point, the economic unknowns today in our view are truly unknown, and therefore making bold and confident short-term predictions on the economic cycle in one direction or the other strikes us as premature. What is clear is that a lot of disinflation is now needed to reach the Fed’s target rate, and the US central bank faces a sizable challenge to bring it back in line. We await to see the economic consequences of monetary policy decisions as well as the inflation data.

Should, for example, sticky price CPI start to roll over without meaningful economic damage, then that could represent an inflection point higher for the stock-market. Although many pundits are ruling out this scenario with great certainty, we would not discount it: before this quarter’s drop of >15%, the S&P had experienced such a quarterly drop of >15% eight times since WWII, and 100% of the time the S&P was higher one year later, with an average return of +26.07%.

What could cause the sticky price CPI to roll over? A number of commodities have started to move lower, potentially exerting downward pressure on inflation expectations. The monetary tightening that has occurred so far will slow down housing activity over the coming quarters, if it has not already – starts and sales showed weakness in May and inventories are increasing. The run-up in prices should decelerate or to some degree even reverse. Weaker housing activity implies less construction of new homes, less spending on home improvements, fewer commissions paid to brokers, less liquidity from remortgaging. Such factors are likely to soften aggregate demand but do not by themselves necessitate a housing market crash or a recession.

VALUATION RECAP

Valuations for developed market equities outside of the US remain below-average. For example, consider the chart below, which shows Free Cash Flow Yields for non-US developed market small-cap stocks. The charts that free cash flow yields for this asset class are near a historically high level. Absent either a severe deterioration in the economy or spike higher in bond yields, we consider this a provocative valuation that has already priced in a lot of bad news. According to a recent JP Morgan note: “Positioning and sentiment of investors is at multi-decade lows. So it is not that we think that the world and economies are in great shape, but just that an average investor expects an economic disaster, and if that does not materialize risky asset classes could recover most of their losses from the first half.” Historically, unusually high bearish sentiment and elevated levels of fear tend to be followed by above-average market returns. Most people are aware that investor sentiment is often an excellent contrarian indicator and that after investors have been the gloomiest, markets frequently have the strongest performance.

Valuation spreads, an indicator of intra-market disparities, sit at above-average historical levels but in our judgement not to a degree that compels big sector bets. This argues for a relatively balanced portfolio, which is how the strategy is positioned. Our primary focus continues to be to own strong companies with great underlying fundamentals, balance sheets and cash flows. In that regard, our portfolio companies had in aggregate an excellent set of earnings reports with strong underlying fundamentals. We are confident that whether the market goes up or down from here in the short-term, on a relative basis, the underlying fundamentals of our portfolio companies will continue to do well.

On behalf of the entire team at Oberweis, thank you for investing in the Oberweis Funds. If you have any questions about your account, please contact shareholder services at (800) 245-7311.

Sincerely,

sigs

James W. Oberweis, CFA – President                            Ralf Scherschmidt – 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.

*Life of Fund returns are from commencement of operations on 03/10/14 for OBIIX and 4/1/22 for OFIGX.

** December 31, 2021. The gross expense ratio for OFIGX is based on estimated amounts for the current fiscal year. Oberweis Asset Management, Inc. (OAM), the Fund’s investment advisor is contractually obligated through April 30, 2023 to reduce its management fees or reimburse OBIIX and OFIGX to the extent that total ordinary operating expenses exceed in any one year 1.10% and 0.95% expressed as a percentage of each Fund’s average daily net assets, 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 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.


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