OBERWEIS INTERNATIONAL OPPORTUNITIES
INSTITUTIONAL FUND (OBIIX)
August 16, 2018
SECOND QUARTER AND FIRST HALF OF 2018 IN REVIEW
Equity prices for international small-caps did not move materially in the first half of 2018. The Oberweis International Opportunities Institutional Fund returned 0.23% in the first half of 2018, while the MSCI World ex-USA Small-Cap Growth Index (the “Benchmark”) returned 1.04%. Although the Fund outperformed its benchmark in the first quarter, stock selection in the technology sector and the Japan region detracted from performance in the second quarter, when the Fund returned -1.16% versus 0.27% for the Benchmark.
This year’s relatively minor change in stock prices masks a period of rising uncertainty and greater volatility. Contentious trade negotiations between the US and China illustrate that the risks of a global trade war are rising. A ratcheting up of the stakes with tit-for-tat retaliation will likely weigh on global growth. It is difficult to assess the odds of cooler heads prevailing in a “grand trade compromise” versus the odds of a full-fledged trade war. As it stands today, the market still mostly assumes the former case, although investors appear to be discounting rising odds of the latter.
European investors once again struggled with rising political uncertainty. This time Italy came to the forefront with a political newcomer taking the Prime Minister position and once again creating uncertainty over the future of the Euro Zone. Tighter monetary policy in the US hit emerging market currencies, with the MSCI Emerging Markets Currency Index declining approximately 5.5% in the second quarter. Industrial activity in China appears to be decelerating and countries such as Germany and Japan remain vulnerable to an industrial slowdown in China. Lastly, despite an increase in output from OPEC, oil continued its move higher, rising slightly more than 14%. Energy was a bright spot for us during the quarter, being our most positive contributing sector. In short, global growth remains positive, but the risks of a slowdown are rising, mostly due to rising trade tensions and tighter US monetary policy.
While macro factors such as global trade may rule the day over shorter time periods, we remain steadfast in our focus on investing in individual businesses in which we believe something misunderstood or under-estimated is likely to drive earnings growth in excess of consensus expectations.
Our outlook continues to be mixed. On one hand, the global economy continues to expand, albeit at a slower pace outside of the US. During the second quarter our team found a large number of new names experiencing positive earnings surprises and revisions. As a result, we added an above-average number of new ideas to the portfolio. In the past, we have observed that periods yielding an unusually high number of new positions can anticipate periods of favorable performance for our strategy.
On the other hand, however, we are incrementally more concerned about unpredictable US trade policy and the risk of a trade war. Globalization has been one of the drivers of margin expansion over the past two decades and we worry about the potential for margin contraction in the case of a trade war. A recent report by Empirical Research Partners (ERP) notes that since China joined the World Trade Organization in 2001, manufacturers’ net margins have nearly doubled with the bulk of the margin improvement coming from the benefits of globalization. Protectionist trade policies have the potential to halt or reverse those margins gains and depress corporate earnings. As every economic student remembers, tariffs have historically not worked well toward either improving trade deficits or stimulating growth. While rationality would suggest the trade dispute should be resolved with a compromise and renegotiated terms, it is difficult to be confident that the U.S. and China will avoid a full-fledged trade war. More importantly, it also appears to us that global markets may be underestimating the increased probability of an adverse outcome. As a result, we are underweight economically sensitive areas like materials and industrials, believing these sectors’ earnings remain most at risk from the ongoing trade developments.
At the end of the second half, the portfolio was invested in 94 stocks in 17 countries. Our top five country weightings (portfolio weighting versus the MSCI World ex-US Small Cap Growth Index) at the end of the quarter were Japan (28.4% vs. 28.1%), the United Kingdom (16.8% vs. 16.6%), France (6.6% vs. 4.1%), Australia (6.4% vs. 6.4%), and Switzerland (5.5% vs. 4.5%). On a sector basis, the portfolio is overweight financials (12.9% vs. 5.9%) and underweight health care (5.6% vs. 11.0%).
We appreciate your investment in The Oberweis International Opportunities Institutional Fund and are grateful for the trust you have shown us. If you have any questions, please contact Brian Lee (institutional clients) or John Collins (advisory accounts) at (800) 323-6166. Thank you for investing with us in The Oberweis Funds.
James W. Oberweis, CFA Ralf Scherschmidt
President Portfolio Manager
*Life of Fund returns are from commencement of operations on 03/10/14 for the Fund.
** Expense ratio is the total net annualized fund operating expense ratio as of 12/31/17. The expense ratio gross of expense offset arrangements and expense reimbursement was 1.15% for OBIIX. Oberweis Asset Management, Inc., (OAM), the Fund’s investment advisor, is contractually obligated to reduce its management fees or reimburse OBIIX to the extent that total ordinary operating expenses exceed in any one year 1.10% expressed as a percentage of the Fund’s average daily net assets, respectively. The annual expense ratio will reflect a blend of both the old and new expense reimbursement arrangements in effect for 2017.
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 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.