I'm pleased to report strong performance for the Oberweis Funds for the first quarter of 2019, both in absolute terms and relative to their respective benchmarks. The International Opportunities Fund returned 15.62% versus 12.72% for the MSCI World ex-US Small-Cap Growth Index. The China Opportunities Fund returned 23.85% compared to 17.69% for the MSCI China Index. Our newest fund, the Emerging Markets Fund, returned 14.83% versus 7.76% for the MSCI EM Small-Cap Index. For the domestic funds, the Micro-Cap Fund and Small-Cap Opportunities Fund returned 21.23% and 16.99%, respectively, compared to 16.00% for the Russell Micro-Cap Growth and 17.14% for the Russell 2000 Growth Index. The Small-Cap Value Fund returned 12.47% versus 11.93% for the Russell 2000 Value Index. Our global fund, the Emerging Growth Fund, returned 14.78% versus 13.10% for the MSCI ACWI Small-Cap Index.
This quarter's global equity rally, which was especially positive for small-caps, was the opposite of last quarter. The rough symmetry in quarter-to-quarter equity returns seems fitting since the issues that roiled markets during the waning days of 2018 reversed as 2019 began. Last quarter's decline was mostly attributable to Federal Reserve Chairman Jerome Powell's indications that more interest rate hikes were coming and setbacks in U.S.-China trade negotiations. Since the beginning of this year, however, the Fed's tone changed markedly and Powell's speeches clearly indicated a dovish retreat. The January Federal Open Market Committee statement deleted language guiding for rate increases and instead preached patience. As a result, the market's expectations for interest rates embedded in Fed Funds Futures changed significantly, from anticipating a couple of increases this year to expecting no change or potentially even a cut in late 2019. Many developing country central banks followed suit, either holding off on hikes or, as in the case of India, trimming rates during the quarter. The prospect of easier monetary policy gave a green light to equity markets around the world.
Trade war rhetoric also shifted as 2019 got underway. Negotiations between the U.S. and China that looked troubled last year, with President Trump saying that China was "not ready" for a deal, turned a corner during the first quarter. Citing progress, the U.S. administration postponed new tariffs and suggested, according to White House economic advisor Larry Kudlow, that the two sides were close to "a remarkable historic deal." Easing trade tensions were a relief to equity markets globally, but especially in China. After falling almost 19% during 2018, the MSCI China Index climbed more than 17% during the quarter. However, a word of caution on trade deals: you can't bank on one until it's actually done. That said, it seems both countries have a lot at stake and adequate incentives to reach an agreement. While we are mindful of progress toward an accord, we have no particular information edge on the end product and therefore our focus remains on the micro: finding undervalued individual companies with growth prospects that we believe are under-estimated by the market.
Despite the first quarter equity surge, investor sentiment still seems biased toward skepticism. For example, the current State Street North American Investor Confidence Index (which measures investor confidence or risk appetite by analyzing the actual buying and selling patterns of institutional investors in North America) hit an all-time low in a dataset that dates to 1998 and includes two bubbles.
In our experience, market tops tend to occur when valuations are high and sentiment is over-flowing with optimism. While there are real risks to consider, we wonder if investors are again being too cautious, letting short-term focus and risk asymmetry distract from long-term compounding returns in equities. Certainly since the financial crisis, many investors have been too fearful, missing out on above-average opportunities (like late 2018) to invest in stocks. U.S. equity outflows in the fourth quarter were the worst experienced since the housing market imploded, and that trend continued throughout the first quarter of 2019. As of today, bearish views on equities still have much to prove given a more dovish Fed. While valuations are not as cheap as they were at the beginning of the year, prices remain in a range of "average". Average valuations, muted investor expectations, and low interest rates have not been historic markers of stock market peaks. In short, nobody can time the market, and by most metrics the present time seems to be a solidly average time to be buying stocks.
Looking forward, we think the inflection point is linked to the U.S.-China trade issue. We believe recent economic weakness and the resulting impact on corporate earnings in early 2019 is tied to the uncertainty regarding the path forward with trade. Discussions we've had with management teams suggest caution pending more trade clarity and, hopefully, a favorable outcome. A "win-win" deal between the two countries should result in a re-acceleration in economic growth, boosted by some pent-up demand as tentative management teams reverse course. A negative outcome that leads to additional protectionist measures could very well tip the global economy into recession and throw a wet blanket on equities until the smoke clears. We still believe there is ample motivation for both countries to take the high road.
While the winds of change can swirl in the near-term, our bottom-up investment strategies focus on exploiting academically documented inefficiencies worldwide. In our growth funds, we look for companies where a transformative change appears to be underestimated by other investors, hopefully leading to earnings growth rates that exceed expectations. In our small-cap value fund, we look for behavioral signaling (such as insider buying and corporate repurchases) hinting that management thinks the business is worth more than the market. Over time, we believe that a portfolio of idiosyncratic ideas that are in some way misunderstood has the potential to outperform the market, even though we fully expect that macro events will influence short-term results.
With respect to our growth-oriented funds, the average forward P/E ratio as of March 31, 2019 was 16.3 times for the Global Opportunities Fund (versus 16.0 last quarter), 15.7 times for the Small-Cap Opportunities Fund (versus 15.8 last quarter), 12.9 times for the Micro-Cap Fund (versus 10.6 last quarter), 18.3 times for the International Opportunities Fund (versus 18.0 last quarter), 16.7 times for the China Opportunities Fund (versus 12.9 last quarter), and 19.0 times for the Emerging Markets Fund (versus 18.2 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 14.1 times (versus 12.4 last quarter).
As of March 31, 2019, the weighted average market capitalization was $3.1 billion for the Global Opportunities Fund, $2.9 billion for the Small-Cap Opportunities Fund, $1.0 billion for the Micro-Cap Fund, $2.7 billion for the Small-Cap Value Fund, $4.4 billion for the International Opportunities Fund, $2.7 billion for the Emerging Markets Fund, and $71.1 billion for the China Opportunities Fund. The China Opportunities Fund's market cap is skewed upward due to two mega-cap holdings; its median market cap is $7.0 billion.
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.
For current performance information, please visit www.oberweisfunds.com.
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, 2018 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%, 1.28%, 1.57%, 1.33%, 2.13%, 1.88%, 1.57%, 1.29%, 1.91%, 1.65%,1.77%, 3.99% and 3.74% for OBEGX, OBGIX, OBMCX, OMCIX, OBSOX, OBSIX,OBIVX, OBVLX, OBCHX, OCHIX, OBIOX, OBEMX and OIEMX 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.
4On 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.
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 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. 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.