Management Commentary: April 2019
Dear Investors,
After a sharp market decline to end the year, we have seen an equally strong resurgence in equity prices over the last several months. An about-face by the Fed was probably the biggest contributor to this recovery, but increased optimism that a trade deal with China could be finalized soon also likely boosted investors’ spirits. With the Fed now clearly on hold in regards to interest rates, we have recently seen longer-term rates fall below short-term rates and to levels we haven’t seen since 2017. The inverted yield curve is often a harbinger for future economic weakness, and clearly fear of a recession is rising. Given the troubles in Europe (political & economic) and lethargic growth in most of Asia, this feeling is understandable. While we acknowledge this viewpoint, we remain confident in the underlying economic trends here in the US, and still feel rising interest rates over the next several years will be the main risk to monitor. In the meantime, we have been maintaining and/or increasing our exposure in order take advantage of what we believe to be a continuation of a positive economic environment for the balance of 2018.
Jacob Internet Fund
The Jacob Internet Fund added one new name in the quarter: Impinj. Impinj is a leading provider of radio frequency identification (RFID) chips. The company has been instrumental in driving real-world adoption of the technology’s leading standard, called RAIN, which gives companies the power to tag and then track items through the supply chain, from manufacturing, through distribution all the way to the individual retailer. Although Impinj has been a pioneer in the market and shown solid revenue growth, an intense competitive environment has been a challenge for the company, keeping margins fairly low. However, the falling prices have also dramatically accelerated deployment of the technology in a variety of markets, including retail, healthcare and aviation. Billions of devices are tagged with RAIN-based RFID chips every year, and thousands of companies use Impinj’s market-leading platform, which includes RFID tags, readers, gateways and related software. While reaching scale will remain a challenge for Impinj, we believe the tailwinds in the underlying market are so strong that the company will eventually become profitable, and/or become an attractive acquisition candidate for a larger company wanting to enter the space.
Jacob Small Cap Growth Fund
Besides also adding Impinj, the Jacob Small Cap Growth Fund added one additional holding in the quarter: Aerie Pharmaceuticals. An innovator in developing treatments for glaucoma, Aerie had its first drug approved (Rhopressa) in 2017. Rhopressa was the first novel drug in a market that had not seen significant improvement in treatments for 20 years. Initial sales have been encouraging and physician feedback has been generally positive. However, Aerie’s most recent drug approval (Roclatan), a combination of its Rhopressa with generic latanprost, the most commonly prescribed medication to treat high interocular pressure (IOP), looks likely to have even much greater potential. Many patients with high IOP struggle with many different eye drop regimens, so compliance is a major issue. By combining two powerful medications, Roclatan could result in a once-daily regimen, leading to better compliance, fewer side effects and a lesser likelihood of permanent eye damage. Although expanding insurance coverage in a market dominated by generics is always a challenge, Aerie is well-funded and we believe they will have a successful rollout of this exciting new drug.
Jacob Discovery Fund
The Jacob Discovery Fund added Impinj as well as two more names: Medicine Man and Diamedica Therapeutics. Medicine Man, Jacob Funds first foray into the cannabis market, is led by some of the earliest pioneers in marijuana’s recent emergence as an increasingly legal product, such as its well-respected CEO Andy Williams. To date, Medicine Man has been a small, modestly profitable provider of consulting and turnkey services for clients across the country looking to get involved in the production and sale of cannabis. But with the anticipated passage later this summer of a law in Colorado that would free up the restrictions on publicly traded companies in the state, Medicine Man has lined up two acquisitions of related entities – including one of the state’s leading cannabis retailers - that would dramatically reshape the company’s business and brighten future prospects even more. Diamedica is an early-stage biopharma company that has developed DM199, the first-ever synthetic form of the KLK1 protein, which plays an important role in regulating blood flow. KLK1 – taken from the pancreas of pigs and human urine – has long been used in Asia to treat patients suffering from strokes, kidney diseases and hypertension. Diamedica has begun the process to get FDA approval for DM199 in treating acute ischemic strokes and chronic kidney disease. It is still very early days, but if DM199 is eventually approved in either indication, we believe the market opportunity in this country is immense. Due to likely better efficacy and lower risks, the drug we believe will also be preferred over the human urinary and porcine KLK1 currently being used in Asia. The neurology-focused subsidiary of Fosun Pharma, a major Chinese drug company, has already licensed the right to develop and commercialize DM199 in China, serving as further validation of the protein’s potential.
Ryan Jacob
Portfolio Manager
Jacob Internet Fund
Jacob Small Cap Growth Fund
Darren Chervitz
Portfolio Manager
Jacob Discovery Fund
Mutual fund investing involves risk. Principal loss is possible. There are specific risks inherent in investing in the Internet area, particularly with respect to smaller capitalized companies and the high volatility of internet stocks. All three funds may invest in foreign securities, which involve greater volatility and political, economic and currency risks, and differences in accounting methods. These risks are greater in emerging markets. All three funds also invest in smaller companies, which involve additional risks, such as limited liquidity and greater volatility.
The Internet Fund may invest in fixed income and convertible securities. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. The market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. In addition, convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality.
Investments in micro capitalization companies may involve greater risks, as these companies tend to have limited product lines, markets and financial or managerial resources. Micro cap stocks often also have a more limited trading market, such that the Adviser may not be able to sell stocks at an optimal time or price. In addition, less frequently-traded securities may be subject to more abrupt price movements than securities of larger capitalized companies.
Click here to view the Jacob Funds prospectus.
The information provided herein represents the opinion of Jacob Mutual Funds and is not intended to be a forecast of future events, a guarantee of future results, nor investment advice.
Click here to view the most recent holdings for the Jacob Internet Fund, as of February 28, 2019.
Click here to view the most recent holdings for the Jacob Small Cap Growth Fund, as of February 28, 2019.
Click here to view the most recent holdings for the Jacob Discovery Fund, as of February 28, 2019.
Please note that these fund holdings are subject to change and should not be considered a recommendation to buy or sell any security.
Earnings growth is not representative of the Fund’s future performance.
The Jacob Funds are distributed by Quasar Distributors, LLC.