Management Commentary: April 2020
Dear Investors,
With the spread of the coronavirus now around the world and the subsequent shutdown of most economies, the markets have endured their worst performance since 2008-2009. Record volatility continues across all sectors, and we continue to adjust to changing conditions for how they could affect the Fund’s holdings. We have now moved into a phase where almost all market sectors have been affected, even those less susceptible to economic disruption. As valuations have now reached extreme levels in many areas, we are adding selectively to certain positions, including purchasing some new ones, and plan to be more aggressive if markets decline further. At this point, avoiding a global recession may be unlikely, but many asset prices are now clearly reflecting that reality. Ultimately, we believe this is a health crisis, not a financial one, and are hopeful it will be as short-lived as possible.
Jacob Internet Fund
The Jacob Internet Fund added two new positions in the quarter: Alibaba and SVMK. Alibaba, one of the largest Internet companies in China today, started as an e-commerce pioneer and has since extended its reach into many different verticals. The company is now a major player in cloud computing, communications and financial services, and has made significant investments in several other areas. The impressive operating margins for Alibaba’s fast-growing core e-commerce business is really what separates it from its peers, and the company’s massive size and shrewd investments set them up for superior growth for the foreseeable future.
SVMK, more widely known in the marketplace as Survey Monkey, is a pioneer in self-serve online surveys. Recent acquisitions, however, have helped SVMK move upmarket into broader experience management solutions for larger enterprises. These include various real-time services to track and monitor interactions that matter most to customers. Early results have been promising, as SVMK has been able to replace established legacy providers with its comprehensive cloud-based platform. This has resulted in both accelerating revenue growth and the opportunity to expand margins going forward.
Jacob Small Cap Growth Fund
The Jacob Small Cap Growth Fund also added SVMK in the quarter, as well as new positions in Apellis Pharmaceuticals, Mesoblast, and Cheesecake Factory. Apellis Pharmaceuticals recently announced positive Phase 3 results for its lead compound (Pegcetacoplan) to address PNH, a rare blood disease that causes red blood cells to break apart. Pegcetacoplan showed superior efficacy in raising hemoglobin levels, more transfusion avoidance, with much less severe side effects versus current treatments. While PNH alone is a modest-sized market, the long-term opportunity lies with the expansion into other indications once its drug is approved.
Mesoblast has a late-stage pipeline of allogeneic stem cell treatments (stem cells taken from other people), with its lead product (Ryoncil) likely to be approved shortly for treatment for bone marrow disease in children (SR-aGVHD). Most recently, Mesoblast announced early positive clinical data on their stem cell treatment for heart failure. As this is an enormous market opportunity with very few effective drugs, future positive results in later trials could have a significant impact on Mesoblast’s stock price.
Cheesecake Factory is a well-known, well-run casual dining chain that has been severely impacted by closures as a result of the coronavirus. Despite the disruption, the company remains open for business at most locations, and its already robust off-premise takeout and delivery business has accelerated significantly as shelter-in-place orders have expanded. While valuations across most consumer names have been reduced considerably, we are confident that Cheesecake Factory has the financial resources to weather a several-month slowdown and believe its share price will reflect this as the economy recovers.
Jacob Discovery Fund
In addition to Mesoblast, the Jacob Discovery Fund added several new investments that could benefit if the financial or health ramifications of COVID-19 end up lasting longer than expected. Like Mesoblast, Athersys is a small drug developer focused on allogeneic stem cell treatments. Its Multistem drug therapy, which can be harnessed and stored more efficiently than many other stem cell products, is currently being studied in ischemic stroke and acute respiratory distress syndrome (ARDS). ARDS is one of the major complications arising from the COVID-19 virus, and often leads to very poor outcomes. In a 52-week follow-up of 30 patients, the company’s double-blind study showed significant improvement in patients suffering from ARDS versus the placebo in terms of mortality, days on ventilators, days in the ICU as well as overall quality of life. While not being powered for efficacy, the study was promising enough that the drug received Fast Track status from the FDA, which is now working with the company, along with fellow government agency BARDA, to pursue the rapid design of a larger trial.
Cytosorbents is another company poised to see sales increase due to the attention on COVID-19. The company’s primary blood filter product, CytoSorb, which can be attached intravenously to standard equipment like dialysis, ventilators and heart-lung machines, is being used to treat patients suffering from cytokine release storm (CRS), another common complication stemming from serious cases of the coronavirus. While not yet FDA-approved for use in the US, CytoSorb has been used quite extensively in Germany to treat patients who are dealing with CRS associated with sepsis and other health issues. The product, which has been used in 80,000 treatments worldwide, is approved in 58 countries and was tested in China in severe cases of the coronavirus. CytoSorbents still must do a better job of proving its filter is effective in improving outcomes and reducing mortality, but we have seen enough data and real-world use to feel the company warrants an investment.
Finally, we added a small position in a Canadian junior gold mining company called Azimut Exploration. Unlike most small exploration companies, Azimut is not overly promotional about its efforts and is relatively judicious about how and when it raises capital. The company, using a proprietary data analytics technology to seek out attractive potential targets, has signed 30 agreements with other mining companies over the years, but owns 100% of perhaps its most promising asset, the Elmer property in James Bay in Quebec. Current mining operations in the area have been put on pause due to the pandemic, but we still expect to see a decent number of new holes drilled in the area by the end of the year to get a better sense of the scope of the opportunity.
Everyone at Jacob Funds hopes your family and loved ones are doing well during these difficult times. Stay safe.
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.
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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 holdings for the Jacob Internet Fund, as of February 29, 2020.
Click here to view the holdings for the Jacob Small Cap Growth Fund, as of February 29, 2020.
Click here to view the holdings for the Jacob Discovery Fund, as of February 29, 2020.
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.