Management Commentary: January 2019
Dear Investors,
Only days into the start of the fourth quarter, the broader stock market began to show weakness, with declines accelerating in the month of December. Concerns about moderating economic growth and a Federal Reserve that seems intent on continuing to raise interest rates created a large amount of investor anxiety. This, combined with fears of a worsening trade skirmish with China and an increasingly uncertain political environment that culminated in the second government shutdown of the year, resulted in the worst year for most equity averages since 2008. While we do not anticipate any of these question marks going away entirely, we also do not feel the direst potential outcomes are the most likely to occur. At a minimum, our belief is that this extreme level of selling is overdone and overlooks the relatively strong performance over wide swaths of the economy. Additionally, we are skeptical that the Fed will continue to raise rates in 2019 unless the economy delivers above-average growth. Therefore, in light of these factors, we have been more aggressive in all of the funds in order to increase weightings in those positions which we believe have reached the most compelling valuations versus their growth prospects.
Jacob Internet Fund
The Jacob Internet Fund added four new names in the quarter: MongoDB, Square, OptimizeRx and Inspired Entertainment. MongoDB is an open-source database company that has capitalized on the explosion of unstructured data management and the evolution away from more traditional database management solutions. Distinct among open-source suppliers in that they have ownership of the underlying code, MongoDB can set terms for how it is used and altered by other companies. This control, along with one of the largest developer communities within the open-source database software universe, should give them a more sustainable position as competition heats up with the larger cloud service providers. Square, which started out as mainly a mobile payment solution provider for small businesses, has now greatly expanded its offerings to both businesses and consumers alike. A pioneer in offering credit to its small-business customers, Square now offers a number of payroll and inventory management services on one integrated platform. On the consumer side, its new Cash App is starting to gain traction against Venmo, the undisputed leader in person-to-person cash payments. While we have watched the progress of both MongoDB and Square for a while, these are two examples how the recent market action has given us opportunities to add quality high-growth names at more attractive prices. We discuss the Fund’s other two new holdings in the Discovery section.
Jacob Small Cap Growth Fund
The Jacob Small Cap Growth Fund only added a new position in MongoDB in the quarter.
Jacob Discovery Fund
The Jacob Discovery Fund added positions in three new names, including OptimizeRx and Inspired Entertainment, which were added to the Jacob Internet Fund as well. OptimizeRx helps pharmaceutical companies reach potential patients right at the point where prescriptions are being written by integrating with hundreds of different electronic health record (EHR) systems. The company reaches more than 500 thousand health care professionals through its network of services, which include e-couponing and compliance assistance programs that help ensure patients buy and correctly use the medicines they are prescribed. OptimizeRx’s business has benefited greatly from the widespread emergence of EHRs as well as increasing regulations limiting the amount of physician-direct marketing pharmaceutical companies can do. Headed by Lorne Weill, former head of Scientific Games and a titan in the gaming industry, Inspired Entertainment could be poised to benefit on the increasingly popularity of merging gambling services with higher-end gaming technology. Inspired trades at a modest valuation, a result of the challenges its legacy server-based gaming terminal operations will have to overcome in the next couple of years, especially in the United Kingdom where the government has passed a rule severely limiting betting amounts. But the real appeal of our investment in Inspired lies in the company’s newer virtual sports technology, the American football version of which was just launched by the Pennsylvania lottery system. While consumer adoption in Pennsylvania so far has been slow, the company already counts almost 100 operators, including 17 new mobile gaming customers, as customers of its virtual sports technology, and we believe adoption will accelerate given the state-by-state legalization of sports gambling as well as the increasing evolution of gambling software to more closely resemble the realistic, high-end technology that younger gamers are used to.
The Jacob Discovery Fund also added a new holding in theScore, another company poised to benefit from the recent Supreme Court ruling giving states the right to legalize sports betting. theScore operates one of the most popular mobile sports apps, with more than 3.7 million active users. Not having a huge sports media operation has forced theScore to get creative in trying to separate its content from the larger, more traditional sports news and scores providers, such as ESPN and CBS Sports. In particular, theScore has focused much of its proprietary efforts on the emerging competitive video gaming category known as eSports. Its eSports YouTube channel has more than 400 thousand subscribers, who viewed more than 33 million videos in the most recent quarter. We believe the company’s independence will similarly benefit its business as it attacks the enormous opportunity in sports gambling that is likely to open up after the recent legal decision. Although efforts in this space are still embryonic, the company recently announced an upcoming mobile sportsbook for New Jersey, one of the first states to legalize sports betting.
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 November 30, 2018.
Click here to view the most recent holdings for the Jacob Small Cap Growth Fund, as of November 30, 2018.
Click here to view the most recent holdings for the Jacob Discovery Fund, as of November 30, 2018.
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.