Management Commentary: January 2023
Dear Investors,
The final quarter of a difficult 2022 fell into an all-too-familiar pattern, starting off somewhat encouraging but then fading near new lows. Constant concerns over the state of the economy and a Fed determined to raise interest rates aggressively were the main culprits. Markets were also more vulnerable to tax-loss selling in a year where most equity indices provided the worst performance in almost 15 years. One bright note in the quarter were some promising signs on the inflation front, with lower energy prices contributing to a drop in many measures. Earnings expectations have already been significantly reduced for 2023, and although they will likely go even lower, it is our view that valuations have more than adequately discounted this. While there is not much consensus among market forecasters this year, one area on which most agree is that the Fed will likely soon start pausing its interest rate hikes to better assess their economic effects, which usually comes with a lag. With this relief likely coming in the next few months, and an increasing amount of cautiousness among investors, we still believe it would be unwise to be defensively positioned. For this reason, we continue to lean even more towards an aggressive posture regarding the Fund’s mix of holdings.
Jacob Internet Fund
The Jacob Internet Fund, as well as the other funds, have added to their Chinese exposure in the quarter given the rapid reopening of their country and the likelihood of significantly more fiscal stimulus this year. This includes the following four new positions: New Oriental Education, Hello Group, Joyy and Huya. New Oriental Education, a fund holding from several years ago, has maintained its position as one of the most well regarded tutoring and test prep companies in China. The education industry in China has undergone a dramatic shift in recent years as the government placed severe restrictions on traditional K-12 tutoring. New Oriental adjusted to this major upheaval by closing roughly half of their existing centers and pivoting to a more holistic offering of classes that have been encouraged by regulatory agencies. Most impressively, the company was able to stay cash flow positive during this tumultuous transition and is now poised to return to its historic levels of profitability.
Hello Group is one of the leading online dating companies in China with both its popular Momo and Tantan apps. While obviously negatively affected during many Covid restrictions and lockdowns over the last two years, Hello Group was also able to stay cash flow positive by reducing expenses and becoming more efficient in its marketing spending. Hello Group has already seen encouraging signs in many user metrics, and we expect them to soon start growing again. Joyy, another fund holding pre-Covid, is a social media streaming company that is also undergoing a major business transformation. The company is close to finalizing the sale of its core YY live-streaming business to Baidu to focus on growing its social media properties (Bigo & Likee) worldwide. Finally, Huya is one of the most popular gaming streaming companies in China with a strong shareholder and strategic partner in Tencent. Although the gaming sector has been subject to some restrictions for minors, we believe that this live-streaming business will remain very popular in China. Huya, as well as other gaming companies, continue to trade at negative enterprise values, making the risk-reward for investors appear very favorable.
Jacob Small Cap Growth Fund
The Jacob Small Cap Growth Fund also added positions in Hello Group, Joyy and Huya in the quarter.
Jacob Discovery Fund
The Jacob Discovery Fund also added a new Chinese position in the quarter: Douyu. Douyu is also a leading player in the streaming gaming and esports market, neck-and-neck with Huya in many metrics. Despite feeling the same challenging headwinds that Huya is facing, the company has been generating positive cash flow, adjusting to the new reality of slower growth by cutting expenses. New games are once again starting to be approved by Chinese regulators, and while we do expect revenue growth to be challenged for some time, we believe the company’s negative enterprise value more than discounts that reality. We intend to continue to look for other opportunities to gain additional exposure to the Chinese market.
Jacob Forward ETF
The Jacob Forward ETF also added positions in New Oriental Education, Hello Group, Joyy and Huya in the quarter.
Ryan Jacob
Portfolio Manager
Jacob Internet Fund
Jacob Small Cap Growth Fund
Jacob Forward ETF
Darren Chervitz
Portfolio Manager
Jacob Discovery Fund
Jacob Internet Fund, Small Cap Growth Fund and Discovery Fund Risk Disclosures:
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.
Cash Flow is the amount of money being transferred into and out of a business, especially as affecting liquidity.
Enterprise value (EV) measures a company's total value, often used as a more comprehensive alternative to equity market capitalization. EV includes in its calculation the market capitalization of a company but also short-term and long-term debt and any cash or cash equivalents on the company's balance sheet.
Jacob Forward ETF Risk Disclosure:
Investing involves risk; Principal loss is possible. Please see the prospectus for the risks associated with investing in the Fund.
Click here for a link to the Jacob Forward ETF prospectus.
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 holdings for the Jacob Internet Fund, as of November 30, 2022.
Click here to view the holdings for the Jacob Small Cap Growth Fund, as of November 30, 2022.
Click here to view the holdings for the Jacob Discovery Fund, as of November 30, 2022.
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.