Management Commentary: July 2020
Dear Investors,
After one of the sharpest market declines in decades, stocks staged a remarkable comeback this quarter, with the Nasdaq recently making new all-time highs. While many businesses are slowly reopening across the country, we are still far from returning to any semblance of normal economic activity. Disease caseloads continue to rise, and outbreaks are likely to continue for the foreseeable future, making the near-term economic outlook unclear, at best. However, some areas of the economy have actually benefitted from recent developments, most notably certain technology companies whose products have seen increasing demand due to the acceleration of online trends that were well in motion prior to the outbreak. We do not necessarily believe this acceleration will abate even as the COVID-19 threat does, and this dichotomy between the haves and the have-nots is likely to continue for some time. Although stock prices are no longer at distressed levels, and valuations appear elevated given the uncertain economic backdrop, we have seen an unprecedented amount of fiscal and monetary stimulus – multiple times larger than during the financial crisis of 2008 - broadly applied to assist us through this extremely difficult period. All of these trillions of dollars of injected liquidity have led to a stabilization of the economic situation as well as an increase in the appetite for higher-risk assets. While we share some of the skepticism from many professional investors regarding the sustainability of this current upswing, it is possible that the result of all this stimulus could be economic conditions improving faster than projected, justifying price appreciation even from current levels.
Jacob Internet Fund
The Jacob Internet Fund added one new position in the quarter: Livongo Health. Livongo is an online service monitoring chronic health conditions, starting with its very successful diabetes management product. By offering wireless-enabled hardware with a robust backend service powered by both AI and personalized human assistance, Livongo’s diabetes management product has led to over 30-50% participation rates among employees (vs. single-digit rates among peers) and significant cost savings for businesses and health plans, thanks to healthier blood sugar levels and fewer hospitalizations. While the company has an enormous runway for growth within diabetes alone, Livongo also is expanding into other chronic conditions including hypertension, behavioral health and a cholesterol offering to be announced later this year. Although these indications are complex and might be difficult to penetrate, Livongo’s head start in diabetes gives us confidence that they can achieve success in these large adjacent market opportunities within a reasonably short time horizon.
Jacob Small Cap Growth Fund
The Jacob Small Cap Growth Fund also added one new position in the quarter: Ideaya Biosciences. Ideaya is an early-stage drug company focusing on a relatively new gene therapy to target cancer cells, called synthetic lethality, The concept of synthetic lethality, which in the case of treating cancer means attempting to kill tumor cells by targeting two separate genetic mutations or growth pathways, has been around for a while but made headlines with the introduction of PARP inhibitors in 2016, and is now being expanded to broader applications and indications using new gene-based technologies. Ideaya has already attracted an impressive group of investors, including Celgene and Google Ventures, and has recently signed a major partnership with GlaxoSmithKline. The Glaxo agreement includes a $100 million upfront payment, $20 million stock purchase, and over $3 billion in potential milestone payments. This endorsement of Ideaya’s programs at such an early stage by a large pharmaceutical partner gives us confidence that the company has a reasonable chance of success as they progress through clinical trials and validate its technology platform. is as the economy recovers.
Jacob Discovery Fund
In addition to Ideaya, the Jacob Discovery Fund also added three other new positions during the quarter: Castlight Health, Park City Group and Brainstorm Cell Therapeutics.
Castlight Health has developed an online healthcare navigation and employee benefit service for self-insured employers and health plans. After years of technological missteps and poor managerial execution, including a rather offensive amount of corporate overspend, we believe the company is finally on the right track and providing a service that adds real value. The company’s free and popular COVID-19 testing information service is an example of meaningful recent innovation. If Castlight is able to deliver on its goal of attracting another major health plan to adopt its platform (Aetna is currently its most important partner), then we believe there is a tremendous amount of upside in its current valuation.
Park City Group operates ReposiTrak, the leading supply chain and compliance platform for the food industry, with more than 20 million transactions processed daily by thousands of retail and supplier customers. An evolving model to a recurring SaaS business has caused some revenue dislocation and masked some decent underlying adoption of its technology, which should soon lead to renewed growth for the already profitable enterprise. While the COVID-19 pandemic has led to some disruption in the food and grocery industry, it has also been generally good for sales and served to highlight the importance of effective supply chain management. We believe that ultimately the experience should lead to more business for ReposiTrak, especially its newest MarketPlace initiative.
Finally, we added Brainstorm Cell Therapeutics, which is attempting to use its stem cell technology called NurOwn to address a variety of neurological disorders. We have gotten increasingly excited about the near-term potential of stem cells in treating numerous health conditions, as shown by our recent investments in Athersys and Mesoblast. Brainstorm is nearing the end of its key Phase III trial for treatment of the awful disease amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig’s Disease. ALS is a devastating condition, one that has no cure, rapid progression, and tragically, a long history of failed drug trials. A large number of ALS patients have been pressuring the US government for years to accelerate approval of NurOwn after reports of several anecdotal success stories emerged, and mixed but somewhat promising data from earlier NurOwn trials. Results from the Phase III trial are expected in the fourth quarter, and while we are hopeful that the company’s drug will provide some benefit to patients, we plan on keeping the position size small to account for the potential risks.
Everyone at Jacob Funds hopes your family and loved ones are doing well during these difficult times.
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 holdings for the Jacob Internet Fund, as of May 31, 2020.
Click here to view the holdings for the Jacob Small Cap Growth Fund, as of May 31, 2020.
Click here to view the holdings for the Jacob Discovery Fund, as of May 31, 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.