Management Commentary: October 2018
Dear Investors,
Major market indexes continued their march higher in the third quarter, with economic optimism and rising earnings leading the way. Whereas unemployment remains at historically low levels, we may finally be seeing a more meaningful increase in wages. Within this backdrop, however, some potential pitfalls still bear watching. Even with the most recent North American agreement, trade tensions with the rest of the world are far from resolved. Additionally, and probably even more importantly, the Fed’s move to gradually raise interest rates may require a more rapid pace should economic growth accelerate. Even though it is our belief that a dramatic rise in interest rates is not likely in the near-term, the Fund’s portfolios continue to minimize exposure to companies most at risk if this were to occur and remain over-weighted in companies that should benefit if the economy exceeds current projections.
Jacob Internet Fund
The Jacob Internet Fund did not add any new positions in the quarter.
Jacob Small Cap Growth Fund
The Jacob Small Cap Growth Fund added two new positions in the quarter: Abercrombie & Fitch and New York & Company. Abercrombie & Fitch is a well-tenured teen retailer that has had success in renewing growth in its core brand as well as maintaining the popularity of its Hollister stores. In general, we have seen a widespread recovery in the teen retail space over the last year, thanks to economic growth and a number of high-profile bankruptcies, and valuation multiples in the sector have expanded as a consequence. In contrast, we believe Abercrombie & Fitch has unfairly seen its valuation multiples contract, making it a very attractive investment at these prices. New York & Company, another clothing retailer, caters more to the millennial and older crowd. While its results have been less impressive than Abercrombie, the company has seen some modest successes, and its debt-free balance sheet and growing cash position puts it in an enviable position to pursue ambitious expansion initiatives that the company has recently announced. New York & Co. (which is changing its corporate name to RTW Retailwinds) is developing a host of new store and fashion line brands, bringing them into opportunities, such as lingerie and plus-size clothing, which are ripe for new entrants. Finally, we believe both companies (Abercrombie and New York & Co), should both continue to be significant beneficiaries of rising consumer spending and its positive effects on overall retail sales.
Jacob Discovery Fund
The Jacob Discovery Fund also added two new positions in the quarter – the above-mentioned New York & Co, and Kona Grill. Kona Grill operates 45 upscale casual restaurants in 22 states and Puerto Rico, serving an eclectic mix of American cuisine and sushi. The company’s new management team has focused on streamlining costs and dramatically reducing its reliance on promotions to drive revenue, leading to a significant uptick in profits. Same-store sales growth continues to be a challenge, but we believe even a modest improvement in results will lead to a valuation reset at a higher multiple. A recent franchise agreement signed for China could also lead to an expansion of the company’s small but promising international business.
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.