Dear Investors,

Stock prices continued to power higher for most of the quarter as many companies showed they could either manage very trying economic conditions, or in the case of many technology businesses, show an acceleration in their revenue and product adoption. Of course, continued accommodating monetary policy and fiscal stimulus also surely played a role in the market’s buoyancy. In any case, thanks in large part to our historic focus on technology investments, we were able to better withstand this severe market volatility and post significantly positive results during the last quarter. Many of the underlying digitization trends that have further proliferated out of necessity due to the pandemic are likely to persist longer term and will ultimately make many companies bigger and more valuable more quickly than they would have otherwise been. We believe higher near-term volatility is still likely given the significant rebound in valuations and uncertainty that now exists as investors worry about a potential second wave of the Coronavirus and a turbulent election season. Looking beyond the rest of this year, high levels of government debt could become a headwind and valuations still appear extended for many of the large companies that dominate major indexes, but we remain optimistic about future growth. As such, we continue to raise our weightings in those small- to mid-sized businesses, whose valuations remain more modest, and which should also benefit from a broader economic recovery.

Jacob Internet Fund 

The Jacob Internet Fund added two new positions in the quarter: Netfin Acquisition and Voyager Digital. Netfin Acquisition is a special purpose acquisition company (SPAC) that will be acquiring the assets of Triterras Fintech, which is one of the largest commodity trading and financing platforms. Founded in 2005, their Kratos platform allows participants to digitally facilitate large commodity transactions that in the past would be cumbersome and expensive to manage, using a historically paper intensive process. In a market where fraud is an enormous concern that has driven away many large financial institutions and sub-$10 million loans were uneconomic for both traders and lenders, the Kratos platform now makes them profitable and safer than from the old transfer of multiple documents among many parties. The World Trade Organization estimates that there is a $1.5 trillion annual availability shortfall of these smaller transactions, of which we believe that Netfin and Kratos can garner a significant share.

Voyager Digital is a relatively new cryptocurrency trading platform, led by a senior executive from E*Trade and the founding CTO from Uber. We believe we are still in the early days of adoption of cryptocurrency as a store of value and means of facilitating financial transactions. While several large cryptocurrency platforms have gained in popularity over the last few years, Voyager Digital stands out as an agency broker, rather than just pairing trades and collecting commissions. This distinction allows Voyager to offer better pricing and more reliable execution as well as interest on customers digital coin holdings, which include more than 50 other options than just the most popular Bitcoin. Because of these features, Voyager has attracted larger retail account sizes and more frequent traders than its competitors. In its most recent business update, Voyager announced an expected 200% growth in assets in the current quarter and we believe their robust platform will attract a growing number of sophisticated cryptocurrency investors.

Jacob Small Cap Growth Fund

The Jacob Small Cap Growth Fund also added Netfin Acquisition, as well as new positions in Heron Therapeutics and Western Copper & Gold. Heron Therapeutics is a drug development company whose most promising candidate (HTX-011) is an opioid replacement therapy for pain management. The market for soft tissue and orthopedic procedures today is several billion dollars, with either ineffective generics or expensive alternatives that do not last long enough. While Heron’s clinical data has been impressive, unfortunately, they have had to resubmit HTX-011 multiple times with the FDA for minor issues, leading to significant weakness in their share price. We believe this severe discount in valuation offered a unique opportunity to invest with an experienced management team in launching new drugs in the difficult hospital setting. We believe with an agreement for expedited review, HTX-011 will likely be approved and ready for commercialization early next year.

Western Copper & Gold is a junior mining company located in the Yukon region of Canada. The company, through its Casino project has over 7.6 billion pounds of copper and 14.5m in gold deposit reserves. Recent feasibility studies indicate even more potential with additional inferred resources. Operating for more than 14 years in the mining-friendly Yukon region, Western has been able to secure necessary road funding to allow the mining project to move forward. With many major mining companies operating adjacent to Casino, we believe it is likely that Western will be able to obtain a strategic partnership in order to develop what will be a very capital-intensive project. With the recent surge in gold and recovery in copper prices, we believe Western will be able to fully realize the potential of the Casino project, leading to significant returns on our investment.    

Jacob Discovery Fund

The Jacob Discovery Fund also added Netfin, Voyager, and Western Copper & Gold. In addition, the fund added Hudson Global, a leading provider of recruitment process outsourcing. The company has a long and somewhat less-than-glorious history as an amalgamation of dozens of staffing and recruitment agencies that were part of the old Monster.com business. After a proxy battle that saw major shareholder Jeff Eberwein take over Hudson as its new CEO, the company has recently refocused its operations to focus on the relatively fast-growing RPO business. Eberwein has done a nice job of streamlining costs and stabilizing revenue since taking over, while engaging in other shareholder-friendly initiatives like buybacks and special dividends. Covid has definitely been a headwind for the company, but with valuation at extremely low levels – the enterprise value of the company is negative – we feel the risk/reward ratio is quite favorable here. A recent acquisition of SF-based Coit Group looks extremely strategic and should help Hudson gain share in the US and within the technology sector.   

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

www.jacobfunds.com

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.

Enterprise value (EV) is a measure of 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 as well as any cash on the company's balance sheet.

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 August 31, 2020.
Click here to view the holdings for the Jacob Small Cap Growth Fund, as of August 31, 2020.
Click here to view the holdings for the Jacob Discovery Fund, as of August 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.