Management Commentary: October 2023
Dear Investors,
After an encouraging start to the quarter, more mixed signals regarding the economy and a steady rise in interest rates led to gradually weaker stock prices. Overall, while consumer spending data has been resilient and labor markets remain healthy, there are other signs that the lag effect of the aggressive rate hikes over the last year may finally be starting to take hold. This, in addition to higher energy prices, has caused more caution among investors. Ironically, our expectation for this year has always been that higher long-term interest rates would be likely, but that the result would be a pivot away from the largest cap names. Although our timing has admittedly been off, we are still confident that if the Fed is truly done with rate hikes and the economy manages to avert a recession, the conditions are in place for the smaller cap companies we favor to significantly outperform.
Jacob Internet Fund
The Jacob Internet Fund added one new position in the quarter, SoFi Technologies. Over the last several years, SoFi Technologies has evolved from a primarily student lending platform to a financial services one-stop shop and tech platform allowing for a broad range of financial products. With now over 6 million customers, SoFi has focused on younger consumers that are early in their financial lives and just beginning to utilize different products and services to meet their financial needs. With highly sophisticated methods to price risk, SoFi has been able to offer very competitive rates on both loans and deposits, with the goal of developing a broad long-term relationship with their customers. With the 3-year-plus moratorium on student loan payments ending soon, Sofi has an excellent opportunity to assist with the expected refinancing activity that is likely to begin. It is estimated that roughly $200 billion of the $1.5 trillion student loans outstanding are at rates higher than are currently available. Additionally, as the interest rate yield curve continues to normalize, SoFi should benefit from expanding net interest margins going forward. Even though SoFi’s growth over the last few years has already been impressive, they have indicated that they will continue their aggressive marketing as margins expand to help achieve their goal of becoming a top 10 financial institution.
Jacob Small Cap Growth Fund
The Jacob Small Cap Growth Fund also added the same new position in the quarter, SoFi Technologies.
Jacob Discovery Fund
The Jacob Discovery Fund added one new position in the quarter, Esperion Therapeutics. Esperion, an old holding for the Jacob Fund family, has fallen on tough times trying to market its FDA-approved cholesterol reduction drugs over the past several years. However, if anything, the science behind the importance of reducing one’s LDL cholesterol has only gotten more solid, as evidenced in part by the terrific long-term outcomes study the company performed for its lead drug, marketed commercially as Nexletol. That CLEAR study, which showed Nexletol can reduce the risk of heart attacks and other serious cardiovascular events by 20%, has led to more momentum for the product, solidifying its place in the treatment armamentarium for cardiologists. Using data from that study, Esperion is seeking a broader, more expansive label for its product, both here in the US and in the EU, which would likely lead to even more product momentum. Meanwhile, Esperion and its EU partner Daiichi Sankyo are tied up in a legal battle for more than $200m in potential milestones. A legal victory (or more likely settlement) would solidify the company’s balance sheet as it moves toward profitability. Recently, we have been adding to names of extremely beaten-down biotech companies with approved, solid assets that we think will either increase sales momentum for them to reach standalone profitability, or more likely, be acquired by larger pharmaceutical companies, and Esperion fits that bill very nicely.
Jacob Forward ETF
The Jacob Forward ETF added one new position in the quarter, SoFi Technologies
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.
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 August 31, 2023.
Click here to view the holdings for the Jacob Small Cap Growth Fund, as of August 31, 2023.
Click here to view the holdings for the Jacob Discovery Fund, as of August 31, 2023.
Click here to view the current holdings for the Jacob Forward ETF.
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.