October 3, 2013
Over the last quarter, the markets have shown their resiliency in the face of numerous potential fiscal and political landmines, powering to new all-time highs. Rising interest rates, potential military action in Syria, mixed economic data and the looming threat of a U.S. government shutdown - none of it has yet been able to derail the equity markets' impressive momentum. While we are wary the aforementioned negatives could still weigh on Wall Street over the next few months, there remains a noticeable rotation out of interest-rate-sensitive sectors (housing, materials, industrials) into higher-growth areas that might be able to overcome these headwinds (technology, healthcare). Obviously we are happy how the environment we are currently in has affected the Internet fund, but it's also helping the Small and Micro Cap funds as they are overweight in both technology and healthcare positions. We believe that these conditions will likely remain in place at least through the end of the year, so we have continued to adjust the funds weightings accordingly.
The Internet Fund added one new name in the quarter: Rally Software. Rally provides a cloud platform for employees to collaborate and test software across their entire organization. With 35 of the top Fortune 100 companies counted as customers, Rally has already established itself as a leader, even though its revenue is still relatively modest. With more software in your average Deere tractor today than was in the first Space Shuttle, it is becoming increasingly clear that software development is no longer solely an issue for tech companies. Rally should benefit from both a growing market and its subscription model, which makes for faster, easier deployments at a lower cost than some of their more traditional software competitors.
The Micro Cap fund added two additional new positions in the quarter (not including Rally): Tetraphase and Penn Virginia. Similar to past holding Trius Pharmaceuticals (acquired 9/12/13), Tetraphase is another early-stage developer of antibiotics. In this case, the company's lead compound - currently in Phase III trials for a couple of critical indications - is mostly targeting gram-negative infections, versus the gram-positive pathogens that Trius targeted. Gram-negative outbreaks are occurring with increasing frequency, often in hospital settings, while resistance to current treatment options is growing as well. Tetraphase is in a great position to benefit from this renewed focus on new antibiotic development. Penn Virginia is an energy exploration and production company that has its main focus on the Eagle Ford shale region in southeast Texas. This has been one of the most prolific areas in the U.S. to drill for oil, and Penn Virginia has acquired significant acreage over the last few years to develop. With improved techniques and more drilling options, we believe that they will be able to significantly increase their production and cash flow for many years to come.
The Small Cap fund, besides adding Rally, Tetraphase and Penn Virginia, also added Fifth & Pacific. Fifth & Pacific is a collection of well-known retail apparel and accessory brands, including Juicy Couture, Lucky and Kate Spade. Out of this group, Kate Spade has been far and away the star performer, with comp sales rising more than 20 percent in a very lackluster environment. Management is currently shopping both Juicy and Lucky to increase their attention on the exceptional global growth of Kate Spade. We believe that once this reorganization is complete, investors will better appreciate the exceptional Kate Spade brand, and they will benefit from a valuation that reflects this potential.
The Wisdom fund added one new position in the quarter: IBM. IBM is recognized as a leading vendor in many technology services including, mainframe computing, software, servers, and storage. Over the past decade, IBM's deliberate shift away from the more commoditized areas of IT spending to higher value-added solutions has resulted in attractive margin expansion and accelerated growth. The company has also proven to be very shareholder friendly over the years, as demonstrated by steady dividend increases and significant share repurchases that have reduced its total shares outstanding by 20 percent over the last five years.
Jacob Internet Fund
Jacob Small Cap Growth Fund
Jacob Micro Cap Growth Fund
Jacob Wisdom 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 four 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. The Small Cap Fund, Internet Fund and Wisdom Fund will invest in smaller companies, which involve additional risks, such as limited liquidity and greater volatility. The Wisdom Fund may invest 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.
Any tax or legal information provided is merely a summary of our understanding and interpretation of some of the current income tax regulations and is not exhaustive. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation. Neither the Fund nor any of its representatives may give legal or tax advice.
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.
Please refer to the prospectus located at www.jacobmutualfunds.com for more complete information including risks, fees and expenses.
Click here to view the holdings for the Jacob Internet Fund, as of August 31, 2013.
Click here to view the holdings for the Jacob Small Cap Fund, as of August 31, 2013.
Click here to view the holdings for the Jacob Micro Cap Fund, as of August 31, 2013.
Click here to view the holdings for the Jacob Wisdom Fund, as of August 31, 2013.
Please note that these holdings are subject to change and should not be considered a recommendation to buy or sell any security.
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Quasar Distributors, LLC, Distributor 10/13