April, 2018

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Posted by Ryan Jacob on April 9, 2018 at 1:00 PM

Dear Investors,

 

After a strong start to the year, the equity markets have posted significant declines highlighted by more volatility than we have seen in several years. While most of this is likely a result from interest rates moving higher, other factors have contributed, including worries about a possible trade war and privacy issues hurting some of the larger technology companies. These concerns, combined with relatively elevated valuations, have left the market more vulnerable than usual. One byproduct of this shift in market character has been the underperformance of larger cap names. As we’ve been outlining in previous comments, we believe that this dynamic is likely in an environment of rising interest rates. Accordingly, we continue to position all of the funds with more small company exposure seeking to take advantage of these trends.

 

Jacob Internet Fund

The Jacob Internet Fund added only one new position in the quarter: First Internet Bancorp. As the first state-chartered FDIC-insured Internet bank, First Internet has steadily built and grown their offerings over the last twenty years. A highly diversified lender among both residential and commercial segments, it has recently built out an impressive public finance business that is now over 20% of their total portfolio. Management has proven themselves over various market cycles, and has always maintained a conservative posture. First Internet Bancorp should not only continue to grow at well-above peer rates, but like most financials, should also benefit from higher interest rates. 

 

Jacob Small Cap Growth Fund

In addition to First Internet Bancorp, The Jacob Small Cap Growth Fund also initiated positions in Alphatec, Mersana Therapeutics, Nexa Resources, Lithium Americas and Orocobre. Alphatec manufactures and sells equipment for various types of spinal surgery. While the company has historically held tiny market share in a fragmented industry, they have recently attracted some of the most tenured management and sales personnel and have repositioned the company to better take on the market leaders. Because this industry in particular is driven more by relationships than necessarily specific products, we believe this turnaround has a high likelihood of success.

Mersana Therapeutics is an early stage pharmaceutical company developing a platform of antibody drug conjugates to treat various forms of cancer. Although they are in early-stage Phase 1 trials, the company has already obtained partnerships with two large pharma companies (Takeda & Merck), providing some validation for the potential of their technology. Dose escalation studies to confirm safety should be completed over the next few quarters, and should be a catalyst to a higher valuation and stock price.

Nexa Resources is one of the top integrated zinc producers in the world. While zinc prices have stayed relatively low since 2011, prices have surged more recently as optimism for higher global growth took hold. As the primary use for zinc is in the production of steel, pricing should remain elevated if economic growth continues. Supply-demand imbalances have already formed and Nexa’s position as a low-cost operator puts them in an ideal position to take advantage. Additionally, at less than 4x forward EBITDA, Nexa has plenty of room for multiple expansion as it becomes clearer that zinc prices will remain high.

Finally, we also invested in two small lithium mining companies: Lithium Americas and Orocobre. We will discuss these, as well as the lithium market dynamics that led to our investments, in the Micro Cap commentary.

    

Jacob Micro Cap Growth Fund

In addition to First Internet Bancorp, Alphatec and Mersana Lithium Americas, The Jacob Micro Cap Fund also added positions in Solitario Zinc, Advantage Lithium and Wealth Minerals in the quarter. Solitario Zinc is partnered with Nexa Resources in their Florida Canyon project in Peru and with Teck Resources in a major project in Alaska. As we discussed in the Small Cap section, we believe the market dynamics for zinc will remain very favorable and Solitario Zinc should also benefit from their exposure and solid partnerships.

As for the new lithium positions in both funds, we have seen pricing for lithium explode in recent years, more than tripling over the past decade, with most of those gains coming since 2014. The demand for the volatile metal has been driven by a dramatic rise in the use of lithium ion batteries, which now power the vast majority of smartphones and electric vehicles (EV) in the world today. And the outlook for lithium remains bullish, as car companies are gearing up for massive growth in those power-hungry EVs, which according to multiple forecasts could account for 10-15% of the new automobile market within the next ten years, up from around 1% today (Norway is already at 40%). Barring the unforeseen development of a competing battery technology, current suppliers of lithium will likely struggle to meet this rising demand and we expect prices to remain elevated, making it economical for new mining projects to reach fruition. Though investing in junior mining companies always entails a high degree of risk, we believe the ones we have chosen for investment have promising prospects for success, operating in attractive areas with relatively low expected production costs and important partnerships with larger lithium players and/or government regulatory agencies that will help provide the massive resources needed to move these mining operations forward.       

 

Ryan Jacob
Portfolio Manager
Jacob Internet Fund
Jacob Small Cap Growth Fund

Darren Chervitz
Portfolio Manager
Jacob Micro Cap Growth Fund


www.jacobmutualfunds.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.

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 recent holdings for the Jacob Internet Fund, as of February 28, 2018.
Click here to view the most recent holdings for the Jacob Small Cap Growth Fund, as of February 28, 2018.
Click here to view the most recent holdings for the Jacob Micro Cap Growth Fund, as of February 28, 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.

Topics: Fund Commentary, Management Commentary, Shareholder Communication