The Oberweis China Opportunities Fund is the top-ranked China-region fund for the past one- and three-year periods. Here, fund manager Jim Oberweis walks us through his investment process and highlights some current favorite stock ideas.
Steve Halpern: Joining us today is Jim Oberweis, who many of our listeners know from the Oberweis Report, a top financial advisory service focused on small-cap stocks. How are you doing, Jim?
Jim Oberweis: Great. Pleasure to be here. Thanks so much.
Steve Halpern: Now, in addition to your well-known newsletter, you're also the portfolio manager for the Oberweis China Opportunities Fund, which, not only earned Morningstar's highest five-star buy rating, but is the number one ranked China-region fund for both the past one- and three-year periods. Could you walk us through the stock selection process that led to such strong ratings?
Jim Oberweis: Sure; so, our stock selection process is quite similar to the same process we've applied in the US for the last 25 years. Effectively, we try to find smaller, high growth companies that are really on the cusp of change, typically driven by new products.
We look for companies that have a barrier to entry and a strong market position, often times within niche markets, so, what does that mean? It means our success or failure is much more predicated on our ability to pick stocks than an overall GDP. We're kind of looking for hidden gems in barrels where there are just not a lot of people looking.
We tend to focus on very, very high growth companies where plus or minus 100 basis points in GDP isn't going to drive the business one way or another, but market penetration is really the name of the game, so it's much more a, kind of, on-the-ground, bootstrap approach toward looking at individual companies rather than trying to make large macroeconomic calls.
Steve Halpern: Now, are you also focused on the valuations of those companies?
Jim Oberweis: Yeah, absolutely, so we call our process aggressive growth at a reasonable price, meaning we look at very high growth companies, but only when the valuations make sense. Now, don't get me wrong, we're willing to pay premium valuations in absolute terms, as long as the growth prospects of the company justify paying a higher price.
Steve Halpern: Now, instead of relying just on paperwork or information that's sent from China, you actually have team members on the ground who visit with companies and you, on occasion, visit directly with companies in China. How important is that direct approach to your stock selection process?
Jim Oberweis: Yeah, it's important. I mean, our approach was always we know how to pick stocks in areas where there's rapid change and high market inefficiencies. Where we have really, I think, done a great job is building out a team of folks with local culture and language experience; although, most of our team was educated at top ten MBA schools in the US.
My co-manager and my partner John Wong, MBA from Stanford, he's a Singaporean—first language is Mandarin. Two analysts with MBAs from Wharton and Columbia that are there all the time; it's a full-time job and they're based in China and really kicking the tires.
As you can appreciate, financials are a little different in China. Having a relationship, and having on-the-ground presence, and ability to go and physically look at companies and do your own due diligence, it's really a must in China.
Steve Halpern: Now, the media appears obsessed over concerns that China's growth could be slowing. Do you share that concern or do you think this overall negative sentiment is creating a longer term opportunity?
Jim Oberweis: Honestly, I think it is creating an opportunity. We have been doing this for eight years and, if you look back, there's been, really, the full gambit and spectrum, in terms of enthusiasm towards China, from anywhere from disdain when we first started, to over exuberance a few years ago, and now we're back to almost hatred of Chinese equities.
I'd much rather own Chinese equities when they're unpopular rather than when everybody loves them, because the valuations tend to much better. Remember, based on what I told you before, we're not buying the banks and the state-owned enterprises and the telecom companies that are really tied at the hip to GDP.
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The expert featured in this column, James Oberweis, may or may not own positions in any investment vehicle mentioned here. The views and opinions expressed are his or her own.
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