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Global Innovators Fund Review of Q4 2016
2
Matthew Page, CFA
• Portfolio manager of strategy since 2010, previously analyst on strategy from 2005 • Joined Guinness Atkinson Asset Management in September 2005 • CFA Charterholder • Previous to Guinness Atkinson, worked for Goldman Sachs as an analyst in Fixed
Income Currencies and Commodities (FICC) • Graduated from University of Oxford, with a Masters degree in Physics in 2004
Dr Ian Mortimer, CFA
• Portfolio manager of strategy since 2010 • Joined Guinness Atkinson Asset Management in December 2006 • CFA Charterholder • Graduated from University of Oxford, with a D.Phil. in Physics in 2006 • Graduated from University College London, University of London, with a First Class
Honors Masters degree in Physics in 2003
Fund manager biographies
Source: Guinness Atkinson Asset Management
3 Global Innovators strategy
Global multi-cap growth with a value discipline The Fund seeks:
• Quality growth companies at attractive valuations • Highly disciplined, systematic approach • Focussed portfolio of best ideas • Seeking high active share • Mid-large cap bias • Buy and hold – low turnover
Objective: Long-term capital appreciation
Benchmark MSCI World Number of positions 30 Position size 3-4% Market cap range > $0.5bn Max industry weight 30% Av. holding period 3-5 years Cash range 1-3%
Source: Guinness Atkinson Asset Management (data as of 12.31.2016)
* Run in its current form since 2003 ** See page 8 for details on the expense waiver
• AUM in strategy: $237M
• Investor class: IWIRX Inception 12.15.98** Expense ratio* 1.24% (net); 1.27% (gross) • Institutional class: GINNX Inception 12.31.15 Expense ratio* 0.99% (net); 1.07% (gross)
4
Investors often aim to identify “quality” companies for investment, in order to seek returns on investment. But the challenge is how to objectively identify quality companies?
We believe return on capital is the best objective identifier of ‘quality’ businesses We seek companies that exhibit:
1. Persistently above average return on capital over an entire cycle • Established competitive advantage • High probability of continued above average return on capital (‘good companies stay
good’)
2. Improving return on capital profile • Potential to achieve above average return on capital in the future • Significant opportunities to reinvest cash flow in high return projects
But must also consider whether the company is a good investment…
What do we mean by a “quality” company?
5
We believe quality companies that can demonstrate some element of innovation through their business model, or their products, or through technological advances have the best chance of defending their superior return on capital
We believe buying companies at attractive valuations significantly increases their investment
return potential over the long term and allows us to better mitigate unforeseen risks
We believe equal weighting and low turnover add useful incremental returns
We believe that our disciplined, intelligently designed, repeatable process maximises our chance of success.
Investment characteristics we seek to identify
Source: Guinness Atkinson Asset Management
6 Investment process: systematic, repeatable, robust
Improving return on capital profile businesses
Persistently high return on capital businesses
Prioritization Business strength, Valuation, Growth
Portfolio addition At least 50% upside on 3 year view, better
risk/return than a current holding
Fundamental analysis Proprietary modelling, Assessment of return potential, Risk analysis,
Competitive advantage, Market sentiment
Watchlist Like the business, don’t like the
valuation
Reject Weak business, poor allocator of
capital, industry in decline
Source: Guinness Atkinson Asset Management
7
Prospect for return from cash-flow growth • Higher than average return on capital or prospect of achieving it • Confidence that earnings can grow – revenue growth, margin
expansion • Consider full spectrum of growth companies to identify best
opportunities Prospect for return from re-rating
• Company out of favour or irrational hype has abated • Multiple (P/E, EV/EBITDA) discount to peers, or market, or
company history • Avoid story stocks, don’t pay up for expected future growth
Recognise markets can be irrational over short term • Do not know when market will re-value company • Buy and hold • Use any short term movements to trim/top-up position
What we are looking for when we buy a new company for the fund
Source: Guinness Atkinson Asset Management P/E = Price/Earnings; EV = Earnings Value; EBITDA = Earnings Before Interest, Debt and Amortization
Business value creation
Return from re-rating
>50% upside to current
valuation over 3 years
+
=
8 Performance vs. benchmark
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the Funds may be lower or higher than the performance quoted. Total returns reflect a fee waiver in effect and in the absence of this waiver, the total returns would be lower. Performance data through the most recent month-end may be obtained by visiting www.gafunds.com. The Adviser has contractually agreed to reimburse expenses (excluding Acquired Fund Fees and Expenses, interest, taxes, dividends on short position and extraordinary expenses) in order to limit the Total Annual Operating Expenses for Institutional Shares and for the Investor Class to 0.99% and 1.24% respectively through June 30, 2018 Performance data shown for Global Innovators, Institutional Class (GINNX), prior to its launch date on 12.31.2015, uses performance data from the Global Innovators, Investor Class (IWIRX).
Source: Guinness Atkinson Asset Management, Bloomberg
As at 12.31.2016 (in USD) Q4 2016 1 year 3 years annualized 5 years
annualized 10 years
annualized
Since inception
annualized
Global Innovators, Investor Class1 2.17% 9.51% 6.12% 15.80% 8.14% 6.93%
Global Innovators, Institutional Class2 2.24% 9.81% 6.22% 15.86% 8.17% 6.95%
MSCI World Index 1.99% 8.18% 4.43% 11.08% 4.46% 5.13%
1Investor class Ticker: IWIRX Inception 12.15.1998 Expense ratio* 1.24% (net); 1.27% (gross) 2Institutional class Ticker: GINNX Inception 12.31.2015 Expense ratio* 0.99% (net); 1.07% (gross)
9 Fund performance
Source: Guinness Atkinson Asset Management, Bloomberg (data as of 12.31.2016)
Performance data quoted represents past performance and does not guarantee future results
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
10.9
%
11.8
%
18.8
%
21.2
%
-45.
4%
45.2
%
17.0
%
-6.5
%
19.9
%
45.3
%
12.6
%
-3.0
%
9.5%15
.3%
10.1
% 20.7
%
9.7%
-40.
3%
30.9
%
12.4
%
-5.0
%
16.6
% 27.4
%
5.6%
-0.3
%
8.2%
-50%-40%-30%-20%-10%
0%10%20%30%40%50%
Guinness Atkinson Global Innovators MSCI World Index
-50%
0%
50%
100%
150%
200%
250%Total return (USD)
10 Attribution in quarter (all in USD)
Top 5 performing stocks Bottom 5 performing stocks
Total return Total returnNVIDIA 56.0% Shire -10.8%
Boeing 19.1% AAC Technologies Holdings -9.6%
Cognizant Technology 17.4% New Oriental Education -9.2%
VeriFone 12.6% Gilead -8.9%
WisdomTree 9.3% SAP -4.4%
Source: Guinness Atkinson Asset Management, Bloomberg (data as of 12.31.2016) Fund holdings are subject to change.
Sheet1
Top 5 performing stocksBottom 5 performing stocks
Total returnTotal return
NVIDIA56.0%Shire-10.8%
Boeing19.1%AAC Technologies Holdings-9.6%
Cognizant Technology 17.4%New Oriental Education-9.2%
VeriFone12.6%Gilead-8.9%
WisdomTree9.3%SAP-4.4%
11 Changes in the quarter
Sells Buys Lenovo New Oriental Education State Street Fanuc Li & Fung Nike Taiwan Semiconductor AAC Technologies
Source: Guinness Atkinson Asset Management (as of 12.31.2016)
12 Changes in the quarter - effect on sector allocation
Source: Guinness Atkinson Asset Management (as of 12.31.2016)
Portfolio sector changes over Q4 2016 (12.31.2016 vs 9.30.2016)
-4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
Financials
IT
Energy
Utilities
Telecos
Materials
Con. staples
Real Estate
Health Care
Industrials
Con. discretionary
13 Changes in the quarter - effect on geographic allocation
Source: Guinness Atkinson Asset Management (as of 12.31.2016)
Portfolio geographic changes over Q4 2016 (12.31.2016 vs 9.30.2016)
-4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0%
North America
Europe
Asia
14 Portfolio allocation by estimated future long term growth rate
Portfolio today
Range last
10years
10 – 20% growth
20% + growth
30% 20 - 50%
63% 30 - 60%
7% 0 - 20%
0 – 10% growth
Source: Guinness Atkinson Asset Management estimates (as of 12.31.2016) Future allocations presented are the belief of Guinness Atkinson which are used to help allocate the portfolio.
Allocation
Sheet1
Portfolio todayRange last 10years
0 – 10% growth30%20 - 50%
10 – 20% growth63%30 - 60%
20% + growth7%0 - 20%
15 Portfolio allocation by estimated future long term growth rate
Portfolio today
Range last
10years
10 – 20% growth
20% + growth
30% 20 - 50%
63% 30 - 60%
7% 0 - 20%
0 – 10% growth
Source: Guinness Atkinson Asset Management estimates (as of 12.31.2016) Future allocations presented are the belief of Guinness Atkinson which are used to help allocate the portfolio.
Allocation
Sheet1
Portfolio todayRange last 10years
0 – 10% growth30%20 - 50%
10 – 20% growth63%30 - 60%
20% + growth7%0 - 20%
16 Portfolio profile
Source: Guinness Atkinson Asset Management, Bloomberg (data as of 12.31.2016) Fund holdings are subject to change
PE PE
16Y 17Y
Roper Technologies Inc Capital Goods 19.2 US 3.3% 28.0 25.2Eaton Corp PLC Capital Goods 30.8 US 3.3% 16.0 15.3Boeing Co/The Capital Goods 98.1 US 3.6% 21.9 16.8FANUC Corp Capital Goods 35.7 JP 3.1% 23.8 34.1Schneider Electric SE Capital Goods 41.7 FR 3.4% 18.2 16.9Siemens AG Capital Goods 104.8 DE 3.5% 15.6 15.8NIKE Inc Consumer Durables & Apparel 87.5 US 3.4% 23.6 21.7H&R Block Inc Consumer Services 4.9 US 3.4% 13.8 13.9New Oriental Education & Technology Group IncConsumer Services 7.6 CN 2.8% 27.2 23.5Intercontinental Exchange Inc Diversified Financials 33.8 US 3.5% 20.5 18.3WisdomTree Investments Inc Diversified Financials 1.6 US 3.1% 39.5 41.0Schlumberger Ltd Energy 118.8 US 3.3% 72.7 43.8Danaher Corp Health Care Equipment & Servic 56.2 US 3.3% 21.6 19.8Alphabet Inc Internet Software & Services 561.3 US 3.3% 22.9 19.2Comcast Corp Media 171.4 US 3.3% 19.8 18.3Shire PLC Pharmaceuticals, Biotechnology 51.4 US 3.0% 13.4 11.2Gilead Sciences Inc Pharmaceuticals, Biotechnology 96.7 US 3.3% 6.3 6.6Applied Materials Inc Semiconductors & Semiconductor 35.6 US 3.5% 18.5 13.7Infineon Technologies AG Semiconductors & Semiconductor 19.7 DE 3.3% 21.7 21.1QUALCOMM Inc Semiconductors & Semiconductor 97.1 US 3.3% 15.1 13.8Intel Corp Semiconductors & Semiconductor 175.1 US 3.3% 13.6 13.0NVIDIA Corp Semiconductors & Semiconductor 57.0 US 3.4% 67.7 38.4PayPal Holdings Inc Software & Services 49.6 US 3.4% 26.3 22.7Cognizant Technology Solutions Corp Software & Services 34.6 US 3.4% 16.5 15.3SAP SE Software & Services 108.6 DE 3.6% 22.1 19.7Check Point Software Technologies Ltd Software & Services 15.6 IL 3.4% 18.7 17.2VeriFone Systems Inc Technology Hardware & Equipmen 2.0 US 3.5% 10.7 12.9AAC Technologies Holdings Inc Technology Hardware & Equipmen 11.9 CN 3.5% 20.0 16.1Samsung Electronics Co Ltd Technology Hardware & Equipmen 222.0 KR 3.4% 12.6 9.3Cisco Systems Inc Technology Hardware & Equipmen 151.7 US 3.3% 13.0 12.7
Average mkt. cap 91.1 Total portfolio 17.9 16.5Median mkt. cap 50.5 Y-o-Y growth 9%
MSCI World Index 19.1 16.5Fund premium / (discount) -6.2% -0.2%
Name Country of domicile % NAVMkt. capIndustry
17 Portfolio profile
Source: Guinness Atkinson Asset Management, Bloomberg (data as of 12.31.2016) Fund holdings are subject to change
PE PE
16Y 17Y
Roper Technologies Inc Capital Goods 19.2 US 3.3% 28.0 25.2Eaton Corp PLC Capital Goods 30.8 US 3.3% 16.0 15.3Boeing Co/The Capital Goods 98.1 US 3.6% 21.9 16.8FANUC Corp Capital Goods 35.7 JP 3.1% 23.8 34.1Schneider Electric SE Capital Goods 41.7 FR 3.4% 18.2 16.9Siemens AG Capital Goods 104.8 DE 3.5% 15.6 15.8NIKE Inc Consumer Durables & Apparel 87.5 US 3.4% 23.6 21.7H&R Block Inc Consumer Services 4.9 US 3.4% 13.8 13.9New Oriental Education & Technology Group IncConsumer Services 7.6 CN 2.8% 27.2 23.5Intercontinental Exchange Inc Diversified Financials 33.8 US 3.5% 20.5 18.3WisdomTree Investments Inc Diversified Financials 1.6 US 3.1% 39.5 41.0Schlumberger Ltd Energy 118.8 US 3.3% 72.7 43.8Danaher Corp Health Care Equipment & Servic 56.2 US 3.3% 21.6 19.8Alphabet Inc Internet Software & Services 561.3 US 3.3% 22.9 19.2Comcast Corp Media 171.4 US 3.3% 19.8 18.3Shire PLC Pharmaceuticals, Biotechnology 51.4 US 3.0% 13.4 11.2Gilead Sciences Inc Pharmaceuticals, Biotechnology 96.7 US 3.3% 6.3 6.6Applied Materials Inc Semiconductors & Semiconductor 35.6 US 3.5% 18.5 13.7Infineon Technologies AG Semiconductors & Semiconductor 19.7 DE 3.3% 21.7 21.1QUALCOMM Inc Semiconductors & Semiconductor 97.1 US 3.3% 15.1 13.8Intel Corp Semiconductors & Semiconductor 175.1 US 3.3% 13.6 13.0NVIDIA Corp Semiconductors & Semiconductor 57.0 US 3.4% 67.7 38.4PayPal Holdings Inc Software & Services 49.6 US 3.4% 26.3 22.7Cognizant Technology Solutions Corp Software & Services 34.6 US 3.4% 16.5 15.3SAP SE Software & Services 108.6 DE 3.6% 22.1 19.7Check Point Software Technologies Ltd Software & Services 15.6 IL 3.4% 18.7 17.2VeriFone Systems Inc Technology Hardware & Equipmen 2.0 US 3.5% 10.7 12.9AAC Technologies Holdings Inc Technology Hardware & Equipmen 11.9 CN 3.5% 20.0 16.1Samsung Electronics Co Ltd Technology Hardware & Equipmen 222.0 KR 3.4% 12.6 9.3Cisco Systems Inc Technology Hardware & Equipmen 151.7 US 3.3% 13.0 12.7
Average mkt. cap 91.1 Total portfolio 17.9 16.5Median mkt. cap 50.5 Y-o-Y growth 9%
MSCI World Index 19.1 16.5Fund premium / (discount) -6.2% -0.2%
Name Country of domicile % NAVMkt. capIndustry
18 Portfolio characteristics
Source: Guinness Atkinson Asset Management, Bloomberg (data as of 12.31.2016)
Industry breakdown % NAV Market cap. ($bn) breakdown % NAV Regional breakdown % NAV
Capital Goods 19.9% 50 49.5% Europe 13.6%Software & Services 16.7% Cash 1.2% MENA 3.3%Diversified Financials 6.6% 100.0% Cash 1.2%Pharmaceuticals, Biotechnology 6.2% 100.0%Consumer Services 6.1%Consumer Durables & Apparel 3.3%Media 3.2%Energy 3.2%Health Care Equipment & Services 3.2%Cash 1.2%
100.0%
19 Portfolio allocation since launch
Sector allocation
Geographic allocation
Source: Guinness Atkinson Asset Management (data as of 12.31.2016) EM = Emerging Markets
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%Cash
Con. discretionary
Con. staples
Energy
Financials
Health Care
Industrials
IT
Materials
Telecos
Utilities
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Cash
Asia
Europe
North America
20 Portfolio today vs MSCI World benchmark
Source: Guinness Atkinson Asset Management, Bloomberg (data as of 12.31.2016)
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
Information Technology
Industrials
Consumer Discretionary
Health Care
Utilities
Real estate
Telecommunication Services
Energy
Materials
Consumer Staples
Financials
Cash
Fund allocation vs MSCI World Index
Fund
Index
-20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0%
Information Technology
Industrials
Consumer Discretionary
Health Care
Utilities
Real estate
Telecommunication Services
Energy
Materials
Consumer Staples
Financials
Cash
Over / under weights
21 What happened in 2016?
Source: Guinness Atkinson Asset Management, Bloomberg (performance from 12.31.2015 to 12.31.2016) Past performance is no guarantee of future results.
-10% -5% 0% 5% 10% 15% 20% 25% 30%
MSCI World Health Care Index
MSCI World Consumer Staples Index
MSCI World Consumer Discretionary Index
MSCI World Real Estate Index
MSCI World Telecom Service Sector Index
MSCI World Utilities Sector Index
MSCI World Information Technology Index
MSCI World Financials Index
MSCI World Industrials Index
MSCI World Materials Sector Index
MSCI World Energy Sector Index
% Return
22 What happened in 2016?
Source: Guinness Atkinson Asset Management, Bloomberg (performance from 12.31.2015 to 12.31.2016) Past performance is no guarantee of future results.
0%
2%
4%
6%
8%
10%
12%
14%
MSCI WorldIndex
MSCI US Index MSCI EmergingMarkets Index
MSCI AC AsiaEx. Japan Index
MSCI JapanIndex
MSCI EuropeIndex
% R
etur
n
23 What happened in 2016?
Source: Guinness Atkinson Asset Management, Bloomberg (data as of 12.31.2016) Past performance is no guarantee of future results
70
75
80
85
90
95
100
105
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Inde
xUS Dollar index (DXY)
24 What happened in 2016?
Source: Guinness Atkinson Asset Management, Bloomberg (data as of 12.31.2016) Past performance is no guarantee of future results.
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16
MSCI World Value - MSCI World Growth
Growth outperforming value
Value outperforming growth
25
*The Advisor has contractually agreed to reimburse expenses (excluding Acquired Fund Fees and Expenses, interest, taxes, dividends on short position and extraordinary expenses) in order to limit the Total Annual Operating Expenses for Institutional Shares and for Investor Class to 0.99% and 1.24% respectively through June 30, 2018. To the extent that the Advisor absorbs expenses to satisfy this cap, it may recoup a portion or all of such amounts absorbed at any time within three fiscal years after the fiscal year in which such amounts were absorbed, subject to the expense cap in place at the time recoupment is sought, which cannot exceed the expense cap at the time of waiver. The expense limitation agreement may be terminated by the Board of the Fund at any time without penalty upon 60 days’ notice.
This information is authorized for use when preceded or accompanied by a prospectus for the Guinness Atkinson Funds. The prospectus contains more complete information including investment objectives, risks, fees and expenses related to an ongoing investment in the Fund. Please read it carefully before investing.
Diversification does not assure a profit or protect against loss in a declining market
Mutual fund investing involves risk and loss of principal is possible. Investments in foreign securities involve greater volatility, political, economic and currency risks and differences in accounting methods. The Fund also invests in smaller companies, which will involve additional risks such as limited liquidity and greater volatility. The Fund is non-diversified meaning its assets may be concentrated in fewer individual holdings than diversified funds. Therefore, the Fund is more exposed to individual stock volatility than diversified funds.
Opinions expressed are subject to change and should not be considered investment advice.
Forward earnings are a company's forecasted, or estimated, earnings made by analysts or by the company itself.
Cash flow is the total amount of money being transferred into and out of a business.
Fund holdings and sector allocations are subject to change and are not recommendations to buy or sell any security.
Disclosure
26 Disclosure
EV/EBITDA, also known as Enterprise or EBITDA Multiple, is a ratio used to determine the value of a company. The enterprise multiple looks at a firm as a potential acquirer would, because it takes debt into account.
Price to Earnings Ratio (P/E) is A valuation ratio of a company's current share price compared to its per-share earnings.
Return on Capital is a return from an investment that is not considered income.
Market capitalization (cap) is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.
MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.
The MSCI World Growth Index captures large and mid cap securities exhibiting overall growth style characteristics across Developed Markets.
The MSCI World Value Index captures large and mid cap securities exhibiting overall value style characteristics across Developed Markets.
One cannot invest directly in an index. Distributed by Foreside Fund Services, LLC
Global Innovators FundFund manager biographiesGlobal Innovators strategyWhat do we mean by a “quality” company?Investment characteristics we seek to identifyInvestment process: systematic, repeatable, robust What we are looking for when we buy a new company for the fundPerformance vs. benchmarkFund performanceAttribution in quarter (all in USD)Changes in the quarter Changes in the quarter - effect on sector allocationChanges in the quarter - effect on geographic allocationPortfolio allocation by estimated future long term growth ratePortfolio allocation by estimated future long term growth ratePortfolio profilePortfolio profilePortfolio characteristicsPortfolio allocation since launchPortfolio today vs MSCI World benchmarkWhat happened in 2016?What happened in 2016?What happened in 2016?What happened in 2016?DisclosureDisclosure
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