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GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–January2018
SummaryReview&Outlook
Fund&Market
• ThepastmonthhasseenAsianmarketsrisestronglywiththeMSCIACPacificexJapanIndexrise6.99%inUSdollarterms.
• TheseconditionsdonotsuitthisFund’sparticularstyleandthusitlaggedthemarketby2.51%.• ThebestperformingsectorswereChinaEnergy,KoreaandSingaporeIndustrials,ChinaTechnology
andChinaFinancials.Amongstcountries,Chinawasthestandoutwinnerrisingover12%indollartermsfollowedbyThailandandMalaysia.
• WewouldnotexpecttooutperformintheseconditionsandalthoughtheFundhaslaggedinJanuary,itisstillintouchwithbroadmarket.OnoccasionsofmarketweaknessattheendofthemonththeFunddemonstrateddefensivequalitiesaswewouldhope.
• Inthemonth,allfourofourChinesebankswereoutperformers,beatingthemarketby7%ormoreindollarterms.WealsosawgoodcontributionsfromAustralianretailerJBHi-Fi,ThaienergycompanyPTT,TaiwantechnologycompaniesNovatekandTaiwanSemiconductor,andfromChineseshipbuilderYangzijiang.
• TheMalaysianringgit,ThaibahtandChineseyuanwerethenestperformingcurrencies;theKoreanwonandPhilippinepesoweretheweakest.
• ThepricesofBrentcrudeoilandGoldbothrose3%,whichwasinlinewithdollarweakness.• Twentytwoofthethirty-sixstockslaggedthemarketmostlybecausetheyarelowerbetanamesso
lesssensitivetomarketmovements.Therewereacoupleofstockshoweverthatarefacingheadwinds.LukFookjewelryreporteddeceleratinggrowthinsamestoresalesinChinaandguidednextyear’sgrowthat~8%comparedtoearlierforecastsof~14%,whichdisappointedthemarket.Li&FungwasweakeronmacroconcernsfollowingamoreaggressivetradestancefromtheUSfollowingtheimpositionoftariffsonChinese-madesolarpanelsanddomesticappliances.
Fundperformance
asof1/31/2018
YTD 1YR 3YR 5YR
10YR
AsiaPacificDividendBuilderFund(GAADX) 4.48% 36.82% 13.69% 9.11% 5.90%
MSCIACPacificexJapan 6.99% 39.05% 12.72% 8.60% 6.88%
Allreturnsover1yearannualized.Source:Bloomberg,GuinnessAtkinsonAssetManagement
ExpenseRatio:1.11%(net)*;3.14%(gross)
GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–January2018
Performancedataquotedrepresentspastperformance;pastperformancedoesnotguaranteefutureresults.Theinvestmentreturnandprincipalvalueofaninvestmentwillfluctuatesothataninvestor’sshares,whenredeemed,maybeworthmoreorlessthantheiroriginalcost.CurrentperformanceoftheFundmaybelowerorhigherthantheperformancequoted.Performancedatacurrenttothemostrecentmonthendmaybeobtainedbycalling800-915-6566and/orvisitingwww.gafunds.com.Performancedatadoesnotreflectthe2%redemptionfeeforsharesheldlessthan30daysand,ifdeductedthefeewouldreducetheperformancenoted.Totalreturnsreflectafeewaiverineffectandintheabsenceofthiswaiver,totalreturnswouldbelower.
EventsinJanuary
• USbondyieldsroseandthedollarweakened.TheUSGovernment10Yearyieldrosefrom2.5%to2.7%andbyFeb2nditreached2.84%.Atthesametimethedollarweakenedontrade-weightedbasisby3.2%(asmeasuredbytheDXYDollarIndexwhichismadeupofEUR57.6%,JPY13.6%,GBP11.9%,CAD9.1%,SEK4.2%andCHF3.6%).
• TheUSannouncedpunitivetariffsonChinese-madesolarpanelsanddomesticappliances.ThisfollowsagenerallymoreactivestanceontradematterswithrespecttoNAFTA.TheChineseresponsesofarhasbeennoticeablymuted.
• InlightoftheweakerdollartheChinesecurrencyhasbeenallowedtoappreciatebrisklyagainstthedollarby3.4%,toitsstrongestlevelsinceJuly2015.Onatradeweightedbasis,theChinesecurrencyiseffectivelyunchangedoverthemonth.
• Inthetechnologysector,thesmartphonerelatedcompaniesareseeingsharepricepressureonweakerdemandinbothChinesesmartphoneandiPhoneXdemand.ChannelcheckssuggestthatAppleisexpectingmoremoderatedemandandisthusscalingbackordersforcomponents.ThisisnotnewnewsandmanyofthesestockshavebeenpricingthisinsinceNovember.
Outlook
• Asianstockmarketsarewellsupportedbyearning’sgrowthandmacro-economicmomentumsupportedbydomesticactivity(particularlyinChina,SingaporeandThailand)andbyglobalgrowthwhichislookingbrighterthanithasformanyyears.
• Wemustexpectthatreportedearningsgrowthwilldecelerateincomingmonths.Thisisamathematicalcertaintyasthecomparisonswillbemadeagainstahigherbase.
• ValuationsinAsiaforthemostpartremainsupportive,especiallyforthosebusinesseswithaprofileofconsistentprofitability.Wearecautiousonthosestocksinthecyclicalsectorsdrivenbymacro-factorsespeciallythoseexposedtoindustrialcommodityprices,likethesteelmakers.
• WeexpecttoseeUSinterestratesmovetowardnormalizationandwearealreadyseeingthebondmarketmovemorequickly.ThismayremovetheneedfortheFederalReservetomovefasterbuttheeffectswillalmostcertainlybefeltintheequitymarkets.
• Thebestdefenses:focus,aswedo,onthosecompanieswhosereturnoncapitalhasbeensustainedabovethecostofcapitalbecauselessoftheirinvestmentvaluewillbeerodedbyahigher
GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–January2018
discountrate;focus,aswedo,oncompanieswithonlymoderatedebtlevelswiththeratioofdebttoequitynogreaterthan1.
Discussion
Asianearningsconsensusforecastswereupgradedafurther2.2%for2018and2019fortheMSCIAsiaPacificexJapanindex.ChineseandSingaporeanmarketssawthebiggestmoves,up3%and2%respectively.Overthepasttwelvemonthsamountstoa16%upgradetoChinaestimatesand5%upgradetoSingapore.DowngradestoforecastsinJanuarywereforTaiwan,PhilippinesandIndia.AustralianandKoreaearningsestimateswereunchangedfor2018andupslightlyfor2019.
WethinkthatAsianmarketswillnowbemuchmorefocusedontheoutlookforearnings.InthepasteighteenmonthsitisouropinionthatmarketmoveshavebeendrivenprimarilybyanexcessivelylowvaluationrelativetobothAsia’shistoryandtodevelopedmarkets.Reportedearningsgrowthhasbeenstronginthepastyearandthishasprovidedsupporttotherallybutnowwethinkinvestorsarelookingaheadforreasonstocontinuetobuy.
UpgradestoChinahavebeensignificantashasChina’sequitymarketperformance.WecontinuetoremindreadersthatAshare(ShanghaiandShenzhen)marketperformanceisnotthebestguidetoassessingChina’seconomicwell-being.Instead,thesemarketstendtobemoreresponsivetoshorttermliquidityconditionsandthisisespeciallytrueoftheShenzhenstockexchange.ButChinaisdoingwell:
• Economicgrowthmomentumisevidentwithoverallgrowthof6.9%in2017vs6.7%in2016.• RisingcommoditypricesareabenefitforChinabecauseitallowsmaterialsproducerstoraise
prices• Pricingpowerforheavyindustryand16%growthinindustrialprofitsimprovesthedebtservicing
capacityofthemoreheavilyindebtedsectors• Higherdebtservicingcapacityhasalsobeenevidentinslowingnon-performingloanformationin
thebankingsector• Thereisnowevidencethatintensifiedeffortsatfinancialreformareprovingeffectiveandnot
destabilizingassomefeared;creditgrowthhasslowedthisyearanddeleveraginginthebankingsectorisbeingenforced.
• Domesticconfidenceishigherasevidencednotonlyinretailsalesandtherealestatesectorbutalsointhereductionincapitaloutflowswhichhasbeenaccompaniedbyrenminbistrengthagainstthedollarto2015levels.
Singaporeupgradesarelesssignificanttotheworldbutareinterestingnevertheless.Thecountryisdevelopedmarketandhasbeenintheeconomicdoldrumsforanumberofyears.Productioncostsarehigherthereandsothegoalhasbeentofindareplacementfortheelectronicmanufacturingsegmentthatdrovegrowthintheyearsbeforethefinancialcrisis.Policymissteps,possiblythegreatestbeingthecontrolsonimmigration,forcedwagecostssharplyhigherandfurthererodedcompetitiveness.Italsohadanimpactonthepropertymarketwhicherodeddomesticconfidencethroughanegativewealtheffect.
GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–January2018
TheSingaporedollardeclinedagainsttheUSdollarfrommid-2014totheendof2016afterstrengtheningfairlysteadilyovertheprevious13years.
However,conditionshavebeguntochangeforthebetter.Theshiftintohealthcare(biotechandpharmaceuticals)isnowpayingoff.Singapore’sfinancialservices,especiallyinassetmanagementandwealthmanagementhavegainedcriticalmass.Macro-economicdatashowarecoveryinindustrialproductionandnon-oilexports.ConsumerconfidencewhichhasbeenfragileisnowshowingsignsoffirmingandtheSingaporedollarstrengthened8.5%in2017andhasrisenafurther1%inJanuary.
Portfolioactivity
WehavekepttheportfoliocompositionunchangedinJanuarybutwithflowsintotheFundwehavebeenabletoeffectrebalancing.ExamplebeneficiariesofthishavebeenLukFook,KT&GandLi&Fung.Thesestockshaveallbeenunderperformersthismonthasmarketattentionhasbeenelsewherewhichrepresentsagoodopportunitytotopupassumingwearecorrectinourtwobaseassumptionswhicharefirstly,thesebusinessesarelikelytosustaintheir8%-orbettercashflowreturnoninvestment(CFROI)andsecondly,thatthemarketundervaluesthatlikelypersistence.
LukFook,aswementionedearlier,hasunderperformedbecausesamestoresalesgrowthinitsChinajewelrystoreshasslowedbymorethaninvestorshadexpected.Thisgrowthslowdownhasbeenintheirsalesofgemsetswhicharehighermargin,butweregardedthisasalmostinevitablegiventhepreviousgrowthratewasunsustainable.Theconcernnowisthatwithmoregrowthcomingfromlowermargingoldproductswewillseeanoverallreductioninprofitability.However,itisourviewthatmargindeclineexpectationshavebeenoverdoneandsecond,ifinflationbecomesanissueweexpecttoseegoldpricespickupwhichwillbenefitLukFook.Wehavealreadya3%riseinthegoldpricethismonthandsoweconsiderLukFook’ssharepricedroptoabeknee-jerkreactionandwearebuyers.
KT&GisaKoreantobacconamewelikethatcomesinandoutoffavor,butitsprofitabilityhasbeenconsistent.Inrecentmonthsthesharepricewasboostedbythelaunchofits“heatnotburn”tobaccoproductbutsomearenowsayingthiswillstillresultinmarketsharelossforKT&G,margincompressionduetohigherproductioncostsandmarketingexpensesandthatitwilltakelongertoachievescaleeconomies.Theseviewshavecontributedtothe16%dropinthesharepricesinceitsmid-Novemberpeak.Wetakeheartfromrecentmanagementguidanceofafasternationalroll-outthisyear,fromsignsoffasterconsumeracceptanceoftheproductsandadditionallyfrommanagementsimproveddividendpolicywhich(let’snotoverstateit)ismoreshareholderfriendlybyensuringaminimum40%ofprofitswillbepaidoutasdividends.
Li&Fungisastockwehavewrittenaboutmanytimesbefore.Thecompanyactsasamiddle-manbetweenmanufacturersinAsiaandretailersintheUSandEurope.Inrecentyearsit'sbusinesshasbeensqueezedbyslowerdevelopedmarketdemandandbythedisintermediatingeffectsoftechnology.Li&Fungthereforehastoreinventitselftosomedegreeandre-focusontheserviceelementofitsbusinessandtodivestitselfofdirectproductionactivity.Theiraimistoprovideaproductdesign,sourcing,productionandshippingservicethatwillreducethetimebetweenproductconceptandfinaldeliveryfromaround40weeksto20.Theyaremakinggoodprogressandthesharepriceralliedlastyear.ItfellbackonPresident
GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–January2018
Trump’simpositionoftariffsonsolarpanelsandwhitegoods;investorsworrywhetherbroadtraderelationsareabouttodeteriorate.Webelievenotandthatthesharepriceweaknessisanopportunity.
Summaryandconclusion
Theportfolioistradingonaprice/earningsmultiplebasis,ata10%discounttothemarketasmeasuredbytheMSCIACPacificexJapanIndex.Thisindexisinturntradingatawiderdiscounttodevelopedmarketsthanitsten-yearaverage.Acombinationofaboveaveragecompaniesinouropinion,payingaboveaveragedividendsandtradingonabelow-averagevaluationseemstoustobeanattractiveone.
EdmundHarrissandMarkHammonds(portfoliomanagers)SharukhMalik(analyst)
TheFund’sinvestmentobjectives,risks,chargesandexpensesmustbeconsideredcarefullybeforeinvesting.Thestatutoryandsummaryprospectuscontainsthisandotherimportantinformationabouttheinvestmentcompany,anditmaybeobtainedbycalling800-915-6566orvisitinggafunds.com.Readitcarefullybeforeinvesting.
Investmentsinforeignsecuritiesinvolvegreatervolatility,political,economicandcurrencyrisksanddifferencesinaccountingmethods.Theserisksaregreaterforemergingmarketscountries.Non-diversifiedfundsconcentrateassetsinfewerholdingsthandiversifiedfunds.Therefore,non-diversifiedfundsaremoreexposedtoindividualstockvolatilitythandiversifiedfunds.Investmentsindebtsecuritiestypicallydecreaseinvaluewheninterestratesrise,whichcanbegreaterforlonger-termdebtsecurities.Investmentsinderivativesinvolverisksdifferentfrom,andincertaincases,greaterthantheriskspresentedbytraditionalinvestments.Investmentsinsmallercompaniesinvolveadditionalriskssuchaslimitedliquidityandgreatervolatility.Fundsconcentratedinaspecificsectororgeographicregionmaybesubjecttomorevolatilitythanamorediversifiedinvestment.Investmentsfocusedinasinglegeographicregionmaybeexposedtogreaterriskthaninvestmentsdiversifiedamongvariousgeographies.Investmentsfocusedontheenergysectormaybeexposedtogreaterriskthaninvestmentsdiversifiedamongvarioussectors.
MSCIACPacificEx-JapanIndexisamarketcapitalizationweightedindexthatmonitorstheperformanceofstocksfromthePacificregion,excludingJapanconsistingofAustralia,China,HongKong,Indonesia,Korea,Malaysia,NewZealand,Philippines,Singapore,Taiwan,andThailand.
DXYistheUSDollarIndexandindicatesthegeneralinternationalvalueoftheUSDollar.ItdoesthisbyaveragingtheexchangeratesbetweentheUSDandmajorworldcurrencies.TheIntercontinentalExchangeInc(ICE,whichoperatesglobalcommodityandfinancialproductsmarketplaces)computesthisbyusingtheratessuppliedbysome500banks.
OnecannotinvestdirectlyinanIndex.
GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–January2018
Price/EarningsRatio(P/E)isanequityvaluationmultiple.Itisdefinedasmarketpricepersharedividedbyannualearningspershare.
Opinionsexpressedaresubjecttochange,arenotaguaranteeandshouldnotbeconsideredinvestmentadvice.Pastperformanceisnotindicativeoffutureresults.
TopFundHoldingsasof01/31/18
1 JBHi-FiLtd 3.30%2 ChinaConstructionBankCorp-HShares 3.24%3 StShineOpticalCoLtd 3.11%4 ChinaMerchantsBankCoLtd-HShares 3.04%5 PTTPCL/Foreign 3.02%6 DBSGroupHoldings 2.88%7 NovatekMicroelectronicsCorp 2.86%8 SonicHealthcareLtd 2.85%9 Industrial&CommercialBankofChinaLtd-HShares 2.83%10 ChinaMobileLtd 2.82%
Fundholdingsandsectorallocationsaresubjecttochangeandarenotrecommendationstobuyorsellanysecurity.
DistributedbyForesideFundServices,LLC.