Guinness Atkinson Funds

Asia Pacific Dividend Fund - April 2007

Guinness Atkinson Funds
Investment Research Series


Asia Pacific Dividend Fund - April 2007

 

Equity markets in Asia regained their poise after a rocky start to the month with the region (as measured by the MSCI All Country Pacific Free ex Japan Index) rising 3.30%. The Chinese domestic equity markets, which triggered the bout of soul searching in the rest of the world, shook off their local concerns and rose over 10% in the month. To remind readers, the Chinese domestic equity markets are not open to international investors and thus are driven almost entirely by local sentiment and liquidity conditions.

Chinese economic conditions do in fact remain very strong and this is giving policymakers some cause for concern. The most recent batch of economic data showing a sharp increase in money supply and a substantially larger trade surplus are, we believe, due to one-off events and do not indicate acceleration in liquidity. However, recent moves to increase banks’ required reserve ratios and the move in March increase interest rates by 0.27% point to the fact the government is seeking to restrain, not curtail, growth.

The south-east Asian markets of Indonesia, Malaysia and Singapore were the best performing markets during the month. In Indonesia, the domestic economy is benefiting from a combination of improved salaries in the public sector boosting consumer spending power; declining interest rates which are already down to 9% from over 10% at the end of last year; falling inflation as oil prices ease back; and increased investment in infrastructure and in the resources and mining sector. The government is also taking more positive steps to encourage investment by establishing three more special economic zones following the success of the earlier zones established in Batam, Bintan and Karimun islands.

Malaysia’s market has also been the beneficiary of increasing investment as the government pushes ahead with the Ninth Malaysia Plan. A General Election is looming and must be held before April 2008 which adds further impetus to economic pump priming. The main areas identified for urgent investment are the South Johor Economic Region (SJER), the Northern and Eastern Regions. For the SJER the infrastructure projects include upgrading and constructing new roads, a bridge, sewerage systems and waterfront beautification. Such projects not only benefit the construction and materials companies but also spill over into the wider economy.

Taiwan and Korea have performed less well over the past year and the past month continued that trend. Nevertheless within these markets there have been bright spots. The exporters in Korea have not done well as investors have focused on those stocks with higher earnings’ visibility and attractive relative valuations. In this environment it is the materials, energy, shipbuilding and financial sectors which have been the better performers. In Taiwan, the better performing stocks were the higher yielding stocks while the high growth technology stocks remained weak, largely on the back of uncertainty in US which remains the major export market.

Investors will not be surprised that given our assessment of recent events we have been active on the portfolio. We have cut exposure to Australia and New Zealand with sales of Great Southern Plantations and Fletcher Building. In addition we took some profit on our holding in the fertilizer company Incitec Pivot. The proceeds of these sales combined with un-invested cash were put into China, Hong Kong, Korea, Malaysia, Singapore and Taiwan. New holdings in China’s Yanzhou Coal and Singapore’s Jurong Technology were augmented by additions to stocks that suffered heavier falls such as China Shipping, Petrochina, Esprit in Hong Kong and Compal Electronics in Taiwan.

 

Portfolio Allocation Sector Allocation

The prospects for Asian stock markets in the short term are still going to be affected by changes in US conditions. As we have said before, Asia is moving towards reducing its dependence on exports and creating a domestic growth engine but it is not there yet. The big growth drivers at present are China and India but it should be noted that policymakers in both economies are concerned about the threat posed by excessive growth and maintain a bias toward tightening.

That said, the economies in Asia are in the process of deepening and domestic activity is picking up. Currencies have been appreciating against the Dollar over the past year and a quarter and it is likely this will continue. Asian companies, in our opinion are running their businesses much more prudently with a focus on profitability and return on investment and this has led to improved stock market valuations.

Dividend payouts are the most visible manifestation of this trend and the steady rise in the amount of earnings paid out to shareholders says so much more about the style of management now being adopted across Asia. These payouts are also being augmented by capital restructurings and returns of capital to shareholders. In Taiwan we are also seeing the positive effects of an accounting policy change that will require different treatment for stock dividends and stock bonuses which is set to increase the amount of cash rather than stock paid to shareholders.

These trends we believe will underpin Asian stocks over the medium to long term.

It is now a year since the launch of the Guinness Atkinson Asia Pacific Dividend Fund and we would like to take this opportunity to thank those who have invested and to welcome new shareholders.

The aim of the Fund is to provide long term capital appreciation through investment in higher dividend paying stocks. Although the income itself is important we also believe that those companies that can maintain the discipline of high payouts will also follow a similar discipline in corporate governance, in concentrating on profits and cash flow and also on return on investment.

For shareholders in the Fund this approach gives them access to one of the world’s most dynamic and fastest growing regions, home to one third of the world’s population, in a more conservative investment approach.

 

Edmund Harriss

April 11, 2007

Performance data quoted represents past performance and does not guarantee future results.

Mutual fund investing involves risk and loss of principal is possible. The Fund invests in foreign securities which involves greater volatility, political, economic and currency risks and differences in accounting methods. The Fund is non-diversified meaning it concentrates its assets in fewer holdings than diversified funds. Therefore, this Fund is more exposed to individual stock volatility than diversified funds.

Asia Pacific Dividend Fund Top 10 Holdings as of March 31, 2006

1

Digi.Com BHD

3.30%

2

Angang Steel Co

3.16%

3

Posco

3.14%

4.

Esprit Holdings

3.14%

5.

VTech Holdings

3.09%

6.

Incitec Pivot

3.02%

7.

Bank of East Asia

2.99%

8.

Krung Thai Bank

2.98%

9.

United Overseas Bank

2.96%

10

Telekomunikasi Tbk PT

2.92%


Fund holdings, geographic and sector allocations are subject to change at any time and are not recommendations to buy or sell any security.

The MSCI All Country Pacific Free ex-Japan Index (MSCI AC Pacific Index) is a free float-adjusted, capitalization-weighted index that is designed to measure equity market performance in the Pacific region. The Index is made up of the stock markets of Australia, China, Hong Kong, Indonesia, Korea, Malaysia, New Zealand, Philippines, Singapore, Taiwan and Thailand.

The Standard & Poor’s 500 Index (S&P 500) is a capitalization-weighted index of 500 stocks in the United States.

One cannot invest directly in an index. Dividend yield is a measure of the annual dividend payment expressed as a percentage. It is calculated by dividing the annual dividend payment to shareholders by the price of the stock.

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 Funds. Please read the prospectus carefully before investing.

Opinions expressed are subject to change, are not guaranteed and should not be considered investment advice.

Distributed by Quasar Distributors, LLC. (04/07)