Taking the Long View

August 22, 2014

The world is fundamentally dependent on energy for economic growth and human progress, and this is unlikely to change. Global energy demand is projected by the International Energy Agency (IEA) to grow steadily over the coming years and future decades as population grows and per capita energy demand continues to rise. Emerging market population growth, together with higher levels of industrialization, urbanization and personal transportation will likely be the key drivers of this theme. While efficiency measures in developed markets could cap the rate of global energy demand growth, it is unlikely that they will be enough to offset a looming energy supply issue.

Based on IEA projections, traditional sources of energy will still be required to help satisfy this demand growth, and we think that crude oil, natural gas and coal could deliver most of the expected global demand growth in the coming years. Advances in technology could allow renewable and alternative energy sources to gain market share, and environmental issues will probably cause demand to switch away from hydrocarbon fuels towards these new sources of supply. All this will take time, but it has already started to happen.

The problem is that the oil and natural gas industry is basically unable to satisfy this demand growth. As it stands today, spare capacity in global oil production is limited to that held by Saudi Arabia, Kuwait and the United Arab Emirates (UAE) – and we believe it is probably less than 1 million barrels per day. The production from oil fields declines naturally every single day, and oil companies invest hard to offset these natural declines and to maintain steady production. With global production of around 92 million barrels per day, we estimate that the industry needs to replace around 6 million barrels of oil per day every year just to maintain current production levels. This alone is a Herculean task for the oil industry and yet, in addition, the oil industry needs to satisfy growing global oil demand.

The oil industry has been in the limelight a lot more in recent months, and it is fair to say that the sector gets more than its fair share of exposure to geopolitical issues around the world. With a large share of global oil production coming from the Middle East, Africa, Latin America and Russia, it is not surprising that the oil price and the valuation of oil equities can react sharply in the short term to major world events. In the last five years, the industry has had to deal with oil spills, industrial accidents, nationalizations, tax increases, civil wars, sanctions and invasions. These types of unpredictable events have generally caused short term crude oil and share price volatility. Some of it has produced positive results for the sector and some of it negative.

Timing an energy investment can be particularly difficult.  For instance, the MSCI World Energy Index outperformed the MSCI World Index by 20% between September 2010 and April 2011 and then underperformed the broad market (i.e. MSCI World Index) by 10% in the subsequent five months. This market fluctuation came primarily as a result of geopolitical events rather than company, sector or market events. However, looking through the short term volatility, the MSCI World Energy Index is up by 11.4% over the last five years, ending 07/31/2014, as OPEC (Organization of Petroleum Exporting Countries) spare capacity has dwindled and the oil market has steadily become tighter. And remember – all this has happened while US oil production has rebounded sharply as a result of the development of shale oil resources.

Even if the US adds a further 3 million barrel per day of new shale oil production into the market over the next three to five years, we still believe that the global oil supply/demand should be finely balanced and that crude oil prices should remain at the high end of their recent range – to incentivize new investment in production capacity and to temper global oil demand growth.

The Guinness Atkinson Global Energy Fund (GAGEX) is designed to reap the potential benefit from these key dynamics and its objective is to deliver long-term appreciation of energy equities, focusing on the oil & gas sector. Our #1 ranking for 10 year performance in the Lipper category, Global Natural Resources, supports our long-term strategy & goal. GAGEX was ranked 1 out of 40 funds for the 10 year period in the Global Natural Resources Lipper category based on total returns for the period ending 6/30/14.  For the same period ending 6/30/14, the fund ranked 5 out of 147 funds for 1 year, 21 out of 126 funds for 3 years, and 7 out of 106 funds for the 5 year period.

‘Market timing’ is a tough business, and we don’t claim to be experts at timing at all! What we do know is that the energy sector has produced positive returns over the long term.  For example, the MSCI World Energy Index has delivered a total return of 10.9% per annum (pa) version MSCI World Index delivering 8.2% pa over the ten years ending July 31, 2014, and MSCI World Energy Index delivered a total return of 11.3% pa vs. the MSCI World Index delivering 7.2% pa over the eighteen years ending July 31, 2014. We also know that the outlook for the energy industry supports further sustained long term energy demand, as supported by the IEA, which should correlate positively for energy investments. We think that using a diversified, professionally managed portfolio of energy equities is a sensible way of gaining consistent, through cycle exposure to the sector. Complementing the argument for long term allocation, we note that sentiment has improved towards the energy sector in recent months, but the sector is clearly still out of favor. We believe that the combination of a long term positive outlook plus near term poor sentiment might offer a particularly attractive entry point at the moment.


Jonathan Waghorn

Portfolio Manager

Guinness Atkinson Global Energy Fund



Past performance is not a guarantee of future results. Index performance is not indicative of fund performance. For current fund performance, please visit www.gafunds.com.


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


Mutual fund investing involves risk and loss of principal is possible.  The Fund invests in foreign securities which will involve greater volatility, political, economic and currency risks and differences in accounting methods. The Fund is non-diversified meaning it concentrates its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. The Fund also invests in smaller companies, which involve additional risks such as limited liquidity and greater volatility. The Fund’s focus on the energy sector to the exclusion of other sectors exposes the Fund to greater market risk and potential monetary losses than if the Fund’s assets were diversified among various sectors. The decline in the prices of energy (oil, gas, electricity) or alternative energy supplies would likely have a negative effect on the fund’s holdings.

The Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus and summary prospectus contains this and other important information about the investment company, and it may be obtained by calling 800.951.6566 or visiting gafunds.com. Read it carefully before investing.

Lipper Analytical Services, Inc. is an independent mutual fund research and rating service.  Each Lipper average represents a universe of Funds with similar invest objectives.  Rankings for the periods shown are based on Fund total returns with dividends and distributions reinvested and do not reflect sales charges.

MSCI World Energy Index is an unmanaged index composed of more than 1,400 stocks listed on exchanges in the U.S., Europe, Canada, Australia, New Zealand and the Far East. The MSCI World Energy Index is the Energy sector of the MSCI World Index.

The MSCI World Index with net dividends is an unmanaged, free float-adjusted market capitalization weighted index that is design need to measure the equity market performance of developed markets. The MSCI World Index consists of 24 developed market country indices. This index includes dividends and distributions net of withholding taxes, but does not reflect fees, brokerage commissions, or other expenses of investing.


One cannot invest directly in an index.

Diversification does not assure a profit nor protect against loss in a declining market.

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