GLOBAL ENERGY 2013 in Review & 2014 Forecast

Transcription

1 TM INVESTING IN HUMAN PROGRESS GLOBAL ENERGY 2013 in Review & 2014 Forecast by Tim Guinness, Will Riley and Jonathan Waghorn Fund Co-managers I N V E S T M E N T R E S E A R C H S E R I E S

2 H I G H L I G H T S 2013 in Review Oil was strong in 2013, with the Brent (global) oil price averaging above $100 for the third year in a row. West Texas Intemediate (WTI) averaged $98 in 2013, $10 lower than Brent. The spread between WTI and Brent, driven principally by an oversupply of US domestically-produced oil and a shortage of suitable refining capacity, narrowed from $18 in The three dominant themes for oil markets last year were: i) Another year of healthy global oil demand, up 1.2 million(m) barrels(b)/day. Non-OECD (Organization for Economic Co-operation & Development) demand growth was fine at 1.2m b/day, and perhaps more surprising was the strength of OECD demand, flat overall and the first year since 2010 that it has not declined. ii) Growing Shia-Sunni tensions and an unwinding Arab Spring in the Middle East. Sanctions continued to depress Iranian production; Libyan production dropped by over 1m b/day in the second half of the year as tensions rose, and Iraqi supply stalled. iii) Continuing robust US shale oil production growth, up by around 1m b/day. The drivers again were the Bakken, Eagleford and Permian basins was a second year of moderate recovery for US natural gas following the bust. In 2013, the US natural gas price averaged $3.73/mcf (million cubic feet), versus $2.75/ mcf in Onshore gas production growth, the main cause of the depressed price over the last three years, moderated, but associated gas from oil production accelerated. The year ended with prices close to a three year high. Gas prices outside the US remained very firm, with European and Asian prices at around $10-11/mcf and $15-17/mcf. Global natural gas demand grew by around 3% (9 billion cubic feet (Bcf)/day). For energy companies, it was a strong year for the US oil sector and a relatively weak one for companies operating outside the US. We saw a swathe of restructuring, improved capital discipline and improved capital efficiency (lower well costs and better productivity) for the US large and mid-cap Exploration & Production (E&P) sector; positive knock-on effects for onshore US service companies; and a third year of strong refining margins for US domestic refiners. It was not so pretty for non-us companies as exploration disappointed in Africa, oil development projects were delayed and cancelled in the North Sea and other deep water areas, European refining margins were in the doldrums and Canadian oil realizations were depressed. Energy Equities Overall, the energy sector has underperformed the broad market for the last 33 months (i.e. since end March 2011). It is the second longest period of relative underperformance since Over this period the MSCI World Index is up 34.7% and the MSCI World Energy Index is up only 7.9%. Since June 2013 the performance of smaller cap stocks, service companies and refiners has picked up, but the large caps have remained weak. In 2013, the energy market bridged this gap with MSCI World Energy Index s up 19.0% for the year and the MSCI World Index up 27.5%. ( 2 ) INVESTMENT RESEARCH SERIES Global Energy Review & Forecast gafunds.com

3 Outlook We expect the oil price to remain firm in 2014, with prices trading mostly in the $ range, and Brent at around a $10 premium to WTI. The mid-point of our trading range is $100, which equates to global crude oil demand spend at around 4.3% of world gross domestic product (GDP) This is more or less what we ve paid for oil on average over the last 40 years. It is a level that will not bring the world economy to a grinding halt and it is a price that, from OPEC s point of view, looks both profitable and fair. We expect Saudi should likely remain in over-production mode for as long as supply remains fairly tight, while their ability to put a floor under the price should Brent fall much below $100 remains strong. Commentators are over-focussed on US shale oil production growth and the prospect of US energy independence. We expect US onshore oil production to grow by a further 2-3m b/ day between now and 2017, implying that US shale oil would become in total a 5-6m b/day resource. This must be weighed against the even stronger rise in global oil demand expected over the same period. Meanwhile, other non-opec countries struggle to grow meaningfully in the face of their natural declines and the redirection of capital to the US. The political backdrop to OPEC s actions is as complicated as it has ever been. Saudi, the UAE and Kuwait sit at center stage of the oil market. We see them coping with whatever Iran, Libya and Iraq throw at them in the future in terms of recovering production. However, the development of an Al Qaeda enclave the Islamic State of Iraq and Syria ( ISIS ) threatens future Iraq production growth. This may prove more negative for OPEC s production than the potential lifting of Iran s sanctions is positive. Oil demand growth in 2014 is likely to match or exceed the 1.2m b/day achieved in 2013, a combination of flat to slightly up in OECD countries and growth of 1-1.5m b/day in the non-oecd region. 10m b/day of demand growth to 2020 is plausible as growth in the world vehicle population accelerates. We think it likely that the oil price will rise from here gradually at something like inflation (or higher), leading to oil prices closer to $150 by the end of the decade. $150 oil in 2020 will equate to an oil bill which is less than 5% of world GDP, which we think is sustainable. The underperformance of energy equities since March 2011 seems to reflect a view that the commodity super-cycle is over. We think this is too simplistic. The more likely evolution of the commodity cycle is that the demand for infrastructure commodities (copper, aluminium, iron ore) may well level off and prices weaken as productive capacity is added and China moves from investment-led growth to consumption-led growth. Typically, however, the next stage of the cycle is that commodities that are in growing demand by consumers (such as energy and agricultural commodities) continue to strengthen further. The energy markets are still cautious, which may present a real buying opportunity for investors; the Brent oil forward curve implies a price of around $80/bl in real terms in 2018 while our portfolio of energy equities trades on a 2014 consensus P/E ratio of just 11.2x, 30% below the broad market s P/E of 15.9x. We just don t see the Brent forward curve as being the likely 2018 outcome and believe that oil prices are much more likely to be around $120/barrel in real terms, and even higher in nominal terms. By that time. If we are right, then it is likely that energy equities will have re-rated versus the broad market and, in the process, delivered some very robust absolute and relative performance. INVESTMENT RESEARCH SERIES Global Energy Review & Forecast gafunds.com ( 3 )

4 BIG DEVELOPMENTS OF 2013 In terms of oil prices, in January 2013 we said...in 2013 Brent may average $110 and WTI (West Texas Intermediate) $100, and the average of the two will be $105. In the event we were pretty close. The average of the two was $ Brent averaged $108.8 ($112.0 in 2012) and WTI averaged $98.0 ($94.1 in 2012). Also, the average spread between Brent and WTI narrowed as we predicted towards $10. It actually moved from $17.9 to $10.8. Focussing initially on non-opec oil supply (OPEC = Organization of the Petroleum Exporting Countries), US onshore oil production grew strongly. Total US oil field production has now grown by circa(c.) 3m b/day over the last 5 years - from 5m b/day (2008 average) to 8m b/day (November 2013 estimate), with c.1m b/day of oil production growth occurring in The key drivers again were the Bakken, Eagleford and Permian basins. Having grown from 302 at the end of 2009 to 900 at the end of 2012, the drilling rig count in those three basins remained relatively stable in 2013 and ended the year at 880. However, there was a shift of rigs from the Bakken and the Eagle Ford into the Permian, reflecting the relative immaturity of that basin in terms of unconventional development. Other non-opec oil production rose in 2013 by circa 0.3m b/day, reflecting growth in Canada and Russia, recovery in Sudan and declines in Syria, Indonesia, the North Sea and Australia. Turning to OPEC oil supply, the organization s fortunes were split, with Libya s production recovery reversed (recent production at 0.2m b/day versus 2012 production of 1.3m b/day), Iraq s production stalled at 3.3m b/day and Iran s production remained depressed by sanctions. Offsetting this, the swing producers (Saudi, United Arab Emirates (UAE) and Kuwait) increased output and Saudi recorded a 32 year record high production level of over 10m b/day during the year. With these three countries producing around 15.3m b/day and in line with last year s average, the other six members production was unchanged or slightly down. The political backdrop to OPEC s actions was as complicated to assess as it has ever been. The US-Israeli-Saudi/Iran standoff has reached a point where there is surprising potential for resolution and the real possibility of a recovery in Iranian production of 0.5-1m b/day at some point. On the other hand, as Libya fell victim to warring factions its production became very erratic, and there has been a nasty development of an Al Qaeda enclave the Islamic State of Iraq and Syria ( ISIS ) in Eastern Syria and Western Iraq which threatens future Iraq production growth. Together these are potentially more negative for OPEC s prospective production than the potential lifting of sanctions on Iran is positive. Geographic spread of Sunni (in yellow) and Shia (in green) population in the Middle East Global oil demand growth was 1.2m b/day in 2013, relative to the International Energy Agency s (IEA) December 2012 (Source: Amnesty International) forecast for 2013 growth of only 0.8m b/day. Behind this stronger than anticipated growth was i) no net decline in demand from OECD economies (rather than the 0.3m b/day decline expected by the IEA) and ii) demand continuing to be strong in emerging economies and ending up at 1.3m b/day versus the 1.2m b/day originally expected by the IEA. ( 4 ) INVESTMENT RESEARCH SERIES Global Energy Review & Forecast gafunds.com

5 While strong non-oecd oil demand growth is in many ways expected, we are pleasantly surprised by the strength of OECD, especially US, oil demand growth. With gasoline prices at only $3.30/gallon, US total product demand is now back over 20m b/day. Recent data puts US demand up nearly 6% per annum (pa) year-on-year (YOY), on a 4 week average rolling basis. The combination of strong demand and moderate supply growth resulted in a tightening of OECD oil inventories in the middle of the year. Similar to 2012, this was addressed by higher production from Saudi, who coordinated an effort to keep the price high but affordable. Inventories loosened somewhat towards the end of the year, sitting at the end of October (latest data point) 1.7 % lower than a year ago. US refining had another strong year, with supply of refined product at 15.3m b/day. The US balance of trade in refined petroleum products has been transformed by strength in demand for refined product from Latin America s emerging economies and elsewhere. In 2008, the US was a net importer of 1.8m b/day of oil products; in 2013 it exported 1.9m b/day (1.25m b/d up on 2012). This swing in trade has more than compensated for the drop in domestic demand over the same period of over 1m b/day. US refining margins were boosted further at those refineries able to benefit from the WTI discount to Brent. It was a much tougher market for international refining, however was a second year of good recovery for US natural gas from the bust, which saw the gas price falling from over $8/mcf to under $2/mcf. In 2013, the US natural gas price averaged $3.73/mcf, having started the year at $3.35/mcf. In addition, the 12 month forward strip rose from $3.60 to $4.18 respectively. A very cold start to the 2013/2014 winter brought stronger year end natural gas prices and caused working inventories of natural gas to fall to a seven year low. US natural gas inventories (Bcf) 4,000 Maximum storage capacity 3,900 to 4,000 Bcf Working gas in storage (Bcf) 3,500 3,000 2,500 2,000 1,500 5 year spread year av , Week number (1st Jan = 1) Source: Energy Information Administration (EIA); Bloomberg LP Outside the US, natural gas prices continued to remain very firm, with European and Asian prices trading at around $10-11/mcf and $15-17/mcf, circa 2 ½ and 4 times that in the US. Global natural gas demand grew by around 3% in 2013, supporting the development of new offshore gas fields which are being commercialized via liquefied natural gas (LNG) technology. In terms of company activity, 2013 was another strong year for the US oil industry and a relatively weak one for those outside the US. We saw a swathe of restructuring (asset disposals, spin offs and corporate splits), improved capital discipline (higher dividends and share buybacks) and improved capital efficiency (lower well INVESTMENT RESEARCH SERIES Global Energy Review & Forecast gafunds.com ( 5 )

6 costs and better productivity) in the US large and mid-cap E&P companies. We also saw a much higher level of shareholder activism as activist shareholders took large positions and forced change at companies such as Hess, QEP Resources and Talisman, while deep value investors such as Berkshire Hathaway took sizeable positions in the sector. It was not so pretty for the non-us companies as exploration disappointed in Africa, deep water oil developments were delayed and cancelled, European refining margins were in the doldrums, Canadian crude oil prices were depressed and non-oecd oil demand growth started to taper. The weak story was matched with mediocre, if not disappointing, share price performance for many non-us companies. Lastly, when we look at energy sector performance, the last 33 months (i.e. since the end of March 2011) has seen big underperformance by energy equities relative to the broad market, the second longest period of relative underperformance since Over this period the MSCI World Index is up 34.7% and the MSCI World Energy Index is up only 7.9%. Since June of last year the performance of smaller cap stocks, service companies and refiners has picked up, but the large caps have remained weak. It is reasonably clear that this underperformance reflects a view that the commodity super-cycle is over, a view reiterated by a December 2013 Bank of America Merrill Lynch (BofAML) global fund manager positioning survey which showed that energy is the second most under-owned sector in the market. However, the Guinness Global Energy Fund delivered strong performance in the year; a total return of 24.1% compared to the MSCI World Energy Index of 19.0% and the MSCI World Index s total return of 27.5%. Performance as of December 31, 2013 Inception date 6/30/04 Full Year year (annualized) Last 2 years (annualized) Last 5 years (annualized) Since Inception (annualized) Global Energy Fund 24.58% 24.58% 13.48% 16.33% 13.43% MSCI World Energy Index MSCI World Index 18.98% 18.98% 10.26% 11.71% 10.50% 32.36% 32.36% 23.63% 17.69% 7.40% Source: Bloomberg Expense ratio: 1.35% Performance data quoted represent 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 Fund may be lower or higher than the performance quoted. For most recent month-end and quarter-end performance, visit or call (800) The Fund imposes a 2% redemption fee on shares held for less than 30 days. Performance data does not reflect the redemption fee and, if deducted, the fee would reduce the performance noted. ( 6 ) INVESTMENT RESEARCH SERIES Global Energy Review & Forecast gafunds.com

7 WHAT DOES THE FUTURE HOLD FOR THE GLOBAL ENERGY MARKETS? Crude oil In terms of the crude oil markets, we continue to think commentators are over-focussed on US shale oil production growth and the prospect of US energy independence. The main impact is that it is good news for the US balance of payments. As regards likely impact on the oil price, it is just one supply and demand factor. Growth in US shale oil production of 5-6m b/day between 2009 and 2017 is comparable in size to the growth in Former Soviet Union (FSU) oil production of 5m b/day from 7.3m b/day to 12.3m b/day over 8 years between 1998 and 2006, during which the oil price rose from $10/barrel to $66/barrel! Our suspicion is that commentators will soon start focusing on the fact that shale oil production growth is slowing down as the decline rate treadmill begins to overwhelm fraccing productivity gains. In December 2013 the US Department of Energy published the following chart for US oil supply, forecasting that shale oil will grow to circa(c.) 5m b/day by 2016 from around 3m b/day currently. US petroleum liquids supply (m b/day) Source: EIA A minimum WTI oil price of $80 appears to be a critical requirement for new unconventional investment, and Bakken oil prices were below that level for most of November If new oil growth is plentiful, we would see a good chance of substantially weaker WTI oil prices as US inventories build amid a ban on oil exports. One of the key discussion points in 2014 will be: to export oil or not to export oil? As we have stated before, this shale revolution in the US is a production surge just like the development of the Gulf of Mexico and North Sea and Alaska in the 1980s in response to the 1970s price hike. However, there is one huge difference: back then, oil demand from the OECD economies had exploded from 1950 to They were at the end of a 25 year journey adopting the motor vehicle; impetus was fading and demand naturally then corrected as prices jumped. INVESTMENT RESEARCH SERIES Global Energy Review & Forecast gafunds.com ( 7 )

8 Now, however, the picture is different. China s per capita demand for oil has not yet even reached that of the OECD at the beginning of the 1950s. We expect two decades of unrelenting oil demand growth to come while the Chinese vehicle fleet moves from 100 million now to 400 million by 2030, and India and several other developing economies follow about ten years behind. The coming world car fleet explosion helps to explain rather simply the reason why global demand for oil is in a strong upward trajectory. Looking ten years forward to 2024, we continue to see 10 to 13m b/day of global demand growth (emerging economies growing at 12-15m b/ day, less 2m b/day of demand decline from the OECD) and muted supply growth (made up of barrels per day growth of perhaps 2-3m from the US, 1-2m from Iraq, 1m from Africa, 1.75m from Brazil, 1.25m from Canada, 1m from the Caspian, and some mature basin declines). If you doubt us, remember that Canada, for example, only grew its oil production by 1.3m b/day from 2002 to 2013 despite all the effort to develop its oil sands. Please note we are being 1m b/ day more optimistic about US shale oil than the EIA (they are predicting 2m b/day of growth from here). And we may also be too optimistic on our non-us oil growth expectations. When assessing the prospects for global supply as a whole, it is important to remember that the starting point each year is a fall of around 4.5m b/day (5% of total supply) as existing basins decline. This is quite some hurdle to overcome year after year. For two years we have commented that Saudi, the UAE and Kuwait stand at center stage of the oil market and that they would manage whatever the US, China or Eurozone economies threw at them. That continues to be our view. We also see them coping with whatever Iran, Libya and Iraq throw at them in the future. So our view is much the same as last year, in that oil will trade mostly in the $90 $110 range, with Brent towards the top end of this range and WTI at around a $10 discount to Brent. World Vehicle Population Source: Department of Energy (DoE); Guinness Atkinson Asset Management The midpoint of this range is $100/ b a r r e l ( b l ), which equates to global crude oil demand spend at around 4.3% of world GDP. This is more or less what the world has paid on average for its oil the last 40 years. It is a level that will not bring the world economy to a grinding halt and it is a price that, from OPEC s point of view, looks fair. They will strive to achieve it and bear in mind, Saudi s 2014 national budget will be balanced if the oil that the country exports is sold at $102/bl. It is also likely that it will rise from here gradually at something like inflation or higher, leading to closer to $150/bl oil prices by the end of the decade. We show our view in the context of the recent past using inflation-adjusted oil prices: ( 8 ) INVESTMENT RESEARCH SERIES Global Energy Review & Forecast gafunds.com

9 12 month moving average (MAV) Oil price (inflation adjusted) WTI Brent Est Brent/WTI (12m MAV) Brent/WTI (5yr MAV) Brent/WTI (12m MAV) Brent/WTI (5yr MAV) 0 Source: Bloomberg; Guinness Atkinson Asset Management This optimistic view is influenced by the fact that we feel that the recovery in the US economy continues and that China will continue to transition to a consumption growth phase of development. The European recovery may not come until 2015, but come it will. NATURAL GAS Next, we turn our attention to North American natural gas markets. We could see a usefully tighter gas market in 2014 than in 2013 if US gas demand continues to grow at c1.5bcf/day pa (split broadly equally between electricity demand, industrial on-shoring demand and net export demand, i.e. Mexico exports up, Canada imports down). The principal imponderable left is how much coal-to-gas switching remains to unwind. We are still cautious about this alleviation of supply tightness and can see the market balancing, rather than being short, for another year as this totally unwinds. But it does seem clear to us that in 2015, i.e. in months, some combination of a rising gas price and rising gas drilling rig count is likely. INVESTMENT RESEARCH SERIES Global Energy Review & Forecast gafunds.com ( 9 )

10 dollars per million Btu Henry Hub natural gas price scenarios (US$/mcf) Historical spot price STEO forecast price NYMEX futures price 95% NYMEX futures upper confidence interval 95% NYMEX futures lower confidence interval 0 Jan 2012 Jul 2012 Jan 2013 Jul 2013 Jan 2014 Jul 2014 Note: Confidence interval derived from options market information for the 5 trading days ending Dec. 5, Intervals not calculated for months with sparse trading in near-the-money options contracts. Source: Source: Short-Term EIA Energy Outlook, December We have been guilty in the past of expecting a quick balance of the gas market as a result of the collapse in the natural gas drilling rig count. And we may be guilty again of over-optimism about how much the gas price will rise before the market rebalances. Nonetheless, we are increasingly comfortable with forecasting gas above $4/ mcf in 2014 and above $5/mcf in The asymmetry in the upper and lower confidence levels in the recent EIA chart shown below is also supportive of this view. The US Department of Energy is predicting flat natural gas production in This may be slightly optimistic, but a point some commentators are failing to grasp is that given associated gas production from shale oil wells is growing at c 2bcf/day pa and Marcellus shale gas production is growing at 2-3bcf/day pa, the implication has to be that all other US gas production is declining by around 4-5bcf/day pa. This is due of course to the effect of the dramatic decline in the ex-marcellus gas rig count from over 900 to under 250 rigs in less than 2 ½ years Source: EIA US natural gas production and imports (bcf/day) annual change (Bcf/d) Federal Gulf of Mexico production (right axis) U.S. net imports (right axis) Marketed production forecast (left axis) U.S. non-gulf of Mexico production (right axis) Total marketed production (left axis) ( 10 ) INVESTMENT RESEARCH SERIES Global Energy Review & Forecast gafunds.com

11 International gas demand will continue to be very robust, with emerging economies again (and particularly China) being most responsible. China s consumption of gas has grown from 2.5bcf/day in 2000 to 15bcf/day in 2013 (one fifth of the consumption of the US) and we expect it to exceed 40bcf/day by 2020, on a trajectory to exceed US consumption around Global demand, now 330bcf/day, will rise to 400bcf/day by 2020 if the last ten years are repeated (4.1% pa growth in the developing world; 1.45% pa growth in the developed world). Given this demand strength backdrop we see no reason why the global gas price will not remain firm and continue to be priced off oil in long-term supply contracts. The need for very large up-front expenditures on pipelines or LNG facilities to supply much of global demand growth is one reason why this is likely to continue. We also believe that US LNG exports, likely to be 6bcf/day by 2020, will be easily absorbed by the growing non-oecd gas demand. ENERGY EQUITIES With regard to the bigger commodity cycle discussion, we will repeat again what we said last year. The more likely evolution of the commodity cycle is that the demand for infrastructure commodities (copper, aluminium, iron ore) may well level off and prices weaken as productive capacity is added and China moves from investment-led growth to consumption-led growth. Typically, however, the next stage of the cycle is that commodities that are in growing demand by consumers (such as energy and agricultural commodities) continue to remain firm and even strengthen further. Lastly, when we look at energy equity valuations, we see that the Guinness Atkinson Global Energy Fund, based on consensus estimates, is trading on a 2014 PE ratio of 11.2x at December 31, 2013; well below the broad market s 2014 PE of 15.9x. The PE discount is 30%, giving a potential upside versus the broad market of 42% when energy PEs close the gap with the broad market; history indicates they ll close the gap when the current oil price and long-run market expectations for the oil price come together. The oil price chart above says to us that $100 oil is around where that could happen. This represents a little bit more than tripling in the real oil price from the cheap oil period. There are other ways of thinking about value. Along with low PEs we find several other metrics indicating the attractiveness of energy equities relative to the broad market; measures such as price-to-book and enterprise value to proven reserves (for the large caps). One approach we increasingly favor over the above is based on the cash flow return on investment (CFROI) methodology developed by HOLT. The chart below shows an estimate of upside for all the energy companies with a market capitalization today of over $1 billion that have a track record in HOLT going back to INVESTMENT RESEARCH SERIES Global Energy Review & Forecast gafunds.com ( 11 )

12 HOLT energy sector median upside/(downside) Source: CSFB HOLT; Guinness Atkinson Asset Management Energy equities have historically been seen as one of the better inflation hedges. If we see dollar inflation of 30/50% over the next decade (that s just % pa), it would be surprising if oil and gas prices do not rise by a comparable percentage over that time frame. We would expect energy equities to perform very well in this environment. A final thought. We noted Warren Buffet s purchase of Exxon in November It is quite possible he finds energy equities rather attractive just now too! ABOUT THE FUND MANAGERS TIM GUINNESS Lead Manager Tim Guinness has served as Guinness Atkinson s Chairman and Chief Investment Officer since the firm s founding in November From 1999 to November 2002, he was Joint Chairman of Guinness Flight Global Asset Management, Ltd. and was the CEO from 1997 to Tim graduated from Cambridge University with a degree in engineering and completed a Master s Degree in Management Science at the Sloan School M.I.T. in the United States. WILL RILEY Co-manager Joined Guinness Atkinson in May 2007, serving as a member of the energy investment team. In 2000 he joined Pricewaterhouse Coopers and in 2003 he qualified as a Chartered Accountant. Will graduated from Cambridge University with a Masters degree in Geography. JONATHAN WAGHORN Co-manager Joined Guinness Atkinson Asset in 2013 after managing the Investec Global Energy Funds since He previously worked as energy analysts at Goldman Sachs International and Wood Mackenzie Global Consultants. Jonathan graduated from University of Bristol with a Masters degree in physics. ( 12 ) INVESTMENT RESEARCH SERIES Global Energy Review & Forecast gafunds.com

13 Monthly commentary about the Global Energy market is available at gafunds.com/ebriefs. CFROI is a proprietary metric prepared by HOLT, a division of Credit Suisse. CFROI is a registered trademark of Credit Suisse AG or its affiliates in the United States and other countries. For more information on HOLT, a corporate performance and valuation advisory service of Credit Suisse, please visit their website at index.jsp Mutual fund investing involves risk and loss of prin cipal is possible. Investments in foreign securities involve greater volatility, political, economic and currency risks and differences in accounting meth ods. These risks are greater for emerging markets countries. The Fund also invests in smaller compa nies, which will involve additional risks such as lim ited liquidity and greater volatility. The Fund may invest in derivatives which involves risks different from, and in certain cases, greater than the risks presented by traditional investments. The Fund s investment objectives, risks, charges and expenses must be considered carefully before investing. The statutory and summary prospectus contains this and other important information about the investment company, and it may be obtained by calling or visiting gafunds.com. Read it carefully before investing. Opinions expressed are those of Guinness Atkinson Funds, are subject to change, are not guaranteed and should not be considered investment advice. Opinions expressed are those of Guinness Atkinson Funds, are subject to change, are not guaranteed and should not be considered investment advice. Top 10 Holdings as of 12/31/13 for the Guinness Atkinson Global Energy Fund are: 1. Canadian Natural Resources Ltd 3.50% 2. Total SA 3.47% 3. Unit Corp 3.46% 4. Royal Dutch Shell PLC 3.45% 5. Hess Corp. 3.44% 6. Valero Energy Corp. 3.42% 7. Statoil ASA 3.41% 8. Patterson-UTI Energy Inc. 3.39% 9. Chesapeake Energy Corp. 3.37% 10. Devon Energy Corp. 3.35% MSCI World Energy Index is the energy sector of the MSCI World Index (an unmanaged index composed of more than 1400 stocks listed in the US, Europe, Canada, Australia, New Zealand, and the Far East) and as such can be used as a broad measurement of the performance of energy stocks. It is not possible to invest directly in an index. Price to earnings ratio (PE) reflects the multiple of earnings at which a stock sells. Distributed by Quasar Distributors, LLC The Fund s holdings, industry sector weightings and geographic weightings may change at any time due to ongoing portfolio management. References to specific investments and weightings should not be construed as a recommendation by the Fund or Guinness Atkinson Asset Management, Inc. to buy or sell the securities. Current and future portfolio holdings are subject to risk. INVESTING IN HUMAN PROGRESS gafunds.com