A high conviction pureplay equity fund managed by Edward Guinness investing in quoted companies in the alternative energy sector. INVESTMENT COMMENTARY - November 2014 Manager Fund size AUM under strategy Aim Edward Guinness (from launch in December 2007) gives investors pureplay exposure to global alternative energy markets. $8.9m $27.7m The Fund is managed for capital growth and invests in companies in the solar, wind, hydro, geothermal, biofuels, biomass and energy efficiency sectors. Investment case We believe that over the next twenty years the alternative energy sector will benefit from the combined effects of: Higher energy prices driven by population growth, developing world industrialisation and diminishing fossil fuel supplies Falling costs of alternative energy assets as the technology improves Energy security concerns Climate change and environmental issues The Guinness Alternative Energy team has been managing alternative energy portfolios since 2007. The Fund is a long-only equity portfolio of around 30 equally-weighted positions. Normally the Fund is invested in companies with a market capitalisation over $100 million. Alternative energy review The third quarter saw the gains of the first two quarters for alternative energy given back. It appears that the drivers were falling oil prices, concerns over ebola, and the prospect of an Asian-led global economic slowdown. We would argue that the economic impact of these changes is lower for the alternative energy sector, and that the pullback relates more to investor sentiment. There has been no material deterioration in earnings expectations across the sector. The fall in the oil price has an impact on sentiment for the sector, but directly impacts just one holding, Cosan, which sells ethanol. Cosan is itself a diversified business, with only one part exposed to ethanol market pricing. The majority of holdings are linked to electricity pricing, which is driven for renewables by subsidies, wholesale electricity pricing methods and, ultimately, natural gas prices. Within the solar sector, demand remains strong, with Japan, the US and China all achieving higher installation levels. Leading module manufacturers have reported that they are manufacturing at full capacity, and module pricing has remained relatively steady. Increases in the China price have been offset by falls in Japan and the US. Emerging market demand is becoming a reality, and we expect the number of countries installing more than 1 GW per annum to increase steadily, providing a more stable growth platform. Over the quarter the solar stocks in the portfolio only contributed marginally to the fall, with losses in most of the module manufacturers offset by gains in Canadian Solar, whose earnings exceeded expectations, and Enphase, the microinverter manufacturer. Tel: +44 (0) 20 7222 5703 Email: info@guinnessfunds.com Web: guinnessfunds.com Guinness Asset Management Ltd is authorised and regulated by the Financial Conduct Authority
The outlook for the solar sector remains positive, with the second half expected to deliver strong demand and some indications that there will be progress in the ongoing US/China/EU tariff wars. Any resolution of this would be highly positive for the whole industry, but particularly the Chinese low cost manufacturers. The wind sector was particularly weak in the third quarter. Although we sold the Fund s main three wind turbine manufacturer holdings in July ahead of price falls, the smaller cap wind utilities were hit hard over the quarter. Theolia struggled with balance sheet restructuring, but the falls in the other names were not matched by any deterioration in their underlying economics. The outlook for the wind sector remains good, with stable project rates of return supporting cash flow and earnings growth that should support share prices. Good Energy in the UK continues to win customers with its renewable energy offering. The Chinese utilities are seeing lower levels of curtailment and meaningful new capacity entering production this year. Future pipelines of projects are supported by low wind turbine prices. Overall we are seeing more supportive policy for the alternative sector. India have indicated that they are preparing to lift their solar target to 15GW by 2019, and China is now aiming to have more than 100GW of installed solar capacity and 200GW of installed wind capacity by 2020. There are indications that the tariff wars between the US, EU and China may begin to abate, albeit with no concrete action yet. Beijing may ask local governments to ensure that up to 10% of power consumption in their areas is from wind, solar and biomass by next year. The IEA has announced that solar power might become the world s largest source of electricity by 2050 as falling costs boost installations. They say that photovoltaic plants may provide as much as 16% of global electricity, and concentrating solar facilities could generate another 11%. Needless to say we think that the prospects for solar photovoltaics are even higher. More yieldcos are emerging and existing yieldcos are raising additional capital, which provides capital for the purchase of operating assets and allows continued development of alternative energy installations with confidence that end buyers and market benchmarks for valuations exist. Portfolio changes We made some major changes to the portfolio in the third quarter. The wind turbine manufacturing holdings Vestas, Nordex and Gamesa were sold as valuations appeared stretched. We expect solid levels of wind installations and margin improvements, but not enough to merit premium valuations. The US market remains a risk, and the Chinese market is not penetrable for international players, leaving the main prospects for growth in other emerging markets. We expect these emerging markets to develop but not at high turbine prices. These holdings were replaced by positions in Enphase, Canadian Solar and Centrotec Sustainable. Enphase is the leading solar microinverter manufacturer. Microinverters improve solar installation performance and robustness, and have the potential to become cheaper than conventional inverters. We are excited about their prospects. Canadian Solar are a leading Chinese (!) module manufacturer, and one of the first to recognize the opportunity in becoming an installer and developer of projects while maintaining a strong cost position and balance sheet. Centrotec are a German heating system installer who are well placed for pending changes to German rules that will require boilers to be replaced after 30 years. The economics of installing their equipment is compelling without subsidies. We have switched our holding in Waterfurnace Renewable Energy into their acquirer NIBE November 2014 guinnessfunds.com 2
Industrier, who are now a global player in heat pumps. We have sold our holding in Itron and replaced it with a position in Wasion Group Holdings, a leading Chinese metering provider trading on attractive valuation multiples. We have sold the Fund s holding in RB Energy, the lithium mining company, as it failed to hit production targets. We also sold Maple Energy, who faced similar problems. We have replaced them with a position in Cosan SA, a leading Brazilian biofuels company with less direct ethanol price exposure. Fund Performance (Q3 2014) The was down 8.68% over the third quarter of 2014, underperforming the two Wilderhill indices which were down 7.13% and 8.19%. Edward Guinness Manager, November 2014 The overall effect has been to lower the earnings multiple on which the portfolio trades. We believe these changes position the Fund well in the stream of future growth stories. November 2014 guinnessfunds.com 3
PORTFOLIO (31.10.14) Fund top 10 holdings Sector analysis Geographic allocation Enphase Energy 4.6% China Longyuan Power 4.0% Inbre 4.0% Mytrah Energy 3.8% Wasion 3.8% Ormat Technologies 3.7% Nibe Industrier 3.6% China Datang Renewable Power 3.6% Trina Solar ADR 3.6% Verbund 3.5% Wind Solar Efficiency Hydro Geothermal Biofuels 10.1% 9.9% 3.7% 3.4% 37.5% 34.4% China USA Canada Italy Hong Kong Spain Brazil India Sweden Austria 11.4% 9.9% 7.3% 7.2% 6.3% 5.9% 3.8% 3.6% 3.5% 30.7% % of Fund in top 10 38.2% Total number of stocks in Fund 31 Cash 1.0% Other Cash 9.2% 1.0% PERFORMANCE (all in USD) Returns to 31.10.2014 1 year 3 years 5 years 10 years annualised annualised annualised Fund -4.3% +6.3% -5.7% n/a Wilderhill Clean Energy Index -5.2% +1.5% -7.8% -7.2% Wilderhill New Energy Innovation +5.9% +10.0% -2.4% +2.8% Calendar year returns 2009 2010 2011 2012 2013 Fund +38.7% -21.5% -41.9% -13.2% +70.8% Wilderhill Clean Energy Index +29.8% -4.8% -50.5% -17.6% +58.5% Wilderhill New Energy Innovation +41.2% -13.7% -39.6% -4.2% +55.7% Fund performance refers to the B Class shares, targeted at retail investors, with an annual management fee of 1.5%. Source: Bloomberg, bid to bid, (inclusive of all annual management fees but excluding any initial charge or redemption fee), gross income reinvested. Performance would be lower if initial charge and/or redemption fee were included. Past performance should not be taken as an indicator of future performance. The value of this investment and any income arising from it can fall as well as rise as a result of market and currency fluctuations. November 2014 guinnessfunds.com 4
Important information and risk factors Issued by Guinness Asset Management Limited, authorised and regulated by the Financial Conduct Authority. This report is primarily designed to inform you about recent developments in the alternative energy markets invested in by the Guinness Alternative Energy Fund. It may also provide information about the Fund s portfolio, including recent activity and performance. It contains facts relating to the alternative energy market and our own interpretation. Any investment decision should take account of the subjectivity of the comments contained in the report. This document is provided for information only and all the information contained in it is believed to be reliable but may be inaccurate or incomplete; any opinions stated are honestly held at the time of writing, but are not guaranteed. The contents of the document should not therefore be relied upon. It should not be taken as a recommendation to make an investment in the Fund or to buy or sell individual securities, nor does it constitute an offer for sale. Risk The is an equity fund. Investors should be willing and able to assume the risks of equity investing. The value of an investment and the income from it can fall as well as rise as a result of market and currency movement, and you may not get back the amount originally invested. The Fund invests only in companies involved in the alternative energy sector; it is therefore susceptible to the performance of that one sector, and can be volatile. Details on the risk factors are included in the Fund s documentation, available on our website. Documentation The documentation needed to make an investment, including the Prospectus, the Key Investor Information Document (KIID) and the Application Form, is available from the website www.guinnessfunds.com, or free of charge from:- the Manager: Capita Financial Managers (Ireland) Limited, 2 Grand Canal Square, Dublin 2, Ireland; or, the Promoter and Investment Manager: Guinness Asset Management Ltd, 14 Queen Anne's Gate, London SW1H 9AA. Residency In countries where the Fund is not registered for sale or in any other circumstances where its distribution is not authorised or is unlawful, the Fund should not be distributed to resident Retail Clients. NOTE: THIS INVESTMENT IS NOT FOR SALE TO U.S. PERSONS. Structure & regulation The Fund is a sub-fund of Guinness Asset Management Funds PLC (the Company ), an open-ended umbrella-type investment company, incorporated in Ireland and authorised and supervised by the Central Bank of Ireland, which operates under EU legislation. The Fund has been approved by the Financial Conduct Authority for sale in the UK. If you are in any doubt about the suitability of investing in this Fund, please consult your investment or other professional adviser. Switzerland The prospectus and KIID for Switzerland, the articles of association, and the annual and semi-annual reports can be obtained free of charge from the representative in Switzerland, Carnegie Fund Services S.A., 11, rue du Général-Dufour, 1204 Geneva, Switzerland, Tel. +41 22 705 11 77, www.carnegiefund-services.ch. The paying agent is Banque Cantonale de Genève, 17 Quai de l'ile, 1204 Geneva, Switzerland. Telephone calls maybe recorded and monitored. Guinness Asset Management Ltd is authorised and regulated by the Financial Conduct Authority any income arising from them can fall as well Tel: as +44 rise. (0) 2072225703 Email: info@guinnessfunds.com November 2014 guinnessfunds.com 5 Web: guinnessfunds.com