A NextEV self-driving concept electric vehicle stands on display at the Auto Shanghai 2017 vehicle show. Self-driving cars are among new technology presenting tremendous opportunities to makers of electronic components, according to Matthew Page, co-manager of the Guinness Atkinson Global Innovators Fund.
Most mutual fund managers are unable to beat stock indices, so when a management team does so for many years, we want to know about it.
Before we dig into the Guinness Atkinson Global Innovators Fund, let’s recall Mark Hulbert’s discussion about how awful active managers’ track records have beenwhen measured against the S&P 500 Index SPX, -0.10% “Over the last 15 years, 92.2% of large-cap funds lagged a simple S&P 500 fund,” MarketWatch’s Hulbert said.
As its name implies, the Guinness Atkinson Global Innovators FundIWIRX, +0.34% aims for growth by investing in companies with competitive edges that translate into high returns on capital.
“We think innovation can be applied across industries,” co-manager Matthew Page said in an interview May 5. “You have disruptive companies, but also companies that sustain themselves through innovation, and also continuous innovators.”
He has been managing the fund with Ian Mortimer since 2010, and worked as the fund’s analyst before that, starting in 2005.
The fund’s benchmark is the MSCI World Index. But Morningstar, which ranks the fund four of five stars, measures its performance against the S&P 500. Here’s how it has performed against both indices:
| Total return - 2017 through May 8 | Average return - 3 years | Average return - 5 years | Average return - 10 years | Average return - 15 years | |
| Guinness Atkinson Global Innovators Fund - Investor Shares | 13.4% | 9.4% | 16.3% | 8.6% | 10.0% |
| MSCI World Index | 7.9% | 9.5% | 13.4% | 5.0% | 6.7% |
| S&P 500 Index | 7.9% | 10.7% | 14.3% | 7.1% | 7.7% |
| Sources: Morningstar, FactSet | |||||
The fund’s average performance has trailed the indices for three years, but has outperformed both by significant margins for five, 10 and 15 years, putting it in exclusive company.
Page said the fund is about 5% overweight U.S. stocks, relative to the MSCI World Index. Here’s the fund’s geographic breakdown as of March 31:
Page said that for the managers of the fund, “innovation” can mean a new product or service, “technical or scientific ... a new chip or drug.” But he also looks for innovative or disruptive business models, “the likes of Netflix NFLX, +0.69% or Uber.”
Then the fund managers dig into a company’s numbers to see if they point to strong long-term financial performance. A hot new technological service or product may not mean there is a solid investment to be had. He said 3D printing is an example, saying he expects continual rapid growth for the industry.
Still, “the companies that were available to invest in, in that area, were not high quality,” he said.
Guinness Atkinson Funds
“So our edge is not trying to predict the next big thing, but trying to find the next entry point for companies — finding out which are hype cycles and which are good investments,” he said. “Sometimes good investments are not the exciting ones.”
Fund holdings
Here are the top 10 holdings of the Guinness Atkinson Global Innovators Fund, as of March 31:
| Company | Ticker | Industry | Total return - 2017 through May 5 | Total return - 3 years | Total return - 5 years |
| AAC Technologies Holdings Inc. | 2018,+1.64% | Electronic Components | 52% | 152% | 423% |
| New Oriental Education & Technology Group Inc. ADR | EDU,-0.27% | Private educational services in China | 55% | 178% | 141% |
| Applied Materials Inc. | AMAT,+1.20% | Electronic Production Equipment | 30% | 133% | 314% |
| Samsung Electronics Co. GDR | SMSN,+1.07% | Telecommunications Equipment | 33% | 58% | 75% |
| Boeing Co. | BA,+0.48% | Aerospace and Defense | 20% | 53% | 177% |
| Check Point Software Technologies Ltd. | CHKP,-0.26% | Internet Software/ Services | 26% | 66% | 92% |
| Cognizant Technology Solutions Corp. Class A | CTSH,-0.17% | Information Technology Services | 13% | 28% | 82% |
| SAP SE ADR | SAP,+0.35% | Software | 20% | 37% | 76% |
| Qualcomm Inc. | QCOM,+0.97% | Telecommunications Equipment | -15% | -24% | 1% |
| Infineon Technologies AG | IFX,+0.64% | Semiconductors | 15% | 142% | 189% |
| Guinness Atkinson, FactSet | |||||
Page discussed the broad theme of technological innovation for cars, communications equipment and appliances, and the increased use of robots.
Recent purchase decisions have leaned toward Asia, but Page stressed: “We are very much bottom-up stock pickers,” meaning the managers are more focused on individual companies’ attributes, not geographic regions.
“So this is not a broad view of Asia, but a lot of what makes Asia cheap is the valuations of banks and financial companies, which make up a lot of the benchmark,” he said. “So it was a combination of Asia stocks looking cheap and these companies’ valuations giving us good starting points. We have subsequently seen a re-rating. I would not necessarily bang on the table to buy more at this point in time, but I am sort of happy with what we’ve got at the moment.”
He was referring to Catcher Technology Co. Ltd. 2474, -2.08% of Taiwan, the fund’s most recently purchased holding, and AAC Technologies Holdings Inc.2018, +1.64% of Shenzhen, China. Those stocks were picked up at “attractive valuations,” Page said, because of concern over Apple iPhone sales. Both are suppliers of components to Apple Inc. AAPL, +0.64% and to other smartphone makers.
With shares of Apple returning 29% this year through May 5, while Catcher is up 39% and AAC is up 52%, he said he would “actually be trimming them back at these levels” if there were new money to invest.
But it’s important to keep in mind how often concerns over Apple, as expressed in breathless media headlines, have pushed down its stock and shares of its suppliers. There may be another period of attractive entry points for these stocks.
Catcher makes unibody aluminum cases for Apple’s MacBook Air and MacBook Pro. Page said that in this niche, the company has “sufficient scale that no other competitor can [really] compete with them. The key is aluminum technology and using robots to mill out single-piece casings.”
Page added that Catcher “buys robots from Fanuc Corp. 6954, -0.89% a Japanese company, which we also own in the portfolio. It is one of the leading robotics companies in the world.”
AAC Technologies represents “another bit of the Apple supply chain,” Page said. The company makes acoustic components, including headphones and also haptic components, which provide vibration feedback to the user, and taptic components, which are touch-sensitive.
A big concern for Apple is increasing competition from lower-cost Asian smartphone manufacturers, but Page said these companies would also be well-positioned to supply them.
Still worthy of buying
When asked to name a company whose stock is still valued low enough that he would consider building the fund’s position, Page mentioned Infineon Technologies AG IFX, +0.64% of Munich. The company has “a very significant edge on their competitors, with some momentum with their earnings results.”
The company makes automotive semiconductor components, and with the development of adaptive cruise control, entertainment systems and automation, “there is more and more silicon going into these cars,” Page said.
“If you look forward, electric vehicles are likely to become a more significant portion of the market,” he said. “You have Tesla Inc. TSLA, +4.58% Apple and Uber and others looking at self-driving cars. The amount of silicon that will be required for those cars is going to grow exponentially, to a point.”
By Philip Van Doorn
Source: https://goo.gl/p0vflS
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