UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES

Investment Company Act file number 811-08360

GUINNESS ATKINSON FUNDS

(Exact name of registrant as specified in charter)

251 South Lake Avenue, Suite 800

Pasadena, CA 91101

(Address of principal executive offices) (Zip code)

(Name and address of agent for service)

James J. Atkinson, Jr.

251 South Lake Avenue, Suite 800

Pasadena, CA 91101

Registrant’s telephone number, including area code: (800-915-6566) 

Date of fiscal year end: December 31

Date of reporting period: June 30, 2023

Item 1. Reports to Stockholders.

The registrant’s semi-annual report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940, as amended (the “Investment Company Act”), is as follows:

Guinness Atkinson™ Funds
Semi-Annual Report

June 30, 2023

TABLE OF CONTENTS

Dear Guinness Atkinson Funds Shareholders,

Fortunately, the first half of 2023 looks a lot better than the first half of 2022. A year ago, we offered that we were unsure of when or how the decline would end but that we were confident that it would. That may not have been the most outlandish of predictions, but it did turn out to be correct. That’s not to say that there isn’t a lot of uncertainty buffeting global financial markets. Inflation is still a worry, as are interest rates and the possibility of a recession. Not to mention the ongoing war in Ukraine. The financial news is highly focused on the uncertainties. That is always the case. The markets are always waiting for the next economic stat or the next move from the Federal Reserve or the next release of government data or the next earnings announcement. We are seemingly always waiting for the end of uncertainty. In truth, there is no such thing. Uncertainty is an inherent part of investing. At some point we will know the answers to all of today’s questions. Of course, we will be then be seeking answers regarding the then current questions of the day.

Over the first half of 2023, three of the Guinness Atkinson Funds are sporting positive returns while three are in the red. The Global Innovators Fund leads the way with a total return of 26.20% (Investor Class) and 26.37% (Institutional Class). We encourage you to examine the longer-term results for the Global Innovators Fund in the accompanying table. Suffice it to say that we believe this fund to be a gem. Note that the year-to-date returns for all of the funds mentioned in this letter are actual, not annualized returns.

The Alternative Energy Fund has provided a total return of 8.19% for the first half of 2023. For the 12-month period ending June 30, 2023, the annualized return was 21.22%.

That these two funds are the top performers year-to-date and the last 12 months and over most of the longer time periods underscores our view that innovation is key to wealth creation and that the shift from fossil fuels to sustainable energy is well underway.

With a total return of 5.43% the Asia Focus Fund has also had a good first six months of 2023. This is a good start to the year for this fund and we’re optimistic that the second half will be even better.

The China & Hong Kong Fund (down 5.80% YTD), The Global Energy Fund (down 4.37%) and the Renminbi Yuan & Bond Fund (negative 2.85% total return YTD) are the three laggards in the family at the year’s midpoint. Check with us in six months as these things have a way of changing.

Throughout this report are detailed commentaries on each of the Guinness Atkinson Funds prepared by our portfolio managers.

We consider ourselves long-term investors and the Guinness Atkinson Funds are aligned with long-term thematic changes we believe are underway. Which is to say we don’t get too excited by short-term results—and high levels of uncertainty—whether they be positive or negative. As usual, we appreciate the confidence you have placed in us and our management team and look ahead to what we hope will be a good second half.

We encourage you to visit gafunds.com for the latest news and announcements on the Guinness Atkinson Funds. You’re also encouraged to visit smartetfs.com to learn about our range of exchange traded funds.

Sincerely,

The table below provides total return data for each of the Funds over the year-to-date, one, three, five, ten year and from inception periods through June 30, 2023. Also included in the table is the expense ratio data from the most recent prospectus dated May 1, 2023, and June 8, 2023.

Periods of greater than one year are average annualized returns; one year and shorter period returns are actual returns. All returns are for the periods ending June 30, 2023.

Performance data shown for the Global Innovators, Institutional Class (GINNX), prior to its launch date on December 31, 2015, uses performance data from the Global Innovators, Investor Class (IWIRX).

Performance data quoted represents 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 the original cost. Current performance of the Funds may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.gafunds.com.

Morningstar Ratings Through June 30, 2023.

Morningstar Ratings Disclosure

Global Innovators Fund ratings shown were given for the Investor Share Class.

For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating™ based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in distribution percentages.)

© 2023 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is proprietary to Morningstar (2) may not be copied or distributed and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

As a shareholder of the Funds, you incur two types of costs: (1) redemption fees (applicable to the Asia Focus Fund, the China & Hong Kong Fund, and the Renminbi Yuan & Bond Fund); and (2) ongoing costs, including advisory fees and other Fund expenses. The examples below are intended to help you understand your ongoing costs (in dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the period shown and held for the entire period from January 1, 2023 to June 30, 2023.

Actual Expenses

For each Fund, the first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid during Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

For each Fund, the second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any redemption fees. Therefore, the second line for each Fund of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. In addition, if these redemption fees were included, your costs would have been higher.

GUINNESS ATKINSON ALTERNATIVE ENERGY FUND

SEMI-ANNUAL REPORT FOR THE PERIOD ENDED

JUNE 30, 2023

Expenses: Gross 1.70% & Net 1.10%. The Adviser has contractually agreed to reduce its fees and/or pay Fund expenses in order to limit the Fund’s Total Annual Operating Expenses to 1.10% through June 30, 2026. For the Fund’s current six-month expense ratios, please refer to the Financial Highlights section of this report.

Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment in the Fund 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. Performance data current to the most recent month-end may be obtained by visiting www.gafunds.com, or calling (800) 915-6565.

In the first half of 2023 the Guinness Atkinson Alternative Energy Fund produced a total return (USD) of 8.19% vs the MSCI World Index (net return) of 15.09%. The fund therefore underperformed the index by 6.90% over the period.

The key events, both positive and negative for sector sentiment, that have affected the energy transition, company profitability and share price performance so far this year have included:

Drivers of fund performance

The first half of 2023 saw continued positive momentum for the energy transition. Further details emerged on the significant energy transition policy commitments that were announced by the EU and US last year. Against this, disruption in the banking sector, coupled with volatile sentiment around interest rates, brought fears of a slowdown in funding that could affect the level of future sustainable energy investments. In this report, we review macro developments, contribution to fund returns in the half, outlook and portfolio valuation.

The key events, both positive and negative for sector sentiment, that have affected the energy transition, company profitability and share price performance so far this year have included:

Within the portfolio our best performing segments were our semiconductor and grid exposed names. Underperforming segments included our solar inverter holdings as well as our wind exposed names.

There was one Buy during the half (Legrand) and the portfolio was actively rebalanced. Legrand is the world’s only global specialist in electrical and digital building infrastructures. It sells more than 300,000 individual electrical products, biased to residential and commercial markets, to a broad global customer base. We believe that the company is well placed to benefit from secular trends such as electrification and efficiency.

At 30 June 2023, the Guinness Atkinson Alternative Energy Fund traded on a 2023/24 P/E of 22/18x and a 2023/24 EV/EBITDA of 14/12x. The Fund trades at about an 18% premium to the MSCI World Index, which we see as justified given the attractive growth rates available to invest in across the sector. As a sense check, consensus EPS growth (2023-2025E) of the portfolio (at c.20%pa) is well ahead of the MSCI World (at c.6%pa), and looking over the next five years, we believe that the portfolio is likely to deliver average earnings growth of around 13-14%pa, comfortably ahead of growth in the MSCI World.

Looking at the remainder of 2023 and beyond, we expect further acceleration of the energy transition:

The outlook we summarise here is broadly consistent with current government activity and observable investment plans. To be clear, however, the growth described falls well short of the energy transition activity needed to achieve a net zero / 1.5 degree scenario in 2050, as targeted by the IPCC and reiterated at COP27. In a net zero scenario, the deployment of renewable generation capacity, penetration of EVs and battery storage, use of alternative fuels and implementation of energy efficiency measures will need to accelerate markedly.

Portfolio managers

Jonathan Waghorn and Will Riley

July 2023

The Fund invests in foreign securities, which involves political, economic and currency risks, greater volatility, and differences in accounting methods. These risks are greater for emerging markets. 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 Fund invests in smaller companies, which involves additional risks such as limited liquidity and greater volatility.

The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. Net Return reflects deduction for withholding tax but reflects no deduction for fees and expenses. Net Return is net of local withholding taxes that any investor would pay. This index is unmanaged, not available for investment and does not incur expenses.

PER or P/E – Price to Earnings ratio is calculated by dividing current price of the stock by the company's trailing months' earnings per share.

EV/EBITDA multiple – The enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio is calculated by dividing EV by EBITDA or earnings before interest, taxes, depreciation, and amortization.

EPS – Earnings per Share.

Please refer to the Schedule of Investments for details on Fund holdings. Current and future portfolio holdings are subject to risk.

The information provided herein represents the opinion of Guinness Atkinson Asset Management, Inc. for the period stated and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Opinions, Fund holdings and sector allocations are subject to change at any time, and are not recommendations to buy or sell any security.

FUND HIGHLIGHTS at June 30, 2023 (Unaudited)

GUINNESS ATKINSON ALTERNATIVE ENERGY FUND

GUINNESS ATKINSON ALTERNATIVE ENERGY FUND

Schedule of Investments

at June 30, 2023 (Unaudited)

GUINNESS ATKINSON ALTERNATIVE ENERGY FUND

Schedule of Investments

at June 30, 2023 (Unaudited)

GUINNESS ATKINSON ASIA FOCUS FUND

SEMI-ANNUAL REPORT FOR THE PERIOD ENDED

JUNE 30, 2023

Expenses: Gross 2.36% & Net 1.98%. The Adviser has contractually agreed to reduce its fees and/or pay Fund expenses in order to limit the Fund’s Total Annual Operating Expenses to 1.98% through June 30, 2026.

For the Fund’s current six-month expense ratios, please refer to the Financial Highlights section of this report.

Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment in the Fund 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. Performance data current to the most recent month-end may be obtained by visiting www.gafunds.com, or calling (800) 915-6565.

The Fund rose 5.43% in the first six months of the year compared to the benchmark which rose 2.62%. The Fund is managed with a strong bias toward growth stocks, but we overlay this with a value discipline which means we do not chase stocks that are either expensive or those which are believed to have great potential but are not yet producing earnings.

The start of the year saw the continuation of the China re-opening rally that began in November, but this stalled in mid-January as geopolitical concerns merged with worries about underlying economic growth momentum. Global factors also played their part with further interest rate rises and a wobble in the US regional commercial banking sector. Investor sentiment toward equities globally has oscillated this year but ended the half year on a positive note. However, Asian market performance has since lagged developed markets on the back of the slower than expected China recovery.

The best performing regional markets were Taiwan and Korea which, although have the largest forecast earnings drop for 2023, have risen by 25% and 22% respectively driven by bullishness on technology and by those looking through to recovery next year. The weakest markets were Hong Kong, Malaysia and Thailand which all fell 6% in US dollar terms while a 9% rally in Chinese stocks left the market flat on the start of the year.

Whilst the Fund has a significant overweight position to China, the Fund still outperformed its benchmark by 2.81% in the first half of the year. Leading stocks were technology names in India, Taiwan and the US (which derive over 50% of revenues from the region), health care names Australia and China and by non-Chinese consumer discretionary companies. Six Chinese companies (Baidu, China Medical System, NetEase, Nari Technology, Tencent and Venustech) made it into our list of seventeen outperformers, rising between 5% and 20% over the period.

There were no changes to the portfolio during the period. 

The fund’s major exposure is to China, accounting for 55% of the Fund which incorporates themes that offer a structural growth story such as the rise of the middle class, manufacturing upgrades, cloud computing, health care, renewable energy and electric vehicles, next generation consumer and financial services. The other main exposures, each accounting for 5% to 11% of the portfolio are to Australia, Korea, Singapore and Taiwan.

There is also 13% exposure to US stocks which generate over 50% of their revenues from the region. Relative to the benchmark the Fund is 14% overweight to China and 7% to Australia and is 8%-10% underweight to Hong Kong, Korea and Taiwan. On a sector basis our biggest overweight exposures are to technology, which consists of manufacturers and services, and to healthcare in Australia, China and Korea. The main underweights are to financials and cyclical sectors such as materials and energy.

The near-term outlook is likely to be shaped by the trajectory of growth and interest rates in developed markets and by China’s economic recovery closer to home. The inflation picture in the US and Europe still looks unclear: headline inflation (including food and energy) is dropping rapidly, but the core inflation rate on which policy makers are focused is proving to be more resistant. At the mid-year point, many central banks have paused their rate hikes to assess the steep increases over the past eighteen months. Recent comments in both the US and Europe, however, suggest more increases are likely. The underlying message is that economic growth in developed markets will need to slow further, whether naturally or by force, to bring inflation rates back to target.

This has implications for Asian exports which have already seen slower volume growth, or contraction. Investment opportunities in the region are more likely to be found therefore, amongst domestic names and amongst specialised, rather than, mass market exporters. Another way of expressing this is we need to focus on market leaders or those with defendable niche market positions where demand and pricing power are more robust. Weaker regional exports are bound to exert a drag on the region, but Asian economies are far more diversified than they used to be, and the consumer plays a much more substantive role. Good companies, positioned in structural growth themes that can deliver superior earnings growth are our area of focus.

Edmund Harriss

July 2023

The Fund invests in foreign securities, which involves political, economic and currency risks, greater volatility, and differences in accounting methods. These risks are greater for emerging markets. The Fund is non-diversified, meaning that its assets may be concentrated in fewer individual holdings than diversified funds. Therefore, the Fund is more exposed to individual stock volatility than diversified funds. Investments focused in a single geographic region may be exposed to greater risk and more volatility than investments diversified among various geographies. The Fund invests in smaller companies, which involves additional risks such as limited liquidity and greater volatility.

The MSCI AC (All Country) Far East ex Japan Index is a free float-adjusted market capitalization-weighted index that is designed to measure equity market performance of the Far East, excluding Japan. Net Return reflects deduction for withholding tax but reflects no deduction for fees and expenses. Net Return is net of local withholding taxes that any investor would pay. This index is unmanaged and is not available for investment, and does not incur expenses.

Please refer to the Schedule of Investments for details on Fund holdings. Current and future portfolio holdings are subject to risk.

The information provided herein represents the opinion of Guinness Atkinson Asset Management, Inc. for the period stated and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Opinions, Fund holdings and sector allocations are subject to change at any time, and are not recommendations to buy or sell any security.

FUND HIGHLIGHTS at June 30, 2023 (Unaudited)

GUINNESS ATKINSON ASIA FOCUS FUND

GUINNESS ATKINSON ASIA FOCUS FUND

Schedule of Investments at

June 30, 2023 (Unaudited)

GUINNESS ATKINSON ASIA FOCUS FUND

Schedule of Investments

at June 30, 2023 (Unaudited)

GUINNESS ATKINSON CHINA & HONG KONG FUND

SEMI-ANNUAL REPORT FOR THE PERIOD ENDED

June 30, 2023

The Fund’s total expense ratio is 1.71%. For the Fund’s current six-month expense ratio, please refer to the Financial Highlights section of this report.

Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment in the Fund 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. Performance data current to the most recent month-end may be obtained by visiting www.gafunds.com, or calling (800) 915-6565. The Fund imposes a 2.00% redemption fee on shares held less than 30 days. Performance data quoted does not reflect this fee. If it had, total return would be lower.

At the end of the first half of the year, the Fund fell 5.80% compared to the Hang Seng Composite Index which fell 3.79%.

China’s economic rebound since dropping its zero covid policy has been weaker than the market expected, leading to poor market performance after a rally lasting from Nov-22 to Jan-23. We think it is important to break down where the strengths and weaknesses in China’s economy currently lie. The rebound in consumption has been encouraging, though lower than expected. Retail sales growth has been robust, with 18% growth in April and 13% growth in May. Areas such as restaurants, shopping malls and travel are seeing the largest rebounds, after suffering the most during last year’s lockdowns. Catering sales rose by 44% in April and 35% in May.

Moving onto the weaker areas in China, it is soft industrial demand and slowing exports which are notable. The Purchasing Managers Index (PMIs) gives us a higher frequency data set from which to judge the state of manufacturing. Both the Caixin and NBS PMIs rebounded in February after an early Chinese New Year, to 51.6 and 52.6 respectively. (Note a reading above 50 indicates expanding activity while a reading below 50 indicates weakening activity, and the readings should be interpreted on a month-on-month rather than year-on-year basis). In March and April both PMIs fell but it was surprising to see both below 50 in April, as this indicated declining activity. In May, the Caixin PMI rebounded to one of its highest levels in the past year while the NBS PMI fell further. The divergence may be due to the sample set in each survey – the Caixin PMI is more geared towards private, exporting firms while the NBS PMI is more geared towards domestic facing companies.

Following strong performance at the end of last year when China started dropping its zero covid policy, Chinese markets continued to rally in January. The rally, which was led by growth stocks, peaked at the end of the month. However from this point on Chinese markets broadly fell as the macro data generally came in weaker than expected. Year-to-date value stocks have outperformed, with the MSCI China Value index falling by 1.4% in USD. Meanwhile the corresponding growth index has fallen by 9.0%. As a reminder, the Fund targets quality, profitable companies which give exposure to the structural growth themes in the China. One of the main reasons behind the outperformance of value is the enthusiasm over reforms to state owned enterprises (SOEs). The latest set of reforms aim to improve the SOEs’ operating efficiency and corporate governance, in order to improve their valuations. The reforms also aim to task the SOEs with helping China’s broader development goals, such as adopting newer technologies to increase China’s self-sufficiency in technology.

Compared to the MSCI China Index, areas which aided the Fund’s performance year-to-date were:

Areas which detracted from the Fund’s performance year-to-date were:

In the first half of the year, we sold one position and bought one position.

We sold Shengyi Technology which makes copper clad laminates (CCLs) for printed circuit boards (PCBs). Given weaker global demand for consumer technology, the earnings outlook for the business had deteriorated. On a total return basis, the prospects for TravelSky were more attractive.

We bought TravelSky, which provides services used for flight bookings such as ticket pricing, reservation and inventory systems and airport passenger processing. It also operates a centralised settlement service between airlines and travel agents. Now that China has moved on from its zero-covid policy, we are expecting a large rebound in both outbound and inbound tourism, which is likely to bode well for TravelSky.

We argue now is an excellent time to be allocating to the high quality, compounder stocks we offer in the Fund. Investors, both Chinese and foreign, are bearish over the prospects over the Chinese economy and this is reflected in very attractive valuations. The portfolio is trading on a forward year price/earnings ratio of 14.2x, which is one of the lowest valuations the current set of holdings has traded at over the past decade.

But valuations are only one component of shareholder returns. In the long-term, it is earnings growth which drives the bulk of returns. Here, we think our focus on high quality, profitable stocks which give exposure to China’s structural growth themes, serves us well in finding earnings compounders. Over the past decade, the Fund’s holdings have in aggregate grown earnings per share by 8% a year (in USD). This is higher than the -1% a year growth offered by the MSCI China Index. Based on consensus analyst estimates, the Fund’s holdings are in aggregate expected to grow earnings by 22% a year over the next two years, again higher than the MSCI China Index which is expected to grow by 13% a year. To put these figures into context, the S&P 500 Index is expected to see earnings growth of only 4% a year over the same period. The current weakness in the Chinese economy has not, in our view, changed the competitive advantages our holdings have held over the past decade. 

(Data as of 06/30/2023. Source: Bloomberg, Guinness calculations. Data in USD. Data for the Fund assumes an equally weighted portfolio of the current holdings. Figures for the Fund reflects the Advisor’s simulation of projected earnings growth based on actual historic data for the Fund’s current holdings)

Edmund Harriss

Sharukh Malik

The Fund invests in foreign securities, which involve political, economic and currency risks, greater volatility, and differences in accounting methods. These risks are greater for emerging markets. The China and/or Hong Kong stock markets in which the Fund invests may experience periods of volatility and instability. These fluctuations may cause a security to be worth less than it was at the time of purchase. Market risk applies to individual securities, a particular sector or the entire economy. China and/or Hong Kong stocks may fall out of favor with investors, the value of Chinese currencies may decline relative to the U.S. dollar and/or China or Hong Kong stock markets may decline generally. The Fund invests in invest in small-cap or mid-cap, which involve additional risks such as limited liquidity and greater volatility, than investments in larger companies.

The Hang Seng Composite Index is a market capitalization weighted index that covers about 95% of the total market capitalization of companies listed on the main board of the Hong Kong Stock Exchange. This index is unmanaged, not available for investment and does not incur expenses.

The MSCI China Index captures large and mid-cap representation covering about 85% of this China equity universe. This index is unmanaged and is not available for investment, and does not incur expenses.

The Caixin PMI measures the performance of the manufacturing sector and is derived from a survey of more private companies.

The NBS PMI measures the performance of the manufacturing sector and is derived from a survey of state companies.

Earnings Growth - The actual or expected increase in profits over two comparable periods of time.

Price/Earnings Ratio – the ratio of a company's share (stock) price to the company's earnings per share.

Please refer to the Schedule of Investments for details on Fund holdings. Current and future portfolio holdings are subject to risk 

The information provided herein represents the opinion of Guinness Atkinson Asset Management, Inc. for the period stated and it is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Opinions, Fund holdings and sector allocations are subject to change at any time, and are not recommendations to buy or sell any security.

FUND HIGHLIGHTS at June 30, 2023 (Unaudited)

GUINNESS ATKINSON CHINA & HONG KONG FUND

GUINNESS ATKINSON CHINA & HONG KONG FUND

Schedule of Investments

at June 30, 2023 (Unaudited)

GUINNESS ATKINSON CHINA & HONG KONG FUND

Schedule of Investments

at June 30, 2023 (Unaudited)

GUINNESS ATKINSON GLOBAL ENERGY FUND

SEMI-ANNUAL REPORT FOR THE PERIOD ENDED

JUNE 30, 2023

Expenses: Gross 1.91% & Net 1.46%. The Adviser has contractually agreed to reduce its fees and/or pay Fund expenses in order to limit the Fund’s Total Annual Operating Expenses to 1.45% through June 30, 2026.

For the Fund’s six-month expense ratio, please refer to the Financial Highlights section of this report.

Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment in the Fund 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. Performance data current to the most recent month-end may be obtained by visiting www.gafunds.com, or calling (800) 915-6565.

Given the weaker oil and gas price environment, the first half of 2023 has seen underperformance for energy equities.

Generally, companies in the Fund that underperformed over the six months were those with greatest operational leverage to falling oil and gas prices. Three of our US shale oil biased Exploration & Production companies (Devon Energy Corp -19%; EOG Resources -10%; Conocophillips -10%) were amongst the weaker performers for this reason. Amongst our European holdings, Equinor (-14%) had the highest leverage to falling international gas prices.

We saw relative strength from our Canadian holdings, in particular Imperial Oil (+7%) and Canadian Natural Resources (+4%). Canadian oil benchmarks (Western Canadian Select) started the year at an unusually wide discount to US benchmarks (WTI). That gap closed over last few months as demand for heavier Canadian crude improved, benefitting Canadian producers.

Larger European integrateds (BP +4%; Shell +8%) also outperformed, with the market warming to both companies announcing greater focus on oil and gas production when compared to long-term plans previously announced. The European majors also enjoyed 10-15% dividend increases, whilst maintaining very high dividend cover.

China was also a stronger area, with Petrochina shares up 50% over the period. Petrochina benefitted from both the fall in oil prices, which boosted the company’s refining profits, and the fall in natural gas prices, which improved midstream earnings (Petrochina had been importing Russian gas at a loss).

The sector and geographic weightings of the portfolio at June 30 2023 were as follows:

Having peaked in early summer 2022 at over $120/bl, oil prices drifted lower to $80/bl over the second half of last year, as extended COVID lockdowns in China and the resilience of Russian oil supply resulted in some of the worst fears around market tightness falling away. Lower prices suited OPEC+, who sought a price not so high that it damaged global GDP, but high enough that it satisfied the fiscal needs of its members. The outcome was broadly successful for OPEC+, with Brent averaging $99/bl in 2022 – a level representing an oil spend of around 4% of world GDP, which is comfortable compared to recent history. By the start of 2023, the narrative in oil markets was shifting to one of China re-opening versus sluggish prospects for GDP, and therefore oil consumption, in North America and Europe.

The Brent oil price started the year at $80/bl and, with a slight loosening in inventories in January and February, fell towards $70/bl. The announcement in early April of an OPEC+ quota cut resulted in a rebound, with Brent reaching a high for the year on April 12 of $83/bl. Brent then fell again, trading for May and June in a fairly tight range between $72 and $77/bl. On the one hand, the demand story looked robust through this period, with the IEA posting several upgrades to its global demand forecast for 2023. Set against this, stronger-than-expected production from Russia, Iran and the US kept a lid on price.

Global oil demand in 2023 was forecasted in January by the IEA to be up 1.7m b/day versus 2022, putting demand around 1m b/day ahead of its previous peak in 2019. Today, the forecast for 2023 demand growth has been upgraded to 2.4m b/day, a function of normalizing economic activity in China after COVID, underestimated strength in Russian and African consumption, and a continued recovery from the aviation sector globally.

Despite the upgrades to demand, OPEC+ opted in April to reduce their production quotas by 1.2m b/day, effective for the rest of this year. The group’s actions were supplemented by a further unliteral cut announced by Saudi in early June of 1m b/day. OPEC+’s actions appeared to be defending a Brent oil price of $80/bl+, though Saudi tend not be explicit in their messaging.

How to explain the apparent disconnect, then, between rising demand forecasts and deeper OPEC+ cuts? The answer appears to lie mainly with stronger production from various OPEC+ members operating under sanctions. At the start of the year, Russian oil supply was expected to fall by 0.8m b/day in 2023, as G7 sanctions in relation to the invasion of Ukraine started to bite. The reality has been quite different, with the majority of Russian oil being diverted to Eastern consumers, albeit under price cap. Production from Iran has also been strong, with oil reported for May to be running over 3m b/day, up from 2.6m b/day in January. Iranian oil exports are thought to have reached 1.5m b/day in May, their highest level since 2018.

As expected, there has also been reasonable growth in supply from US shale oil, which looks to be up by around 0.4m b/day since the start of the year. Production in the US is being hampered somewhat by slowing drilling productivity, as some producers start to exhaust their most productive acreage. Offsetting this, we have seen continued reliance on wells that were previously drilled but left uncompleted (DUCs), which have formed a meaningful proportion of completed wells this year.

For natural gas, the year started with prices outside the US near record highs, driven by the limiting of flows of Russian gas into Europe post their invasion of Ukraine. Europe had spent several months having to outbid other parts of the world for marginal LNG cargoes to ensure that gas in storage was sufficient through the winter. The last six months have seen a sharp reversal, with European and Asian prices dropping to around $10/mcf, still c50% above pricing before COVID, but a sharp relief when compared to peak prices at $40-50/mcf+. The turnaround can be explained by an unseasonably warm winter, particularly in Europe, which dampened heating demand for gas, and a concerted effort to swap gas for cheaper substitutes, such as gasoil. A normalizing of the supply/demand balance for gas in international markets helped lower US natural gas prices, which dropped from $4.50/mcf in January to $2.75/mcf by the end of June.

Given the state of the world economy, and uncertainties around some fringe members of OPEC, the outcomes for spot oil prices in the short-term are hard to predict. What is clearer is that the incentive price for new supply has risen, now to around $75-80/bl, which coincides with the ‘floor’ for oil which Saudi are looking to defend longer-term. We see a disconnect between this longer-term floor and the oil price currently being reflected in energy equity valuations, which is closer to $60-65/bl.

Whilst global oil demand is expected to rise 2.4m b/day this year, the shape of demand growth looks skewed to the second half of the year. 1H 2023 demand looks to be up 2.1m b/day on 1H 2022, whereas 2H 2023 is expected to rise by 2.9m b/day. The IEA have recently published their first forecast for global oil demand in 2024, up by 0.8m b/day versus 2023 and taking demand to 103m b/day, over 2m b/day higher than the previous peak in 2019. This expectation is consistent with the IMF’s current global GDP growth forecast for 2024 of 3.0%. The outlook for demand in the OECD in 2024 (-0.4m b/day) is on trend with a gradual improvement in the efficiency of oil use since peak OECD demand in 2007. By contrast, non-OECD oil demand is due to be up 1.2m b/day next year, putting demand in the region 8% higher than in before COVID (vs OECD -4%).

OPEC+ continue to be led by Saudi, who are seeking still to micromanage the market through temporary surpluses. We see Saudi are a rational and intelligent operator in the oil market, targeting an oil price that provides them with a fiscal surplus ($80/bl+), but one that does not stress the world economy. Saudi’s sweet spot for oil, therefore, appears to be in the $80-100/bl range. The biggest wildcards within the OPEC+ group remain Russia and Iran. With Russian government oil & gas revenues down around 50% so far this year, Russia can either take the path of ignoring quotas and keeping production as high as possible, or falling into line with OPEC+ quotas in the hope that oil prices rise. We believe Saudi are pressuring Russia to pursue the latter course. For Iran, if a deal can be achieved with the US, it opens to the door to around 0.5m b/day of additional exports, but not much more given the recovery in Iranian exports already achieved.

In the non-OPEC world (ex US shale), capital spending is starting to pick up again, with money in particular being directed towards deepwater projects in Brazil and Guyana. That said, the low level of CAPEX being committed for the largest non-OPEC oil projects around the world in 2016-21 (averaging around $35bn, compared to around $100bn in 2010-14) is likely to drive anaemic growth/stagnation in non-OPEC (ex shale) supply for some time to come. Any uptick in spending in 2022-24 will take a number of years to feed through to improved supply. And considering the oil cost curve, it appears that industry inflation, higher taxes, plus an increasing cost of capital for hydrocarbon projects, has pushed the marginal incentive price (i.e. 75th percentile of the cost curve) to around $80/bl, up from $70/bl a year or two ago. 

For US shale oil, activity has been slowing this year in the face of lower prices. The number of onshore rigs drilling for oil in the US has fallen nearly every week so far this year, the rig count now at 545 versus a peak of 627 in December 2022. Also, it seems that drilling productivity is falling (recent EIA data shows a sharp decline in new oil per rig), as the best inventory is ‘drilled out’ and producers move increasingly to second tier acreage. This also points to growth in US shale oil over the next twelve months of 0.2-0.3m b/day (and virtually all of that growth coming from the Permian basin), versus growth over last twelve months of closer to 0.8-0.9m b/day. Should demand grow as expected, sluggish growth from the US points to a higher call on OPEC to balance the market.

For international natural gas markets, the reduced flow of Russian gas into Europe continues to pose a major challenge. On the one hand, reduced demand over the winter (via price induced demand destruction and warm weather) has left gas in storage in Europe at comfortable levels, setting up well for next winter. Against this, global demand for LNG has risen this year with the re-opening of the Chinese economy post COVID, meaning it will be more difficult for Europe to attract LNG cargoes should the region experience, for example, colder 2023/24 winter. Longer-term, we see international gas prices settling in a $11-13/mcf range. This price range should be sufficient to incentivise marginal sources of LNG to be developed and shipped to the European market, which by 2025/26 should have sufficient LNG import capacity. It would also allow Europe to displace permanently almost all its Russian gas imports. An international gas price in the $11-13/mcf is well down on the highs seen in 2022, but would leave the market at a c.50% higher price point than that seen in the few years prior to COVID and the Russian invasion of Ukraine.

Lower oil and gas prices so far this year has been accompanied by a decline in oil & gas equities. The fall in energy equities leaves the price-to-book (P/B) ratio for the energy sector at the end of June at around 1.7x. This compares to the S&P 500 which, after the rally this year, trades at 4.3x. On a relative P/B basis versus the S&P500, therefore, the valuation of energy equities sits under 0.4x, still over two standard deviations below the long-term average.

At the end of June, we estimate that the valuation of our portfolio of energy equities reflected a long-term Brent/WTI oil price of around $63/bl. If the market were to price in a long-term oil price of $70/bl, it would imply around 25% upside while there would be around 55% upside at a long-term oil price of $80/bl Brent, in our view.

We estimate the 2023 free cashflow yield of our portfolio, after capital expenditure, to be around 12% and note that the expected 2023 dividend yield of the portfolio currently sits at around 4.7%. Fixed dividends in the portfolio have generally been growing, and have ample room to run further, given the high free cashflow yield.

The Fund invests in foreign securities, which involve political, economic, currency risks, greater volatility, and differences in accounting methods. These risks are greater for emerging markets. The Fund is non-diversified, meaning that its assets may be invested in fewer individual holdings than diversified funds. Therefore, the Fund is more exposed to individual stock volatility than diversified funds. The Fund 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 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. Net Return reflects deduction for withholding tax but reflects no deduction for fees and expenses. Net Return is net of local withholding taxes that any investor would pay. This index is unmanaged and is not available for investment, and do not incur expenses.

The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies.

MCF is an abbreviation denoting a thousand cubic feet of natural gas.

Price to Book Ratio (P/B Ratio) a ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share.

P/E – Price to Earnings ratio is calculated by dividing current price of the stock by the company’s trailing months’ earnings per share.

Free cashflow – Represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base.

Please refer to the Schedule of Investments for details on Fund holdings. Current and future portfolio holdings are subject to risk.

The information provided herein represents the opinion of Guinness Atkinson Asset Management, Inc. for the period stated and it is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Opinions, Fund holdings and sector allocations are subject to change at any time, and are not recommendations to buy or sell any security.

FUND HIGHLIGHTS at June 30, 2023 (Unaudited)

GUINNESS ATKINSON GLOBAL ENERGY FUND

GUINNESS ATKINSON GLOBAL ENERGY FUND

Schedule of Investments
at June 30, 2023 (Unaudited)

GUINNESS ATKINSON GLOBAL ENERGY FUND

Schedule of Investments
at June 30, 2023 (Unaudited)

GUINNESS ATKINSON GLOBAL INNOVATORS FUND
SEMI-ANNUAL REPORT FOR THE PERIOD ENDED
JUNE 30, 2023

Fund performance (Total Return in USD). Bloomberg and Guinness Atkinson Asset Management

Expenses: Investor Class Gross 1.27% & Net 1.24%; Institutional Class Gross 1.10% & Net 0.99%. The Adviser has contractually agreed to reduce its fees and/or pay Fund expenses in order to limit the Fund’s Total Annual Operating Expenses for Investor Class and for Institutional Class shares to 1.24% and 0.99% through June 30, 2026.

For the Fund’s current six-month expense ratios, please refer to the Financial Highlights section of this report.

Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment in the Fund 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. Performance data current to the most recent month-end may be obtained by visiting www.gafunds.com, or calling (800) 915-6565.

Summary

Over the first half of 2023, the Guinness Atkinson Global Innovators Fund produced a total return of 26.20% (in USD) vs the MSCI World Index net total return of 15.09% (in USD). The fund therefore outperformed the benchmark by 11.11%.

Performance

Following a relatively volatile first quarter, Q2 saw relative calm as equity markets ticked upwards, driven by ‘growth’ orientated stocks. The first half of 2023 can be split into a number of distinct performance periods, each with different drivers and leaders from both a style and sector perspective.

The first quarter can be broadly split into 3 distinct stages:

(1) – Recovery Rally

Many of the key market concerns from 2022 abated somewhat (inflation, China’s Covid policy, recessionary risks and an energy crisis) during the period, with renewed hope of a soft-landing. As risk-on sentiment returned, the more cyclically orientated sectors that underperformed in 2022 outperformed in January. Paired with a market view of an earlier pivot towards looser monetary policy, driving the outperformance of ‘growth’ during the period.

(2) – Market Reversal

The market reversed course in early February, as hopes of an earlier pivot away from tight monetary policy were dampened. Employment and inflation data came in surprisingly ‘hot’ in both the US and Europe, and Fed Chair Jay Powell followed with hawkish rhetoric over the future path of interest rates. Expectations of a higher and later peak rate drove the underperformance of growth relative to value.

(3) – Banking Crisis

The collapse of Silicon Valley Bank introduced a level of volatility back into markets. Equities initially reacted with a sharp sell-off, as fears of financial contagion grew. A strong policy response from regulators restored a level of confidence back into the banking system and calm back into equity markets, which rebounded over the subsequent weeks. The crisis drove a tightening of credit conditions. Tight credit conditions typically create a headwind for economic growth, driving a rotation towards higher quality companies with strong balance sheets and margins. However, tighter credit conditions were also likely to play a part in reducing inflation, also supporting growth stocks, on the basis that the exogenous shock might play a part in bringing forward looser monetary policy.

Fund performance over the first quarter can be attributed to the following:

(4) Growth/AI Outperformance

The drivers of growth outperformance seen over Q2 have largely differed from the two periods of outperformance seen by the factor in Q1. Whilst the first period of outperformance was one in which equities on the whole were rallying hard, and the second period of growth outperformance was largely amidst a market correction, both were driven, in part, by interest rate expectations of when a pivot in monetary policy may occur. The latest period of ‘Growth’ outperformance was, up until early June, in the context of sideways moving equity markets. Looking deeper, however, there was a range of interesting market dynamics.

Unlike the prior two periods, ‘Growth’ outperformance was not driven by expectations of an earlier pivot to loose monetary policy. In fact, over the second quarter interest rate expectations acted as a headwind for ‘growth’ stocks, with the implied peak policy rate shifting both higher and later. Yet growth outperformed anyway. Growth outperformance in the second quarter was stark, yet was driven by just a handful of stocks. After struggling throughout 2022, ‘Big Tech’ continued on its strong run throughout 2023, and was the core source behind the outperformance of ‘growth’ and equities more broadly. Interestingly, the MSCI World would have fallen into negative territory in late May (quarter to date) had the Big Tech names not been included in the index, but instead finished +2.9% USD.

The catalyst for growth outperformance was renewed enthusiasm over Artificial Intelligence. Whilst AI is not a new phenomenon, the launch of Chat GPT earlier in the year has captured the imagination of consumers and businesses alike over 2023, and encouraged businesses across sectors to investigate the best way to leverage and incorporate the technology into their business models and operations. Investment into Artificial Intelligence was evident in company fundamentals too. Nvidia added $184bn to their market capitalization following their quarterly earnings, more than the entire market cap of close-peer Intel, with the stock surging +24% on the day of results. The company, which, for the second quarter running, ended as the Fund’s top performer, guided for revenues of $11bn in the next quarter, over 50% higher than the $7bn estimated by analysts. Soaring demand for chips required for generative AI purposes was clearly much greater than the market expected, creating a tailwind for AI-exposed stocks.

On the whole, H1 2023 was a record low for US equity market breadth. Just 32% of US stocks have outperformed the market YTD, highlighting the sharp concentration of winners. In June, we have seen the rally broaden and the outperformance of growth decelerate, as all sectors finished in positive territory. Whilst the technology sector continued to run (+6.2% in June), the performance was shared more equally with the more cyclically inclined Consumer Discretionary (+10.5%), Industrials (+9.0%) and Materials (8.3%) all outperforming the broader MSCI World.

Fund performance over the second quarter can be attributed to the following:

Activity

Over the first six months of 2023, we made no changes to the portfolio.

Outlook

The Fund seeks to invest in quality, innovative growth companies trading at reasonable valuations. By doing so, we seek to invest in companies that are experiencing faster profit growth, larger margins and with less susceptibility to cyclical pressures. In particular, our focus on quality growth-at-a-reasonable-price has shown it strength in avoiding the highly valued non-profitable tech businesses that have swung between large rises and falls, but ultimately underperformed significantly over the last two years.

The table below illustrates how the portfolio reflects the four key tenets of our approach of innovation, quality, growth, and conviction. The fund has superior characteristics to the broad market; higher spend on intellectual property through research and development (R&D), less capital intensiveness, higher cash flow returns on investment, with higher historic growth. The fund currently trades at a 22.9% premium to the benchmark on a PE basis which we believe is a reasonable price to pay for this attractive set of characteristics.

Guinness Atkinson Asset Management, Bloomberg (data as at 30th June 2023)

There is no doubt that the macro-environment looks more attractive for equities than it may have done at the beginning of the year. Even after a banking crisis, many more rate hikes than expected, a disappointing Chinese reopening and continued earnings downgrades across the market, equities have still recovered from the depths of 2022. And it is easy to see why. Many of the core concerns that weighed heavily on equities over the prior year have diminished: the economy has remained remarkably resilient, headline inflation has fallen consistently, the hiking cycle is on pause (for now), and company earnings have, on the whole, continued to surprise to the upside.

Whilst we are not necessarily ‘bearish’ on the current macro-outlook, we do see reason for caution that we may not be ‘out of the woods’ just yet. Whilst company earnings have largely surprised to the upside over half-year, with 78% of S&P 500 companies exceeding Q1 estimates (in-line with the long-term average), this is largely in the context of cuts in earnings expectations. We note a number of leading economic indicators that may suggest an impending recession. The yield curve remains deeply inverted, with the 10 year/3 month indicator at its deepest inversion over the past 40 years – a period in which the curve has correctly indicated five out of five recessions. In the context of a seemingly resilient economy and limited progress in taming core inflation towards target levels, the Fed may yet be emboldened to maintain hawkish monetary policy, leading to later rate cuts than expected.

The culmination of these headwinds means that we could well be in a lower growth environment for the foreseeable future. As such, we believe the Fund’s focus on quality growth – that is, businesses that can continue to grow in a low growth environment stemming from structural demand drivers – remains well placed.

Ian Mortimer & Matthew Page

July 2023

The Fund invests in foreign securities, which involve political, economic and currency risks, greater volatility, and differences in accounting methods. These risks are greater for emerging markets. The Fund is non-diversified, meaning that its assets may be invested in fewer individual holdings than diversified funds. Therefore, the Fund is more exposed to individual stock volatility than diversified funds. The Fund invests in smaller companies, which involve additional risks such as limited liquidity and greater volatility.

The approach of the Fund is not to provide access to the most innovative companies in the world but rather to look at companies using the ‘prism’ of innovation to highlight those we think might be winners in the future - and then only buy them if they are offering reasonable value compared to those future expectations. We are firm believers that innovative companies may outperform in the future and that a value discipline to stock selection has the potential to add to that performance.

The MSCI World Index (Net Return) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. Net Return reflects deduction for withholding tax but reflects no deduction for fees and expenses. Net Return is net of local withholding taxes that any investor would pay. The NASDAQ Composite Index is a market capitalization-weighted index that is designed to represent the performance of the National Market System, which includes over 5,000 stocks traded only over-the-counter and not on an exchange.These indices are unmanaged and are not available for investment, and do not incur expenses.

Cash flow measures the cash generating capability of a company by adding non-cash charges (e.g. depreciation) and interest expense to pretax income.

A cash flow return on investment (CFROI) is a valuation metric that acts as a proxy for a company's economic return. This return is compared to the cost of capital, or discount rate, to determine value-added potential.

Earnings growth is not representative of the Fund’s future performance.

Please refer to the Schedule of Investments for details on Fund holdings. Current and future portfolio holdings are subject to risk.

The information provided herein represents the opinion of Guinness Atkinson Asset Management, Inc. for the period stated and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Opinions, Fund holdings and sector allocations are subject to change at any time, and are not recommendations to buy or sell any security.

FUND HIGHLIGHTS at June 30, 2023 (Unaudited)

GUINNESS ATKINSON GLOBAL INNOVATORS FUND

GUINNESS ATKINSON GLOBAL INNOVATORS FUND

Schedule of Investments

at June 30, 2023 (Unaudited)

GUINNESS ATKINSON GLOBAL INNOVATORS FUND

Schedule of Investments

at June 30, 2023 (Unaudited)

GUINNESS ATKINSON RENMINBI YUAN & BOND FUND

SEMI-ANNUAL REPORT FOR THE PERIOD ENDED

JUNE 30, 2023

Expenses: Gross 2.70% & Net 0.90%. The Adviser has contractually agreed to reduce its fees and/or pay Fund expenses in order to limit the Fund’s Total Annual Operating Expenses to 0.90% through June 30, 2026.

For the Fund’s current six-months expense ratios, please refer to the Financial Highlights section of this report.

Performance data quoted represents 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. Performance data current to the most recent month-end may be obtained by visiting www.gafunds.com, or calling (800) 915-6565. The Fund imposes a 2.00% redemption fee on shares held less than 30 days. Performance data quoted does not reflect this fee. If it had, total return would be lower.

In the first six months of 2023 the Fund fell -2.85% compared to the Hang Seng Markit iBoxx Offshore RMB Overall Total Return Index which fell -2.48% in USD terms and the Offshore Renminbi (CNH) which fell -4.76% against the dollar.

Despite opening the review period on a positive, economic activity in China showed further signs of slowing in the first half of the year, particularly in the manufacturing, industrial and labour sectors, and the property market stuttered. Foreign Direct Investment also softened, expanding 0.1%yoy in the first five months. China’s official manufacturing PMI did, however, improve in June, although still in contraction, while services expanded less than expected, and the June Caixin manufacturing PMI came in stronger than expected, at 50.5 (a reading above 50 denotes expansion and below 50, contraction).

The PBoC therefore lowered its key benchmark rates in June amid the slowdown in economic performance. Declining interest rates in China, noteworthy given rising interest rates in most Western economies, have also been accompanied by slower trade activity. China’s sovereign bond yields have fallen this year with the 10-year China Government Bond yield down to 2.62% from 2.81% at the start of the year. The weakness in the currency versus the dollar reflects these headwinds but it also reflects the relative strength of the dollar. Against a China-trade-weighted basket of currencies the Yuan was only -1.96% weaker and remains well above the 2019-2020 lows.

One holding matured during the period, China Construction Bank/Singapore 2.85% 04/22/23.

Bonds issued by Government/Supranational organizations accounted for 23% of the portfolio. China financials accounted for 26% of the portfolio, and foreign financials accounted for 20%. Non-financial corporations accounted for 25% of the Fund. The valuation of the portfolio as measured by the yield to maturity was 3.56% and the duration of the portfolio was 1.24 years.

China’s post-pandemic recovery has begun to show signs of slowing, as external demand and the property market drags growth. Confidence appears low, as such businesses are reluctant to invest and hire. Given the weaker-than-expected rebound we expect policymakers to deploy further fiscal stimulus. The PBoC has eased key policy rates, however, this may not be enough to support sustainable growth; there is also plenty of room for targeted monetary policy easing, especially given the low inflation backdrop. We are confident that policymakers can navigate this period of weakness as there has sufficient firepower available, including China’s USD3tn worth or reserves. However, under Xi Jinping, who has a higher tolerance for slower growth we expect to see targeted, rather than broad-based stimulus.

The PBoC’s Yi Gang, sounded upbeat about China’s economic recovery, stating that China should meet its growth targets as expansion in the second half is expected to be “relatively high” due to base effects. On inflation, Li expects CPI to gradually pick-up with annual inflation forecast to surpass 1% by the end of the year. Li also reiterated the central bank’s commitment to targeted monetary policy and support for the real economy; he said last month that there was “plenty of room in interest rates”.

With ongoing reforms and reopening policies, China remains an attractive destination for foreign investors looking to tap into its market and participate in its economic development. In May we heard of the official launch of the China-Hong Kong Swap Connect, which will allow international investors access to China’s USD3tn interest rates swaps market. The platform will initially have a CNY20bn (USD 2.89bn) daily limit, which should be easily reached. Clearly the yield differential between US Treasurys and China onshore bonds has seen a decrease in offshore investors, however, as access to Chinese onshore securities gets easier and trading costs are less expensive, China’s sovereign bonds should be more attractive as they not only offer stability but also diversification.

We maintain that the renminbi is undervalued and expect it to appreciate in the long term, particularly as growth picks up in the second half of the year, and when interest rate differentials begin to shrink once the Fed commences an easing cycle.

Edmund Harriss

July 2023

The Fund invests in foreign securities, which involve political, economic and currency risks, greater volatility, and differences in accounting methods. These risks are greater for emerging markets. The Fund is non-diversified, meaning that its assets may be concentrated in fewer individual holdings than diversified funds. Therefore, the Fund is more exposed to individual stock volatility than diversified funds. The Fund invests in smaller companies, which involve additional risks such as limited liquidity and greater volatility. Investments in debt securities typically decrease in value when interest rates rise, which can be greater for longer-term debt securities. The Fund may invest in derivatives, which involves risks different from, and in certain cases, greater than the risks presented by traditional investments.  

Investments focused in a single geographic region may be exposed to greater risk than investments diversified among various geographic regions.

The Hang Seng Markit iBoxx Offshore RMB Bond Index family (“HSM iBoxx”) is designed to track the performance of the offshore RMB bond market. This index is unmanaged and not available for investment, and does not incur expenses.

The RMB Cash Offshore (CNH) is the currency code for renminbi traded outside China in the offshore market.

The RMB Cash Onshore (CNY) is the international currency code for the renminbi.

Yield to maturity is the total return anticipated on a bond if the bond is held until it matures.

SEC 30-day Yield: 2.79% (subsidized); 0.44% (unsubsidized). The unsubsidized SEC yield is calculated with a standardized formula mandated by the SEC. The formula is based on maximum offering price per share and does not reflect waivers in effect.

Duration is expressed in the form of number of years and measures a bond's sensitivity to change in interest rates.

To be specific, it measures the change in market value of security due to 1% change in interest rates. Please refer to the Schedule of Investments for details on Fund holdings. Current and future portfolio holdings are subject to risk.

The information provided herein represents the opinion of Guinness Atkinson Asset Management, Inc. for the period stated and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Opinions, Fund holdings and sector allocations are subject to change at any time, and are not recommendations to buy or sell any security.

FUND HIGHLIGHTS at June 30, 2023 (Unaudited)

GUINNESS ATKINSON RENMINBI YUAN & BOND FUND