Investment Process

The years of experience and lessons learned over many market cycles has helped Harbour craft a robust and disciplined investment process for equities and fixed interest securities. Our combination of quantitative macro-economic and fundamental analysis across both equity and fixed interest markets is dedicated to producing superior investment results for our clients. Harbour manages each investment strategy within clearly defined investment parameters that provide clients with understanding and transparency of their investment portfolio.

Australasian Equity Fund

Investment Policy and Process

Harbour Asset Management Limited believes in a growth-orientated active investment management approach to generate alpha (return over the benchmark) for a client's portfolio. Harbour employs a combination of quantitative, macro-economic and fundamental research approaches when selecting New Zealand and Australian equities for inclusion in portfolios.

Harbour's investment process combines the talents of individual in-house analysts (fundamental ratings) with a largely quantitative based investment process that seeks to identify the key out-performance indicators for stocks. These indicators or factors comprise macro-economic, earnings, quality and balance sheet variables intended to identify stocks that will potentially grow earnings faster than the consensus expects.

The Harbour research team focuses research within the stocks that are ranked strongly in their investment process. Stocks that are highly ranked by the combination of the quantitative scores, are supported by macro-economic factors and are Buy rated by Harbour analysts are strong contenders for inclusion in the portfolio.

Equity Process: Combining Analyst, Quantitative & Macro factors

Australasian Equity Income Fund

Investment Policy and Process

The investment process melds a strong quantitative selection process across Australasia with a quality and fundamental overlay. The quantitative process begins with a liquidity and volatility screen which defines the range of potential investments taken from over 250 securities.

Each potential investment is then subject to five further quantitative tests including dividend and cash flow yields, dividend growth potential, and relative valuation criteria. A final portfolio of about 40-60 names is then subject to two further quality tests and a fundamental analyst score to assist in refining both the number of stocks and portfolio construction.

The portfolio, by generally holding 40-60 securities, is expected to be more diversified than typical equity portfolios reflecting the intention to provide a more consistent yield for investors. However portfolio returns are not expected to be highly correlated to the equity market.

The portfolio has the capacity to defensively invest up to 35% in cash, government and corporate bonds. It is intended that cash, government and corporate bonds will be utilised after taking into account economic and sector risk characteristic, and where yields may diverge from expected equity yields.

Process: Quantitative with Quality and Fundamental Review

Australasian Equity Focus Fund

Investment Policy and Process

The Harbour Equity Focus fund is a concentrated best research ideas, long only equity fund, investing in New Zealand and Australian stocks that rate highly using Harbours core research process.

The funds objective is medium to long term capital growth through the market cycle from investing in quality businesses with strong growth prospects.

That the Focus Fund’s philosophy is based on academic research that shows that concentrated “Best Ideas” portfolios out-perform the market in contrast to the average manager.

That the fund is diversified by construction rules.

It own’s between 15 and 25 stock positions.

Individual stock positions reflect the degree of Harbour analysts conviction as represented by active over weight holdings in Harbour’s flagship Equity Growth fund, modified to reflect market liquidity and social responsible investment considerations where directed by clients.

Has the ability to hold up to 35% in cash and fixed interest securities.

The fund has a bias to growth sectors which our research shows to ride positively through most cycles.

The three portfolio managers of the fund are Andrew Bascand, Craig Stent and Shane Solly.

A diagram of the Harbour Australasian Equity Focus Fund investment process is displayed below:

NZ Fixed Interest Funds

Investment Policy and Process

The Harbour fixed interest team's investment process has been developed over 20 years of local and global experience. Structural and macroeconomic research forms the cornerstone of the investment process, and is complemented by valuation indicators and market intelligence. A disciplined approach is used to draw together this research into 6 month forecasts of key global and NZ yield curves. Finally, the team then undertakes detailed research on individual securities, including liquidity and credit analysis, and factors in the transaction costs from portfolio turnover.

This single investment process is then applied across all Harbour's fixed interest funds, according to their respective objectives and investment guidelines. The Harbour NZ Core Fixed Interest Fund draws on the full breadth of the investment process, given it has the broadest mandate and most scope for active management. The Harbour NZ Short Duration Fund is guided by the signals from the investment process for securities with less than 3 years to maturity. The Harbour NZ Corporate Bond Fund draws on the detailed credit research of the process, and follows a diversified, low-turnover strategy to capture the credit premium available from investing in corporate bonds.

Investment Process: Research Signals

Income Fund

Investment Policy and Process

We believe that income assets can be combined to deliver the investment objectives of income-focused clients. By diversifying the portfolio across income asset classes and taking an active approach to risks and opportunities, we can lower the volatility of returns and create the scope for capital gains.

Harbour Income Fund - investing across the capital structure

Following on from our investment policy, the investment process of the Harbour Income Fund involves four key stages.

Harbour Income Fund - Investment Process

  1. Asset Allocation: The first step is to draw on our multi-asset investment process to determine what our research signals are telling us about the expected returns from different asset classes. This part of the process utilises a broad database of economic and market indicators and time-series data, as well as the insights from Harbour’s portfolio managers in each of these asset classes. This will determine our holdings in cash, fixed interest and equities relative to neutral settings.

  2. Security Selection: Once this top-down asset allocation is complete, we draw on the investment processes of the fixed interest, equity and manager selection teams to populate portfolio with securities. For example, the credit process of the fixed interest team determines the holdings of money market securities, bonds and loans; while Harbour’s equity team processes determine the holdings of equity growth, equity focus and equity income.

  3. Active management: Once the portfolio has been populated with underlying securities, we monitor and manage the Fund’s exposure to aggregate risks, such as movements in fixed rates, exchange rates, and volatility.

  4. Portfolio construction: The final stage of the investment process brings together all the layers of research and forecasts, to construct the best possible portfolio given the Fund’s investment objectives and portfolio guidelines.

T. Rowe Price Global Equity Growth Fund

T.Rowe Price Investment Policy and Process

T. Rowe Price constructs a growth oriented portfolio consisting of around 130 stocks. In following his growth style the manager has a natural bias towards emerging market stocks, where typically around 15-25% of the portfolio will be held. Given the broad diversification, it is likely the portfolio will track its benchmark with a standard deviation around this of 3-7%.

When evaluating a company’s prospects T. Rowe Price analysts consider industry trends, the cashflow generation capability of the company, its balance sheet strength, the quality of its management and the attractiveness of its share price relative to its growth profile. As a growth investor, the Portfolio Manager has a natural bias towards emerging market companies. The T. Rowe Price team travel extensively to these destinations. The Portfolio Manager recognises these companies can exhibit additional risk such as political risk and therefore takes smaller positions in individual companies as well as capping the total exposure to emerging markets at 15% above the benchmark weight.

The Fund invests in a broadly diversified portfolio of global equities, typically comprising around 130 stocks. Exposure limits are constrained by a number of guidelines which include limits to individual stocks, a +/- 10% limit to sector positions relative to the index weights and +/- 10% limit to country positions relative to the index (with the exception of the larger USA market which has a +/- 20% tolerance). In order to ensure investors receive a return that has reference to broader markets, the Fund’s performance is expected to have a standard deviation of relative performance around the index (a tracking error) of 3% - 7%. The Fund is typically fully invested in equities.

The Fund has the same trustees, custodian, auditors and investment accountants as the other Harbour Funds.