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

The Harbour Income Fund is designed for investors seeking a high stream of regular income, but also want to protect the real value of their capital over the medium term. The Fund is primarily designed for conservative investors.

The Fund holds units in other Harbour Funds. In normal circumstances it will hold approximately 70% of its value in the Harbour NZ Corporate Bond Fund and approximately 30% in the Harbour Australasian Equity Income Fund. These weightings can be increased or decreased by up to 10% depending on the manager’s view of prevailing market conditions. In making this decision the manager considers a number of indicators including: market valuations, inflation indicators, company earnings, economic surprise indicators, market sentiment, market risk levels and other qualitative considerations. These are augmented by the bottom-up perspectives of the respective managers of the underlying Funds. These inputs are analysed with reference to the Harbour Investment Clock, a stylised representation of asset pricing cycles as presented below. The manager may also introduce an allocation of up to 20% to the Harbour NZ Short Duration Fund as a defensive measure.

Investment Process: Research Signals

The Harbour NZ Corporate Bond Fund is primarily comprised of a diversified portfolio of corporate bonds. It aims to capture the credit and liquidity premium attached to corporate bonds, bank securities and local authority stock. This comes in the form of higher yields than are normally available from bank deposits or Government Stock. The Fund holds a buffer of Highly Liquid securities to accommodate client-driven cash flows and payment of distributions. This helps to minimise transaction costs and enables most corporate bonds to be held to maturity. The primary sources of risk management are diversification, credit research and constraints on exposures such as subordinate-ranking securities. To hold unrated bonds the portfolio manager must deem them to be of investment grade quality in his credit assessment. While sub-investment grade bonds can provide higher yields, they can, in times of stress, add unwanted volatility and illiquidity to the Fund. The manager would rather spend the risk allocation within the equity portion of the Fund. Further details can be found here.

The Harbour Australasian Equity Income Fund is a diversified portfolio of around 40-60 income producing Australasian shares. The investment process blends a strong quantitative selection process across Australasia with a quality and judgemental overlay. 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 prior to the final portfolio construction. The portfolio may at times also hold up to 20% in cash and fixed interest securities. Further details can be found here.

The Harbour NZ Short Duration Fund is an investment grade portfolio that holds liquid money market securities and short-term maturity corporate bonds, all denominated in New Zealand Dollars. The Fund is designed to earn a premium over 90 day bank bills, while aiming to avoid the volatility of traditional fixed interest funds. Further details can be found here here.

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.