RaboDirect's Key Accounts & Investments Manager, Michael Courtney, sat down with Shane Solly, Portfolio Manager of the Harbour Australasian Equity Focus Fund (the Fund) to get you the details on this new addition to the RaboDirect Managed Funds platform
1. Can you explain your role with Harbour and how long you’ve been with the company
I am a Portfolio Manager and Investment Analyst. As Portfolio Manager I bring together Harbour's best research driven New Zealand and Australian stock investment ideas into one diversified equity fund. As an Investment Analyst I form recommendations on stocks listed on the New Zealand and Australian stock market. The Harbour analyst team’s recommendations form the basis of Habour’s equity funds. I joined Harbour in 2014. Prior to that I was the Head of Equities at Mint Asset Management, and a Senior Equity Portfolio Manager with ING NZ (now ANZ Funds).
2. How long have you been managing the Fund for?
Since the Fund’s inception in 2014.
3. Can you explain a bit about the strategy behind the Fund
The Harbour Australasian Equity Focus Fund has a capital growth objective.
The Fund is a portfolio of the Harbour research team’s best research ideas. Harbour’s best research ideas are generally growth stocks that the Harbour research team has a high level of conviction in, and believe that earnings growth is being under appreciated by the broader investing market.
The Fund favours growth stocks because these stocks ride through most cycles. It tends to have a bias to stocks in the healthcare, technology and other industry sectors that benefit from structural change, and it utilises a ‘less delivers more’ portfolio construction approach. Risk is targeted at quality medium term growth stocks.
As a result, Fund returns are influenced more by idiosyncratic (unique) stock specific performance than the performance of the broader stock market.
4. When someone invests in the Fund, where is the money invested?
The Fund is generally fully invested in New Zealand and Australian stocks (companies listed on the New Zealand or Australian Exchanges). It can also hold up to a combined maximum of 35% in cash and investment grade bonds. The underlying funds and securities are held by the Fund’s custodian Trustees Executors.
5. How do you decide what the most suitable/appropriate investment options are for the Fund?
Harbour selects stocks for inclusion in the Fund using its well established and proven investment process.
The process begins with the quantitative analysis of factors that have historically been associated with growth driven performance. Data for a wide range of New Zealand and Australian companies are ranked considering key company specific growth factors, underlying company financial quality, and company Environmental, Social and Governance (ESG) practices.
Based on regular, rigorous company and industry meetings Harbour's analyst team rate each company. The combination of the quantitative research and analyst rating results in a ranking of all stocks. To be considered for inclusion in the Fund, stocks need to be the Harbour Research teams, highest ranking, highest conviction buy rated stocks.
6. What are Harbour's views on the NZ, Australian and wider global economies at the moment?
While we expect inflation, interest rates and growth to remain low globally, we believe inflation and interest rate expectations may have gotten too low. A modest move in global inflation expectations is contributing to an increase in long term bond interest rates. This in turn is triggering a rotation in equity market investment sectors, away from stocks with higher dividend income that have benefited from investors moving cash from low income yielding bonds over the last year.
US and European political changes are dampening consumer and business confidence. Asian economic growth is expected to remain positive. New Zealand economic lead indicators continue to support positive forward economic growth expectations, influenced by positive net migration and solid export demand. Australian economic lead indicators also support positive forward economic growth expectations, driven by residential housing activity and a basing in the mining sector.
We also expect accelerating technology change, demographic trends and industry disruption to continue to influence economic conditions and stock returns. Some economies and companies will benefit more than others form these trends.
We expect conditions to remain broadly supportive of medium term positive returns from the New Zealand and Australian markets. The NZ market’s mix of relative earning certainty should remain attractive as global volatility increases from low levels. The Australian market is relatively attractively priced, but underlying company earnings risk is more mixed than the New Zealand market.
7. Although this fund is an Australasian equity fund, does Harbour still pay close attention to what is happening globally?
Yes. Global factors are important when investing locally as they influence returns, and risks associated with these returns.
Economic trends (including inflation, growth and interest rates) and structural industry change impact on stock selection and allocation. Many of these influences are global in nature.
We draw on internal and external views to influence our investment views. We subscribe to research from global thought leaders, and our research team regularly travels overseas on research trips.
But our primary focus is on the underlying drivers of company performance. Often the best stock specific investment opportunities emerge when there are periods of change which broader markets over or under estimate. This is when our detailed company analysis provides us with the confidence to make investment decisions for the Fund.
8. How would you describe the performance of the Fund in recent times? And what sort of performance should customers expect from this Fund going forward?
The Fund’s returns are influenced by its relatively concentrated investment in a select number of medium term growth stocks.
The Funds positive performance over the last year has been driven by strong returns from larger growth companies including Fisher and Paykel Healthcare, Mainfreight , and Challenger, and investments in smaller emerging growth companies such as a2 Milk, Gentrack and GTN. We expect such idiosyncratic stock specific performance will continue to determine overall Fund performance.
The Fund’s emphasis of idiosyncratic stocks investments means that it has delivered a better return than broader equity markets as they have fallen from September. While this will not always be the case, this period of returns highlights that the Fund generates different return outcomes from broader equity markets. Over time we expect the Fund will generate an above average level of capital growth.
9. Could you explain your thoughts on the risk the Fund carries
The Fund invests in 15-25 New Zealand and Australian stocks. This means that the Fund tends to have higher risk and volatility than some other Funds. The Fund’s skew to growth stocks generates strong returns over the medium term, but there may be periods of time when growth stocks fall out of favour with the broader investment market, increasing Fund return risk. The Fund’s tactical hedging of Australian Dollar investments back to the New Zealand Dollar may increase return risk.
10. What methods does the Fund use to minimise foreign exchange risk?
The Fund tactically hedges Australian dollar risk, using forward currency contracts with investment grade rated trading banks, in a 0-90% range.
11. What specific performance objectives do you set for the Fund?
The Fund has the objective of generating medium to long term capital growth through the market cycle for investors, by investing in quality businesses with strong growth prospects. While the Fund is constructed on a benchmark agnostic basis (driven by stock characteristics, not the weightings in benchmark stock market indices) it has an objective to out-perform a 50/50 S&P NZX50/S&P ASX200 reference benchmark over a rolling 3 year period.
12. Do you expect a level of cyclical fluctuation in the Fund's price?
The Fund’s price will fluctuate with the performance of New Zealand and Australian equity markets. Because the Fund generates returns and manages risk by investing in a relatively concentrated portfolio of 15-25 New Zealand and Australian stocks, returns will be influenced by stock specific events and may be quite different from the broader New Zealand and Australian equity markets.
13. Does this Fund pay distributions? If so when?
No. But investors are able to sell units on a daily basis, providing cash quickly and easily when required.
14. Why should someone invest in this Fund?
The Fund has the objective of generating medium to long term capital growth through the market cycle for investors, by investing in quality businesses with strong growth prospects. The Fund provides an efficient way for investors to invest in some of the best New Zealand and Australian (indeed global) growth companies, with risk managed by Harbour's proven, professional investment team.
Research shows that investing in such growth companies is one of the best ways to grow wealth over time. The Fund also provides a useful investment option for those investors that want to invest in local shares, but want their investment determined by underlying stock investment characteristics rather than mechanistic benchmark stock index construction which reflects the biggest, but not always the best companies.
15. For someone who is new to funds, what are some important considerations to take into account before investing in the Fund?
Investors need to be able to tolerate the potential for negative returns from time to time. This Fund is invested in the New Zealand and Australian equity market. Equity markets can go up and down, and can produce periods of negative return.
16. How would you see this Fund fitting into an investor's portfolio?
This Fund can be used as a diversified New Zealand and Australian equity exposure for anyone that is seeking New Zealand and Australian equity exposure. It can be used on its own as a diversified but higher risk capital growth investment, or it can be used as a capital growth enhancer to more diversified investment portfolios. The Fund is best suited to those investors with a three to five year plus investment horizon.
To the extent that any information, analysis, opinions or views provided above constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised advice under the Financial Advisers Act 2008, nor do they constitute advice of a legal, tax, accounting or other nature to any persons.