RaboDirect's Key Accounts & Investments Manager, Michael Courtney, sat down with Susanna Lee, Portfolio Manager of the Harbour NZ Equity Advanced Beta 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 manage Harbour's quantitative research program and the Harbour NZ Equity Advanced Beta Fund. I have been with Harbour for coming up to 5 years. Prior to that I was with AMP Capital and AXA Global Investors.
2. How long have you been managing the Fund for?
Since the fund's inception in December 2014.
3. Can you explain a bit about the strategy behind the Fund
The Fund seeks to provide a core 70% exposure to the S&P/NZX 50 Portfolio Index with a 30% weighting to an equally weighted exposure to growth, yield and valuation success factors. Success factor tilts have empirical and academic support and are relevant to the unique New Zealand equity market. We like to think of it as Harbours best quantitative ideas around a passive core to provide potential modest outperformance. The Fund is designed to have the same risk as the New Zealand equity market, but it is constructed to have a potential higher expected return profile.
4. When someone invests in the Fund, where is the money invested?
The money is invested in the New Zealand Equity market. The funds themselves and the securities are held at our custodian Trustees Executors.
5. How do you decide what the most suitable/appropriate investment options are for the Fund?
The Fund only invests in the NZX50 index members. Position sizes are decided by quantitative investment process. We run quantitative models to screen for the best growth, quality yield and quality value stocks in the market. If they rank well, then they get a higher weighting in the portfolio. With the NZX50 Portfolio index as the basis for investment there is also somewhat of a small cap bias.
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 a New Zealand 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 has tilts to certain success factors and through the portfolio construction a natural tilt away from large capitalisation stocks. At the start of the year the strategy underperformed the benchmark with international money flowing into the New Zealand equity market and pushing up the share prices of the larger companies. In the most recent months this has reversed and the Fund has outperformed. Since inception in Dec 2014 the Fund has outperformed its benchmark.
The Fund invests in diversified factor exposures, each of which have their own unique performance cycle, over the long term we expect them to have a better expected return profile than the market. Because of the diversified nature of the success factors we are able to construct a portfolio with similar risk and higher expected return. Actual returns may differ from expected returns.
9. Could you explain your thoughts on the risk the Fund carries?
The Fund is exposed to the New Zealand equity market, and has a similar risk. It is also exposed to yield, growth and value performance cycles. One measure of risk being the standard deviation of returns, is similar to that of the index active share is around 15% and maximum tracking error within the investment guidelines is at 2%.
10. What methods does the Fund use to minimise foreign exchange risk?
The Fund is only invested in New Zealand listed securities hence there is no foreign exchange risk for this Fund.
11. What specific performance objectives do you set for the Fund?
There is no specific performance target for this Fund. The investment process is designed to provide broad market exposure with expected returns to be better than the index performance over the medium term. Actual returns may differ from expected returns.
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 equity market.
13. Does this Fund pay distributions? If so when?
14. Why should someone invest in this Fund?
This Fund provides investors with a core New Zealand Equities exposure, through a systematic quantitative driven investment approach. It is low cost and is constructed in a way that that we believe will deliver investment returns better than the index.
15. For someone who is new to funds, what are some important considerations to take into account before investing in the Fund?
This Fund is invested in the NZ equity market. Investors need to be aware that this Fund does have equity risk where markets can go up and down. Investors need to be able to tolerate the level of risk and potential drawdowns of the New Zealand equity market.
16. How would you see this Fund fitting into an investor's portfolio?
This Fund can be used as a diversified New Zealand equity exposure for anyone that is seeking New Zealand equity exposure. It can be used on its own or as a core or for those that would like a higher risk/return option with a concentrated portfolio or with specific stocks as satellites.
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.