NZ Fund Managers

[Snoopy]

Information on bonus payments that might become due to Harbour Asset Management may be found here.

https://harbourasset.co.nz/assets/Le...nformation.pdf

The Harbour Australasian Equity Fund and Harbour Australasian Equity Focus Fund currently invest directly into wholesale funds managed by us (Harbour Wholesale Funds).

Outperformance is achieved if the Wholesale Fund’s unit price return (with any performance fee accrual added back) is greater than the return of the Wholesale Fund’s performance fee benchmark, plus an additional hurdle of 1% pa (calculated and accrued within the daily unit price).

For the Australasian Equity Fund, the Wholesale Fund’s performance fee benchmark is a composite index of 50% of the NZX 50 Net Index (does not include imputation credits) and 50% of the ASX 200 Index (which is 50% hedged into NZ dollars). The High Water Mark unit price is exceeded if the Wholesale Fund’s unit price, on 31 December of any year, is greater than the Wholesale Fund’s current High Water Mark unit price.

The concept of a High Water Mark exists so that the fund managers are not paid twice for creating growth that only covers previous losses.

The performance fee comprises 10% of the outperformance. The performance fee is capped at 10% of the outperformance. That is, the maximum performance fee that we can be paid is 0.90% ((10% outperformance cap less 1% benchmark hurdle) x 10% performance fee = 0.90%).

Other fees (which include performance fees) are listed as 'not applicable' to the two NZ based index based equity tracking funds. Similarly there is no bonus fee listed as applicable to the "Harbour Real Estate Investment Fund".

SNOOPY

[Snoopy]

Milford Asset Management - How Do Distributions Work?

Distributions from the funds are non-taxable events and are not treated as income for tax purposes.

------------------

It is the bit that I have put in italics that intrigues me. How on earth can that be?

Not from Milford, but I have been reading up on how Harbour Asset Management does things

"The Fund may elect to deduct from your distribution an amount equal to the PIE tax (if any) paid by the Fund in respect of your holding. In such a case, unit holders may receive differing net distributions. Currently, however, the Funds intend to reflect PIE tax by adjusting your units held and not by making deductions from distributions."

I am now wondering if Milford does the same thing? Effectively Milford pay tax by deducting that tax from your unit balance. This means that should Milford choose to make a distribution to you from their fund, it is not a taxable event, because any tax due was paid in a 'prior event', where Milford took some of your fund capital to pay the tax due. I have no idea if that is how Milford actually run things. But such an explanation would fit in with their narrative.

SNOOPY

[Snoopy]

At this point in the thread I think we have enough protagonists to make some observations and conclusions. I have listed the previously described funds from largest to smallest so that you can decide if being 'small and nimble' is really an advantage. Or does having large scale and amortising management resources over a larger asset base tend to produce better returns? Of course, we have to remember that all of these funds are not equal (neither in scope nor strategy) as per the earlier fund descriptions have already outlined (Milford Post 2, Fishers Post 7, KiwiWealth Post 10 and Harbour Post 25).

I have decided to look at both one year returns, that best reflect the current sharemarket environment and five years that give a longer term picture of what happened when the market was growing more steadily.

Fund Name	Fund Size	Fund Return (1yr to 30-04-2022)	Fund Return (5yr to 30-04-2022)
Kiwiwealth Growth Fund	$2,206m (@30-06-2021)	-1.27%	N.A.
Milford Global Equity Fund	$886.0m (@31-03-2022)	-3.82%	9.80%
Milford Trans Tasman Fund	$811.5m (@31-03-2022)	-0.08%	12.58%
Milford Dynamic Fund	$778.7m (@31-03-2022)	0.44%	14.07%
Harbour NZ Shares Index Fund	$382.4m (@31-03-2022)	-2.92%	10.37%
Fisher NZ Growth Fund	$320.0m (@31-12-2021)	-13.1%	12.3%
Harbour Australasian Equity Fund	$248.6m (@31-03-2022)	-2.81%	11.27%
Harbour Sustainable NZ Share Index Fund	$186.0m (@31-03-2022)	-3.34%	N.A.
Fisher International Growth Fund	$142.9m (@31-12-2021)	-16.7%	11.3%
Harbour Real Estate Investment Fund	$110.4m (@31-03-2022)	1.63%	N.A.
Fisher Australian Growth Fund	$109.5m (@31-12-2021)	1.5%	11.7%
Harbour Australasian Equity Focus Fund	$35.2m (@31-03-2022)	3.47%	13.35%
Average		-2.85%	10.7%

Notes

1/ All of these fund returns are after fees but before tax.
2/ The Milford Dynamic Fund is closed to new investors


So what do I make of all this? That's next.

SNOOPY

[Snoopy]

So what do I make of all this? That's next.

First impression on the five year returns is all the protagonists have done a decent job. Of those funds where the history does not go that far back:

1/ Kiwi Wealth has been operating under Kiwibank ownership since 2012. However, their 'growth engine' (the KiwiWealth Growth fund) suffered a comparative performance slump in 2016 - they were the worst performing kiwisaver provider over 2016. This was due to the Australian and New Zealand sharemarkets doing well, while all Kiwi Wealth's growth investments were concentrated in other less profitable sharemarkets. Sometimes when a fund under-performs, management prefers to close it down and start a new fund to erase any historical baggage. The date of the start of the new KiwiWealth Growth fund (2018) suggests to me a 'fund rebirth' may have happened at KiwiWealth. I do not know how the investment strategy changed between the 'old' KiwiWealth growth fund and the 'new' KiwiWealth growth fund. But I would be fascinated to find out, if anyone does know.
2/ The Harbour Sustainable Shares option I am prepared to accept is a recent development (the idea of sustainable share investing has only become mainstream in the last five years).
3/ The Harbour Real Estate Investment Trust has a 3 year compounding return of 10.17%, and it is probably reasonable to expect a similar return had it been operating for five years. Not sure why Harbour wasn't offering such an investment five years ago. Perhaps they were still in their 'growth phase' at that point?

I think it is worth noting that the international (that means outside Australia and New Zealand in this context) share investment funds, performed a percentage point or two lower than other growth funds. This could be because international investment funds operate under New Zealand's FIF investment regime, which robs unit-holders of 1.5% of the capital value of the fund each year. On the size angle, is it notable that the smallest of the international funds looked at (Fishers) has performed best?

The Milford International Fund being the worst performing fund of all types under scrutiny was an eye opener. This is in contrast to their Australian and New Zealand based equity funds that were above average.

SNOOPY

[Snoopy]

So what do I make of all this? That's next.

A one year investment return, as part of a multi-year savings program is a pretty meaningless statistic. So why am I looking at it?

Over the last year or so, the investment environment globally has become more difficult. The changes have in effect been a 'stress test' on our investment managers. So how have our investment mangers reacted? Has the change in the investing environment meant that some of the formerly very successful investment strategies have come unstuck? How robust is what our investment managers are doing? Let's take a look.

Two share funds stand out, and not in a good way: Fishers International Growth Fund (-16.7%) and Fisher's NZ Growth Fund (-13.1%). These losses are way in excess of the other funds. So what do Fisher Funds management have to say about them?

4th February 2022: https://fisherfunds.co.nz/newsroom/m...t-to-the-year/

22nd March 2022: https://fisherfunds.co.nz/newsroom/m...lenging-times/

3rd May 2022:: https://fisherfunds.co.nz/assets/fun...und-Update.pdf

9th May 2022: https://fisherfunds.co.nz/newsroom/m...-fisher-funds/

Key points from the above links are below:

NewZealand

09-05-2022: "a2 Milk (-13%) shares fell against the backdrop of Shanghai's extended lockdowns to curb the spread of Omicron. These lockdowns are creating renewed COVID-related supply chain challenges in getting product to market."
"
03-05-2022: "Fisher & Paykel Healthcare Corporation Limited, PE ratio now 24,, -12% Share Price Change, -2.0% Contribution to Return"
"Xero Limited (Yes Fishers still call it an NZ company), PE ratio -4400, -5% Share Price Change, -0.6% Contribution to Return"
"a2 Milk Company Ltd: PE Ratio 139, -13% Share Price Change -0.6% Contribution to Return"

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My observation of the above negative outcomes is that Fishers look to be holding good companies 'at any price'. Those following the Covid-19 outbreak would have caught up with the fact that hospitalisations were going down with Omicron. With that, we might have expected a fall off in orders of Fisher and Paykel Healthcare (FPH)'s hospital level breathing equipment. Pre-Covid 19 FPH peaked around $16, and now the price has 'come down' (sic) to $21. So FPH has still done well, overall, over five years. But for those investors on the ball at the time, it was clear - at a certain stage- that investors were paying very handsomely to be part of the Covid-19 response (the FPH share price spiking towards $40 was putting the company on unsustainable multiples, and there was an opportunity there for Fisher to book profits - which they did not take).

Xero (XRO) makes no money - still. Good product from what I have heard, and SAAS companies can move from loss to profit in a flash. But at eye watering multiples, you would have to call this company speculative from an investment perspective.

A2 milk (ATM) was priced as a one trick Chinese market infant formula pony. Good product, but really, really fully priced even today.

Personally I admire FPH, XRO and ATM for their vision and what they have achieved, Yet as an investor, my admiration has always been from a distance as those big names have never ticked the value box for me. Today these companies are priced at higher PE values that than Fisher's NASDAQ heroes. What were Fishers thinking when they got on board? Where was the value discipline in their purchasing?

International

04-02-2022 "While we have wanted to buy into the company (Netflix) for a long time, it has always traded at a valuation we viewed as too expensive. With the sell-off in growth stocks in recent months, and what we see as some temporary headwinds facing the company, we were able to buy Netflix at a 45% discount to its November highs (Snoopy note: now at a 75% discount from November highs!)."

22-03-2022: "Since January 2022 we have taken the opportunity to add three new companies to our portfolio: Microsoft (Fishers like the cloud computing outlook), Netflix (oh dear, see below), and Salesforce. Markets have continued to fluctuate since our purchases; however, we have conviction in our investment approach and continue monitoring our portfolio companies closely to react to changes in business fundamentals."

09-05-2022: "The largest detractors for the month were Netflix (-49%, PE now 15.7) and PayPal (-24%, PE now 26). Netflix fell materially following their Q1 earnings and Q2 guidance for subscriber losses, disappointing the market. PayPal sold off with technology stocks more broadly, but partly rebounded after reporting results towards the end of the month that were better than feared. Despite disappointing recent stock price performance, we believe these are still great businesses that are well-positioned to grow in their respective industries."

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I can see why Fishers made the above highlighted investments. It aligns with the Fisher policy of buying and holding 'good companies'. I share this philosophy myself. But if buying good companies means purchasing at a 'speculative price', then IMO this means a 'speculative lightening strategy' should be in place to reduce such holdings when they get to stratospheric share price levels. And just because a share costs less than it did last month, does not mean it is cheap.

This example of Fishers isn't a case of failing to identify good companies. It is a case of paying too much for them IMO. Ironically now that the market has dealt Fishers a 'value hammer blow', it might be time to take up positions in these funds if you do not hold. Nevertheless chasing the big names without doing a down to earth value analysis is very disappointing investment management behaviour. I have lost a lot of faith in Fishers as a fund manager in choppy (i.e. more normal) markets over this quarter. I hope they have learned a lesson.

SNOOPY

[Snoopy]

So what do I make of all this? That's next.

As a first step into investing into sharemarkets, having some 'skin in the game' of your local market is often not a bad way to start. So what opportunities have these four fund managers thrown up for making such investments?

Taking the five year view there are only two: Fisher's NZ Growth Fund, and Harbour's NZ Shares Index Tracker Fund. Despite the dismal record of Fishers NZ Growth Fund over the last 12 months, and their inherently higher fee structure, it is clear that Fishers have substantially outperformed the index, offering on average 20% higher returns each year. Whether this out-performance can continue under less bullish market conditions is open to question.

The third NZ market option - which hasn't yet been going for five years - is the Harbour Sustainable NZ Market Index tracker. The popular view is that 'investing sustainably' is good for both ESG and economic reasons. Over the last year this has not been true. The Harbour index tracker fund has outperformed its 'sustainable' index counterpart by 0.42%. Why?

Sin stock Sky City, taking into account their 7cps dividend, has declined by 13.4% over the tax year. Coal burning Genesis Energy dropped by 17.8% (using a tax adjusted estimated 13cps net dividend payment figure inclusion) over the same period. Meanwhile, over this time, the NZX50 declined by 3.2%. So these two high profile 'unsustainable exclusions' from the NZX50 constituents do not explain the Sustainable fund under-performance. Looking at the top ten fund constituents (post 25) the sustainable fund was less heavily weighted towards EBOS (EBO). EBOS increased in value by 40.5% (including the dividend contribution) over the financial year. Why the sustainable fund was less, in relative terms. invested in EBOS is unclear. But it doesn't seem to have anything to do with sustainability. A mere 0.05% of the sustainable return under-performance can be attributed to higher management fees in the sustainable fund. So it looks like the reason for the sustainable fund's under-performance might be 'lots of small reasons'. Overall, it doesn't look like the sustainable fund under-performance can be explained in terms of 'sustainability'.

Milford gave as their reason for not running an exclusive NZX equity investment fund, that they had reached a size where they had too much money to look after. The NZ domiciled split in their end of year declared position in the 'Milford Trans Tasman Equity Fund' is 24.22 percentage points out of 42.48, or 57%. 57% of the declared fund size works out to be: 0.57 x $811.5m = 463m. So we might infer from this that investing more than around $450m in one fund on the NZX is unworkable, for liquidity reasons, for an active manager. Maybe it is no co-incidence that the very successful 'Fisher NZ Growth Fund' is below this quantum in size. Of interest is that Kingfish, which is ostensibly the listed equivalent of the 'Fisher NZ Growth Fund' has $525m of NZ listed shares under management at the end of the financial year.

Decision Time Subject to being able to adapt their investment style - and in particular judgements of value - to the new post boom investment environment it looks like, out of all the protagonists, that the 'Fisher NZ Growth Fund' is the way to go for NZX investment.

SNOOPY

[Snoopy]

Subject to being able to adapt their investment style - and in particular judgements of value - to the new post boom investment environment it looks like, out of all the protagonists, that the 'Fisher NZ Growth Fund' is the way to go for NZX investment.

Kingfish is the listed entity run by Fisher funds that invests in the NZ sharemarket. I had assumed that since both this and the 'Fisher NZ Growth Fund' were run by the same people, the investments would be the same. But while there are obvious resemblances between the portfolios, there are some differences worth noting.

Fund Assets @31-03-2022	Kingfish	Fisher NZ Growth Fund
Mainfreight	20.0%	18.99%
Infratil	17.6%	11.34%
Fisher & Paykel Healthcare	14.1%	15.02%
Summerset	10.1%	8.68%
Auckland International Airport	8.6%	7.12%
The A2 Milk Company	4.3%	4.25%
Vista Group International	3.8%	3.36%
Freightways	3.7%	?%
Ryman Healthcare	3.7%	?%
Delegat Group	3.2%	3.24%
Contact Energy	3.0%	?%
Ebos Group	2.0%	?%
Port of Tauranga	2.0%	?%
Meridian Energy	1.0%	?%
Pushpay Holdings	1.0%	?%
NZ Dollar Cash	1.9%	?%
Xero Limited	0%	12.12%
Serko Limited	0%	3.06%
Total	100.0%	87.18%

Kingfish provides full disclosure in their end of quarter report:

https://kingfish.co.nz/assets/Invest...March-2022.pdf

whereas the 'Fisher NZ Growth Fund' does not:

https://fisherfunds.co.nz/assets/fun...und-Update.pdf

However it is very noticeable that Fishers have a 12.12% portfolio rating towards Xero, the accounting software company based in Wellington that removed their listing to the ASX, whereas Kingfish have none. It is a bit strange to have a company that is only listed on the ASX in the NZ Growth Fund. But there you go! I guess the headquarters are still in Wellington, so it counts as NZ!

SNOOPY

[Snoopy]

Earlier fund descriptions have already outlined The Harbour NZX Index Fund (Post 25).

I have decided to look at both one year returns, that best reflect the current sharemarket environment, and five years that give a longer term picture of what happened when the market was growing more steadily.

This particular comparison I have set up because of the variation that Harbour have put into their index fund, that changes it from a pure index fund. Namely this is that no single entry in the fund must make up more than 5% of its capitalisation. I am old enough to remember why this restriction was introduced.

[BACKSTORY]
Back in the day, before 'Spark' was Spark, and before Chorus was hived off as a separate entity, there was this mother of all telco companies called Telecom, headed by one Theresa Gattung. Now Theresa was one of a triumvirate of "powerful women at the top in power at the time", including New Zealand's first elected female prime minister 'Refused Dame' Helen Clarke and Dame Sian Elias, the first female Chief Justice of New Zealand. Theresa was the first female leader of a major NZ corporate. And back then Telecom was by far the largest company on the NZX. However, she took the 'women can do anything' mantra one step too far. Telecom's monopolistic behaviour lead to it being broken up into separate wholesale lines (Chorus) and retail (later rebranded as Spark) companies. I can't remember the exact peak value of Telecom on the NZX was relative to all other companies. I think it was around 10% to 15% of the entire NZX. Needless to say when the monopolistic dream unravelled, shares in Telecom got savaged and so did the funds of index fund holders.

To avoid the change in fortune of one company so heavily affecting the fortunes of NZs more conservative index sharemarket investors, I recall a new index fund being set up with exactly the restriction that the Harbour Index fund now has: No more than 5% of the fund to be invested in any one company. In recent years, particularly with all the state power companies being listed and the break up of the old Fletcher Challenge conglomerate, I am not sure if this "5% rule" has really been needed since. But this 5% cap remains remains as a legacy of the "Untouchable Telecom" years.
[/BACKSTORY]

Knowing the history of this 5% cap, I was curious as to whether it made a difference today. So what better way to do that than to compare it to the actual NZX50 index. The Smartshares NZX top 50 ETF I have thrown as a third comparator, is NZX's own index tracker. This Smartshares fund had the 5% cap on a single entity rule as well.

Fund Name	Fund Size	Return (1yr to 30-04-2022)	Return (5yr to 30-04-2022)
Harbour NZ Shares Index Fund	$382.4m (@31-03-2022)	-2.92%	10.37%
Smartshares NZ ETF Top 50	$641.4m (@31-03-2022)	-3.40%	10.52%
NZX50	Not Applicable	-6.65%	10.00%

SNOOPY

P.S. Discussion to follow

P.S.S.

Back Office Calculations


Rather annoyingly, the Smartshares return information I could find on-line was based on the year ending 31st March, whereas the Harbour NZ shares index fund figures I had recorded were to 30th April. There has been a significant deterioration in the NZX over this last month so I could not ignore the data mismatching periods. Historical quotes for this Smartshares Fund 'FNZ', I found as below

Date	31-03-2017	30-04-2017	31-03-2021	30-04-2021	31-03-2022	30-04-2022
FNZ Price	$2.19	$2.25	$3.41	$3.40	$3.29	$3.23

This allowed me to work out correction factors for the time shifted months as follows.

For one year: $3.23 - $3.40 = -$0.17 and $3.29 - $3.41 = -$0.12. So an extra 5c was lost in the April year compared to the March year.

An extra 5c based on the closing price on 31-03-2022 represents 0.05/3.29 = 1.52% of the total return. So the reported total return for the March year must be reduced by this amount: -1.88% - 1.52% =-3.40%

For five years: $3.23 - $2.25 = $0.98 and $3.29 - $2.19 = $1.10. So an extra 12c was not gained in the April year compared to the March year.

An extra 12c 'not gained' based on the closing price on 31-03-2022 represents 0.12/3.29 = 3.65% of the total return. But this return difference was made over a five year period. Annualising that incremental return I get (1.0365)^0.2=1.00720. This means the compounding return per year lost is 0.72%.

So the reported total return for the March year must be reduced by this amount: 11.24% - 0.72% =10.52%

For the NZX50:

1 year return: 12731(1+r)= 11884 => r = -6.65%
5 year return: 7379(1+r)^5= 11884 => r = 10.0%

[Wright]

Snoopy, awesome posts mate really insightful and helpful, hope there are lots more to come.

[Snoopy]

Fund Name	Fund Size	Return (1yr to 30-04-2022)	Return (5yr to 30-04-2022)
Harbour NZ Shares Index Fund	$382.4m (@31-03-2022)	-2.92%	10.37%
Smartshares NZ ETF Top 50	$641.4m (@31-03-2022)	-3.40%	10.52%
NZX50	Not Applicable	-6.65%	10.00%

P.S. Discussion to follow

Being a 'share picker' I generally pay very little attention to the index. However, looking at how things stand now:

https://www.interest.co.nz/nzx50

I can see that the 5% rule is having an effect for the index tracker funds that follow it. Take the example of A2 milk (ATM). At the time of writing it makes up 2.9% of the NZX50, with a share price of $4.45. This implies a share price of roughly $7.67 (this trigger figure also depends on the movement of other share values that make up the index of course) would have seen ATM over that 5% threshold. October 2017 on the way up is the likely date that this $7.67 'trigger price' would have come into play. A2 joined the NZX50 in early 2013. That meant that the rise from around 50c per share up until that $7.67 estimated 'crossover date' would have been fully captured by both the Harbour Asset and Smartshares referenced funds. That ATM index inclusion in 2013 was a prelude to a '15 bagger' for index fund investors!

However after that inclusion time, as the ATM share price continued to rise at a rate higher than the market, there would have been a steady selling of ATM shares by the two funds. That would have ensured that the overall value of ATM in those 'index approximating' Harbour and Smartshares funds remained at no higher than that 5% threshold cap. This meant that Harbour/Smartshares would have missed some of the extraordinary gains as the share raced up to $20. But it also meant that they missed out on that excess share of the share price fall as the ATM share price shrunk from $20 down to $4.50 over the last couple of years. That could be one reason that Smartshares/Harbour have outperformed the NZX50 index over the last year. An underweight rating in Fisher & Paykel Healthcare (nominally 10.6% of the index even now), following its sharp decline, would be another.

Tellingly the only reported difference I can find between the two managed funds is that Smartshares charges 0.5% of the value of the fund annually to, ahem, 'manage' this index fund where as Harbour only charges 0.2%. That should mean the Harbour fund produces a superior return - which it does over one year - but not over five. I am struggling to explain that. One theory I have is that in could be a matter of 'fund inflow timing'.

The Harbour Sustainable NZ shares fund, also index based, started two years ago. So suddenly Harbour investors would have had a choice of index hugging fund to select. I would expect the quantum of new money going into the original Harbour NZ Shares Index fund to reduce at that point. The alternative Smartshares index tracker would have had a more even funds inflow that would bias more gains and/or losses, in dollar terms, towards the latter two year part of the total five year period. The NZX50 has been roughly flat for two years. So with relatively less money going in over the last two years, the Harbour fund should have performed relatively better over the five year period (it didn't - I am not entirely convinced by my own argument either. No doubt someone will point out the error in my logic).

Further internet trawling and I may have found the answer:

https://investmentnews.co.nz/investm...over-etf-fans/

It looks like the Harbour Fund was not a full index tracker until two years ago. It used to be called the 'NZ Equity Advanced Beta Fund' and had under-performed.

"Over the five years to the end of December 2019, the Beta fund returned about 14.8 per cent after fees compared to almost 17 per cent for the raw benchmark."

This would explain why the Harbour 'now' index tracker under-performed its higher fee Smartshares alternative over the last five years.

SNOOPY