NZ Fund Managers

[Snoopy]

But if you ask me, in times of high inflation the last thing I would want to hold are bonds, especially corporate bonds where profit margins are normally squeezed out during recessionary times. Your best protection against the eroding power of inflation is to own companies that have the ability to raise prices without hurting their profit margins. Now if fixed term rates on cash holdings were around 10% a year, ok then things stack up as you really need cash rates above the inflation rate. But anything less than the inflation rate is a waste of time - net after paying taxes.

I am not going to disagree with your comment above SBQ. My own view is that an offered bond rate should be a couple of percentage points above the dividend rate offered by the same company. This is as compensation for holding a fixed interest investment that has an equity like downside risk, but with most of the compensating upside risk that an equity investment in the same company would have, now removed. Perhaps I should disclose that I do not hold any bond investments myself, and I am not necessarily recommending that others do so either. I do have some bank term deposits though, which I see as more secure than company issued bonds.

However, there are some instances where owning bonds is necessary. like if you are acting as a trustee for a defined purposes account for example. Another instance is where you are invested in a 'balanced fund' which has a mixture of shares and bonds. Although you may not be invested in bonds as a 'headline act', they are there in your portfolio nevertheless.

My main point in investigating bond managers then, is to try and understand how various bond managers styles influences returns. Or paradoxically if these managers 'have no style' and are just creating 'index hugging returns.' I think it is worth knowing this stuff, even if 'investing in bonds' is not part of your own core investment philosophy. But if you don't want to know, then you don't have to read it!

SNOOPY

[Snoopy]

Are these fund figure returns net of all taxes and management / administration fees?

This is a really good question. If you click on the Milford link for the June 30th 2022 report that I have provided,

https://milfordasset.com/wp-content/...Fund_Jun22.pdf

then you will see that 'Annual Returns' are reported under 'How has the fund performed' in two ways:

a/ Annual return (after deductions for charges and tax) .
b/ Annual return (after deductions for charges but before tax)

For comparison purposes I have chosen to report 'option a', which is the figure a 28% PIE taxpayer will receive 'in the hand'.

Then if you go to the 'Annual Return Graph' (based on a year ended 31st March which is why these return figures differ to the June 30th year ended figures quoted earlier in the report) , with the comparison of fund returns verses an index, we find there is the following disclaimer:

"The Fund returns in this update are after tax at the highest prescribed investor rate (PIR) of tax for an individual New Zealand resident. Your tax may be lower."

"The market index return is before tax and fees."

This may indicate that the 'Annual Returns Graph' comparison graph is not an apples with apples comparison! I find that very odd, if the whole purpose of requiring a 'comparative index return' is to figure out if your manager is doing a good job or not.

Let's unpick this a bit further. This Milford Trans Tasman Bond fund is a New Zealand based PIE investment. So when they are talking about the maximum PIR tax rate, they mean 28%, (not 39% - the maximum individual tax rate). But is tax just taken off the coupon interest paid by the bond? Or does tax reflect tax on capital gains and losses on trading those bonds as well? If this was an NZ based share fund, then the answer to that last question would be 'no'. But for an individual investor (who is not a trader) then investing in NZ bonds comes under the 'scheme of arrangement' income tax rules. This means an individual investor is in effect liable for a capital gains tax on bond profits, regardless of whether they are a 'share trader' or not. So do funds pay 'income tax' on any capital trading profits they make from bond trading? I do not know the answer to that question. Yet the answer to that question has a very material effect on what an 'after tax' profit figure is for these funds.

My gut feeling is that a fund paying tax on 'bond trading profits' would be wholly unfair for a unit holder, because different unit holders would have different PIE tax rates. But this would go against the 'set and forget' PIE income doctrine, that is meant to make filling out tax returns for PIE investors so much easier. To me it would still make more sense to treat 'capital gain treated as income' at the investor level rather than at the fund level. But the intersection path between 'making more sense' and 'IRD tax rulings' is not a guaranteed one. If anyone does know what tax rules these NZ based PIE bond funds operate under, I would love to know!

In the meantime I am just going with the comparative graph that, in this instance Milford, has provided us with!

SNOOPY

[Snoopy]

The 5 years from 2018 to 2022 year end shows they've under performed the index by -3.26%. Compound that through 10 or 20 years and then you will see the helpers have really helped themselves.

I see where you get your -3.26% figure from: 0.94%+ 0.53%-1.70%-2.02%-1.01% = -3.26% . This is not how you work out the under-performance of the fund over five years though.

What we have here is a 'multiplicative event' where each annual performance multiplies on what has happened in the years before. The correct method is to compare the fund verses the index performance as follows (Numbers taken from the annual result comparative table in post 48):

Cumulative 5 Year Fund Return (multiplier): (1.0354)(1.0361)(1.0273)(1.0326)(1-0.0381)= 1.0946

Cumulative 5 Year Index Return (multiplier): (1.0455)(1.0563)(1.0443)((1.0273)(1-0.0475) = 1.1285

Underperformance Over the Five Year Period is therefore: 1.1285 - 1.0946 = 0.0339 or 3.39% (that is the total percentage underperformance over 5 years, not 'per year')

Nevertheless, I do understand this changed calculation doesn't invalidate the point you were making about the 'helpers helping themselves'.

SNOOPY

[Snoopy]

Next up for review is the KiwiWealth conservative fund. There is no pure bond fund available to KiwiWealth investors. Instead there is a 'Conservative Fund' that aims to have a maximum 20% allocation to growth assets.

Information in this post is derived from these two respective 3 month quarterly statements:

https://www.kiwiwealth.co.nz/assets/...-June-2022.pdf

https://www.kiwiwealth.co.nz/assets/...-June-2021.pdf

Key Bullet Points

1/ The Conservative Fund is invested in up to 20% in shares and other growth assets (target 15%), with the remainder invested in cash and fixed interest assets. Current Position 14.81% equities (30-06-2022) vs 15.73% equities (30-06-2021).
2/ Fund Risk rating of '3' on NZ's 1 to 7 investment fund scale (where 7 is the most risky)
3/ The fund, as at 30-06-2022 (the date of the latest quarterly report), had $38.054m of fixed interest funds, bonds and growth investments under management.
4/'Management fee's are set at 0.71% of the funds asset value, comprising a managers base fee of 0.70% and an 'other management and administration charges' deduction of 0.01% (June 2022 reporting date).
5/ After fees and tax return for previous 12 month period (and 12 months prior to that): -6.34% (+3.53%).
6/ After fees and tax average annual return over the last three financial years at EOFY22 31-03-2022 (and two financial years from the FY2021 EOFY position): +1.55% (+4.40%). At EOFY2022, the fund had only been operating for three years

The difference between the 'fund return' and 'market index return' over the last three years paints an interesting picture.

Year (xxxx)	Fund Return YE Mar(xxxx) {A}	Index Return YE Mar(xxxx)	After Tax Index Return YE Mar(xxxx) (x0.72) {B}	{A}-{B}
2022	-2.14%	-1.72%	-1.24%	-0.90%
2021	+6.42%	+4.48%	+3.26%	+3.16%
2020	+2.54%	+2.76%	+1.99%	+0.55%

A positive number in the {A}-{B} column indicates that KiwiWealth's management has 'added value', whereas a negative value indicates the reverse. Comparing KiwiWealth with the the other two protagonists we have looked at so far (Fishers and Milford), the management at KiwiWealth has contributed more negatively over the difficult FY2022.

So what has gone 'comparatively wrong' at the KiwiWealth Conservative Fund? Looking at the change in the fund holdings over the last reported twelve months might give us a clue as to what happened.

Fund Constituent Holding Name	Top Ten Holdings 30-06-2022	Top Ten Holdings 30-06-2021
Westpac NZD Account (Cash & Cash Equivalents)	3.24%	10.87%
New Zealand Local Government Funding Agency Bond 3.5% 14/4/2033	2.80%	3.22%
New Zealand Local Government Funding Agency Bond 4.5% 15/4/2027	2.53%	2.71%
New Zealand Local Government Funding Agency Bond 1.5% 20/4/2029	2.34%	2.54%
Kommunalbanken AS 4% 20/8/2025 (Norway)	2.22%	2.31%
Kainga Ora 3.42% 18/10/2028	2.20%	2.39%
Transpower New Zealand Ltd 1.735% 4/9/2025	2.06%	?%
International Bank for Reconstruction & Development 1.625% 10/5/2028 (USA)	2.00%	2.13%
Kommunalbanken AS 1.25% 2/7/2030 (Norway)	1.96%	1.87%
Asian Development Bank 2.125% 19/5/2031 (Philippines)	1.94%	?%
Landwirtschaftliche Rentenbank 0.75% 9/6/2025 (Germany)	?%	1.95%
New Zealand Government Bond 2% 15/5/2032	?%	1.90%
Total Top Ten	23.09%	31.89%
Top Nine Investment Average Coupon Rate	Coupon 2.63%	Coupon 2.51%
Top Nine Investment Average Years to Maturity	6.4 years	7.6 years

A four step dissection of the year ended 30th June 2022 one year returns

a/ If you look at the comparative fund constituent lists, then you will see - over the year - KiwiWealth has converted most of what was a 'very high cash holding' (more than 10% of the fund) into bond holdings. Net buying of bonds, when interest rates are rising, is a sure way to lose money. This is what KiwiWealth has done.

b/ Next when we look at the bond holding list, we will see that not much has changed (8 out of 10 holdings are the same). KiwiWealth has shortened -by a year- their average bond maturity date. But they are still 'on average' longer dated in bond maturity than Fishers or Milford. Furthermore, their averaged coupon rate -while increasing-, is still below the other two as well. This is another sign of lacklustre management in this admittedly difficult rising interest rate environment.

c/ We need to consider the effect of the Conservative Fund 'equity holdings' (not a normal inclusion for a conservative fund) on the overall result. There was a significant 'equity loss' over June FY2022 (See Appendix post 57).

d/ An additional complication of the KiwiWealth Conservative Fund is that, unlike Fishers and Milford, they have gone in search of multinational bonds from Norway, Germany, the United States and the Philippines. This again brings intro play KiwiWealth's currency hedging policy that will apply to 90% of foreign exposures (In fact, this has provided windfall currency gains over FY June 2022: See Appendix post 57).


KiwiWealth Conservative Fund Mismanagement Summary: June 2021 to June 2022 (See Appendix post 57 for numbers source)

-$1.66m (equity losses) - $1.41m (bond losses) + $0.47m (windfall currency bond gains) = -$2.60m (overall loss)

Taking the non standard items out of the equation, we can work out the 'core bond loss' of the bond portfolio for the year: -$1.41m. This figure is only 60% of the headline loss. if we use this revised core loss figure as a comparison to the index figure, core management performance switches from 'unfavourable' to 'favourable'. Using equity in the conservative portfolio has paid dividends in times of rising equity markets. But this tactic has backfired spectacularly over the June 2022 financial year.


The next point of interest is multi-year returns.

The three year return at 1.55%pa is greater than the five year return Fishers 0.69%pa or Milford 1.39%pa. I believe this is due to the equity component of the KiwiWealth Conservative fund roughly doubling over the study period (despite recent falls from all time highs). Not super superior management of bonds that make up 85% of the KiwiWealth Conservative portfolio.

To separate 'underlying performance' from the 'level of fees charged', we can add back the annual fee charges for each comparative fund to the actual returns:

KiwiWealth: 1.55%+(0.72)0.71%= 2.06%, Fisher: 0.69% + (0.72)0.96%= 1.38%, Milford: 1.29%+(0.72)0.65%= 1.76%

I have to be cautious here attributing actions to KiwiWealth fund managers. For a start, I don't have enough combined information (see above table) to see even 32% of the constituency of the fund on either comparative date (30-06-2022 or 30-06-2021). Furthermore I am forming my view on what happened over the year based entirely on looking at the start and end points, while ignoring bond holding levels 'in the middle'.

KiwiWealth commented on FY20222 bond market conditions in their annual report for FY2022:

https://www.kiwiwealth.co.nz/assets/...eport-2022.pdf

Two principal points of note:
a/ Central banks shifted their stance from viewing inflation as a “transitory” phenomenon to eventually realising it was more of an enduring issue. That caused interest rates to spike higher - and sooner than expected.
b// Russia’s invasion of Ukraine caused a global shock in the markets. Commodity prices soared. Given Russia is a key producer of several crucial commodities, including oil, gas, and wheat, this contributed to a further surge in inflation. Bond yields rose sharply (=>bond prices down).

Taking a/ and b/ together, we might think that KiwiWealth have a good excuse for interest rates rising faster than they expected. But we all knew interest rates would rise from 50 year lows. It was only a question of when. Some other fund managers were sitting on cash 'in anticipation' of interest rates rising, whereas KiwiWealth was not.

Notice that one of the two additions to the 'top ten holdings' for KiwiWealth (Asian Development Bank Bonds) has a maturity of 9 years. coupled with a potential US currency risk. On the surface this looks like a poor move, because longer dated bonds do worse in a climate of rising interest rates. And the US dollar tends to rise in times of global uncertainty (increasing capital repayment requirements on US denominated bonds). I am not sensing a great demonstration of 'active bond market skill' on behalf of KiwiWealth here. It looks to me more like an 'equity boost' has been attached to a 'mostly bond portfolio', with the longer term perspective that it will cover 'bond market mistakes' (this strategy backfired over FY2022).

In Summary, the KiwiWealth Conservative Fund looks like it has delivered a creditable result. But closer inspection reveals this was due to the structure of the fund not complying with common industry understanding of what a 'conservative' label is. So comparison with Fishers and Milford is not -in this instance- an 'apples with apples' comparison.

SNOOPY

[SBQ]

These are small variances between Fisher Fund and the market index. Why? Because they hold a 'slightly' different mix, but not enough to prove to themselves and demonstrate to others, real skill in choosing the right stocks to buy. Di-WORSIfication is the term Charlie Munger uses when fund managers do a few tweaks here and there to get some minimal benefit. His claim is the most you try to buy everything, as a means to reduce risk by diversification, the more your portfolio mimics what the index return is. It's a cop out way of doing the same what all other fund managers do. With Berkshire, they demonstrate real skill in stock picking by only holding a small handful of companies. Because they aim to be is partnership in the business and obtain as much as possible, the 'profit margin' from that company. You throw figures like EBITDA out the door because when you think like a partner of the business, you think about how to minimise tax, operating costs, and even more so, retain as much earnings as possible for future expansion, and less of paying large fat dividends.

[SBQ]

Back in 2016 at Berkshire's AGM, Buffet explained it very clearly about the disadvantages of fund managers (hedge funds, any dude with a job trying to pick stocks):

https://www.youtube.com/watch?v=xp9KUCel778

I like the example he refers to "the low energy people" that buy 1/2 of the whole market while "the hyperactives" buy the other 1/2 of the market. As these hyperactives are busy buying and selling, swapping stocks here and there in the same 1/2 of the market pool, will always generate a lower return than the 'low energy people' group. They charge fees for their so called expertise knowledge in investments but over the long long term - multi-decade period, they can not do better than simply owning the index market ETF itself.

Snoopy, while you're making these comparisons among various NZ fund managers, I have to say it's kinda pointless. There will be some variances in returns, but they're really fighting a losing battle.

[Snoopy]

The main post 54 got too long. So I have split off these background calculations to make the main post more readable.

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

c Appendix/ There is no specific information on the particular equity holdings in this fund. However if we look at my post 10 on the 'KiwiWealth Equity Fund', you will see KiwiWealth favour NASDAQ listed companies. So I am going to use the NASDAQ index as a proxy for the circa 15% of equity value the KiwiWealth Conservative fund holds. Over the June 2021 to June 2022 year, the NASDAQ declined from 14639 to 11128. In exchange rate adjusted terms, that represents a decline of:

[(11128/0.61 ) - (14639/ 0.70)]/ (14639/0.70) = -12.8% (Unhedged Portion) AND
[(11128) - (14639)]/ (14639) = -23.5% (Hedged Portion)

The total equity portion of this fund is currently:

0.1 x (0.15 x $38.054m) = $0.57m (unhedged) AND
0.9 x (0.15 x $38.054m) = $5.14m (hedged)

(This adds up to a total equity share of the fund being worth an indicative $5.71m)

So the 'equity share loss' of the overall Conservative Fund loss for the June 2021 to June 2022 year is:

$0.57m - $0.57m/(1-0.128) = -$0.08m (unhedged)
$5.14m - $5.14m/(1-0.235) = -$1.58m (hedged)

(That adds up to a total equity share loss of -$1.66m)

Compare that figure with:

[$38.034m - $38.054/(1-0.0634)] = -$2.60m (the total fund loss for the year)

This shows the 'equity loss' made up: $1.66m/$2.60m= 62% of all net losses. That will come as a shock to investors who thought their KiwiWealth Conservative Fund was actually being managed conservatively!

d Appendix/ From the top ten disclosures, these overseas bond funds make up 35% of bond holdings. I don't know if these overseas bond funds make up 35% percent of the total bond holdings. But in the absence of information to the contrary, I have to assume that they do. In alignment with KiwiWealth's hedging policy (90% of overseas positions hedged), and backing out the 'equity' portion of the fund, the unhedged overseas bond holding balance is now:

0.1 x (0.35x($38.05m-$5.71m)) = $1.13m

The euro has been quite stable over the June to June year relative to the NZD (0.59->0.60). But the USD has strengthened (0.70->0.61). So if half of the 'overseas bonds' were linked to the USD, and assuming a 28% PIE tax rate, there would be an expected windfall currency gain of:

0.5 x 0.72 x (70/61) x $1.13m = $0.47m

Now we need to look at that 'windfall currency gain' in comparison to the overall loss declared for the year.

[$38.034m - $38.054/(1-0.0634)] = -$2.60m

This means it looks like the 'windfall currency gain' reduced total net losses by: $0.47m/($2.60m+$0.47m)= 15%






KiwiWealth Conservative Fund Mismanagement Summary: June 2021 to June 2022

-$1.66m (equity losses) - $1.41m (bond losses) + $0.47m (windfall currency bond gains) = -$2.60m (overall loss)

Note: the $1.41m in 'core bond losses' have been calculated using the other three surrounding numbers.

SNOOPY

[Snoopy]

The final of the four managers I have chosen to examine in this 'fixed interest' series is "Harbour Asset Management" starting with their "NZ Core Fixed Interest Fund."

Information in this post is derived from these two respective 3 month quarterly statements:

https://www.harbourasset.co.nz/asset...erest-Fund.pdf

https://www.harbourasset.co.nz/asset...2021-final.pdf

Key Bullet Points

1/ An actively managed investment grade bond fund that invests mainly in New Zealand Government and corporate bond fixed interest securities, but also includes International Fixed Interest constituent content of up to 10%.
2/ Fund Risk rating of '3' on NZ's 1 to 7 investment fund scale (where 7 is the most risky)
3/ The fund, as at 30-06-2022 (the date of the latest quarterly report), had $152.910m of fixed interest funds and bonds under management.
4/ 'Management fees' are set at 0.65% of the funds asset value, comprising a managers base fee of 0.56% and an 'other management and administration charges' deduction of 0.09% (July 2022 reporting date).
5/ After fees and tax return for previous 12 month period (and 12 months prior to that): -6.07% (-0.92%).
6/ After fees and tax average annual return over the last five financial years (and measured over 5 years 12 months prior to that): 0.64% (2.16%).
7/ Aims to make quarterly distributions in March, June, September and December
8/ Variation in Total fund maturity in years permitted from reference index: + or - 1.5 years (source: ringing fund manager and Harbour_SIPO_-_29_August_2022.pdf).


The difference between the 'fund return' and 'market index return' over the last five years paints an interesting picture.

Year (xxxx)	Fund Return YE Mar(xxxx) {A}	Index Return YE Mar(xxxx)	After Tax Index Return YE Mar(xxxx) (x0.72) {B}	{A}-{B}
2022	-4.10%	-6.28%	-4.52%	+0.42%
2021	+1.11%	-0.78%	-0.56%	+1.67%
2020	+2.39%	+4.72%	+3.68%	-1.29%
2019	+3.80%	+6.63%	+4.77%	-0.97%
2018	+3.07%	+4.64%	+3.34%	-0.27%

A positive number in the {A}-{B} column indicates that Harbour management has 'added value', whereas a negative value indicates the reverse. No-one likes to lose money. But it looks like, over the last year Harbour have 'added the most value' by not losing as much money as an index tracker invested in the same asset class. Conversely, over the FY2019 and FY2020 periods, the 'under-performance' of Harbour cannot be explained away by management fees alone. Over these two years, fund manager directed deviation from the index has resulted in significant losses for fund holders.

What is it that Harbour Asset Management have 'done right' over the last reported twelve months? Looking at the change in the fund holdings over the last reported twelve months might give us a clue.

Fund Constituent Holding Name	Top Ten Holdings 30-06-2022	Top Ten Holdings 30-06-2021
NZ Government Stock 15/04/2037 2.75%	13.16%	4.57%
NZ Government Stock 15/05/2041 1.75%	7.44%	?%
NZGS Index Linked Bond 20/09/2025 2.00%	6.21%	4.81%
NZ Government Stock 15/05/2024 0.50%	5.63%	12.78%
NZ Government Stock 15/04/2025 2.75%	3.63%	?%
NZ Government Stock 15/05/2032 2.00%	2.66%	2.90%
ANZ NZD Cash	2.48%	3.81%
NZ Government Stock 14/04/2033 3.50%	2.38%	3.50%
NZ Government Stock 15/04/2023 5.50%	2.29%	4.00%
NZ Government Stock 15/05/2028 0.25%	2.28%	8.38%
NZ Government Stock 20/04/2029 3.00%	?%	3.94%
NZGS Index Linked Bond 20/09/2030 3.00%	?%	2.46%
Total Top Ten	48.16%	51.15%
Top Nine Investment Average Coupon Rate	Coupon 2.33%	Coupon 2.50%
Top Nine Investment Average Years to Maturity	7.8 years	8.0 years

I have to be careful here attributing actions to Harbour Asset fund managers. Even though the fund content disclosure is the best of the protagonists so far, I still barely have enough combined information (see above table) to see only 50%ish of the constituency of the fund on both comparative dates (30-06-2022 or 30-06-2021).

Harbour Asset's June 2022 comment on the state of the global interest rate market may be found here:

https://www.harbourasset.co.nz/resea...at-moderation/

"Factors have contributed to a period of low volatility in key macroeconomic variables since the mid-1980s that is often referred to as the “Great Moderation” "
"Over the coming decades it may just be digitisation (technological advancement) among the factors that helps economies to contain inflation pressures. An additional structural inflation force may have also emerged in the world’s effort to tackle climate change via de-carbonisation."
"The possible end of the 'great moderation' may see fixed income investors seek greater compensation to part with their money for long periods of time and presents an upside risk to longer-dated bond yields."
"The ongoing war in Ukraine and China’s zero-tolerance COVID approach are key risks to the economic outlook. Both could keep inflation elevated for longer and weigh more heavily on global economic activity."

My interpretation of what Harbour Asset Management is saying is that, on a global basis, both in the long term and the short term, interest rates are going to be higher than what we have been used to.

Having 'talked the talk' of where interest rates might be heading, has the resultant Harbour Asset fixed interest investment strategy 'walked the walk'? Unlike the other three protagonists, the average 'bond interest rate' for Harbour's investments has come down over the year. Also although the average 'time to maturity' has reduced slightly, it is still significantly higher than the other three protagonists. A true belief in 'higher interest rates coming' would be consistent with buying higher yield bonds with shorter maturity dates - the opposite to what has happened in the Harbour portfolio. Whether you believe the persistently higher interest rate story or not, my opinion is that if a manager has a philosophy, then the said manager should follow their own convictions. That does not seem to have happened at Harbour Asset management. Finally, on the one year result measuring stick, only Fisher funds have done worse.

Moving onto the multi year picture (bullet point 6), 'Harbour Asset Management', with their "NZ Core Fixed Interest Fund" are the worst performer of the four protagonists.

I want to remind readers that I am forming my view on what happened over the year based entirely on looking at the start and end points, while ignoring bond holding levels 'in the middle'. Nevertheless my overall conclusion is that although Harbour has some bright people that have put a lot of effort into thinking about what is driving interest rates and where they will likely go, they haven't acted on this thinking. Harbour Asset's management of interest bearing investments over this 'testing time' is by my measures, a 'bottom of the class' effort. Very disappointing.

SNOOPY

[Snoopy]

After my previous review, it is only fair that I look at Harbour Asset management's second fixed interest fund, the 'NZ Corporate Bond Fund', which becomes the fifth fund I am considering from our set of four 'bond fund investing' protagonists.

Information in this post is derived from these two respective 3 month quarterly statements:

https://www.harbourasset.co.nz/asset...-Bond-Fund.pdf

https://www.harbourasset.co.nz/asset...2021-final.pdf

Key Bullet Points

1/ An actively managed investment grade bond fund that provides access to favourable income yields through a diversified portfolio of primarily investment grade corporate bond fixed interest securities. 5% of the fund is targeted to remain as cash or cash equivalents.
2/ Fund Risk rating of '3' on NZ's 1 to 7 investment fund scale (where 7 is the most risky)
3/ The fund, as at 30-06-2022 (the date of the latest quarterly report), had $418.533m of fixed interest funds and bonds under management.
4/ 'Management fee's are set at 0.46% of the funds asset value, comprising a managers base fee of 0.38% and an 'other management and administration charges' deduction of 0.08% (July 2022 reporting date).
5/ After fees and tax return for previous 12 month period (and 12 months prior to that): -5.37% (-0.36%).
6/ After fees and tax average annual return over the last five financial years (and measured over 5 years 12 months prior to that): 0.99% (2.49%).
7/ Aims to make quarterly distributions in March, June, September and December
8/ Variation in Total fund maturity in years permitted from reference index: + or - 0.5 years (Source; ringing fund manager, and Harbour_SIPO_-_29_August_2022.pdf).

The difference between the 'fund return' and 'market index return' over the last five years paints an interesting picture.

Year (xxxx)	Fund Return YE Mar(xxxx) {A}	Index Return YE Mar(xxxx)	After Tax Index Return YE Mar(xxxx) (x0.72) {B}	{A}-{B}
2022	-4.24%	-5.22%	-3.76%	-0.48%
2021	+2.13%	+1.90%	+1.37%	+0.76%
2020	+2.64%	+4.19%	+3.02%	-0.38%
2019	+3.70%	+6.04%	+4.35%	-0.65%
2018	+2.98%	+4.72%	+3.40%	-0.42%

A positive number in the {A}-{B} column indicates that Harbour management has 'added value', whereas a negative value indicates the reverse. Over FY2021 Harbour managers have 'added the most value'. Conversely, over the FY2018, FY2019 , FY2020 and FY2022 periods, the 'under-performance' of Harbour can be explained by fund applied management fees. It is particularly important to recognise that when the yield of a bond portfolio goes very low, management fees take a disproportionate shine off the year to year fund management performance. This is because fees are charged on the capital value of the fund, and not the income produced.

Over FY2018, FY2020 and FY2022, the fund manager directed deviation from the index has resulted in small gains, which have turned into small losses for fund holders, because of the management fees applied. Since by nature, Harbour's 'NZ Corporate Bond Fund' is a low fee fund, this effect should lessen as interest rates rise again.

What can we learn from Harbour Asset Management's management performance over the last twelve months? Looking at the change in the fund holdings over the last reported twelve months might give us some clues.

Fund Constituent Holding Name	Top Ten Holdings 30-06-2022	Top Ten Holdings 30-06-2021
Bank of New Zealand 07/06/2027 4.985%	4.08%	?%
Housing New Zealand Ltd 24/04/30 2.183%	3.68%	?%
Westpac NZ Limited 23/03/2023 3.72%	3.50%	3.31%
Westpac NZ Limited 16/02/2027 3.696%	3.45%	?%
Housing New Zealand Ltd 05/10/26 2.247%	2.98%	3.45%
NZ Government Stock 15/04/2023 5.50%	2.95%	3.32%
NZ Local Gov Fund Agency 15/04/37 2.00%	2.87%	?%
NZGS Index Linked Bond 20/09/2025 2.00%	2.77%	?%
Westpac NZ Limited 29/07/2024 2.22%	2.76%	?%
Kommunalbanken AS 12/06/2025 0.75%	2.72%	3.07%
NZ Local Gov Fund Agency 15/04/25 2.75%	?%	3.40%
Housing New Zealand Ltd 12/06/25 3.36%	?%	2.97%
Transpower NZ Limited 04/09/25 1.735%	?%	2.51%
Dunedin City Treasury 17/07/2025 3.61%	?%	2.36%
Municipality Finance PLC 06/23 0.625%	?%	2.36%
Landwirtschaftliche Ren 23/04/24 5.375%	?%	2.20%
Total Top Ten	31.76%	28.95%
Top Ten Investment Average Coupon Rate	Coupon 2.93%	Coupon 2.97%
Top Ten Investment Average Years to Maturity	4.70 years	3.40 years

I have to be careful here attributing actions to Harbour Asset fund managers. I still barely have enough combined information (see above table) to see only 30%ish of the constituency of the fund on both comparative dates (30-06-2022 or 30-06-2021).

Harbour Asset's June 2022 comment on the state of the global interest rate market may be found here:

https://www.harbourasset.co.nz/resea...at-moderation/

"Factors have contributed to a period of low volatility in key macroeconomic variables since the mid-1980s that is often referred to as the “Great Moderation” "
"Over the coming decades it may just be digitisation (technological advancement) among the factors that helps economies to contain inflation pressures. An additional structural inflation force may have also emerged in the world’s effort to tackle climate change via de-carbonisation."
"The possible end of the 'great moderation' may see fixed income investors seek greater compensation to part with their money for long periods of time and presents an upside risk to longer-dated bond yields."
"The ongoing war in Ukraine and China’s zero-tolerance COVID approach are key risks to the economic outlook. Both could keep inflation elevated for longer and weigh more heavily on global economic activity."

My interpretation of what Harbour Asset Management is saying is that, on a global basis, both in the long term and the short term, interest rates are going to be higher than what we have been used to.

Having 'talked the talk' of where interest rates might be heading, has the resultant Harbour Asset fixed interest investment strategy 'walked the walk'? Unlike the other three protagonists, the average 'bond interest rate' for Harbour's investments has come down over the year. The average 'time to maturity' has gone up, even if it is still within the ball park offered by the other protagonists. A true belief in 'higher interest rates coming' would be consistent with buying higher yield bonds with shorter maturity dates - the opposite to what has happened in the Harbour portfolio. Whether you believe the persistently higher interest rate story or not, my opinion is that if a manager has a philosophy, then the said manager should follow their own convictions. That does not seem to have happened at Harbour Asset Management, with their 'NZ Corporate Bond Fund. But what Harbour have or haven't done is at least consistent behaviour with the management of Harbour's other fixed interest: "NZ Core Fixed Interest Fund".

On both the one year and five year result measuring stick, the 'NZ Corporate Bond Fund' has performed better (or less worse) than the "NZ Core Fixed Interest Fund". When adjusted for fees:

'NZ Corporate Bond Fund' (percentage return): -5.37 + 0.72(0.45) = -5.05 (One Year), 0.99 +0.72(0.45) = 1.31 (5yrs)
'NZ Core Fixed Interest Fund' (percentage return): -6.07 +0.72(0.65) = -5.60 (One Year), 0.64 +0.72(0.65) =1.11 (5yrs)

Yet it isn't surprising that the corporate bonds would provide a better return than a fund containing government stock. That's because government stock is priced for a lower risk premium.

I want to remind readers that I am forming my view on what happened over the year based entirely on looking at the start and end points, while ignoring bond holding levels 'in the middle'.

Moving on to judging the 'multi year fixed income picture', Harbour Asset Management's ' 'NZ Corporate Bond Fund' are the second best performer behind Milford. So I rate the 'NZ Corporate Bond Fund' as a longer term sound investment option amongst our group of protagonists. Albeit one let down by not adapting as well to the changing interest rate market over the last financial year, compared to some other 'fixed interest managers' out there.

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 48, Fishers Post 47, KiwiWealth Post 54 and Harbour Posts 58 & 59).

I have decided to look at both one year returns, that best reflect the current bond market environment, and five years that give a longer term picture of what happened when the market was growing more steadily (even if that -last year-, this does reflect a sudden and significant rise in interest rates).

Fund Name	Fund Size	Fund Return (1yr to 30-06-2022)	Annual Fund Return (5yr to 31-03-2022)
Milford Trans Tasman Bond Fund	$1,152,3m (@30-06-2022)	-5.94%	+1.29%
Harbour NZ Corporate Bond Fund	$418.533m (@30-06-2022)	-5.37%	+0.99%
Harbour NZ Core Fixed Interest Fund	$153.910m (@30-06-2022)	-6.07%	+0.64%
Fisher NZ Fixed Income Trust	$126.7m (@30-06-2022)	-7.13%	+0.69%
KiwiWealth Conservative Fund	$38.054m (@30-06-2022)	-6.34%	+1.35% (3 years) (2)
Average		-6.17%	+0.99%

Notes

1/ All of these fund returns are after fees but before tax.
2/ The Kiwiwealth Conservative Fund has only been active for 3 years. It is also the only 'conservative' fund that contains a share equity component.

So what are the constituents of these funds that are giving surprisingly consistent results? That's next.

SNOOPY