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Investment News

Harbour re-launches income fund

Fund will include more active management after changes

Tuesday, July 4th 2017, 11:08AM

by Susan Edmunds

Harbour Asset Management is re-launching its income fund and targeting a a higher return as it diversifies its investments.

Harbour director and portfolio manager Mark Brown said the fund was initially set up in a simplified way, as a combination of Harbour’s Corporate Bond Fund and its Australasian Equity Income Fund. 

But he said over time it had become clear that those were two distinct entities with their own purposes, and there was more that could be done with the Income Fund by broadening its scope and giving it a different investment mandate, in its own right.

In its new guise, the fund will also invest in securities that are not a natural fit with either the corporate bond or equity income funds. Harbour said it would expand into additional income-generating asset classes, allowing some allocation into well-researched non-investment grade corporate bonds and loan products.

Brown said that would mean broadening into bonds that were subordinate in nature, or parts of the fixed interest landscape where changing rules and regulations had created more opportunities for non-bank lenders to take a slice of the market.

“A lot of the opportunity comes from the changes the banks are faced with now by regulators... banks are required in the name of financial stabliity to put more and more capital aside for the exposure they take,” Brown said.

“The cost of that gets passed on to people who borrow from them. Fund managers are not affected so we are a more cost-efficient lender for that part of the market – they are pulling back and that creates a rewarding investment opportunity for us.”

The wider scope of the asset allocation range would allow more active management and for the fund to deliver returns that beat benchmarks by a more significant margin.

Brown said the fund would suit people who were frustrated with the low rates available on term deposits, and who wanted a better level of income, but who were wary about having to take a lot of extra risk.

He said it was likely that term deposit rates would remain low for some time, driving investors to look for other options. He said the rates on offer from banks already reflected the fact that they needed deposits to meet their funding requirements and were higher than they might otherwise be, so potential upside was limited.

They would not rise significantly until the Official Cash Rate rose, he said.

Investors mightachieve a much better return with a little more risk by switching to the income fund, he said.

“[These investments] are more risky by definition than investing in senior-ranking bonds but they are less risky than equities.”

Returns will continue to be predominantely driven by the fund’s core holding of New Zealand fixed interest securities and dividend-paying Australian equities. It will target a return of 3.5% above the cash rate, compared to 2% in its previous guise.

A minimum of 5% of the fund will be held in highly-liquid securities, defined as New Zealand Government securities with less than five years maturity, cash, and other cash equivalents.

The fund will have a maximum of 30% exposure to international fixed interest, including investment grade fixed interest, non-investment grade fixed interest and loans. The neutral position is to be 100% hedged to the New Zealand dollar, but Australian Dollar exposure of 10% and Trade—Weighted Index exposure of 10% is also permitted.

At present, retail funds under management in the income fund are only a couple of million dollars. But Brown said the fund would get a boost from wholesale funds that were expected to migrate into it. That would bring the total FUM for the fund to about $90 million.

Brown said Harbour had structured the fund with the intention that it would have a volatility level of 4.5%, less than that of a typical balanced fund.“Under these numbers we think it is going to be unusual for the product to deliver a negative return in any given year.”

He said other income funds in the market tended to have more equity exposure than the Harbour fund’s neutral level would be.  Others had delivered strong returns over recent years, but Harbour was posiitioning itself tobe more resilient to market downturns, he said.

“Historically we have tended to focus on single-sector funds and people who were after a particular type of fixed-interest fund or equity portfolio.  This is a fund that we think puts us in pretty good stead for clients thinking about an investment income as an investment objective, as opposed to exposure to an asset class,” Brown said.

He said the first iteration of the income fund had done it in a simplistic way, and this new evolution developed it another step.  

The management fee for the fund will drop from 77 basis points to 63 basis points. Harbour said that should deliver better value for investors. Quarterly distributions are paid at the fixed rate of 1.25 cents per unit.

Existing clients can choose whether they want to migrate to the new version of the fund. Financial advisers have been informed of the changes, which take effect on June 19.

Tags: Harbour Asset Management

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Institution Rate 33% 39%
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ANZ Term Fund - 150 days 2.40    -    -
ANZ Term Fund - 9 months 2.70    -    -
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ASB Bank Term Fund - 5 years 4.10    4.28    4.48
ASB Bank Term Fund - 9 months 3.60    3.75    3.92
BNZ Term PIE - 120 days 2.25    -    -
BNZ Term PIE - 150 days 2.40    3.38    3.53
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BNZ Term PIE - 18 months 2.50    3.65    3.81
BNZ Term PIE - 12 months 2.60    3.38    3.53
BNZ Term PIE - 9 months 2.65    3.44    3.60
BNZ Term PIE - 6 months 2.65    3.75    3.92
BNZ Term PIE - 90 days 1.90    2.72    2.85
Co-operative Bank PIE Term Fund - 6 months 3.40    -    -
Heartland Bank Term Deposit PIE - 12 months 2.95    3.53    3.69
Heartland Bank Term Deposit PIE - 6 months 2.80    3.43    3.58
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Kiwibank Term Deposit Fund - 90 days 2.10    2.72    2.82
Kiwibank Term Deposit Fund - 6 months 2.55    3.49    3.65
Kiwibank Term Deposit Fund - 12 months 2.70    3.39    3.55
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Kiwibank Term Deposit Fund - 120 days 2.15    3.03    3.17
Kiwibank Term Deposit Fund - 9 months 2.65    -    -
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Westpac Term PIE Fund - 120 days 2.40    3.38    3.53
Westpac Term PIE Fund - 18 months 2.70    3.29    3.43
Westpac Term PIE Fund - 12 months 2.70    3.49    3.65
Westpac Term PIE Fund - 6 months 2.80    3.44    3.60
Westpac Term PIE Fund - 9 months 2.75    3.17    3.32
Westpac Term PIE Fund - 90 days 2.15    2.56    2.67
Westpac Term PIE Fund - 2 years 2.70    3.79    3.96
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