New Zealand is well-positioned to continue to provide investors with both a safe-harbour and strong returns relative to other geographies.

19th October 2013

New Zealand – on first impressions think clean, green, beaches, mountains, films like Lord of the Rings, music sensation Lorde, and of course The All Blacks. Few people think about investment opportunities, when perhaps they should.

New Zealand has a vibrant capital market with strong franchises in the technology, healthcare and the dairy industries.

Although New Zealand may only warrant a cursory glance or form a small part of any global portfolio exposure, New Zealand companies have for more than a decade provided excellent returns for both equity and bond investors.

Table 1: New Zealand Key Facts

 Population

4.5 mn

GDP (Year to Q2  13)

$NZ 212 bn

Stock Market Capitalisation

$NZ 56 bn

Government Bonds Outstanding

$NZ 70 bn

Corporate Bonds Outstanding

$NZ 35 bn

NZDs per 1 USD (end Oct 13)

0.8350

Real GDP growth

3.0%

Annual inflation

1.5%

Unemployment rate

5.8%

Consensus (2014)

New Zealand is one of only a few developed countries to have weathered the global financial crisis with a strong credit rating intact. New Zealand has GDP growth close to 3% and a vibrant capital market which is seeing new equity listings across a number of sectors.

Government stability, strong growth of the local savings industry and the proximity to growing Asian markets are factors that have helped contribute to about a 23%pa growth in the equity market in the past two years. Moreover, New Zealand’s equity market continues to provide a cash yield to global investors in of about 4.4%, while local investment grade bonds yield over 4%. These yields look good in the context of local inflation which is hovering around 1%.

New Zealand’s Harbour Asset Management (Harbour) has embraced these market conditions, harnessed the experience of a team of proven investment professionals and developed innovative equity and fixed interest investment solutions that have delivered impressive risk adjusted returns for their clients.

Harbour’s team of twelve investment professionals have deep experience in global markets with the senior members of the team having worked together for over 13 years. Andrew Bascand as Managing Director and Portfolio Manager for Australasian Equities leads the equity team. Andrew worked for the Bank of England and then as a Managing Director for Merrill Lynch in London. The equity team comprises senior investment analysts well versed in global and local company research and are complemented with analysts who bring quantitative and analytical skills to bear on portfolio construction and now both also have initiated coverage of stocks.

Christian Hawkesby, Head of Fixed Interest and Director, leads the Harbour fixed interest team. Christian has been with Harbour for two years after a successful 10 year career at the Bank of England where he held a number of senior positions, including Head of Market Intelligence, Chief Manager of the Sterling Markets Division, and Private Secretary to the Deputy Governor.  Christian began his career as an economist at the Reserve Bank of New Zealand, so is well-versed in the local economy.  Fixed interest portfolio manager, Mark Brown, who was Head of Fixed Interest at AllianceBernstein NZ for over 10 years, provides further depth to the Fixed Income team.

It is this global perspective in the local market, together with a strong research focus, that distinguishes Harbour. We apply a consistent quantitative screening process across our investment universe and then apply our fundamental analysis to identify the best available opportunities. As a signatory to the UN Principles of Responsible Investing, Harbour incorporates a strong corporate governance overlay.

Experience and a consistent approach have delivered stellar investment outcomes. Harbour’s high growth Australasian equity strategy has delivered annualised returns of 13.0% pa for over 13 years with an impressive 4.9% pa alpha. This Fund brings a core exposure to New Zealand, but also invests about 25% of the funds in Australia in higher growth sectors. The Fund has a bias to faster growing sectors such as healthcare and technology and in the 12 months to October 2013 provided gross returns of 35.5%.

Source: Harbour, NZX. Past performance should not be used as an indicator of future performance. Please see the disclaimer atwww.harbourasset.co.nz, Returns are gross of tax and fees.

Harbour has worked with a number for clients to bring innovative new funds to the market. Last yearHarbour launched an Australasian Equity Income Fund designed to provide a low volatility and a strong income stream for investors built through diversified investment in Australian and New Zealandcompanies paying sustainable high dividend yields. Since inception in January 2012 this Fund delivered a 23.4% pa return.

The fixed interest team have utilised their respective macro and portfolio management experience to design innovative solutions in the fixed interest space across short duration, corporate debt and blended government bond mandates. The flagship Harbour NZ Core Fixed Interest Fund has been the New Zealand’s strongest performing core fund in the 12 months to September 2013, with an alpha of 2.1% generated from a diversified range of sources, including credit allocation, security selection, duration management, and relative trades.

For investors focussed on the outlook, the inevitable question is can solid returns be expected to continue.

Andrew Bascand believes the New Zealand market can continue to deliver strong performance and will appeal to global investors looking for absolute real returns in a low return global market environment. The consensus view is that New Zealand economic growth will continue to be about 3% over the next few years. The rebuilding of Christchurch provides a strong backbone for growth inNew Zealand, and the Free Trade Agreement with China is providing a significant boost to export growth.

“Although New Zealand equities may not be cheap, they remain attractive with relatively high dividend yields, and growth in corporate profits and dividends. New Zealand companies are not overly geared. These factors mean that there is generally strong dividend certainty, and the New Zealand capital market is really quite healthy. And while we are more nervous about returns in the listed regulated utilities sector, New Zealand has several globally attractive industries.”

The agricultural sector is an example of one industry with strong potential as the Free Trade Agreement with China has opened up a growing market demanding high quality protein products. The listing of Fonterra last year and the success of smaller dairy companies like A2 Corporation and Synlait Milk provide additional choices for investors wanting exposure to the agricultural sector.

New Zealand also has a very innovative technology sector. New Zealand produces globally relevant technology companies. Xero and Diligent are well known larger New Zealand companies, but there are several more emerging technology companies with excellent prospects.

These growth sectors are complemented by the healthcare sector with Fisher & Paykel a well established brand in the US, and many up and coming biotech opportunities.

Source: Harbour Asset Management. Data as at end October 2013. Past performance should not be used as an indicator of future performance. Please see the disclaimer at www.harbourasset.co.nz

The fixed interest market comprises the New Zealand government and broad range of around 50 different investment grade NZ dollar corporate issuers.  The New Zealand government is AA+ rated, with government debt below 30% of GDP.  The Australasian banks, which are well capitalised and highly rated, make up the largest part of the non-government issuer market.  Utilities, local authorities, and state-owned enterprises make up the most of the rest of the market.  Additional diversification is provided by supranationals and international agencies, such as the World Bank, that issue ‘Kauri Bonds’ in New Zealand dollars.

Looking ahead, Harbour believes that the next decade could see continued strong attractive returns for both New Zealand equities and bond investments relative to other opportunities around the world. Whilst small in a global context, New Zealand is the quiet out-performer in the Asia-Pacific zone increasing urbanisation and an ageing population will combine with strong product and technology innovation to underpin and enhance ongoing and sustainable growth.

Finally, in a low interest rate world, New Zealand is well-positioned to continue to provide investors with both a safe-harbour and strong returns relative to other geographies.

Source: Harbour Asset Management