Fund brings active and passive together

Harbour Asset Management is launching an Advanced Beta Fund designed to track the NZX Portfolio Index with tilts towards value, yield and growth factors. The Harbour NZ Equity Advanced Beta Fund will be benchmarked against the NZ Portfolio Index.

“Harbour is overlaying its active investment management style to a passive based New Zealand equity only fund,” Harbour chief operating officer Jody Kaye says.

This is the first passive based fund with a rules based overlay for New Zealand equity investors.

Advanced beta is a term used to describe smart beta or passive plus investment strategies that global managers have been implementing and marketing successfully for a number of years. The popularity of these types of strategies is that, whilst still providing a core foundation of passive equity market exposure, they have empirically proven, quantitative rules based ‘success factors’ which enhance returns with a modest increase to tracking error (1.5% to 2%).

The surge globally in both development and flows into advanced beta strategies is driven by the potential to use particular quantitative factors in the investment process to achieve above benchmark returns. Advanced Beta funds in some cases capture these sources of return while retaining the benefits of rules based investing, such as, transparency, diversification, investment strategy capacity and relatively low turnover and costs. Portfolio construction is generally rules based, transparent and prescriptive.

The Harbour NZ Equity Advanced Beta Fund portfolio will have 70% of the fund tracking the NZX Portfolio Index with a 30% tilt to three equally weighted portfolios of 10% value, 10% yield and 10% growth. Liquidity screens ensure low implementation costs and the fund is expected to have a low portfolio turnover.

“Our clients have told us they want a transparent, efficient and well tested alternative for passive New Zealand equities. The appeal of this fund is that it marries our experience in managing mandates for wholesale clients with the quantitative factors that we have been using in our active investment processes," Kaye says. "It brings a proven quantitative discipline to a passive solution.”

He said the fund appeals to advisory firms who are true believers in market efficiency as well as those firms who operate a core and satellite approach to portfolio construction. The fund allows active investors to have an anchored portfolio with an efficient allocation of capital to styles that drive equity returns over the long term.

"We expect implementation costs to be significantly lower than traditional active management."

“Advanced Beta funds typically cost less than active management because the process is rules based, and does not require the same level of research or any stock selection decisions undertaken by a fundamental active manager,” Kaye says.

Comments from our readers

On 16 December 2014 at 7:46 am John Berry said:

Using a rules based process to extract higher returns makes sense - as long as the rules have an economic rationale (and are not simply data mined with no apparent justification for why they work). As a simple example, equally weighted indexes generally outperform cap weighted indexes because of the higher allocation to smaller growth stocks.

"Smart beta" strategies are widely adopted in the US and Europe - generally recognised as a step up on pure passive exposures (and cheaper than active).

The reality is there is room for passive, smart beta and active investment approaches. Regardless of US evidence that over extended periods active management does not outperform, active managers remain essential for market efficiency. (Markets simply wouldn't operate if all investors were passive or smart beta). Advisers need to form a view on what approach, or combination of approaches, works best for their clients.

On 16 December 2014 at 4:23 pm MPT Heretic said:

Nothing wrong with a bit of marketing spin but that is all enhanced/advanced beta is. Active tilts that allow the manager to extract a higher fee for proprietary decisions which just like any active mgmt may or may not work.

What is a little confusing is a structure which purports to tilt 10% growth, 10% value and 10% yield.... Given an index generally would be split 50/50 into value and growth...wont that just washout to a 10% tilt to yield?

On 17 December 2014 at 9:08 am Jody Kaye said:

Hello
it is great to see some discussion around this Fund. Harbour encourages transparency so we would welcome the opportunity to meet with advisers and take them through our portfolio construction process. Please contact Harbour if interested.

On 17 December 2014 at 1:59 pm Pragmatic said:

John Berry is correct - the total universe of active managers collectively fails to outperform over the longer term. However - there are numerous examples of active managers who consistently outperform over the longer term... with part of the value proposition being to identify them.

On the active v passive v active/passive debate: there is definitely a place for both active & passive in a portfolio. Passive is simply a price argument, whereby the investor should seek the lowest price access point into the chosen market or sector. With an active approach, the investor should be prepared to pay a premium for access to a market / sector / capability that is difficult to achieve via passive strategies. Anything in between active & passive is more of a mechanism to extract active-like fees in exchange for index-like returns.

On 18 December 2014 at 3:24 am John Milner said:

Is this really the first? DFA (Aust) launched a similar product in collaboration with the NZX, replacing the NZX's existing NZX50 product earlier this year. However, additional product in the market is good for everyone. I welcome Harbours product to the market and look forward to watching the competing results.

On 18 December 2014 at 8:59 am Paul Brownsey said:

I’d like to comment on a few points raised by Pragmatic and others.

The active /passive debate tends to be full of heat and light, but very rarely do I see a solid data based discussion. We often hear critics of passive approaches claim “but the evidence is overwhelming that passive doesn’t work.” I would urge anyone interested in this debate to spend some time perusing https://us.spindices.com/resource-center/thought-leadership/spiva/ and then a bit of time examining returns on the very good monthly fund return database published by http://www.fundsource.co.nz/ (you may need to be a Fundsource client to view).

The Standard and Poor’s data is exceptional and compelling. Active managers as a class consistently underperform index. There is very little return consistency from managers. For instance their latest survey shows that of 514 US large cap managers (in the top 50% of performance in 2010) only 5.84% of those (30 funds) were still in the top half of performance 4 years later. If we assume there is a 50% chance of being in the top half each year, just by random chance we would expect 32 funds to survive each year in the top half of performance.

I’d also question Pragmatic’s assertion that smart beta approaches are disingenuous. This statement is effectively dissing the factor analysis work initially proposed by Fama-French and built on by many others which I think is most unfair. Properly constructed factor models are used widely and successfully to explain sources of return. Which raises another point that our industry is generally poor at - measuring performance against appropriate benchmarks. For instance very easy to outperforma benchmark when your investable universe includes assets outside the benchmark universe. A good and very egregious example is any long only equity fund that uses cash as a benchmark, or a small cap fund that uses large cap stocks as a benchmark (thank you factor analysis).

Lastly, good on you Harbour for launching a new fund that is different to what is out there. Our industry must be defined by investor choice and clear disclosure. The fund may or may not provide superior returns, but having another option from an NZ domiciled manager is great for investors and puts the onus on other managers to keep improving. I like the focus on low costs – another dirty secret of the NZ industry is that funds need not disclose transaction costs as part of the MER calculation.

Fund brings active and passive together

Harbour is launching a fund which is a first in New Zealand; marrying active and passive management styles.

Monday, December 15th 2014, 6:00AM 13 Comments

Comments from our readers

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