[GRTV] Harbour Asset Management – Andrew Bascand

Ten years ago Harbour Asset Management set off on its investment voyage. In this video managing director Andrew Bascand reflects on the good and bad of the firm's first 10 years.

Wednesday, December 11th 2019, 8:36AM

Andrew Bascand

Good Returns: So 10 years ago, Harbour Asset Management started and with me in the studio is, Andrew Bascand the managing director. Andrew, welcome. And 10 years, a lot has happened in that time.

Andrew Bascand: Yeah. It's great to be here 10 years later. Yeah. It's interesting because 10 years ago in 2009, of course New Zealand hadn't won a Rugby World Cup for 22 years. It's amazing to reflect on that.

Isn't it? Yeah.

Hopefully it's not another..

Hopefully it's not another 22 years. Yes. Just got to find a coach first.

That's right. Well, we'll see.

We'll see. And the OCR back then.

Well, who would have thought the OCR coming out of the GFC had a new low of 2.5%. Now, we thought that was really low in 2009.

And look where it is now.

Can you believe it, 1%?

Yeah. And might go lower.

It could go anywhere from here. But back in 2009 we thought 2.5% was a really low interest rate.

Yeah. So tell me in the 10 years, what are some of the biggest investment trends you've seen?

Well, I mean the most obvious thing, back in 2009 no one was really talking about responsible investing in any strong way. That's been probably the most evident trend that's got stronger and stronger every year.

But it seems to me, it's really starting to get cut through engagement now.

I think it's totally embedded. In 2010 when we set up Harbour, in January of that year, we immediately became a UN PRI, United Nations Principles, a signatory to that.

Oh, so you signed up right up the start?

Right at the start. It was a deep belief five of us had,; make a difference. We'd done quite a lot of work on that already with the previous employer. Back then there were about 400 to 500 signatories globally, now there are just under 3000. And I think there's $34 trillion now signed up. I think there was less than $1 trillion, way back then. So it's a big trend.

And it's very embedded in your processes because I've heard you guys talking about how you go through each of the stocks and you basically rate them, don't you?

Yeah. The UN has 17 goals, the sustainable development goals. And each one of those goals has a whole lot of individual principles. And what we do is, we ask about 80 questions of companies every year and develop a sense of the scoring, how they're going on those goals.

There is a correlation isn't there? And the ones who score well also perform well?

I think what there's a correlation, those that score poorly generally over a period of time, that's indicative of management or the board, it's a poor score-

So it's actually looking for the poor ones rather than the good ones in some ways?

We want to lift the standard of all companies and that's the key thing.

And Harbour's quite engaged isn't it, in terms of discussing things with companies and directors and management? That's changed quite a lot too, hasn't it?

We sort of have to be engaged. Our clients want us to be voting on everything and they know the evidence as well. The evidence is, after a positive engagement, companies generally perform better over the following 12 and 24 months. You can see that in the data too.

Yeah. And other trends you picked up, obviously we're in this really low interest rate environment, that presents real challenges, doesn't it?

Yeah. I think the key thing is our clients are looking for, not just beating the benchmark, they want sustainable, absolute returns as well, and they don't want too much volatility. So it's increasingly getting tricky and we're explaining to clients that we're in this lower return environment. So diversification, really important.

Is it harder now than it was 10 years ago? Investing?

I think it's always been hard to invest. We always reflect that each point in time, there's something else that appears to be a risk, but you go back to 2009, the risk of the GFC, there was risk of technology change. In 2009, Fletcher Building was the largest company in New Zealand. And now look where it is, not even in the top 10. Things change. So being active, I think is really important. So we've seen this trend of passive money rolling into New Zealand, rolling globally, passive funds being increasingly dominant in the pricing of equities. I think that's about to change again.

Oh really? Yeah.

I think being active is an important aspect when investing.

I would have thought it becomes more important now. So Fletcher Building story's interesting because the biggest company now is a2 and I remember when it was a penny dreadful stock.

Well, so do I. I remember visiting Dunedin in 2000, 2001 when that company was just getting off with Howard Paterson. And others and it stayed that way for a long time and then it became institutional with the placement of 60 cents that we started to participate in the market with.

So I asked you before, one of your best or most astounding stories of your time at Harbour.

I think it's been patient in investing and I'll give you the a2 example. We had to wait for a long time for investors to recognize what we saw in that story and it was three or four years of investing patiently in a2. And then we had the big reveal, I think in February 2018 when they did the deal with Fonterra. Fonterra came real. They upgraded very significantly, the earnings and they announced their plan to China and the market just had to take sit and hold of this new opportunity that had arisen. It became a real investible opportunity for global investors.

So how hard is it to stay patient when you're sitting there and you've got investors wanting returns?

We have to take them on that journey. Every client that comes in that invests in the equity market for example, in one of our products, needs to understand it's a three to five year timeline. If they're investing in a short duration, a core fixed interest product, it's different. So they want monthly returns, they want stable returns, but in equities, patience is the story.

That's a hard one to sell to investors though, isn't it?

It's interesting. We started with two clients in 2009, really lucky, one of the big global consultants and the large Government Superannuation Fund. And now we've got 123 further clients, 125 clients now.

Wow.

And so everyone that's come on has need to understand the patience of... You've got to invest for the medium too. We actually don't know really what's happening a month, six months, even a year out. It's the medium term trends that we're interested in.

And there's always all the short term noise of things which is going on, which can be quite disrupting, I guess.

Exactly. And so of the last 10 years, what are the four key dominant themes that I think will be enduring? First of all, demographics, there are two types of demographics we're interested in, us, aging population. But then the rise of the millennial in the next decade, the millennials become the biggest consumption basket in the world. So that's important. China, Indonesia, India, and millennials everywhere, they become very important.

I find the millennials fascinating because they have quite a different approach to investing too and the sorts of things they do.

More empathetic. They want to have stakeholder analysis. They truly want to understand where their money is heading, so they want to be more active. This is why I think we're going to have a change from passive to active.

Yeah. So too much money going into passive?

I think we've seen the rise of big global funds. We know who they are and they own lots of securities in New Zealand and globally, and I'm not calling it dumb money, I'm calling it money that is following and chasing the same factor time and time again.

Yeah. And disappointments? There's always a few along the way.

Yeah, exactly. I think my classic disappointment as we sold out of Xero when it was $5, watch that share price go to $44, that's eight times your money. And then had to be very patient until that share price came back, so we could find that opportunity again in the tens.

So why do you think you missed that?

Oh, we made the mistake, we'd already made five times our money.

Which is pretty good.

Which is pretty good and it seemed to run ahead... We didn't really understand this was becoming a platform business. It was becoming a business, not just for accounting, but it was becoming a business that had an opportunity to get revenue from many different sources.

Yeah. So it must be quite hard now as an investor because you suddenly have all these tech companies and all these new ideas. It's not like you have a coal mining company or a steel manufacturer or something. You've got all these things and you've got to try as investors, try and get your head around that. It must be quite a different environment to say 10 years ago.

Many of these companies also are global, so you have to travel, you have to see what market are they trying to sell into. And beyond Xero, an example for New Zealand would be Vista or Serko. These are New Zealand tech companies making it global.

But a2, again is a good example because you spent a lot of time, I believe, researching up in China and watching what's going on up there.

Yeah. Well, there are three of us that have gone there in the last year regularly in our team. Additionally, of course they are now in the US too, so we had to go to US market. Nearly all the great fast growing New Zealand companies are global companies.

Which again, is quite different, isn't it? Because New Zealand companies often had trouble going globally and now we seem to be getting better at it.

I'm reminded of a story regarding Mainfreight, in 2003 and four, there was an investor that went to see Don Braid and they said, we will sell out of our Mainfreight shares if you don't pull back to New Zealand from Australia.

Oh really?

And Don Braid was to his charm, said to them, it's been great having you as a shareholder, I'm sorry, we can't go together on this journey. I don't think those are the words he used, actually.

No, but I think the message-

And the rest is history because it's clear that yes, we remember those companies that didn't succeed because we are risk averse naturalism investors.

Interesting one.

We are risk averse.

Yeah. Well, thank you very much and it's been a great journey you've been on and I look forward to the next 10 years.

Thanks very much.