The Harbour Way – Investing for Income

The Toyota way is a set of now famous principles that underly Toyota’s approach and production system. Toyota embodies the process that reliably and consistently produces exceptional cars. At Harbour we have created our own blue print of underlying principles, to ensure our offering is not only reliable but also consistently exceptional.

Harbour Wealth’s approach to a client’s retirement plan follows that of a business process. The success of this business could mean the difference of retiring comfortably or not.

Retirement is a significant chapter in anyone’s life. It signals the end of an era and most importantly it signals the slowing down or end to the wealth accumulation phase of your life. For 30 years or more, you have been sacrificing disposable income to provide yourself with a sustainable income, for a time when you can no longer generate a monthly income.

Despite the magnitude of such a decision, we continue to see a plethora of retirement portfolios devoid of any strategy or robust process, unique to the client in question. The income that you need and the capital that you have spent year’s accumulating, are unique to you. A ‘one size fits all approach’, the most common approach – simply is not good enough.

Business Overheads – A Lean Machine

An overhead is a resource consumed or lost in completing a process, that does not contribute directly to the end result. We are very fee conscious at Harbour Wealth and offer solutions that are underpinned by the following rigid principles:

  • Rebates – any rebates received are to be passed back to Harbour clients, adding to growth.
  • Indexation (passive investing – “buying the market”) – these building blocks cost roughly one sixth of an actively managed fund. When 90% of active managers in South Africa are unable to beat this very index, why should this not be the first port of call?

The impact of a 2% saving in fees over 20 years – 43% more capital

Taking the Free Lunch

We all know there is no such thing as a ‘free lunch’, but in the investment world there is – asset allocation! Asset allocation is the process of deciding into which asset classes and in what proportion, your funds should be divided up, through different stages of the economic cycle.

Global consensus reaffirms that asset allocation is the most important investment decision that can be made. The most famous academic piece in this area was written by Brinson, Singer and Beebower in their paper: “Determinants of Portfolio Performance” in 1991. They studied 10 years of historic data of 91 of the largest US Pension funds, to try and understand from the data, which factors contributed the most to long term performance and out performance. The teams that run funds of this size are not only highly skilled but also have the full array of tools to deliver performance.

Their findings were very interesting – asset allocation contributed 91.5% towards the return.

1991 I hear you say? The most dangerous phrase in the investment world is: “This time it’s different”.

Production Line Efficiency

Just as Toyota created the most consistent production line in building their cars, so does Harbour in the way we apply our investment process.

Our production line consists of four actively managed components (investment strategies), that deliver on their respective mandates. In understanding our client’s unique cash flow needs, we build a customized solution that retains its’ efficacy, regardless of the size of our national client base. If it is not scalable then it will detract from individual client performance and experience, which is paramount to our founding principles.

This process allows us to commit to clients, that we aim to extend the life of their capital on average by 20% more. This does not attract any extra cost, so the cost reward trade-off favours our clients.

Constant Refinement of Production Process

If change is the only constant, then change we must, especially if it allows improvement to our process. We are constantly testing it and being fully independent allows us to consider all opportunities, all of the time.

Harbour Advisory, our Category 2 manager, attends to each of our production pillars throughout the year. The oiling of joints and trimming of wastage may be done on a small scale during each year, but it adds up over time. This house-keeping, that is so often neglected, can add up to 2.5% return in a year to a client’s portfolio.

Consistent Components

Each component or fund in an investment solution, contributes to the success of the overall outcome. It is imperative that each component is rigorously assessed, both initially and on an ongoing basis, to ensure it is the best component for the job.

Harbour Advisory conducts due diligence on each of the underlying funds that are held in our investment solutions. This due diligence process continues after the inclusion of a fund into a strategy. Funds or ETF’s are assessed on several levels, which include but are not limited to:

  • Management team
  • Fees
  • Performance Track record
  • Security – size of instrument or fund.
  • Institutional Diversification / Correlation – one fund manager’s view may differ significantly to another’s. Each manager’s view may produce the desired result at different times in the market.

The above is a mere snapshot of the Harbour Way of investing, particularly when it comes to income. The Harbour Way, just like the Toyota Way, we don’t see as specific to any company or sector, but instead talks to the importance of principles that foster exceptional behaviour on a consistent basis, whether by one’s staff or process.

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