2021 CIC Yearbook by Consilium

Consilium Investment Committee Yearbook When investing, what is comfortable is rarely profitable. Investing with the intention of earning a positive return usually involves taking a risk. The higher the desired level of return, the higher the risk you generally need to take. The last decade has been an outstanding time to be invested in the share market. However, over the last couple of years, investors have also been reminded that risk is still a two-way street. When it pays off you can be well rewarded, and when it doesn’t you will see your portfolio values decline, even if only temporarily. With ongoing Covid-19 uncertainties as a constant backdrop, worldwide supply chain issues, rapidly rising global inflation, the prospect of increasing global interest rates, and a devastating military conflict between Russia and Ukraine, investors’ comfort levels have been sorely tested. As market concerns have ebbed and flowed, we have witnessed periods of strong performance mixed with periods of disappointing returns. It’s all part of the bargain when taking an intentional exposure to investment risk. While increased market volatility might be unsettling for some investors, it is simply a reflection of how markets all over the world are reacting to daily information, whether that relates to Covid infections, inflation rates, the impact of economic sanctions being imposed on Russia, or any number of other factors. Thankfully, increased volatility doesn’t inhibit our ability to determine whether the funds we have selected for each portfolio are delivering returns consistent with their mandate. This is critical. Individual fund mandates each represent a portion of the overall portfolio risk exposures we are seeking to take. If we were to experience any unexpected investment outcomes at the fund level, it would be vital that we had a mechanism to quickly identify and resolve any issues. Through our extensive quarterly monitoring processes, we deploy a mechanism that does exactly that. We forensically measure the performance of each recommended fund against the most appropriate benchmark available, as well as directly following up with each fund manager to ensure that any non-performance related matters are also in order. Looking back on 2021, the CIC Yearbook includes a detailed record of all the quarterly monitoring and additional due diligence analyses completed on your behalf, with a goal of promoting good outcomes for your clients. If you have clients, prospects or regulators wanting to verify exactly what monitoring and reporting functions were undertaken in 2021, the CIC Yearbook will provide all the answers. In addition to the comprehensive portfolio monitoring materials, the CIC Yearbook also contains a number of other key papers and reports delivered during the year – all of which were aimed at helping support your efforts to deliver the highest quality investment advice to your clients. We hope you find this third edition of the CIC Yearbook to be a valuable resource.

Vol 3, 2021: 1 October 2020 – 31 December 2021

Contents

01.

Consilium Investment Committee

An overview of Consilium Investment Committee primary functions, current members and schedule of responsibilities.

02.

Quarterly Reports

Regular portfolio benchmarking and monitoring materials, including portfolio returns vs benchmarking analysis, monitoring review, talking points, key market movements and economic commentary extract for the quarter.

03.

Quarterly Due Diligence

Enhanced due diligence reports.

04.

Articles

Investment related article published during 2021.

Consilium Investment Committee An overview of Consilium Investment Committee primary functions, current members and schedule of responsibilities

01.

Current members Members of the Committee are appointed by the Consilium Executive Management Team for a period of 12 months and may be considered for re-election annually thereafter. The current members of the Consilium Investment Committee (CIC) are:

Damon O’Brien, CFA, B Com, DipPFP, AFA — Head of Investment Services Damon is a CFA Charterholder with over 20 years’ experience in the wealth management industry, primarily specialising in asset allocation, investment research and portfolio management. His additional qualifications include completing a degree in Commerce from Canterbury University, a Post Graduate Diploma in Business Studies (in Personal Financial Planning) and achieving Authorised Financial Adviser status in 2010. Damon is a member of the CFA Institute and the CFA Society of New Zealand.

Professor Ben Marshall, BBS, MBS(Hons), and PhD — Independent Academic Consultant Professor Ben Marshall serves on the editorial board of a number of journals and has consulted to public and private companies in a range of different areas. He holds the MSA Charitable Trust Chair in Finance at Massey University. Professor Marshall has undertaken research in areas such as the impact of climate on financial markets, factors that influence stock returns, quantitative approaches to portfolio management, transaction cost and illiquidity measurement, and exchange traded funds. His research has been published in leading international journals and he is a regular speaker at international finance conferences. Professor Marshall is currently ranked in the top 1% of authors based on downloads of his working papers. Professor Marshall has a particular focus on governance, analytical support and policy review.

Mitchell Bristow, BSc, B Com, CFA — Investment Research Lead Mitchell is a CFA Charterholder with 13 years’ experience as a senior quantitative analyst and risk manager for two fund of hedge fund businesses in Hong Kong. Mitchell has primary responsibility in areas of investment analysis, performance monitoring, supplementary fund due diligence, asset allocation and research. Mitchell holds a Bachelor of Science (majoring in Statistics) and a Bachelor of Commerce (majoring in Management Science) from the University of Canterbury.

Lydia Luo, B Com, BA, AIF — Investment Analyst/Team Leader Lydia has been working for Consilium for over 4 years with the primary focus of her role including monitoring the model portfolio’s performance, risk and attribution, and assisting with strategic asset allocation and RFP. Before working at Consilium, Lydia was in the managerial roles in products and services firms. In this role, Lydia was involved product development, planning, decision making and communication with internal and external sources. Lydia has a Bachelor of Commerce majoring in Operations Research and a Master’s degree in Applied Finance and Economics from the University of Canterbury. Lydia is a candidate in the CFA® program and is bound by the CFA Institute’s Code of Ethics and Standards of Professional Conduct.

Ben Brinkerhoff, B Com, BA, AIF — Head of Advice Ben is an Accredited Investment Fiduciary (AIF) and has a degree in both History and Economics from the University of California. In 2010 he passed the United States Certified Financial Planner exam. Ben has over 20 years’ experience in financial services, undertaking roles such as economist for the Qatar Economic Free Zones as well as senior executive roles within a large US financial advisory firm.

Schedule of responsibilities The following table summarises the current responsibilities of committee members: DATE OF

FUNCTION

ACTIVITIES

Strategic asset allocation (SAA)

Review SAA every 3 years

Nov 2024

Update approved products list every 12 months

Dec 2022

Investment manager and fund recommendation

Performance monitoring Quarterly governance

Provide quarterly review of performance of each CIC approved asset and conduct further investigation as required

Independent oversight of quarterly review commentary and actions

NEXT REVIEW

Jul 2022 Jul 2022

Communication/

Maintain records of all decisions and communicate to

Manager review

Qualitative review of investment managers and pricing

Jul 2022

Expected return

Update expected return of CIC portfolios

Apr 2022

record keeping

Research and process oversight

internal stakeholders or partner firms

Process enhancement recommendations and independent review of all research projects undertaken by the CIC to ensure consistency with stated policy and procedures.

Ongoing

Quarterly Reports Regular portfolio benchmarking and monitoring materials, including portfolio returns vs benchmarking analysis, monitoring review, talking points, economic commentary extract, and key market movements. 2020, Q4 (Oct 2020 – Dec 2020) 2021, Q1 (Jan 2021 – Mar 2021) 2021, Q2 (Apr 2021 – Jun 2021) 2021, Q3 (Jul 2021 – Sept 2021) 2021, Q4 (Oct 2021 – Dec 2021)

02.

Consilium Summer Update October – December 2020 P1 P5 P8 P10

Market commentary Key market movements for the quarter Triumph of the Optimist Randomness of returns

Consilium 209 Cambridge Terrace Christchurch 8013 03 353 1007 support@consilium.co.nz www.consilium.co.nz

When we reflect on the performance of global equity markets over the last 12 months, a picture really does tell a thousand words… The following chart highlights the cumulative performance of the S&P Global Broad Market Index1(in USD) over the course of the tumultuous last 12 months. After falling over 30% during the first quarter when the initial wave of the global pandemic hit, the index then defied all expectations by, remarkably, closing out the year with a gain of +16.8%. From the low point on 23 March, this represented a global share market rebound of just over 73%! Figure 1: S&P Global Broad Market Index (BMI) cumulative total return in 2020

The difficulty with forecasting is laid bare when a year like 2020 comes along.

Over the years, we have talked at length about our inability to predict the future. And, often in the same breath, we have stressed the merits of adopting evidence-based investment strategies where ‘forecasting the future’ is not a necessary component of the strategy’s ultimate success. The difficulty with forecasting is laid bare when a year like 2020 comes along. In January, almost no-one was predicting a deadly global pandemic. And yet, before the quarter was out, we were facing the unimaginable, and global shares had fallen in a heap. In late March, the world was struggling to come to terms with what had occurred. We were besieged by escalating Covid-19 infection rates, mounting deaths, border closures, country lock-downs and extreme economic uncertainty. In the midst of all of this, very few were predicting the extraordinary speed and strength of the market rebound that was soon to follow. 1

A float-adjusted market capitalisation global share index measuring the US dollar performance of over 11,000 constituent companies across 25 developed and 25 emerging market countries.

However, by the end of the year, even while second and third waves of the pandemic were battering the USA and Europe, and with a contested US presidential election where the sitting president was refusing to accept the results, global share markets were moving sharply back into positive territory.

The key difference now was that Covid-19 vaccines were beginning to be distributed in the northern hemisphere. And even though we still don’t know how the post-Covid world will look or function (particularly in relation to international travel and tourism), the faster-than-expected arrival of the vaccines provided the impetus to push share markets to new heights. In this most extraordinary year, it wasn’t interest rates, inflation, growth rates or profitability that were the main drivers of returns. It was confidence. In the first quarter, confidence quickly evaporated as we collectively began to fear for our lives and our livelihoods.

However, as we gradually readjusted to the idea that we had the capacity to protect ourselves, and that governments everywhere were not going to stand idly by while their economies tanked, our fears slowly changed to hope and, finally, to optimism.

Figure 2 below summarises the key asset class returns in 2020 on a quarter by quarter basis, by highlighting the performance of a major market index in each asset class. All returns are gross of domestic tax and fees and are from a New Zealand investor’s perspective (i.e. in New Zealand dollars). From the returns table we note that:

• Shares displayed their capacity for significant upward (and downward) price volatility all within the same year. This is, of course, consistent with their description as a higher risk and return asset. Although hit hardest in the first quarter, shares also rebounded the strongest and rewarded disciplined investors who maintained their investment.

Figure 2: Quarterly returns of major asset classes in 2020 Asset Class

Index Name

Jan -Mar

Apr - Jun

Jul - Sep

Oct - Dec

12 mths

New Zealand shares

S&P/NZX 50 Index (gross with imputation credits)

-14.5%

16.9%

2.9%

11.5%

14.6%

Australian shares

S&P/ASX 200 Index (total return)

-24.0%

20.8%

0.8%

12.5%

4.2%

International shares (hedged NZD)

MSCI World ex Australia Index (hedged to NZD)

-20.9%

18.2%

6.6%

11.7%

11.4%

International shares (unhedged)

MSCI World ex Australia Index

-10.6%

10.2%

5.4%

4.6%

8.6%

Emerging market shares

MSCI Emerging Markets Index (gross div.)

-13.8%

9.3%

7.0%

10.1%

11.0%

New Zealand property

S&P/NZX All Real Estate Index (gross with imputation)

-20.3%

6.8%

13.4%

8.7%

5.0%

International property

S&P Developed REIT Index (gross)

-19.2%

3.0%

0.2%

3.6%

-13.6%

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

1.3%

3.4%

1.7%

-1.0%

5.4%

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

2.2%

0.6%

0.2%

3.2%

New Zealand cash

NZ One-Month Bank Bills

0.2%

0.1%

0.4%

Notes:

• • •

All indices are unhedged unless otherwise specified. The two MSCI World ex Australia share indices assume reinvestment of after-tax dividends only. The full 12-month return is not a simple sum of the four quarterly returns. The 12-month figures are all compound returns which assume continuous investment throughout the year in each asset class.

• Listed property assets generally lagged share market returns, and international property performed particularly poorly. Covid-19 contributed to many businesses ‘working from home’ for an extended period in 2020, and questions remain as to how this trend may evolve in a post-Covid world. • High quality bonds continued to offer diversification benefits to investors, particularly in times of extreme market stress. While the overall quarterly returns otherwise speak for themselves, we think there are a few other noteworthy takeaways from this highly unusual year: 1. Investing for the long term when the outlook looks bleak remains a profitable strategy. The share market is forward looking and if we always wait for the reassurance of improving news headlines, then it is likely the best gains have already been made. Anyone that bought shares while the market was going down in March ended up with a great return for the year. 2. A weak economy doesn’t necessarily mean a weak share market. As economies were shutting down and the business outlook was nosediving in March, there were projections in New Zealand and overseas about possible double-digit unemployment rates. That can’t possibly be a good time to invest, right? Wrong. Figure 3 below summarises the performance of US shares over the last 73 years (1948–2020), based on the prevailing unemployment rate: Figure 3: US unemployment vs S&P 500 index returns US unemployment

Frequency

S&P 500 annualised returns

>9%

34.7%

45%

10.6%

7% - 9%

17%

<5%

33%

5% - 7%

16.9% 6.9%

Although US unemployment exceeds 9% relatively infrequently (around 5% of the time), these periods have, counterintuitively, coincided with the best average US share market returns.

In this most extraordinary year, it wasn’t interest rates, inflation, growth rates or profitability that were the main drivers of returns. It was confidence. We saw a continuation of this pattern in 2020. The US economy hit 14.7% unemployment in April, just as the share market there commenced its strong upswing. 3. Outcomes always seem obvious in hindsight. Looking back and seeing the global share market having rallied 73% off its low, it’s tempting to tell ourselves that we knew this would happen. But on 23 March, no-one could have predicted the timing, size, and speed of this market recovery. Governments around the world played a very significant hand in this by collectively pumping trillions of dollars of stimulus towards businesses and individuals. While this flood of financial support could not stop the virus, it was able to steer us away from an economic depression. And the impact this has had on investor confidence, and asset prices, is all too apparent from the share market performances witnessed over the last nine months of 2020.

So . . . where to from here? After what we all went through in 2020, it would be a truly brave (or foolhardy?) person who attempts to provide a detailed roadmap for the year ahead. Although the arrival of several Covid-19 vaccines gives us cause for renewed optimism, the list of reasons for investor uncertainty heading into 2021 remains frustratingly long. For starters, we still have a global pandemic. We still have intermittent lockdowns, travel restrictions, volatile markets, and extreme political turbulence. We have considerable uncertainty over large parts of the economy and job sustainability. We also now have new record levels of government debt, and questions over how it will ever be repaid. In the meantime, we continue to have historically low interest rates and the likelihood is these will stay low for an extended period. It’s a sobering list. But before we get too despondent, we should remember that most of these issues, in one form or another, were also present in 2020 and, for the last nine months of that year, investors enjoyed great returns. We don’t know what 2021 will bring, but we do know it will bring its own unique set of challenges. If 2020 taught us anything it was that, through no fault of our own, we can sometimes be in situations that we are uncertain how to handle. And when those situations have the potential to severely impact our investment or retirement plans, then we really need to be able to make the smartest decisions possible. That’s where good advice and an evidence-based investment approach are so valuable. We know that markets are volatile, and we know that unexpected events will occasionally take us all by surprise. As a result, these “known unknowns” are factored into our long term planning. Although the likelihood of experiencing an unexpected event means a wider range of short term investment outcomes are possible, these outcomes are not often going to be fatal to a sound long term plan. And it is this knowledge that greatly assists us not to panic when something unsavoury does occasionally hit the fan. The idea that share prices can sometimes fall significantly and yet still manage to rebound is not new. In fact, on average, we expect share market returns to be negative once every three or four years.

We know that markets are volatile, and we know that unexpected events will occasionally take us all by surprise. As a result, these “known unknowns” are factored into our long term planning. But we continue to allocate to shares because it’s in the share markets that we expect the bulk of our long term returns to be generated. It never stops being uncomfortable when share prices are falling but the best advice, even at those times, is to stick to your plan. For all long term investors who experienced the awful first quarter in 2020, the decision to stay invested was very likely their best investment decision of the year.

Key market movements for the quarter In a remarkable achievement by medical researchers, several Covid-19 vaccines displayed extremely positive trial results during the final quarter of 2020. These results were both sooner than expected, and with higher efficacy rates, which fuelled expectations of a quicker return to social and economic normality. In December, initial vaccines were approved for international distribution and the global inoculation against Covid-19 commenced. This was very positive for markets, with expectations of an increase in near term economic output and revenues driving share prices higher almost across the board, even as a ‘second wave’ of Covid-19 was causing increasing infection and mortality rates around the world. Overall returns through the quarter were generally positive for riskier assets, and many equity markets posted significant gains to close out an unforgettable year with solid returns. An outcome few of us would have dared dream of in late March.



International shares

(hedged to NZD)

It was largely anticipated that Joe Biden would prevail in the US presidential election yet a risk of a disorderly transition of power weighed on the economic outlook. This also led to delays in finalising US government support packages which stifled investor sentiment as October drew to a close.

+11.7% +4.6%

The final quarter of 2020 started similar to the rest of the year, with high levels of uncertainty resulting in heightened volatility for risky assets.

(unhedged) The November election delivered a comfortable margin of victory (eventually) for Biden which was followed closely by

positive vaccine news and the finalisation of US government support packages in late December. This triple dose of good news "Trumped" the incumbent’s claims of election fraud, driving very strong share market performance through November and December pushing all major developed markets equity indices to positive returns for the quarter. The S&P 500 Index (total returns in USD) advanced +12.1% for the quarter closing out a remarkable +18.4% return for the year. In Europe, share market performance was also very strong. This was largely due to the positive vaccine news, the approval of further recovery packages by the European Union, and the finalisation of the Brexit trade deal in late December. For the quarter, the MSCI Europe ex UK Index (in local currency) gained +10.2% dragging the 2020 return into the black at +2.1%. The same themes drove the British FTSE 100 index up by +10.9% to close the year down -11.5% (in GBP terms). Japanese equities also participated in the rally with the MSCI Japan Index advancing +12.8% for the quarter to lift its annual return back into the positives. The New Zealand dollar was generally strong versus foreign currencies and this meant that hedged foreign assets outperformed. In New Zealand dollar terms, the MSCI World ex Australia Index delivered a quarterly return of +11.7% on a hedged basis and +4.6% unhedged. For the complete 2020 calendar year the New Zealand dollar hedged index ended up +11.4% and the unhedged index up +8.6%. Source: MSCI World ex-Australia Index (net div.)



Emerging markets shares

Emerging market equities generated their strongest quarterly return in over a decade, with Korea and Brazil both notable outperformers. Conversely, Egypt, where new daily Covid-19 cases accelerated, posted the lone negative return +10.1% across the entire emerging markets region. Overall, the MSCI Emerging Markets Index (gross return in USD) advanced +19.8% over the quarter to return +18.7% for the year. Positive vaccine news lifted hopes for a global economic recovery in 2021. This helped bolster commodity prices which was generally very supportive for emerging market net exporters. US dollar weakness during the quarter was also a positive, as the debt servicing burden for many emerging market nations holding USD denominated debts was reduced. Regional heavyweight, China, produced a solid positive return for the quarter but lagged the regional average. The launch of an anti-trust investigation into Alibaba and a further escalation in US-China tensions both dragged on sentiment. In unhedged New Zealand dollar terms, the MSCI Emerging Markets Index produced a quarterly return of +10.1%, for a +11.0% calendar year return. Source: MSCI Emerging Markets Index (gross div.)



+11.5%

New Zealand shares The New Zealand stock exchange rode the fourth quarter surge in global equity markets by delivering an excellent +11.5% over the quarter as the local index posted a +14.6% gain for the year; a result scarcely believable nine months earlier. During December, New Zealand’s GDP for the third quarter of the year was released. The reported growth rate of +14.0% represented the largest quarterly rise in growth on record, confirming the strong recovery of the domestic economy post Covid-19 lockdowns. This strong economic performance was reflected in domestic business confidence, with the ANZ business survey indicating a very positive outlook for profit expansion and investment intentions in the year ahead. This improving sentiment, added to a growing sense that a ‘return to normality’ might be possible some time in 2021, saw a number local firm’s share prices jump appreciably in the final quarter of the year. Notable firms amongst the better performers during the quarter were Fletcher Building (+53.2%), Mainfreight (+51.7%) and Meridian Energy (+49.9%), with all firms generally citing improving trading conditions and profitability expectations. Towards the other end of the spectrum, in mid-December the a2 Milk Company announced a downward revision to their August guidance, now stating that their full 2021 financial year revenue was forecast to be $350m to $500m lower than previously advised. This resulted in a swift -22.1% daily price decline on 18 December and led the firm to significantly underperform the overall market, posting a -21.3% return for the fourth quarter and a disappointing -19.6% for the full year. Source: S&P/NZX 50 Index (gross with imputation credits)



Australian shares

Australian share market returns were very strong and remarkably evenly dispersed over the quarter. The large capitalization S&P/ASX 100 returned +13.78% in Australian dollar terms, while the small capitalization S&P/ASX Small +12.5% Ordinaries Index delivered +13.83%. Although, over the full year, the small outperformed large by a sizable 8.41%. Commodity prices generally experienced a resurgence in the final quarter of 2020, and this was very positive for materials and resources companies in iron ore. Chinese economic stimulus to combat Covid-19 impacts, coinciding with an interruption in Brazilian supply, drove the iron ore price up 27.5% in the last three months of the year. While this helped Rio Tinto and BHP advance 20.7% and 19.2% respectively for the quarter, Fortescue Metals delivered by far the greatest gains in the sector, up 43.7% for the quarter and 151.0% for the year. In a quarter of strong returns across a range of sectors, some of the previous sector laggards – namely financials, real estate and energy - finally found some strong support. Information technology, the sector that appeared to benefit most from Covid-19, also finished the year strongly and, for the full 12 months, delivered more than triple the return of the next best performing Australian market sector. Returns to unhedged New Zealand investors were slightly reduced by a small appreciation in the New Zealand dollar over the quarter. Source: S&P/ASX 200 Index (total return)



International fixed interest Government bond yields diverged quite markedly during the quarter.

+0.2% The US 10-year yield was 0.23% higher, ending the year at 0.91%. Investors appeared to be buoyed by the curtain

closing on an erratic Trump administration and looking forward to a fresh start - and the prospect of a significant new spending program – under President-elect Biden.

German yields were flat while Italian and Spanish 10-year yields saw declines as the European Central Bank increased quantitative easing. Across the English Channel, the UK 10-year yield was little changed as growing vaccine optimism was tempered by Brexit uncertainty (i.e. what the trade deal really means for the UK) and new lockdown measures. Corporate bonds also enjoyed a good quarter, generally outperforming government bonds, with both investment grade and lower credit quality bonds delivering strong positive total returns. The FTSE World Government Bond Index 1-5 Years (hedged to NZD) posted a +0.2% gain to take its 12-month return to +3.2%, while the broader Bloomberg Barclays Global Aggregate Bond Index (hedged to NZD) returned +0.8% for the quarter for a +5.4% return in 2020. Source: FTSE World Government Bond Index 1-5 Years (hedged to NZD)

 -1.0%

New Zealand fixed interest Domestic bond returns were the only negative asset class over the fourth quarter as stronger economic data and improving investor sentiment brought an abrupt end to the trend of falling interest rates. The sharpest rise in yields occurred in November driven by a combination of factors. New Zealand economic data had mostly been outperforming expectations, with sectors such as housing, employment, and exports all surprisingly robust. However, this had largely been ignored until the news of viable Covid-19 vaccines hit global headlines in October and November. Further upward pressure was added with the government’s renewed focus on house price inflation and a ‘walking-back’ in the rate cut rhetoric from the Reserve Bank at their November meeting, which resulted in a jump in domestic yields. By the end of the quarter, the 10-year New Zealand government bond yield finished 0.49% higher at 1.02%. It was a poor month overall for domestic fixed interest strategies. Although credit securities generally outperformed government bonds, the rise in local bond yields was negative for bond prices and resulted in a -1.0% return for the S&P/NZX A-Grade Corporate Bond Index over the quarter, although the full year return was still a healthy +5.4%. The longer duration, but higher quality S&P/NZX NZ Government Bond Index declined -2.8% for the quarter while also delivering +5.4% for the year. Source: S&P/NZX A-Grade Corporate Bond Index

Table 1: Asset class returns to 31 December 2020 Asset Class

Index Name

3 months

1 year

3 years

5 years

10 years

New Zealand shares

S&P/NZX 50 Index (gross with imputation credits)

+11.5%

+14.6%

+17.0%

+16.8%

+16.1%

Australian shares

S&P/ASX 200 Index (total return)

+12.5%

+4.2%

+5.8%

+8.9%

+5.7%

MSCI World ex Australia Index (net div., hedged to NZD)

+11.7%

+11.4%

+9.4%

+11.8%

MSCI World ex Australia Index (net div.)

+4.6%

+8.6%

+10.1%

+11.1%

+10.9%

Emerging markets shares

MSCI Emerging Markets Index (gross div.)

+10.1%

+11.0%

+6.0%

+12.1%

+4.8%

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

-1.0%

+5.4%

+5.0%

+5.6%

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

+0.2%

+3.2%

+2.8%

+3.6%

New Zealand cash

New Zealand One-Month Bank Bill Yields Index

+0.1%

+0.4%

+1.3%

+1.6%

+2.3%

International shares

Unless otherwise specified, all returns are expressed in NZD. We assume Australian shares and emerging market shares are invested on an unhedged basis, and therefore returns from these asset classes are susceptible to movement in the value of the NZD. Index returns are before all costs and tax. Returns are annualised for time periods greater than one year.

Triumph of the Optimists American philosopher Don Marquis once dryly observed, "An optimist is someone who never had much experience". Well, Don Marquis never met Elroy Dimson.

Investors too often extrapolate the future based on their recent experiences. In March 2020, who but the most rampant optimist would have dreamt, in the midst of the swiftest negative correction in sharemarket history, that most global sharemarkets would recover to deliver positive returns by year’s end? Yet this is precisely what happened. The optimists triumphed. It was such a remarkable outcome that it brought to mind the timeless research of noted economist Elroy Dimson.

In 'Triumph of the Optimists', Professor Dimson drew on the collective investment experience of over 100 years of financial market returns from 16 different countries, and in every case he and his co-authors found the same result, shares have higher returns than bonds and cash, often substantially higher. In his findings at the time, he wrote, “In the United Kingdom, equities provided an annualised return of 10.1%, or 5.8% after adjusting for inflation. The best performing equity market was Sweden, with a real return of 7.6% per year, while the worst was Belgium, with an annual real return of 2.5%.”

Very few historians of finance have reached the heights of Professor Dimson. He is the Emeritus Professor of Finance at London Business School and his work has been cited over 10,000 times in academic articles. He has written and edited books such as “Financial Market History: Reflections on the Past for Investors Today” and the “Global Investment Returns Yearbook 2020”, but he is perhaps best known for a book first published nearly 20 years ago, the boldly titled, “Triumph of the Optimists: 101 Years of Global Investment Returns.”

Below we show the full chart of results detailed in Dimson’s book. Although they are, admittedly, about 20 years old, the broad findings continue to remain very relevant today.

Figure 4-7: Real returns on equities versus bonds internationally, 1900-2000

Annualised percentage return 10.0% 8.0% 6.0% 4.0%

2.5%

2.7%

3.6%

3.8%

4.5%

4.6%

4.8%

2.5%

2.0%

1.2%

5.0%

5.8%

2.8% 1.5%

1.3%

0.0% -2.0%

-0.4%

-1.0% -2.2%-

2.2%

-1.6%

-4.0%

Equities

5.8%

Bonds

1.1%

6.4%

6.7%

1.8%

6.8%

1.6%

7.5%

7.6%

2.4% 1.4%

1.1%

Despite a year of uncertainty and upheaval, 2020 has ultimately been a triumphant year for the optimistic investor.

Despite a year of uncertainty and upheaval, 2020 has ultimately been a triumphant year for the optimistic investor. When the NZX lost about 30% in 30 days in late March, the news headlines were dominated by pessimism. Many businesses faced the prospect of closing down for an unknown period of time. The logic seemed painfully obvious. No customers means no profit, and no profit means businesses were going to either suffer or fail altogether. At the time you couldn’t blame someone for thinking that continuing to own shares in such an environment was not a good idea. But since the markets hit their low in March, from that point to the end of December 2020, the NZX 50 Index (total return) has been up by over 54%. We know that investing in shares holds a certain level of risk. This year has proven it so. Professor Dimson has a wonderful quote about risk that is based on his extensive research into the history of financial markets. “Risk,” he says, “means more things can happen than will happen. It is not standard deviation. It is not variability. It is this sense that future events are highly variable and unknowable that gives us the best sense for risk.”

A global pandemic is an example of something that ‘could’ happen. And there are many other things that too could happen. But as share prices represent the best guess we have of the future value of a firm, and because future events are highly unknowable, shares are inherently risky. However, over 100 years of financial history tells us that while anything can happen, and sometimes does, the value of businesses which can nimbly adapt to the environment of the day, will have the best opportunity to grow and to thrive over time. That may not be the case every year, but over time horizons spanning decades (similar to the time horizon of most investors) it almost certainly will be. As for investors that do not have that long term time horizon or don’t like the market rollercoaster, holding other assets in combination with shares may be more prudent. Like you, we are happy to see 2020 in the rear-view mirror. But hopefully this experience has done for each of us what Professor Dimson discovered in his research, that optimists can truly triumph.

6.5%

12.1%

5.7%

-5.1%

2002

6.4%

8.2%

5.9%

5.7%

2001

New Zealand fixed interest

Hedged global bonds

New Zealand cash

Portfolio 50/50

Lowest

-36.2%

-9.6%

-33.1%

4.3%

5.6%

6.0%

6.3%

10.0%

11.5%

11.8%

13.4%

22.2%

24.1%

25.6%

25.7%

2003

11.8%

5.6%

6.3%

4.3%

11.5%

13.4%

24.1%

25.7%

2004

4.3%

5.9%

6.3%

7.7%

9.5%

11.7%

13.0%

14.1%

20.0%

21.0%

25.1%

25.2%

2004

11.7%

6.3%

9.5%

5.9%

25.2%

20.0%

14.1%

13.0%

7.7%

4.3%

21.0%

25.1%

2005

6.3%

7.3%

9.1%

10.0%

12.2%

15.7%

15.8%

17.9%

19.7%

21.5%

22.3%

41.7%

2005

12.2%

7.3%

9.1%

6.3%

17.9%

19.7%

41.7%

22.3%

15.8%

15.7%

21.5%

10.0%

2006

5.5%

5.9%

7.7%

13.8%

16.0%

16.6%

20.3%

21.5%

24.9%

28.3%

29.6%

38.3%

2006

16.0%

7.7%

5.5%

5.9%

38.3%

24.9%

28.3%

13.8%

21.5%

16.6%

29.6%

20.3%

2008

-20.8%

-38.5%

-23.5%

-21.5%

-21.9%

-35.6%

-32.8%

-35.6%

-32.8%

-28.7%

-23.5%

-21.9%

-21.5%

-20.8%

-8.2%

8.3%

15.2%

15.4%

2008

-8.2%

8.3%

15.2%

15.4%

-20.8% -38.5%

-7.9%

-5.5%

-4.3%

-0.3%

2.7%

3.5%

8.6%

8.9%

18.2%

27.5%

2007

3.5%

8.6%

8.9%

2.7%

-20.8% -28.7%

-4.3%

27.5%

-7.9%

-5.5%

-0.3%

18.2%

-0.3%

2007

1.8%

3.1%

3.5%

4.5%

5.7%

9.5%

11.8%

15.9%

17.0%

18.9%

42.1%

43.5%

2009

17.0%

3.1%

3.5%

5.7%

9.5%

11.8%

43.5%

15.9%

1.8%

4.5%

42.1%

18.9%

2009

15.1%

1.5%

2.4%

3.0%

3.4%

4.0%

6.3%

7.8%

8.7%

9.1%

10.7%

17.4%

2010

9.1%

3.0%

6.3%

8.7%

15.1%

3.4%

10.7%

17.4%

1.5%

4.0%

7.8%

2.4%

2010

-18.4%

-10.5%

-9.0%

-5.5%

-1.0%

0.1%

2.7%

8.3%

9.3%

11.2%

2011

0.1%

2.7%

8.3%

9.3%

0.1%

11.2%

-18.4%

-9.0%

-5.5%

-10.5%

-1.0%

2011

2012

2.7%

6.3%

7.2%

9.1%

9.4%

11.0%

11.6%

12.4%

15.0%

17.7%

20.5%

24.2%

2012

12.4%

2.7%

7.2%

6.3%

17.7%

20.5%

11.6%

11.0%

9.1%

9.4%

15.0%

24.2%

-2.3%

1.9%

2.2%

2.7%

3.1%

3.9%

9.1%

16.5%

27.0%

32.7%

2013

9.1%

2.7%

2.2%

1.9%

3.1%

3.9%

-2.3%

32.7%

27.0%

3.9%

16.5%

2013

1.8%

3.1%

3.4%

7.4%

9.0%

9.3%

10.6%

11.1%

17.5%

24.2%

28.7%

2014

9.0%

3.4%

11.1%

7.4%

28.7%

24.2%

3.1%

7.4%

9.3%

10.6%

1.8%

17.5%

2014

-2.6%

3.3%

4.4%

4.5%

5.8%

6.2%

9.0%

13.5%

13.6%

14.1%

14.2%

14.5%

2015

6.2%

3.3%

4.5%

5.8%

14.2%

14.5%

-2.6%

14.1%

9.0%

13.5%

4.4%

13.6%

2015

10.1%

2.3%

3.8%

4.1%

5.3%

5.8%

9.0%

9.9%

10.0%

10.4%

2016

9.0%

2.3%

5.8%

4.1%

3.8%

9.9%

10.4%

10.0%

5.3%

9.0%

10.1%

2016

2017

23.6%

1.9%

4.0%

5.0%

5.8%

12.3%

13.9%

14.9%

18.5%

20.1%

20.4%

35.0%

2017

12.3%

1.9%

4.0%

5.8%

5.0%

13.9%

35.0%

20.4%

14.9%

20.1%

18.5%

23.6%

6.0%

-9.5%

-8.8%

-7.4%

-5.5%

-3.3%

-2.0%

-0.1%

1.8%

1.9%

4.4%

10.9%

2018

-2.0%

1.9%

1.8%

4.4%

-0.1%

10.9%

-9.5%

-8.8%

-5.5%

-3.3%

-7.4%

6.0%

2018

31.6%

1.5%

5.2%

7.5%

14.3%

18.5%

21.1%

22.6%

23.0%

25.5%

27.0%

32.4%

2019

14.3%

1.5%

7.5%

5.2%

23.0%

32.4%

18.5%

25.5%

21.1%

27.0%

22.6%

31.6%

2019

2020

-14.5%

-7.4%

0.4%

4.2%

5.0%

5.4%

6.0%

8.5%

8.6%

11.0%

14.6%

2020

6.0%

0.4%

5.4%

-14.5%

5.0%

11.0%

8.6%

-7.4%

8.5%

4.2%

14.6%

Source: NZ Equities: NZSX 10 Index from Jan 1991 to June 1991. NZSX 50 Index (Gross Dividends) from July 1991 to Dec 2015. S&P/NZX 50 Index (Gross with Imputation) from Jan 2016 to present. Australian Equities: S&P/ASX 200 Index (Total Return) Global Large Equities: MSCI World Index (net div., AUD) Global Value Equities: MSCI World Value Index (net div., AUD) Global Small Equities: DFA Global Small Trust (gross of fees) Jan 1991 to Dec 1998. MSCI World Small Index Jan 1999 to present Emerging markets equities: DFA Emerging Market Trust (gross of fees) Jan 1991 to Dec 1998. MSCI Emerging Markets Index from Jan 1999 to Dec 2015. MSCI Emerging Markets (Gross Div.) from Jan 2016 to present. NZ Property: New Zealand Property Index (Price only) from Jan 1991 to Jan 1997.New Zealand Property Index (Gross Dividends) from Feb 1997 to Dec 2015S&P/NZX All Real Estate Index (Gross with ICs) from Jan 2016 to present. Global Property: UBS Global Real Estate Index (Gross Dividends) from Jan 1991 to Dec 2014. S&P Developed REIT Index (net div.) from Jan 2015 to present. NZ fixed interest: NZX 10 Yr Govt Bonds from Jan 1991 to May 2003. ANZ Corporate A Bonds from June 2003 to present. Hedged Global bonds: Citigroup World Government Bond Index Hedged to NZD to Dec 2012. Barclays Global Aggregate Bond Index Hedged to NZD Jan 2013 to present. NZ 30 day bank bills: NZ One Month Bank Bill Yields. 50/50 portfolio: portfolio returns net of manager fees, but gross of tax, adviser and platform fees.

-11.6% -36.3%

3.5%

-20.1%

-25.3%

5.7%

5.9%

-11.9%

-5.1%

-1.2%

5.7%

6.4%

7.2%

8.0%

8.2%

6.5%

-11.9%

12.6%

Global property

10.4%

12.1%

New Zealand property

12.1%

-25.3%

3.5%

Emerging markets shares

12.6%

-33.1%

7.2%

Global small shares

12.1%

10.0%

-36.3%

-9.6%

Global value shares

13.9%

6.0%

-11.6% -36.2%

Global large shares

Highest

22.2%

-20.1%

8.0%

Australian shares

2003

-1.2%

25.6%

2002

2001

13.9%

New Zealand shares

7.3%

4.2%

7.1%

6.1%

10.9%

7.1%

6.7%

2.2%

3.5%

7.3%

10.9%

Avg

This table shows each asset class in our portfolios and their returns over the past 20 years, as well as the returns of a 50/50 portfolio. There is no discernible pattern in the results from year to year. This makes it exceptionally challenging to pick in advance, the highest performing asset class each year. To achieve more consistent results, we invest in multiple asset classes. This ensures our portfolios always have some exposure to the highest returning sectors, whilst never being at risk of only being allocated to the lowest returning sectors. This is known as prudent diversification.

Randomness of returns

Q4 2020 talking points Table of Contents Table of Contents ................................................................................................................................................................................... 1 Key market movements for the quarter ............................................................................................................................................ 1 International shares............................................................................................................................................................................2 Emerging markets shares .................................................................................................................................................................2 New Zealand shares ..........................................................................................................................................................................3 Australian shares.................................................................................................................................................................................3 International fixed interest................................................................................................................................................................4 New Zealand fixed interest ..............................................................................................................................................................4 Risk factor summary ...............................................................................................................................................................................6 Unscreened model portfolios versus index portfolios ................................................................................................................... 7 SRI model portfolios versus index portfolios ................................................................................................................................... 7 Talking points for absolute performance..........................................................................................................................................8 Talking points for relative performance ............................................................................................................................................9 Disclaimer and Notes ........................................................................................................................................................................... 10 Appendix 1: Full index, fund and expectation performance tables .......................................................................................... 10

Key market movements for the quarter In a remarkable achievement by medical researchers, several Covid-19 vaccines displayed extremely positive trial results during the final quarter of 2020. These results were both sooner than expected, and with higher efficacy rates, which fuelled expectations of a quicker return to social and economic normality. In December, initial vaccines were approved for international distribution and the global inoculation against Covid-19 commenced. This was very positive for markets, with expectations of an increase in near term economic output and revenues driving share prices higher almost across the board, even as a ‘second wave’ of Covid-19 was causing increasing infection and mortality rates around the world. On 3 November, the US election was held and after a protracted period of uncertainty and misinformation, Joe Biden was eventually confirmed as the new president elect on 16 December. Discord from incumbent Donald Trump and his ardent supporters continued as the year drew to a close, and spilled into the new year. Even as Biden’s 20 January inauguration approaches, Trump continues to claim election fraud and corruption without evidence and after having numerous court cases thrown out. Protests were common and often violent, including the siege of the US Capitol Building in early January.

Overall returns through the quarter were generally positive for riskier assets, and many equity markets posted significant gains to close out an unforgettable year with solid returns. An outcome few of us would have dared dream of in late March.

International shares The final quarter of 2020 started similar to the rest of the year, with high levels of uncertainty resulting in heightened volatility for risky assets. It was largely anticipated that Joe Biden would prevail in the US presidential election in November, but in the lead-up markets were concerned with the risk of a disorderly transition of power, particularly if the victory margin was small, and this weighed on the economic outlook. This also led to delays in finalising US government support packages which stifled investor sentiment as October drew to a close. The 3 November election delivered a comfortable margin of victory (eventually) for Biden which was followed closely by positive vaccine news and the finalisation of US government support packages in late December. This triple dose of good news drove very strong share market performance through November and December pushing all major developed markets equity indices to strongly positive returns for the quarter. The S&P 500 Index (total returns in USD) advanced +12.1% for the quarter closing out a remarkable +18.4% return for the year. In Europe, share market performance was also very strong. This was largely due to the positive vaccine news, the approval of further recovery packages by The European Union, and the finalisation of the Brexit Trade deal in late December. For the quarter, the MSCI Europe ex UK Index (in local currency) gained +10.2% dragging the 2020 return into the black at +2.1%. British equities were strong through the period with the positive vaccine news and the Brexit trade deal helping support the beleaguered region. In GBP terms the FTSE 100 advanced +10.9% to close the year down -11.5%. Japanese equities also participated in the rally with the MSCI Japan Index advancing +12.8% for the quarter to lift its annual return back into the positives. The New Zealand dollar was generally strong versus foreign currencies and this meant that hedged foreign assets outperformed. In New Zealand dollar terms, the MSCI World ex Australia Index delivered a quarterly return of +11.7% on a hedged basis and +4.6% unhedged. For the complete 2020 calendar year the New Zealand dollar hedged index ended up +11.4% and the unhedged index up +8.6%.

Emerging markets shares Emerging market equities generated their strongest quarterly return in over a decade, with Korea and Brazil both notable outperformers. Conversely, Egypt, where new daily Covid-19 cases accelerated, posted the lone negative return across the entire emerging markets region. Overall, the MSCI Emerging Markets Index (gross return in USD) advanced +19.8% over the quarter to return +18.7% for the year. Positive vaccine news lifted hopes for a global economic recovery in 2021. This helped bolster commodity prices which was generally very supportive for emerging market net exporters. US dollar weakness during the quarter was also a positive as the debt servicing burden for many emerging market nations holding USD denominated debts was reduced. Regional heavyweight, China, produced a solid positive return for the quarter but lagged the regional average. The launch of an anti-trust investigation into Alibaba and a further escalation in US-China tensions both dragged on sentiment. In unhedged New Zealand dollar terms, the MSCI Emerging Markets Index produced a quarterly return of +10.1%, for a +11.0% calendar year return.

New Zealand shares The New Zealand stock exchange rode the fourth quarter surge in global equity markets by delivering an excellent +11.5% over the quarter as the local index posted a +14.6% gain for the year; a result scarcely believable nine months earlier. During December, New Zealand’s GDP for the third quarter of the year was released. The reported growth rate of +14.0% represented the largest quarterly rise in growth on record, confirming the strong recovery of the domestic economy post Covid-19 lockdowns. New Zealand’s annual GDP growth by the end of September also expanded into positive territory, significantly outperforming all other developed economies including Australia and the USA. This stronger relative economic performance was reflected in domestic business confidence, with the ANZ business survey indicating a very positive outlook for profit expansion and investment intentions in the year ahead. This improving sentiment, added to a growing sense that a ‘return to normality’ might be possible some time in 2021, saw a number local firm’s share prices jump appreciably in the final quarter of the year. Notable firms that were amongst the better performers during the quarter were Fletcher Building (+53.2%), Mainfreight (+51.7%) and Meridian Energy (+49.9%), with all firms generally citing improving trading conditions and profitability expectations. Towards the other end of the spectrum, in mid December The a2 Milk Company announced a downward revision to their August guidance, now stating that their full 2021 financial year revenue was forecast to be $350m to $500m lower than previously advised. This resulted in a swift -22.1% daily price decline on 18 December and led the firm to significantly underperform the overall market, posting a -21.3% return for the fourth quarter and a disappointing 19.6% for the full year.

Australian shares Australian share market returns were very strong and remarkably evenly dispersed over the quarter. The S&P/ASX 100 (the largest 100 companies in the Australian market) returned +13.78% in Australian dollar terms while the S&P/ASX Small Ordinaries Index (the companies ranked 101 to 300 in the Australian share market) delivered +13.83%. Although, over the full year, the S&P/ASX Small Ordinaries Index outperformed the top 100 companies by a sizable 8.41%. Commodity prices generally experienced a resurgence in the final quarter of 2020 and this was very positive for materials and resources companies. In iron ore, Chinese economic stimulus to combat Covid-19 impacts, coinciding with an interruption in Brazilian supply, drove the iron ore price up 27.5% in the last three months of the year. While this helped Rio Tinto and BHP advance 20.7% and 19.2% respectively for the quarter, Fortescue Metals delivered by far the greatest gains in the sector, up 43.7% for the quarter and 151.0% for the year. In a quarter of strong returns across a range of sectors, some of the previous sector laggards – namely, financials, real estate and energy - finally found some strong support. Information technology, the sector that appeared to benefit most from Covid-19, also finished the year strongly and, for the full 12 months, delivered more than triple the return of the next best performing Australian market sector. Returns to unhedged New Zealand investors were slightly reduced by a small appreciation in the New Zealand dollar over the quarter.

International fixed interest Government bond yields diverged quite markedly during the quarter. The US 10-year yield was 0.23% higher, ending the year at 0.91%. Investors appeared to be buoyed by the curtain closing on an erratic Trump administration and looking forward to a fresh start - and the prospect of a significant new spending program - under president elect Biden. The German 10-year yield fell by 0.05% to -0.57% while Italian and Spanish 10-year yields saw more significant declines of 0.32% and 0.20% respectively, as the European Central Bank increased quantitative easing. Across the English Channel, the UK 10-year yield was little changed as growing vaccine optimism was tempered by Brexit uncertainty (i.e. what the trade deal really means for the UK) and new lockdown measures. Corporate bonds also enjoyed a good quarter, generally outperforming government bonds, with both investment grade and lower credit quality bonds delivering strong positive total returns. The FTSE World Government Bond Index 1-5 Years (hedged to NZD) posted a +0.2% gain to take its 12 month return to +3.2%, while the broader Bloomberg Barclays Global Aggregate Bond Index (hedged to NZD) returned +0.8% for the quarter for a +5.4% return in 2020.

New Zealand fixed interest Domestic bond returns were the only negative asset class over the fourth quarter as stronger economic data and improving investor sentiment brought an abrupt end to the trend of falling interest rates. The sharpest rise in yields occurred in November and this was driven by a combination of factors. New Zealand economic data had mostly been outperforming expectations, with sectors such as housing, employment, and exports all surprisingly robust. However, this had largely been ignored until the news of viable Covid vaccines hit global headlines in October and November. Further upward pressure was added with the government’s renewed focus on house price inflation and a ‘walking-back’ in the rate cut rhetoric from the Reserve Bank at their November meeting, which resulted in a jump in domestic yields. By the end of the quarter, the 10 year New Zealand government bond yield finished 0.49% higher, having moved from 0.53% at the end of September to 1.02% at the end of December. Although credit securities generally outperformed government bonds, and shorter maturity bonds that have less price sensitivity to rising interest rates outperformed longer maturity bonds, it was nevertheless a poor month overall for domestic fixed interest strategies. The rise in local bond yields was negative for bond prices and resulted in a -1.0% return for the S&P/NZX A-Grade Corporate Bond Index over the quarter, although the full year return was still a healthy +5.4%. The longer duration, but higher quality S&P/NZX NZ Government Bond Index declined -2.8% for the quarter while also delivering +5.4% for the year.

New Zealand One-Month Bank Bill Yields Index

+0.2%

+1.4%

+2.2%

+1.3%

-13.8%

-10.6%

-20.9%

-24.0%

-14.5%

2020

+0.1%

+2.4%

+0.6%

+3.4%

+9.3%

+10.2%

+18.2%

+20.8%

+16.9%

2020

+0.1%

+0.7%

+0.2%

+1.7%

+7.0%

+5.4%

+6.6%

+0.8%

+2.9%

2020

+0.1%

+0.8%

+0.2%

-1.0%

+10.1%

+4.6%

+11.7%

+12.5%

+11.5%

2020

+0.4%

+5.4%

+3.2%

+5.4%

+11.0%

+8.6%

+11.4%

+4.2%

+14.6%

year

+1.3%

+4.9%

+2.8%

+5.0%

+6.0%

+10.1%

+9.4%

+5.8%

+17.0%

years

+1.6%

+4.9%

+2.8%

+5.0%

+12.1%

+11.1%

+11.8%

+8.9%

+16.8%

years

+2.3%

+5.8%

+3.6%

+5.6%

+4.8%

+10.9%

+11.8%

+5.7%

+16.1%

years

movement in the value of the NZD. Index returns are before all costs and tax. Returns are annualised for time periods greater than one year.

cash

New Zealand

Bloomberg Barclays Global Aggregate Bond Index

fixed interest

(hedged to NZD)

FTSE World Government Bond Index 1-5 Years

S&P/NZX A-Grade Corporate Bond Index

MSCI Emerging Markets Index (gross div.)

MSCI World ex Australia Index (net div.)

(net div., hedged to NZD)

MSCI World ex Australia Index

S&P/ASX 200 Index (total return)

S&P/NZX 50 Index (gross with imputation credits)

Index Name

International

fixed interest

New Zealand

markets shares

Emerging

International

Australian

New Zealand

Asset Class

Table 1: Asset class returns to 31 December 2021

Risk factor summary •

The Q4 equity risk premium was strongly positive across all regions.

•

With market volatility still high, there was wide dispersion in returns across companies and industries. Contrary to the rest of 2020, Q4 saw energy, financials and materials generally outperforming the broad market. Information technology was positive although slightly less than the market while healthcare and real estate generally lagged. On balance, value premia were positive in all regions, with Australia the best.

•

Smaller companies were strong too, led by New Zealand and developed markets.

•

The profitability factor was generally negative. However, the exposure to this factor is significantly lighter than that to size and value and its detraction was overcome by the larger factors.

•

Yields nudged higher in the US and Australia but were relatively unchanged in Europe and the UK. These changes did not have a dramatic impact with the positive roll down return due to the upward sloping yield curves generally offsetting the negative pricing impact of a higher yield. Overall, longer term bonds performed broadly in line with shorter dated bonds.

•

New Zealand yields spiked higher following the positive economic news detailed above and this increase in yields meant a decrease in price for a negative term premium.

•

Credit spreads continued to narrow following the upheaval in Q1 so corporate bonds generally outperformed government bonds thanks to a positive credit premium. The average spread has now narrowed back to preCovid levels.

Table 2 – Equity risk factor premiums for quarter

New Zealand Australia Developed markets Emerging markets

Market premium

Value premium

Size premium

REIT/utilities exclusions

Profitability impact

Term premium

Credit premium

+ + + +

o + + +

+ o + o

n/a

–

o + +

– – o

n/a

Unscreened model portfolios versus index portfolios Table 3 – Three month and 12 month unscreened model portfolio vs index return

Last 3 months’ return Last 12 months’ return Last 10 years’ return

Portfolio

20/80

30/70

40/60

50/50

60/40

70/30

80/20

90/10

98/2

Model

3.2%

4.7%

Index

1.8%

2.9%

6.2%

7.6%

8.9%

10.3%

11.6%

12.8%

13.8%

3.9%

4.9%

6.0%

7.1%

8.2%

9.3%

10.1%

Outperformance

1.4%

1.8%

2.3%

2.7%

3.0%

3.2%

3.4%

3.6%

3.7%

Model Index

5.2%

5.8%

6.0%

5.7%

5.4%

4.9%

4.2%

3.6%

5.6%

6.5%

7.3%

8.0%

8.7%

9.3%

9.8%

10.3%

10.6%

Outperformance

-0.3%

-0.7%

-1.3%

-2.0%

-3.0%

-3.9%

-4.9%

-6.1%

-7.0%

Model

6.1%

6.6%

7.1%

7.5%

7.9%

8.3%

8.6%

8.8%

9.1%

Index

5.8%

6.5%

7.2%

7.9%

8.5%

9.2%

9.8%

10.4%

10.9%

Outperformance

0.3%

0.1%

-0.1%

-0.4%

-0.6%

-0.9%

-1.2%

-1.6%

-1.9%

Long term expected returns

5.4%

5.8%

6.4%

6.8%

7.3%

7.8%

8.3%

8.7%

9.0%

Note – model portfolio returns are after investment management fees, whereas index returns are gross.

▪ Overall, quarterly performance for all portfolios was strongly positive across the board, with all portfolios outperforming their relevant index portfolio and aggressive portfolios outperforming the most. ▪ For the complete year, all portfolios were positive although all unscreened model portfolios underperformed their relevant index portfolio due largely to the significant negative risk premia in Q1 2020. ▪ Portfolio returns over longer periods remain positive: 10 year returns range from 6.1% pa for the 20/80 to 9.1% pa for the 98/2 broadly in line with our long term expected returns. The higher risk portfolios are however trailing the index portfolios.

SRI model portfolios versus index portfolios Table 4 – Three month and 12 month SRI model portfolio vs index returns

Last 3 months’ return Last 12 months’ return Last 10 years’ return

Portfolio

20/80

30/70

40/60

50/50

60/40

70/30

80/20

90/10

98/2

Model

2.8%

4.1%

5.3%

6.5%

7.6%

8.7%

9.9%

11.0%

12.0%

Index

1.7%

2.7%

3.7%

4.8%

5.8%

6.8%

7.9%

9.0%

9.8%

Outperformance

1.1%

1.4%

1.6%

1.7%

1.8%

1.9%

2.0%

2.1%

Model

8.1%

9.0%

9.9%

10.6%

11.3%

11.9%

12.5%

13.2%

13.5%

Index

5.7%

6.6%

7.4%

8.1%

8.7%

9.2%

9.6%

9.9%

10.1%

Outperformance

2.4%

2.5%

2.6%

2.7%

2.9%

3.2%

3.4%

Model

7.1%

7.9%

8.6%

9.2%

9.8%

10.3%

10.9%

11.4%

11.7%

Index

5.9%

6.8%

7.6%

8.3%

9.0%

9.7%

10.3%

10.8%

11.3%

Outperformance

1.2%

1.1%

1.0%

0.9%

0.8%

0.7%

0.6%

0.5%

Long term expected returns

5.4%

5.8%

6.2%

6.5%

6.9%

7.3%

7.7%

8.1%

8.3%

Note – model portfolio returns are after investment management fees, whereas index returns are gross.

▪ Quarterly performances of the SRI model portfolios were also strong, albeit less positive than the unscreened portfolios. A reduced exposure to the value factor contributed to the lower outperformance. ▪ Longer term returns remain strong and over 10 years range from +7.1% pa for the 20/80 to +11.7% pa for the 98/2, exceeding both the index portfolios and our long term expected returns.

Talking points for absolute performance ▪ Q4 was a very good return for almost all asset classes and for the majority of the risk tilts our portfolios take. This resulted in strong performance across the portfolio risk spectrum. ▪ 2020 was certainly a year to remember (or perhaps forget) with 3 of the 4 quarters delivering results in ‘the tails’. By this we mean observations that appear at the extreme ends (or tails) of the (available) historical return distribution. Figure 1 below illustrates the 60/40 portfolio’s four most recent calendar quarter returns among the quarterly returns this portfolio has delivered historically. While Q1 was easily the worst we have ever seen, Q2 and Q4 were the third and seventh best quarters placing them both in the top decile. This reinforces the benefits of a disciplined long term investment strategy and of resisting the emotional urge to react to short term events. A similar returns profile was evident across all portfolios and most asset classes, in particular equities.

Figure 1: Range of quarterly returns of 60/40 model portfolio since: Q1 1997 to Q4 2020

60/40 Model Portfolio 1 January 1997 to 31 December 2020 30

Key: Q1 2020 -14.9% Q2 2020 10.3% Q3 2020 3.3% Q4 2020 8.9% Negative Quarters (26%) Positive Quarters (74%)

Q1 2017 +4.0% Q1 2010 +4.0% Q3 2003 +3.9% Q1 2004 +3.8% Q2 2005

+3.8% Q3 2017 +3.7% Q1 2011 +3.6% Q4 2003 +3.6% Q2 2000 +3.6% Q2 2019

+3.5% Q4 2010 +3.4% Q2 2018 +3.4% Q3 2020 +3.3% Q2 2014

+3.0% Q3 2019

+1.9% Q4 2014

+2.9% Q2 2015

Q4 2004

+1.6% Q2 2006

+2.8% Q3 2007

+5.9% Q3 2000

+1.6% Q1 2001

+2.8% Q3 2014

+5.8% Q3 2005

+1.4% Q1 2014

+2.8% Q4 2011

+5.8% Q2 1999

Q1 2000

+1.3% Q1 1997

+2.8% Q3 2018

+5.6% Q1 2013

-0.1% Q2 1998

+1.2% Q2 2008

+2.7% Q4 2013

+4.9% Q4 2006

-0.1% Q2 2013

+1.1% Q2 2017

+2.7% Q4 2009

+4.8% Q3 2012

Q2 2012

-0.3% Q3 2006

+0.9% Q2 2016

+2.6% Q4 2005

+4.7% Q4 2017

Q2 2002

-2.2% Q4 2007

-0.3% Q4 1997

+0.7% Q1 2005

+2.5% Q4 2016

+4.7% Q1 2015

Q3 2010

+9.4% Q2 2009

Q4 2008

-4.1% Q1 2009

-2.8% Q4 2000

-0.5% Q4 2002

+0.7% Q1 2002

+2.4% Q1 2007

+4.7% Q3 1997

+7.6% Q1 2019

+9.2% Q4 1998

-6.4% Q3 2001

-4.4% Q3 1998

-2.9% Q1 2003

-0.7% Q2 2011

+0.6% Q3 2004

+2.4% Q4 2015

+4.4% Q2 2001

+6.7% Q4 2001

+9.2% Q4 2020

Q3 2009

-6.5% Q3 2011

-5.2% Q2 2010

-2.9% Q3 2015

-0.8% Q3 2008

+0.6% Q2 2007

+2.4% Q1 1999

+4.3% Q4 2012

+6.6% Q1 2012

+8.9% Q1 1998

+11.3% Q1 2006

Q1 2020

-6.7% Q4 2018

-5.3% Q1 2008

-3.4% Q3 2002

-1.7% Q1 2018

+0.5% Q3 1999

+2.4% Q1 2016

+4.1% Q3 2016

+6.4% Q4 1999

+8.9% Q2 2003

+11.1% Q2 2020

-14.9%

-6.9%

-5.6%

-4.0%

-2.0%

+0.0%

+2.3%

+4.1%

+6.0%

+8.4%

+10.3%

12.0%

10.0%

8.0%

Q2 1997

6.0%

0.0%

-2.0%

-4.0%

-8.0%

-10.0%

-12.0%

-14.0%

-16.0%

-18.0%

-6.0%

4.0%

+3.1% Q3 2013

+1.9% Q2 2004

2.0%

Q4 2019

Source: Consilium, more portfolios and indices available on request

Talking points for relative performance The main sources of outperformance for model portfolios relative to index portfolios during Q4 2020 were as follows:

▪ Size tilt in New Zealand outperformed: Large caps lagged in New Zealand with several of the bigger names failing to match the broader index through Q4 (a2 Milk: -21.3%, Fisher & Paykel Healthcare: -0.2%, Spark: 0.0%). The portfolios take a higher exposure to smaller capitalisation companies and this tilt was beneficial for the quarter. The Advanced Beta fund outperformed the broad New Zealand share market thanks to this size tilt but underperformed its style benchmark partially due to underweights in several strong performers (eg Infratil: +48%, Mainfreight: +52%, Summerset: +40%). ▪ Value tilt in Australia outperformed: In Australia the tilt towards lower relative price companies led to a overweights in strongly performing energy (Santos: +27.0%) and financials (ANZ: +32.7%, NAB: +27.6%) which helped contribute to the positive value premium in Australia. An underweight to very large high relative price healthcare firm CSL (-2.5%) also contributed to the positive value premia over the quarter. ▪ Value tilt in Developed Markets outperformed: All of Dimensional’s developed markets equity trusts in the portfolios (Core, Value and Small) take varying tilts towards companies of lower relative price in order to harness the value premium. In general, this premium was positive through the quarter as value names outperformed growth. After dominating the year, information technology underperformed in the fourth quarter and underweights here (Salesforce: -19%, Nvidia: -11%, Zoom: -34% and Microsoft: -2.7%) were beneficial as were underweights to Amazon (-5.0%) and Facebook (-4.3%). Conversely, portfolio underweights in companies such as Tesla (+51%) and The Walt Disney Company (+34%) detracted from relative performance. While the final quarter was strongly positive for the value tilt, the total 2020 impact was negative. ▪ Size tilt in Developed Markets outperformed: Similarly, all of Dimensional’s developed markets equity trusts in the portfolios (Core, Value and Small) take varying tilts towards smaller market capitalisation companies in order to harness the size premium. The Global Small trust is one the most diversified trusts in the portfolio with over 4,500 holdings. No single name added a significant amount in isolation, rather the entire space thrived on the back of the positive vaccine news. ▪ Value tilt in Emerging Markets outperformed: Leading performers in the lower relative price (value) segment of emerging markets equities included Brazilian miner Vale S.A. (+47%), Taiwanese semiconductor manufacturer United Microelectronics Corporation (+56%) and Korean memory chipmaker SK hynix Inc (+39%). Conversely an underweight in Samsung Electronics (+38%) and overweight to Indian Energy conglomerate Reliance Industries Limited (-19%) detracted. The fund’s small underweight to China had a slight positive effect this quarter. ▪ Credit tilt in developed markets outperformed: With the positive vaccine news and growing expectations of a quicker return to an open economy, the perceived default risk on riskier bonds declined. Credit spreads (the additional yield on those riskier bonds) returned to levels last seen at the start of 2020 meaning returns in Q4 were better for portfolios holding a higher proportion of credit exposures. All of our portfolios (except the 98/2) take an exposure to credit risk and were duly rewarded.

▪

SRI portfolios underperformed unscreened portfolios: The SRI portfolios have smaller exposure to the value factor and no exposure to emerging markets, both of which slightly reduced the returns relative to the unscreened portfolios. The overall effect of the SRI exclusions effectively washed out. Some excluded companies performed well – Shell (oil): +32%, Airbus (high emissions airline): +39%, Honeywell International (airline, defence systems): +19%, BHP (mining): +18%, Woodside (oil): +28% - while others underperformed - Nestle (labour rights controversies): -9% and Lockheed Martin (defence systems/weapons): -14%.

Disclaimer and Notes Table 5 - Strategy benchmarks Asset class

Index

New Zealand equity

S&P/NZX 50 Index (gross with imputation credits)

Australian equity

S&P/ASX 200 Index (total return)

International equity (developed markets)

MSCI World ex Australia Index (net div.)*

International equity (emerging markets)

MSCI Emerging Markets Index (gross)

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

International fixed interest

FTSE World Gov't Bond Index 1-5 Yrs (hedged NZD)

New Zealand cash

New Zealand One-Month Bank Bill Yields Index

* to reflect model portfolio strategy, this index is hedged in equal ratio as the developed market strategy for each model portfolio.

▪

Model portfolios are designed and supplied by the Consilium Investment Committee (CIC).

▪

Model portfolio returns are net of underlying management fees, but gross of custodial and adviser monitoring fees.

▪

Index portfolios comprise exactly the same asset class weights and hedging strategy as model portfolios, but index portfolio returns assume a comparable investment into a selection of major asset class indices.

▪

The major asset class indices chosen for this analysis are for broad comparison purposes only and do not precisely replicate the investment strategies or factor tilts employed in the underlying model portfolios.

▪

The indices are unable to be invested in and therefore depict a theoretical pre-cost investment return.

▪

Individual investment portfolios that deviate from model portfolios will experience different returns.

▪

Past returns are no guarantee of future returns.

Appendix 1: Full index, fund and expectation performance tables The following pages present the performance of all recommended funds across all partner and Synergy portfolios. These are compared to the broad market returns and each funds expectation series. Some of the expectation series have been custom built by the Consilium Investment Committee to create period returns that best reflect the risks the funds are systematically taking (in particular the risk tilts). Many of these factor specifications have been estimated using publicly sourced returns series and are often not the exact specification the fund manager uses (for example the Australian Value factor). For more information on the assumptions used to create the following data please contact the Consilium Investment Committee.

Table 6 – New Zealand Equities 3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

5 Years Std Dev

#1-50

11.52

14.71

14.62

16.96

16.84

16.10

11.45

S&P/NZX 10 Index (Gross with ICs)

#1-10

11.33

9.60

19.47

19.81

17.59

16.04

S&P/NZX 20 Index (Gross with ICs)

#1-20

11.73

13.84

17.26

19.72

18.66

17.77

16.37

24.79

15.43

17.05

16.95

#11-50

11.58

24.42

8.14

13.63

16.06

#51+

21.91

46.37

26.42

13.19

8.69

23.27

5.02

15.51

10 Years Inception Date Std Dev

Marke t re turn: S&P/NZX 50 Index (Gross with ICs)

9.95

Jul-06

12.65

11.16

Aug-09

11.32

10.03

Aug-09

N/A

12.72

N/A

Jul-12

17.52

13.59

11.19

Aug-09

17.09

15.61

18.90

14.86

Aug-09

12.76

14.05

12.83

10.38

Oct-05

N/A

12.72

N/A

Jul-12

N/A

12.55

N/A

Jan-15

N/A

12.72

N/A

Jul-12

N/A

12.69

N/A

Aug-14

Othe r i ndi ce s of i nte re st:

S&P/NZX 50 Portfolio Index (Gross with ICs) S&P/NZX MidCap Index (Gross with ICs) S&P/NZX SmallCap Index (Gross with ICs)

S&P/NZX All Real Estate Index (Gross with ICs) Fund e xpe ctati ons vs styl e i ndi ce s S&P/NZX 50 Portfolio Index (Gross with ICs)

16.37

24.79

15.43

17.05

16.95

Styl e re turn

+4.84

+1 0.08

+0.81

+0.1 0

+0.1 2

15.30

21.88

12.77

14.41

14.79

Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.25% pa)

-1 .06

-2.91

-2.66

-2.65

-2.1 6

Harbour NZ Equity Adv. Beta (net of fees, with ICs)

S&P/NZX 50 Portfolio Index (Gross with ICs)

16.37

24.79

15.43

17.05

16.95

Styl e re turn

+4.84

+1 0.08

+0.81

+0.1 0

+0.1 2

16.30

24.61

14.77

16.11

16.41

Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.35% pa)

-0.07

-0.1 8

-0.65

-0.95

-0.54

SmartShares NZ Core Equity (net, with ICs)

Quarterly summary: Positive style return for both funds. Underperformance by both funds relative to style benchmark, but not enough for EDD flags.

Table 7 – Australian Equities 3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

5 Years Std Dev

10 Years Std Dev

Inception Date

Marke t re turn: S&P/ASX 200 Index (Total Return)

12.53

13.42

4.23

5.77

8.85

5.68

16.83

15.18

Feb-86

Othe r i ndi ce s of i nte re st: S&P/ASX 100 Index (Total Return) S&P/ASX 300 Index (Total Return) S&P/ASX Small Ordinaries Index (Total Return)

12.61 12.62 12.65

13.11 13.95 20.52

3.62 4.57 12.26

5.93 5.91 5.62

8.79 8.97 10.58

5.92 5.58 1.68

16.71 16.93 20.22

15.13 15.22 18.16

Feb-86 Feb-86 Feb-86

MSCI Australia Small Cap Index (net div.) MSCI Australia Index (net div., AUD) Size Factor ('SMB'. Source: MSCI Aust Small Cap mius MSCI Aust.)

12.38 12.97 -0.58

20.59 12.96 7.63

17.41 1.81 15.60

7.67 5.08 2.59

12.17 8.31 3.86

3.49 5.32 -1.83

20.68 16.85 3.83

18.30 15.32 2.97

Jan-99 Feb-86

S&P/ASX 200 Value TR S&P/ASX 200 Growth TR Value Factor ('HML'. Source: ASX 200 Value minus ASX 200 Growth)

16.90 8.92 7.97

14.58 12.46 2.12

-3.30 12.13 -15.43

0.30 11.30 -11.00

5.75 11.86 -6.11

3.86 7.24 -3.38

18.92 15.73 3.19

16.43 14.75 1.68

May-10 May-10

S&P/ASX 300 A-REIT Index (Total Return) S&P/ASX 300 EX a-reit Index (Total Return)

12.07 12.65

21.83 13.42

-1.28 5.03

4.89 5.98

7.52 9.08

9.02 5.35

22.85 16.77

18.82 15.22

Feb-86 Sep-00

13.70 +1 .1 7 13.79 +0.09

15.79 +2.37 17.83 +2.04

5.30 +1 .07 5.09 -0.21

4.81 -0.96 4.97 +0.1 6

8.84 -0.01 9.82 +0.98

4.75 -0.93 5.01 +0.26

18.05

15.88

May-10

18.34

16.23

Aug-06

19.25 +5.82 23.50 +4.25

16.08 +1 1 .85 11.57 -4.51

7.37 +1 .61 5.68 -1 .69

11.68 +2.83 9.88 -1 .80

3.80 -1 .88 2.33 -1 .48

19.82

17.58

May-10

Dimensional Australian Small Company Trust (net of fees) Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.61 % pa)

12.62 +0.09 12.92 +0.30

20.51

18.32

Nov-00

Aust. Value Expectation (exREIT Mkt + 0.05.SMB + 0.40.HML) Styl e re turn Dimensional Australian Value Trust (net of fees) Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.34% pa)

15.81 +3.29 18.81 +3.00

14.60 +1 .1 8 19.11 +4.51

-0.40 -4.63 2.23 +2.63

1.73 -4.04 3.13 +1 .40

6.79 -2.06 10.47 +3.68

3.89 -1 .79 4.09 +0.21

18.46

16.19

May-10

19.91

17.59

Jul-99

Aust. Sust. Expectation (incREIT Mkt + 0.20.SMB + 0.15.HML)

13.70 +1 .1 7 13.83 +0.1 3

15.79 +2.37 19.58 +3.79

5.30 +1 .07 9.43 +4.1 3

4.81 -0.96 N/A

8.84 -0.01 N/A

4.75 -0.93 N/A

18.05

15.88

May-10

N/A

Jan-19

12.62 +0.09 12.56 -0.06

13.95 +0.53 13.84 -0.1 0

4.57 +0.34 4.42 -0.1 5

5.91 +0.1 4 5.73 -0.1 8

8.97 +0.1 1 8.80 -0.1 7

5.58 -0.09 5.42 -0.1 6

16.93

15.22

Feb-86

16.91

15.21

Nov-98

Fund e xpe ctati ons vs styl e i ndi ce s Aust. Core Expectation (incREIT Mkt + 0.20.SMB + 0.15.HML) Styl e re turn Dimensional Australian Core Equity Trust (net of fees) Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.28% pa) Aust. Small Expectation (exREIT Mkt + 0.75.SMB + 0.05.HML) Styl e re turn

Styl e re turn Dimensional Australian Sustainability Trust (net of fees) Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.31 % pa) iShares Aust. Equity Expectation (ASX 300) Styl e re turn iShares Indexed Australian Equity Fund Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.1 1 % pa)

Quarterly summary: Mildly positive style returns for all. Dimensional Australian Value fund with high fund tracking error, but not enough for EDD flag. All other funds’ tracking errors within tolerance bands, no EDD flags.

Table 8 – International equity (developed markets) 3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

5 Years Std Dev

10 Years Std Dev

Inception Date

Marke t re turns: MSCI World ex Australia Index (hedged to NZD, net div.)

11.75

19.15

11.40

9.45

11.84

11.81

14.40

12.93

Jul-01

MSCI World ex Australia Index (net div.)

4.62

10.25

8.60

10.11

11.12

10.91

12.48

11.59

Feb-86

+7.13

+8.90

+2.81

-0.66

+0.71

+0.90

13.93

19.32

8.22

7.46

10.58

10.71

15.70

13.69

Jan-99

6.07

7.55

-7.74

1.90

6.07

7.67

12.81

11.85

Feb-86 Feb-86

Hedging impact (MSCI World ex Aust NZD - MSCI World ex Aust) Othe r i ndi ce s of i nte re st ( NZD unhe dge d) : MSCI World ex Australia Small Cap Index (net div.) MSCI World ex Australia Value Index (net div.) MSCI World Index (net div.) (ie including Aust)

4.76

9.96

8.53

10.04

11.01

10.76

12.21

11.31

MSCI ACWI Index (net div.) (ie including emerging markets)

5.45

11.22

8.77

9.51

11.13

10.00

12.06

11.12

Jan-99

S&P 500 Index

3.12

9.56

10.78

13.60

14.06

14.80

13.11

12.29

Feb-86

MSCI Japan Index (net div.)

5.98

10.55

7.12

5.53

7.56

7.35

12.05

13.08

Feb-86

MSCI United Kingdom Index (net div.)

7.53

4.64

-16.23

-2.87

1.56

3.85

14.00

13.12

Feb-86

MSCI Europe ex UK Index (net div.)

5.97

9.45

3.77

4.98

7.09

6.93

14.22

14.06

Feb-86

-8.05

-10.31

-6.44

-0.50

-1.01

0.80

10.33

12.04

Feb-86

-6.09

-6.21

-1.54

2.44

2.05

-1.59

11.39

13.35

Feb-86

-2.56

-1.02

-3.40

-0.08

-2.48

-0.51

10.44

10.61

Feb-86

-4.20

-2.48

1.90

0.10

1.34

-0.10

8.41

9.51

Jan-99

Size Factor ('SMB'. Source: Dartmouth University)

5.97

7.22

1.81

-3.59

-0.95

-1.32

4.94

4.78

Jan-91

Value Factor ('HML'. Source: Dartmouth University)

5.19

-4.98

-27.39

-15.57

-8.31

-5.28

8.82

7.23

Jan-91

-3.99

0.24

5.19

4.90

3.62

3.92

4.07

3.96

Jan-91

3.39

3.32

-14.53

1.65

2.80

7.22

14.89

13.49

Jan-01

3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

5 Years Std Dev

10 Years Std Dev

Inception Date

15.28

13.49

Jul-01

15.78

14.10

May-09

United States Dollar Japanese Yen British Pound European Monetary Unit

Negative currency returns reflect a relative strength in the NZD (and vice versa)

Profitability Factor ('RMW'. Source: Dartmouth University) S&P Developed REIT Index (net div.)

Fund e xpe ctati ons vs styl e i ndi ce s Global Core (NZD Hdgd) Expectation (1.0x Market + 0.15x SMB + 0.15x HML) Styl e re turn Dimensional Global Core Equity Trust – NZD Hedged Class Units (net of fees) Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.36% pa) Global Sustainability Expectation (1.0x NZD Mkt + 0.15x SMB + 0.15x HML) (GSUST expection has varied to match mandate)

Styl e re turn

Dimensional Global Sustainability Trust - NZD Hedged Class Units (net of fees) Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.38% pa) Global Small Expectation (1.0x Market + 0.75x SMB + 0.10x HML)

15.46

21.68

7.43

5.77

10.49

10.70

+3.71

+2.53

-3.98

-3.67

-1 .34

-1 .1 1

14.77

21.48

5.97

5.69

9.74

10.02

-0.69

-0.20

-1 .45

-0.08

-0.76

-0.68

N/A

Jul-16

N/A

Jun-16

13.89

12.13

Jan-91

15.72

13.65

Sep-00

14.11

12.92

Jan-91

15.00

13.56

Sep-99

12.48

11.59

Feb-86

15.46

22.21

13.18

10.03

+3.71

+3.06

+1 .78

+0.58

14.68

22.84

15.52

11.17

-0.78

+0.63

+2.34

+1 .1 5

11.49

17.57

6.68

4.70

9.40

9.16

Styl e re turn

+6.87

+7.32

-1 .91

-5.41

-1 .72

-1 .76

13.79

18.46

4.48

4.96

8.98

9.65

Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.65% pa)

+2.30

+0.89

-2.21

+0.26

-0.42

+0.49

Dimensional Global Small Company Trust (net of fees) Global Value Expectation (1.1x Market + 0.10x SMB + 0.50x HML)

11.06

12.58

-4.31

1.35

7.00

7.74

Styl e re turn

+6.45

+2.33

-1 2.91

-8.76

-4.1 2

-3.1 8

9.45

9.94

-9.93

-0.35

5.74

7.03

Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.46% pa)

-1 .61

-2.64

-5.62

-1 .70

-1 .26

-0.71

Dimensional Global Value Trust (net of fees) EthicallyC Equities Expectation (MSCI World ex Australia Index (net div.))

4.62

10.25

8.60

10.11

11.12

10.91

Styl e re turn

4.24

10.71

13.03

N/A

Nov-18

Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.20% pa)

-0.37

+0.46

+4.43 12.48

11.59

Feb-86

12.20

11.38

Jul-97

12.11

11.48

Jan-99

N/A

Dec-17

Vanguard Ethically Conscious International Shares Index Fund (UnHedged) Vang Intl. Shares Expectation (MSCI World ex Australia Index (net div.))

4.62

10.25

8.60

10.11

11.12

10.91

Styl e re turn

4.62

9.90

8.70

10.24

11.15

11.03

Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.1 8% pa)

+0.00

-0.35

+0.1 0

+0.1 3

+0.03

+0.1 1

Vanguard International Shares Index Fund (Unhedged) AMP ACWI Expectation (MSCI ACWI 69% Hedged)

4.39

9.35

7.92

9.85

11.51

12.05

Styl e re turn

+0.83

+0.97

+0.1 8

-0.60

+0.00

-0.91

10.07

17.56

10.36

8.63

N/A

Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.40% pa)

+5.67

+8.21

+2.44

-1 .22

AMP Capital All Country Global Shares Index Fund

Quarterly summary: Mildly positive style returns for all. Dimensional Global Sustainability Trust (NZD Hedged) with significant long-term outperformance relative to expectation. EDD Flag. AMP Capital All Country Global Shares Index Fund with significant quarterly outperformance relative to expectation. EDD Flag. All other funds’ tracking errors within tolerance bands, no further flags.

Table 9 – International equity (emerging markets) 3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

5 Years Std Dev

10 Years Std Dev

Inception Date

10.03

17.23

10.78

5.69

11.62

4.47

12.03

12.16

Jan-99

MSCI Emerging Markets Small (net div.) MSCI Emerging Markets Value Index (net div.) MSCI Emerging Markets IMI (net div.)

12.38 13.05 10.29

22.61 15.06 18.11

11.61 -1.23 10.78

2.17 1.31 5.24

7.10 8.02 11.09

3.11 1.72 4.30

15.08 12.81 12.43

14.03 12.75 12.33

Jan-99 Jan-99 Jan-99

MSCI MSCI MSCI MSCI MSCI MSCI

2.25 13.23 27.14 11.29 25.96 11.81

12.20 28.71 39.92 24.79 18.79 3.92

21.16 31.92 35.33 8.12 -24.23 -18.11

8.50 19.92 8.21 4.31 0.09 9.02

13.89 20.27 14.39 8.42 14.83 15.29

8.47 10.79 7.45 4.21 -2.80 1.82

15.12 15.73 17.05 19.68 32.77 21.92

16.19 14.65 16.24 20.51 28.37 23.92

Jan-99 Jan-99 Jan-99 Jan-99 Jan-99 Jan-99

Size Factor ('SMB'. Source: Dartmouth University) Value Factor ('HML'. Source: Dartmouth University) Profitability Factor ('RMW'. Source: Dartmouth University)

6.67 -2.77 -3.21

4.55 -1.05 -2.90

-12.32 1.93 -4.81

-2.15 -3.09 -0.41

2.11 -3.96 0.63

0.13 -0.93 3.17

7.85 4.71 4.16

6.60 5.02 4.11

Jan-00 Jan-00 Jan-00

MSCI Emerging Markets Real Estate Index (net div.)

-2.48

-3.98

-22.22

-5.63

N/A

Oct-16

13.05 +3.02

15.06 -2.1 7

-1.23 -1 2.02

1.31 -4.38

8.02 -3.59

1.72 -2.75

12.81

12.75

Jan-99

Styl e re turn

12.28

15.59

-4.10

-0.51

7.97

1.31

14.03

13.86

Oct-00

Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.71 % pa)

-0.77

+0.53

-2.87

-1 .82

-0.05

-0.41

10.29 +0.25

18.11 +0.87

10.78 -0.01

5.24 -0.45

11.09 -0.53

4.30 -0.1 7

12.43

12.33

Jan-99

Styl e re turn

10.16

17.45

10.45

4.99

10.63

3.85

12.16

12.18

Oct-10

Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.55% pa)

-0.1 2

-0.66

-0.33

-0.25

-0.45

Marke t re turn: MSCI Emerging Markets Index (net div.) Othe r i ndi ce s of i nte re st ( NZD unhe dge d) :

China Index (net div.) Taiwan Index (net div.) Korea Index (net div.) India Index (net div.) Brazil Index (net div.) Russia Index (net div.)

Fund e xpe ctati ons vs styl e i ndi ce s DFA EM Expectation (MSCI EM Value Index) Dimensional Emerging Markets Trust (net of fees) MSCI Emerging Markets IMI (Net Div.) iShares Indexed Emerging Markets IMI Equity Fund

Quarterly summary: Mildly positive style returns for both funds. Both funds’ tracking errors within tolerance bands, no EDD flags.

Table 10 – New Zealand fixed interest 3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

5 Years Std Dev

10 Years Std Dev

Inception Date

Marke t re turn: S&P/NZX A-Grade Corporate Bond Index

-1.05

0.62

5.42

5.02

4.98

5.55

2.06

1.88

Sep-94

Othe r i ndi ce s of i nte re st: New Zealand One-Month Bank Bill Yields Index Average NZ six-month term deposit S&P/NZX NZ Government Bond Index

0.07 0.36 -2.84

0.14 0.87 -0.39

0.42 2.19 5.42

1.27 2.87 4.98

1.58 3.03 4.78

2.27 3.55 5.26

0.19 0.14 3.19

0.25 0.19 3.11

Feb-86 Apr-65 Jul-85

-1.05 -

0.62 -

5.42 -

5.02 -

4.98 -

5.55 -

2.06

1.88

Sep-94

Styl e re turn

-0.74

1.10

5.62

4.71

4.54

4.96

1.95

1.69

Mar-09

Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.45% pa)

+0.31

+0.48

+0.20

-0.31

-0.44

-0.59

Fund e xpe ctati ons vs styl e i ndi ce s Harbour Bond Fund Expectation (NZX Corp A Index) Harbour Corporate Bond Fund

NB. S&P/NZX A-Grade Corporate Bond Index has a 3-4y modified duration, while the S&P/NZX NZ Government Bond Index has a 5-6y modified duration.

Quarterly summary: Expectation for Harbour Corporate Bond Fund is market return. Harbour Corporate Bond Fund’s tracking error outside tolerance bands and is an EDD flag.

Table 11 – International fixed interest 3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

5 Years Std Dev

10 Years Inception Std Dev Date

0.15

0.38

3.20

2.82

2.76

3.58

1.00

0.95

Feb-86

0.12 0.20 0.28

0.26 0.55 0.77

2.34 4.45 5.15

2.32 3.54 4.85

2.36 3.33 4.68

3.10 4.24 5.78

0.28

0.49

2.24

2.46

2.62

3.45

0.58

0.60

Sep-00

0.84

1.54

5.41

4.88

4.89

5.85

2.78

2.66

Feb-99

0.16 0.08 0.56

0.50 -0.06 0.78

2.81 -2.21 0.26

2.53 -1.08 0.03

2.32 -0.71 0.21

2.68 -0.79 0.07

0.58

0.60

Sep-00

Marke t re turn: FTSE World Government Bond Index 1-5 Years Othe r i ndi ce s of i nte re st ( al l NZD he dge d) FTSE World Government Bond Index 1-3 Years * FTSE World Government Bond Index 3-5 Years * Bloomberg Barclays Global Treasury Bond Index *

('FWGBI 1-5y')

('FWGBI 1-3y') ('FWGBI 3-5y') ('BGTBI')

(* NZD Hedged index return estaimted from AUD hedged series)

Bloomberg Barclays Global Aggregate Bond Index 1-3 Years Bloomberg Barclays Global Aggregate Bond Index T e rm Pre mi um f or ~7 ye ars durati on Cre di t Pre mi um at 1 -3 ye ars durati on Cre di t Pre mi um at 7-9 ye ars durati on

('BGAB 1-3') ('BGAB All')

( BGT BI - FW GBI 1 -3y) ( BGABI 1 -3 - FW GBI 1 -3) ( BGABI Al l - BGT BI)

Fund e xpe ctati ons vs styl e i ndi ce s Bloomberg Barclays Global Aggregate Bond Index 1-3 Years (hedged to NZD) 0.28 Styl e re turn Dimensional Two-Year Diversified Fixed Interest Trust NZD Class (net of fees) Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.25% pa) FTSE World Government Bond Index 1-5 Years (hedged to NZD) Styl e re turn Dimensional Diversified Fixed Interest Trust NZD Class (net of fees) Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.28% pa)

+0.1 3

0.49

2.24

2.46

2.62

3.45

+0.1 1

-0.96

-0.36

-0.1 5

-0.1 3

N/A

Feb-17

1.00

0.95

Feb-86

1.42

1.83

Mar-04

2.78

2.66

Feb-99

0.23

0.47

1.46

1.96

-0.05

-0.02

-0.78

-0.50

0.15

0.38

3.20

2.82

2.76

3.58

0.25

0.53

1.50

2.22

2.77

4.05

0.10

0.15

-1.71

-0.60

0.00

0.47

Barcl ays Gl obal Aggre gate E xpe ctati on Funds: Barclays Global Aggregate Bond Index (hedged to NZD)

0.84

1.54

5.41

4.88

4.89

5.85

Styl e re turn

+0.68

+1 .1 6

+2.21

+2.06

+2.1 3

+2.27

0.52

1.15

4.67

4.32

N/A

Dec-17

Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.40% pa)

-0.32

-0.39

-0.74

-0.56 N/A

3.86

N/A

Dec-11

AMP Capital Hedged Global Fixed Interest Index Fund Dimensional Global Bond Trust - NZD Class Units (net of fees) Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.35% pa) Dimensional Global Bond Sustainability Trust - NZD Class Units (net of fees) Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.39% pa)

1.41

3.01

7.06

5.81

5.65

+0.57

+1 .47

+1 .65

+0.94

+0.76

N/A

May-18

N/A

Sep-18

1.35

2.99

7.66

+0.51

+1 .45

+2.25

Vanguard Ethically Conscious Global Aggregate Bond Index Fund – NZD Hedged 0.82 Fund tracki ng e rror ( i ncl udi ng re tai l T E R, curre ntl y 0.28% pa)

-0.01

1.63

5.53

+0.09

+0.1 2

Quarterly summary: Positive term and credit premia led to positive style returns. All funds’ tracking errors within tolerance bands, no EDD flags.

Disclaimer: The material contained in this report has been prepared based upon information that Consilium NZ Limited believes to be reliable but may be subject to typographical or other errors. Consilium has taken every care in preparing this information, which is for client education purposes only. Although the data has been sourced from publicly available information and/or provided by the investment managers, we are not able to guarantee its accuracy. Past performance, whether actual or simulated, is no guarantee of future performance. This document does not disclose all the risks of any transaction type described herein, and the recipient should understand any terms including relevant risk factors and any legal, tax and accounting considerations applicable to them.

Portfolio returns vs benchmarks Model portfolio and index portfolio returns to 31 December 2020 Weightings

Asset allocation

Returns Dec 20 Quarter

Growth

Income

Model

strategy Defensive

Aggressive

1 year

3 years

Long term 5 years

10 years

Index

Model

Index

Model

Index

Model

Index

3.2%

1.8%

5.2%

5.6%

5.0%

5.8%

4.7%

2.9%

5.8%

6.5%

5.5%

5.8%

6.5%

6.2%

3.9%

6.0%

7.3%

5.7%

6.6%

7.2%

expected returns

Model

Index

5.3%

6.1%

5.8%

5.4%

6.3%

6.6%

6.5%

5.8%

7.2%

7.1%

7.2%

6.4%

7.6%

4.9%

6.0%

8.0%

5.9%

7.3%

7.8%

8.1%

7.5%

7.9%

6.8%

8.9%

6.0%

5.7%

8.7%

5.9%

7.9%

8.3%

9.0%

7.9%

8.5%

7.3%

10.3%

7.1%

5.4%

9.3%

5.9%

8.5%

8.7%

9.8%

8.3%

9.2%

7.8%

11.6%

8.2%

4.9%

9.8%

5.8%

9.0%

9.2%

10.7%

8.6%

9.8%

8.3%

12.8%

9.3%

4.2%

10.3%

5.5%

9.6%

9.5%

11.5%

8.8%

10.4%

8.7%

13.8%

10.1%

3.6%

10.6%

5.3%

9.9%

9.7%

12.1%

9.1%

10.9%

9.0%

Quarter

1 year

Index returns to 31 December 2020 The indices used to calculate the index portfolio returns are as follows: Index returns p.a.

Asset Class

Index

New Zealand equity

S&P/NZX 50 Index Gross with Imputation

11.5%

14.6%

17.0%

16.8%

Australian equity

S&P/ASX 200 Index (Total Return)

12.5%

4.2%

5.8%

8.9%

5.7%

Intl equity (developed mkts)

MSCI World ex Australia Index (net div., hedged to NZD)

4.6%

8.6%

10.1%

11.1%

10.9%

Intl equity (developed mkts)

MSCI World ex Australia Index (net div.)

11.7%

11.4%

9.4%

11.8%

Intl equity (emerging mkts)

MSCI Emerging Markets Index (gross div.)

10.1%

11.0%

6.0%

12.1%

4.8%

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

-1.0%

5.4%

5.0%

5.6%

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

0.2%

3.2%

2.8%

3.6%

New Zealand cash

30 Day Bank Bills

0.1%

0.4%

1.3%

1.6%

2.3%

Notes:

manager fees, but gross of custodial and adviser monitoring fees

3 years

5 years

10 years 16.1%

Portfolio returns vs benchmarks Model portfolio and index portfolio returns to 31 December 2020 Weightings SRI Asset allocation

SRI Long

Returns Dec 20 Quarter

1 year

3 years

5 years

term

10 years

Growth

Income

Model

Index

Model

Index

Model

Index

Model

Index

Model

Index

returns

2.8%

1.7%

8.1%

5.7%

6.8%

5.3%

6.8%

5.5%

7.1%

5.9%

5.4%

4.1%

2.7%

9.0%

6.6%

7.6%

6.3%

7.8%

6.5%

7.9%

6.8%

5.8%

5.3%

3.7%

9.9%

7.4%

8.4%

7.1%

8.6%

7.4%

8.6%

7.6%

6.2%

6.5%

4.8%

10.6%

8.1%

9.0%

7.8%

9.4%

8.3%

9.2%

8.3%

6.5%

7.6%

5.8%

11.3%

8.7%

9.6%

8.4%

10.1%

9.2%

9.8%

9.0%

6.9%

8.7%

6.8%

11.9%

9.2%

10.1%

9.0%

10.8%

10.0%

10.3%

9.7%

7.3%

9.9%

7.9%

12.5%

9.6%

10.6%

9.6%

11.5%

10.8%

10.9%

10.3%

7.7%

11.0%

9.0%

13.2%

9.9%

11.1%

10.0%

12.2%

11.4%

10.8%

8.1%

12.0%

9.8%

13.5%

10.1%

11.4%

10.3%

12.6%

12.0%

11.7%

11.3%

8.3%

Defensive

Aggressive

expected

Index returns to 31 December 2020 The indices used to calculate the index portfolio returns are as follows: Index returns p.a.

SRI Asset allocation

Index

New Zealand equity

S&P/NZX 50 Index Gross with Imputation

11.5%

14.6%

17.0%

16.8%

16.1%

Australian equity

S&P/ASX 200 Index (Total Return)

12.5%

4.2%

5.8%

8.9%

5.7%

Intl equity (developed mkts)

MSCI World ex Australia Index (net div., hedged to NZD)

4.6%

8.6%

10.1%

11.1%

10.9%

Intl equity (developed mkts)

MSCI World ex Australia Index (net div.)

11.7%

11.4%

9.4%

11.8%

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

-1.0%

5.4%

5.0%

5.6%

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

0.2%

3.2%

2.8%

3.6%

New Zealand cash

30 Day Bank Bills

0.1%

0.4%

1.3%

1.6%

2.3%

Notes: standard unscreened market indices in each asset class.

underlying manager fees, but gross of custodial and adviser monitoring fees

Quarter

1 year

3 years

5 years

10 years

2020 Q4 Partner Firm Monitoring Certificate from Consilium Investment Committee (CIC) Quarterly monitoring: In the Partner Firm Service Agreement and Consilium Investment Committee Policy and Procedures Manual, the CIC outlined the following process for reviewing underlying investments. All investment securities are reviewed on a quarterly basis and performance is measured against appropriate benchmark indices. Where a security’s performance is consistent with its mandate and in line with broad style and/or asset class returns, no further action will generally be taken. However, a security may be placed on an ‘enhanced due diligence’ list, and subjected to a higher degree of scrutiny, for any of the following reasons: -

A change in the primary portfolio manager

A significant change in the fund management company’s majority owner or ownership structure

A more than 25% fall in the fund’s assets under management over a rolling one-year period (due to

outflows, not market movement)

Total fund assets falling below our minimum fund size thresholds at any time

A change in the fund’s investment style, diversification and/or risk factor tilting

An increase in the fund’s fees

The fund exhibited quarterly tracking error versus a relevant benchmark outside its monitoring

The fund exhibited a persistent deviation in tracking error versus a relevant benchmark outside its

thresholds

monitoring thresholds, measured over a rolling three-year basis, minus fees and allowing a volatility

threshold appropriate for each fund -

An extraordinary event which, in the opinion of the Investment Committee, may impact on the

manager’s ability to comply with the fund mandate in future

We completed the monitoring of all of the above aspects for all underlying funds in the Partner Firm portfolios and found the following: 1.

Harbour Corporate Bond Fund: Q4 2020 outperformance The trust outperformed the benchmark by +0.31%, which exceeds our monitoring bands.

Harbour Corporate Bond Fund: Mandate breach – duration breach Harbour notified us of a passive duration breach during the fourth quarter of 2020. Initial comments have linked the breach to the expososure taken to the Auckland Council bond, ahead of the benchmark.

Harbour Corporate Bond Fund: Mandate breach – Ineligable purchase Harbour notified us of a breach in the fourth quarter of 2020, with the purchase of an ineligible security, the National Australia Bank AUD bond.

Dimensional: Change in key parties Addition of The Bank of New York Mellon Corporation as an eligible FX Hedge Counterparty.

We will be undertaking an analysis of all four flags over the coming weeks, and we are aiming to have completed papers summarising our findings in the next three months.

Update on prior flagged actions: 1.

DFA Global Small Company Trust: Q2 2020 underperformance Investigation COMPLETED. Our analysis highlighted that a large proportion of the underperformance in the June quarter was attributable to known structural elements of the trust. Such as, less exposure to deep growth low profitability companies contributed to underperformance at the portfolio level. While increased exposure to underperforming value and deep value companies led to further negative relative. The identified risk exposures are consistent with the trust’s mandate, and we identified no unexpected or unexplained risks. No change to portfolios is needed as a result of this flag.

DFA Global Sustainability Trust: Q2 2020 outperformance Investigation COMPLETED. Our analysis highlighted that the outperformance in the June quarter was attributable to structural elements of the trust, particularly the tilts towards small companies, with increased exposure to the significantly outperforming micro-cap and small cap sectors. The identified risk exposures are consistent with the recently modified trust mandate, and we identified no unexpected or unexplained risks. No change to portfolios is needed as a result of this flag.

DFA Australian Small Company Trust: Q3 2020 outperformance Investigation COMPLETED. Our analysis highlighted that a large proportion of the outperformance was attributable to structural elements of the trust such the trusts tilts towards companies with high profitability and the exclusion of unprofitable mid-size companies. We concluded that the identified risk exposures are consistent with the trust’s mandate, and we identified no unexpected or unexplained risks.No change needed as a result of this flag.

DFA Australian Core Equity Trust: Q3 2020 outperformance Investigation COMPLETED. Our analysis highlighted that the outperformance in the September quarter was attributable to structural elements of the trust, particularly the tilts towards small companies. Risk exposures are consistent with the trust’s mandate, and we identified no unexpected or unexplained risks.No change needed as a result of this flag.

DFA Australian Sustainability Trust: Q3 2020 outperformance Investigation COMPLETED. Our analysis highlighted that the outperformance in the September quarter was attributable to structural elements of the trust, particularly the tilts towards small companies and additional contribution was made through the portfolio’s sustainability considerations. Risk exposures are consistent with the trust’s mandate, and we identified no unexpected or unexplained risks. No change needed as a result of this flag.

Harbour Corporate Bond Fund: Q3 2020 outperformance Investigation COMPLETED. Our analysis highlighted that the majority of the funds relative outperformance was due to gains made on the primary issuance of a 2050 Auckland Council Bond, which the index did not take exposure to until October. We conclude that the identified risk exposures are consistent with the trusts mandate, and we identified no unexpected or unexplained risks. No change was needed as a result of this flag.

Smartshares NZ core equity trust: Mandate change Investigation COMPLETED. Dimensional have introduced a profitability screen to the Smartshares NZ core equity trust. This brings the funds mandate in line with Dimensional funds process globally. We remain satisfied that DFA are seeking an expected return greater than the benchmark, consistent with its mandate. No change was needed as a result of this flag.

Platform discrepancy on Smartshares NZ core equity trust: 3m return deviation Investigation COMPLETED. Source of deviation has been identified as mistime distribution.

New Business: -

NZ Equity RFP complete and mandate for index tracker and SRI fund awarded to Harbour Asset Management.

2020 Kiwisaver review completed late December 2020

2020 Peer group review completed late December 2020

Approved products list ongoing

Working towards 1 April launch for both mandates

Ethical Investing Consilium Autumn NZUpdate Autumn Update January – March 2021 P1 P5 P8

Market commentary Key market movements for the quarter Housing affordability... where to from here?

C2CConsilium Partners 209 Cambridge PO Box Terrace 316 Christchurch Auckland 8013 1140 09 03 337 353 0997 1007 support@consilium.co.nz team@c2cpartners.co.nz www.c2cpartners.co.nz www.consilium.co.nz

In the context of a long term investment plan, a single year is not a very long time. That said, it’s difficult to write this particular report without reflecting, at least a little, on what an extraordinary year we have all just experienced. Twelve months ago, we were about three weeks into our national Covid-19 lockdown, and the corresponding Autumn 2020 market report was drafted in a home office. At the time, the only thing we knew for certain was that, globally, we had been unceremoniously thrust into unfriendly territory. It was certainly a worrying time from a health perspective, with a potentially fatal pandemic raging, which initially created a gigantic upheaval in investment markets. At the time, the immediate outlook was highly unsettled, and no one had any idea what was going to happen the next day, let alone the next month or year. Apart from the age-old (but extremely appropriate) advice of not panicking, one of the points we managed to stress in that Autumn 2020 report was that share markets would be a “leading indicator” of the eventual recovery. What that meant was that share markets would start to improve well before we would see any clear evidence of improvement in the world around us. And so it proved.

Share markets have generally spent much of the last 12 months going from strength to strength.

In a global context, we are still a long way from being “back to normal”. Yes, vaccination programmes are being implemented, economic growth rates are recovering, and the recent announcement of a travel bubble with Australia are all reasons for improving optimism. But, if we scratch a little deeper, we see that unemployment rates remain elevated, global supply lines are stretched, international travel is still challenging for many, and a significant third wave of the coronavirus is currently sweeping Europe and many emerging nations. Some of these issues may take months or years to settle, but forward-looking share markets are not sitting and waiting — quite the contrary. Share markets have generally spent much of the last 12 months going from strength to strength.

Over the three months ending 31 March 2021, the highly influential US1 market recorded a strong gain of 6.2%. For the 12 month period from 1 April 2020, this rounded out an almost unimaginable 56.4% return. To put this in context, it was only the second year since the end of World War II where the US market has delivered a 12 month return in excess of 56%.

This performance, along with the returns of many other global share markets over the last year, is unusually high because it includes the big bounce-back from the Covid-19 turmoil that saw markets plummet in February and March 2020. For investors who stayed committed to their long term investment plans, this at least helped provide suitable compensation for those two very challenging months.

Returns were similarly impressive across other international developed markets. Over the first quarter of 2021, Japan2 recorded a substantial jump of 8.9%, and Europe (excluding the UK)2 gained 8.4%. The UK2, although continuing to be a relative laggard within the major developed market region, still delivered a solid 5.2% return.

While developed market returns were almost unanimously positive in the first quarter, the performances of emerging market nations were a little less consistent. Of the four largest emerging market constituents, China2 was virtually flat, returning -0.2%, while South Korea2, Taiwan2 and India2 posted excellent quarterly results of 6.1%, 12.7%, and 5.2%, respectively. In aggregate, the emerging markets asset class delivered 2.3%3.

Closer to home, the returns of the New Zealand and Australian markets also diverged for the quarter. In recent years, the New Zealand share market has tended to outperform the Australian share market in local currency terms.

However, in the three months ending March, Australia4 was clearly the stronger market gaining 4.3% compared with the New Zealand5 market return of -3.9%. This represented the largest quarterly outperformance by the Australian share market since the final three months of 2016.

In New Zealand, listed bank shares did well, and Fletcher Building, which reported strong half year improvements in margins and profits, gained 22%. However, it was quarterly weakness from other market heavyweights such as Contact Energy (-19.8%), Meridian Energy (-26.6%), and the a2 Milk Company (-28.6%), which dragged the overall market return into the negatives. Although the performance of most share markets was generally strong for the quarter, fixed interest markets struggled as government bond yields rose quite sharply during the quarter.

Yields were lifted by the continued rollout of Covid-19 vaccinations and expectations of a large US economic stimulus. The general thesis behind these increased yields seems to be that the coronavirus will be conquered, the world will get back to “normal”, and the combination of a growth surge (from economic normalisation) and ongoing significant government stimulus will lead to increased growth, increased inflation and, ultimately, higher interest rates. It’s a plausible enough scenario, but ‘plausible’ does not mean ‘guaranteed’, and history repeatedly tells us that inflation and interest rates are notoriously difficult to predict. For any doubters, it might be worthwhile to reflect on what happened just over a decade ago.

Coming out of the Global Financial Crisis (GFC), market commentators were almost unanimous in predicting the significant inflation risk that would surely result from central banks’ efforts to shore up financial markets. This consensus view was based on the dramatic easing in monetary policy, the establishment of additional central bank liquidity facilities, and the Large Scale Asset Purchase programmes that were all implemented in 2008/09. However, in the decade that followed, despite records being set in terms of the breadth of the subsequent economic recovery and the record low unemployment rates it generated, inflation stayed persistently below market expectations.

According to the long term US inflation calculator, the average annual US inflation rate from 2000 to 2009 was 2.56%, but in the decade that followed the GFC it actually reduced to 1.77%. It was a very similar story here in New Zealand as our consumer price index rose an average of 2.7% in the decade leading up to the GFC and only 1.6% in the decade following it. Looking back at this today, we can point to the greater utilisation of technology and the increasing transfer of production from relatively high cost producers to relatively low cost producers (e.g. relocating factories from the US to Vietnam), as two key contributors to the inflation rate persistently falling short of the bloated post-GFC expectations. But, back in 2009, reasons why inflation might stay surprisingly low weren’t being widely mentioned at all. Will it be different this time? Perhaps, but we’ll only find out in the future where, as we know, nothing is certain.

Even though economic growth has been strong in recent quarters (much of which can be attributed to the bounce-back from Covid-related lockdowns when economic activity stalled), the overall level of economic activity in most countries suggests that spare capacity still exists. This is most obviously the case in labour markets, where unemployment rates in developed economies are higher than those generally associated with full employment. When there is capacity in the labour market, new workers can be hired without necessarily impacting wages across the wider economy. This helps keep costs of production down and inflationary pressures in check. As for the significant economic stimulus and increased money supply around the globe, we can’t take it as a foregone conclusion that these will irrevocably drive inflation higher. Outside of the housing sector and the share market, the demand for money remains relatively weak. The post-GFC years already provide us with a template in which highly

Having said all of the above, the markets continually express their view of the future by the way they price securities every minute of every day, and that collective view generally sent government yields higher in the first quarter. accommodative monetary conditions did not lead to persistently higher inflation. Having said all of the above, the markets continually express their view of the future by the way they price securities every minute of every day, and that collective view generally sent government yields higher in the first quarter. In the US, the 10 year Treasury bond yield increased by 0.82% (moving from 0.92% to 1.74% over the quarter) while the 2 year Treasury was almost unchanged. It is this ‘steepening’ in the yield curve that is generally an indicator of rising growth and inflation expectations. Other nations reflected a broadly similar pattern. The UK 10 year yield increased by 0.65% to 0.85%, and across Europe, where the vaccination programme is some way behind the US and UK, yields in Germany, France, Spain, and Italy also increased, although in smaller amounts.

In the meantime, the best strategy, as always, is to stick to your plan. Bond yields and bond prices have an inverse relationship (meaning bond prices decline when bond yields increase), so the rising yield environment was generally negative for the prices of fixed income assets in the quarter. As a result, the World Government Bond Index6 and the Global Aggregate Bond Index7 were down -0.4% and -2.5%, respectively for the quarter.

On 24 February, the Reserve Bank of New Zealand (RBNZ) held New Zealand’s overnight cash rate (OCR) at 0.25%. This was the eighth successive “no change” decision since they reduced the OCR from 1.00% to 0.25% last March. In the accompanying Monetary Policy Statement, they noted they would “not change the stance of monetary policy” until they had confidence they could sustainably achieve their consumer price inflation and employment objectives. They qualified this by saying that “gaining this confidence will take considerable time and patience”. In other words, the RBNZ doesn't see any overwhelming inflation pressures on the near horizon either, but of course their view, and the market’s view, will continue to evolve as additional information becomes available in the weeks and months ahead. Over the first quarter, the 2 year New Zealand Government Bond yields stayed largely unchanged, while the yield on 10 year Government Bonds increased by 0.82% (from 1.02% to 1.84%). In keeping with the movements internationally, this resulted in a similar steepening in the yield curve in New Zealand which was also negative for local bond returns during the quarter, as the New Zealand Corporate A Grade Bond Index8 declined -2.1%. Where interest rates and inflation may go from here is anyone’s guess. Although the market has only a patchy record in accurately predicting future movements, it is currently pricing-in a higher inflation risk.

However, the policy makers that actually decide the short term interest rate settings, like the RBNZ and the Federal Reserve in the USA, are less confident about the sustainability of the recovery. In the coming months (or years), it will be interesting to see if the market slowly adjusts towards the thinking of the policy-makers or vice versa. In the meantime, the best strategy, as always, is to stick to your plan. It proved to be the right decision last April when the market fallout from Covid-19 was still fresh and it’s very likely the right decision now. Interest rates are already expected to gradually increase in the future. That’s the expectation embedded into the upward sloping yield curves we see today, and it’s also reinforced by government policies that are designed to relentlessly pursue greater economic growth. But whether these future interest rate increases happen faster or slower than the market currently expects, is really anyone’s guess.

Although we can’t expect another 12 months of strong double-digit share returns, well diversified portfolios nevertheless remain well placed to deliver the returns that the markets will ultimately make available.

1 2 3 4 5 6 7 8

S&P 500 Index (total return in USD)

MSCI Country and regional indices (gross dividend in local currency) MSCI Emerging Markets Index (gross dividend in USD) S&P/ASX 200 Index (total return in AUD)

S&P/NZX 50 Index (gross with imputation)

FTSE World Government Bond Index 1-5 Years, hedged to NZD

Bloomberg Barclays Global Aggregate Bond Index, hedged to NZD S&P/NZX A-Grade Corporate Bond Index

Key market movements for the quarter The first quarter of 2021 saw broadly positive returns for riskier assets supported by the rollout of the Covid-19 vaccines, paired with ongoing supportive fiscal and monetary policy. The start of the quarter was volatile, with the siege of the US Capitol Building threatening to overshadow or disrupt President Biden’s inauguration on January 21. However, the 46th US president eventually took office without incident. Biden’s early executive orders included rejoining the Paris Climate Agreement, directing the government to rejoin the World Health Organization, and the American Rescue Plan Act of 2021. The latter was a $1.9 trillion stimulus package to support the US’s recovery from the pandemic and recession, including direct payments to most Americans, funds for vaccine distribution, and other business and healthcare support. One of the most interesting stories of the quarter was the price action of several small US companies, most notably GameStop, a brick-and-mortar retailer of video games. An internet forum targeted GameStop’s share price, pushing it up by as much as 30 times in early January. Their aim was to hurt hedge funds that were known to be betting against this firm. The initial price rise had its intended consequence as hedge funds were forced to exit their positions crystalising significant losses. However, as quickly as the price had shot up, momentum quickly turned, and the share price plummeted back towards its earlier range. The net impact on markets was negligible as GameStop, and the companies involved represented very minor weights, but it served as a reminder of the risks in holding concentrated positions. It also highlighted an understated impact that web forums can have on markets and shone a spotlight on the regulator's shortcomings in monitoring these areas. The first quarter also saw the anniversary of the fastest market correction ever seen — during February and March 2020. The subsequent 12 month returns for many asset classes reflect the sharp subsequent recovery from those lows, providing a forceful reminder of the merits of a disciplined long term investment approach.

 +6.2% (hedged to NZD)

+8.1%

(unhedged)

International shares

With global vaccination programmes underway, an improving economic outlook along with continued government support has meant improving prospects of companies’ future revenue and profitability. This has been very positive for most share markets. In the US, the flagship S&P 500 Index (total returns in USD), advanced +6.2% for the quarter for a remarkable +56.4% return over the past 12 months. In Europe, share market performance was also very strong. The MSCI Europe ex UK Index (in local currency) gained +8.4% through the quarter and, during March, this index surpassed its highest pre-crisis level.The MSCI Europe ex UK Index gained +40.0% over the last 12 months. British equities were also strong, although they did not increase at the same rate as their neighbours. In GBP terms, the FTSE 100 advanced +3.9% for the quarter and +18.4% for the last 12 months. Japanese equities were among the best in developed markets for the quarter, as a relatively weak Japanese Yen enhanced the revenue of exporters. The MSCI Japan Index jumped +8.9% for the quarter for a +43.5% return over the last 12 months. Small capitalisation companies generally outperformed larger companies in the quarter and also posted higher returns over the last 12 months. Economically sensitive industries such as energy, industrials, and financials were the best performing as the prospect of strong economic growth drove their prices higher. Defensive industries such as utilities (e.g. power companies) and consumer staples (e.g. food producers) are typically less volatile and advanced at a slower rate. Healthcare and information technology – sectors that had thrived through the pandemic – lagged through the quarter, although information technology remains near the top over the last 12 months. The New Zealand dollar was generally weak versus foreign currencies and this meant that unhedged foreign assets outperformed. In New Zealand dollar terms, the MSCI World ex Australia Index delivered a quarterly return of +6.2% on a hedged basis and +8.1% unhedged. The rolling 12 month return for the New Zealand dollar hedged index was +49.7%, while the unhedged index gained ‘just’ +31.4%. Source: MSCI World ex-Australia Index (net div.)



Emerging markets shares

Emerging market equities generated gains as well, albeit less than developed markets. The vaccine roll out in these nations has been slower than in developed nations, and high infection rates again meant social restrictions in some +5.4% countries. Oil heavy economies such as Russia and Saudi Arabia were among the best performing nations as renewed global demand for oil pushed prices up. Taiwan was also strong, led by large semiconductor producers who produced good results. Korea and India produced small gains while regional heavyweight, China, struggled in the face of ongoing US-China tensions, even under the new US administration. In unhedged New Zealand dollar terms, the MSCI Emerging Markets Index produced a quarterly return of +5.4%, for a +35.8% return over the last 12 months. Source: MSCI Emerging Markets Index (gross div.)

 -3.9%

New Zealand shares Although the Royal New Zealand Yacht Squadron proved to be world beaters, domestic equities took on a little water in the first quarter of 2021. It was a handful of disappointing results from the larger firms and the announcement of a 1 percent drop in our GDP during the last quarter of 2020 (worse than expectations) that knocked us right off our foils. In aggregate, the broad S&P/NXZ 50 Index declined -3.9%. Dairy companies Synlait Milk and a2 Milk were among the poorest performers as multiple earnings downgrades soured investor demand. Synlait’s largest client is a2 Milk, and a2 has seen demand for their infant powder dry up through the latter half of last year, negatively impacting both firms’ reported profit expectations. Meridian and Contact Energy also had volatile quarters, and each ended down more than -20%. Both had enjoyed a strong end to 2020 as high demand for these clean energy companies from international investors had pushed their prices up. However, during the first quarter, Standard and Poors signalled the expansion of their global clean energy index from 30 holdings up to 100, slashing Meridian and Contact’s weightings. Investors tracking this index reduced their holdings in both companies which pushed each firm’s price well down. At the other end of the spectrum, Fletcher Building enjoyed another strong quarter, as did The Warehouse Group, which reported a record profit late in the quarter. Source: S&P/NZX 50 Index (gross with imputation credits)



Australian shares

Australian share market returns were strong over the quarter. The S&P/ASX 100 (the largest 100 companies in the Australian market) returned +4.5% in Australian dollar terms, while the S&P/ASX Small Ordinaries Index (the companies +5.8% ranked 101 to 300 in the Australian share market) delivered +2.1%. Over the last 12 months, small capitalisation companies have been very strong, with the S&P/ASX Small Ordinaries Index up +52.1% versus +36.8% for the top 100 companies. The strongest performing sector in Australia was financials, where Westpac led the rally on the back of strong profit reporting through the quarter. The market sees an improving outlook for the banking sector with a strong economy and a thriving housing market, in particular, helping profit projections. Heavyweight miners BHP Group and Rio Tinto posted small gains, however many of the mid cap gold miners posted losses as the price of gold fell during the quarter, harming these firms’ prospects. Returns to unhedged New Zealand investors were slightly enhanced by a small appreciation in the Australian dollar over the quarter. Source: S&P/ASX 200 Index (total return)

 -0.4%

International fixed interest

As mentioned earlier, longer term yields broadly rose as the market priced in prospects of an improving economic growth outlook. As was the catalyst in equity markets, the vaccine rollout and continued government support drove expectations, and the market began to price in interest rate increases earlier than was the consensus at the start of the year. The US 10 year yield — the yardstick for global yields — increased to 1.74%, effectively returning it to pre-Covid levels. These yields are now at the lower end of the broad range observed in the decade following the GFC. Many developed market government yields saw similar moves, with the 0.83% increase in the US being matched in Australia with the UK not far behind. Yields in the European union also rose, although by smaller magnitudes. The Japanese 10 year yield was relatively unchanged. When bond yields are relatively stable, bond investors receive the bulk of their return from the bond yield and from something called the ‘roll down’ return, which is a valuation benefit that generally accrues to investors as the bonds they hold move closer to maturity. At the start of the period, both of these sources of return were minimal as yields were low and curves were relatively flat. In the first quarter, the prices of bonds fell as bond yields increased sharply, and the impact of the lower bond prices was far larger than the positive combined yield or roll down benefits. Longer duration bonds were hit the hardest, while corporate bonds performed slightly better than government bonds. The FTSE World Government Bond Index 1-5 Years (hedged to NZD) declined -0.4%, while the broader Bloomberg Barclays Global Aggregate Bond Index (hedged to NZD) returned -2.5% for the quarter. These declines are among the worst seen in this asset class since the turn of the century. However, the impact of Covid-19 on both equity and bond markets has generated some short term results (both good and bad) which have been far from normal.

When we look at the annualised performance of bonds over longer time periods, we quickly find returns that are a lot closer to long term expected averages, such as the Bloomberg Barclays Global Aggregate Bond Index (hedged to NZD), which has returned +4.0% pa over the 3 years to end March 2021. It should also be noted that although the increase in yields contributed to a negative quarter for bonds, it also serves to increase the expected return of these same assets going forward. The final silver lining within this period of higher volatility in bond markets is the diversification benefits we have seen in portfolios. This negative performance on fixed income assets occurred alongside another very strong performance from the riskier equities. The flipside of this was exhibited during the initial Covid-19 crisis early last year, where high-quality fixed income assets benefitted (at that time) from a drop in yields, when equities were delivering large losses. This is precisely the sort of diversification benefit we expect from pairing these different asset classes together in portfolios; when one does poorly, the other will often perform well and help carry the portfolio. Source: FTSE World Government Bond Index 1-5 Years (hedged to NZD)

 -2.1%

New Zealand fixed interest Yields in New Zealand followed the global trend and spiked with the NZ 10 year yield closing the quarter at 1.84%, 0.82% above its starting point. The impact was negative on performance, although generally less so here than overseas, as our market has a relatively shorter average time until maturity, and the yield changes were less amplified. Government bonds generally outperformed credit securities, and shorter maturity bonds that have less price sensitivity to rising interest rates outperformed longer maturity bonds, but generally, all parts of this asset class posted losses. The S&P/NZX A-Grade Corporate Bond Index declined -2.1% over the quarter, and the rolling 12 month return has been +1.9%. Longer term performance remains robust, with both the 3 and 5 year annualised average coming in at +4.0%, while the 10 year return is +5.0% per annum. The longer duration but higher quality S&P/NZX NZ Government Bond Index declined -3.4% for the quarter and has retreated -1.6% over the preceding 12 months. Source: S&P/NZX A-Grade Corporate Bond Index

Table 1: Asset class returns to 31 March 2021 3 months

1 year

3 years

5 years

10 years

S&P/NZX 50 Index (gross with imputation credits)

-3.9%

+28.9%

+15.7%

+14.3%

+15.2%

S&P/ASX 200 Index (total return)

+5.8%

+45.0%

+10.5%

+9.8%

+5.6%

MSCI World ex Australia Index (net div., hedged to NZD)

+6.2%

+49.7%

+12.4%

+13.6%

+12.0%

MSCI World ex Australia Index (net div.)

+8.1%

+31.4%

+14.2%

+13.2%

+11.0%

Emerging markets shares

MSCI Emerging Markets Index (gross div.)

+5.4%

+35.8%

+8.1%

+12.2%

+4.9%

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

-2.1%

+1.9%

+4.0%

+5.0%

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

-0.4%

+0.6%

+2.6%

+2.3%

+3.5%

New Zealand cash

New Zealand One-Month Bank Bill Yields Index

+0.1%

+0.3%

+1.1%

+1.5%

+2.2%

Asset Class

Index Name

New Zealand shares Australian shares

International shares

Unless otherwise specified, all returns are expressed in NZD. We assume Australian shares and emerging market shares are invested on an unhedged basis, and therefore, returns from these asset classes are susceptible to movement in the value of the NZD. Index returns are before all costs and tax. Returns are annualised for time periods greater than one year.

Housing affordability... where to from here? For generations, property has been the preferred investment of many New Zealanders. Those of us fortunate enough to own our own homes take great pride in doing so. But, for many, the attraction runs deeper than simply having a roof over our own heads. We understand property. We trust property. We also know that over a long period of time, investors in residential real estate have often been able to generate a very good return from property.

This makes intuitive sense because if the price of property (excluding capital improvements) were to increase much faster than the rate of inflation, it would eventually outpace most people’s ability to purchase it!

When we look at property markets overseas, residential property generally represents a solid if unspectacular investment. For example, in the chart below, we can see that the average price of residential property in the United States has increased by only 1.1% above the rate of inflation over the last 93 years. This price series excludes the effects of capital upgrades that occur when you spend additional money to maintain or make improvements to your property.

Long term growth of residential property and inflation 1927 - 2020 $100

Residential property (price only)

4.0% p.a.

Inflation

2.9% p.a.

$40 $15

$10

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

World Pandemic: COVID-19

Brexit referendum

US credit downgrade

Global Financial Crisis

9/11 terrorist attacks

Russian Debt Crisis

1987 share market crash

Start of low global inflation

Oil Shock

Microprocessor invented

Post Korean War recession

WWII ends

Start of great depression

2020

Analysis period is for June 1927 to December 2020. All returns are in US dollars

Sources: Residential property: 01/1920 to present - Shiller Home Price Index (source: Grebler, Five-CityMedian, PHCPI, FHFA, S&P/Case-Shiller). Inflation: US Consumer Price Index (source: Stocks, Bonds, Bills and Inflation, Chicago: Ibbotson and Sinquefield, 1986. Represented by Consumer Price Index for All Urban Consumer (CPI–U), not seasonally adjusted. The CPI is updated with a one month lag). Note: These materials are only prepared for client education purposes. Consilium has taken every care in preparing this information. Although the data has been sourced from publicly available information and/or provided by the investment managers, we are not able to guarantee its accuracy. Past performance, whether actual or simulated, is no guarantee of future performance.

International House Price to Income Ratios 1987/1992 to 2019

Price to Income Multiple

7 6 5 4 3 2 1 0

Australia

Canada

Ireland

1987 or 1992 (Earliest Data)

New Zealand

United Kingdom

2019 Median Market

But that’s not what seems to have happened in New Zealand. The following chart above shows data from the Demographia 2021 study1 on international housing affordability and compares housing affordability from about 30 years ago to today. The measure of affordability is the national average home price as a multiple of the national average income. This measure helps us make an easier comparison between countries with different income levels. As can be seen quite clearly above, the red bar is twice the height for New Zealand as the green bar. That means it takes almost twice the income to purchase a house now compared to 30 years ago. This chart was based on 2019 data, so with the recent strength in the housing market, it’s very likely to be even worse today. We also observe that the red bar for New Zealand is higher than comparable Englishspeaking countries. The overall result is that New Zealand housing is much more unaffordable than it was 30 years ago, and it is much more unaffordable, on a relative basis, compared to other countries. This probably helps explain why the New Zealand government felt compelled to introduce some changes to the tax regime faced by residential property investors. 1

United States

The overall result is that New Zealand housing is much more unaffordable than it was 30 years ago, and it is much more unaffordable, on a relative basis, compared to other countries.

The two main changes announced in March include: 1. The extension of the ‘bright line test’ to 10 years for existing residential property (maintained at 5 years for new builds). This means an effective tax on any capital gains made on properties sold earlier.

2. The removal of tax deductibility of interest expenses for homes purchased from 27 March 2021, with deductibility to be phased out entirely over the next four years. It seems these changes have been introduced with the intention of reducing the profitability, and therefore the incentive, of investing in existing residential property. And, if it removes the incentive for property investors to purchase the existing housing stock, then it might just make more room for the ubiquitous ‘first home buyer’ that the government spends so much time trying to figure out how to help. It is far too early to tell whether these policy changes will have that desired effect, because at least part of what’s driving New Zealand’s relatively unaffordable housing market is a supply side issue. House prices are already high; but if these high prices aren’t inducing sufficient investment into new property developments, then there must be some constraint either on the supply of land, materials or labour. Solving these issues isn’t anywhere near as simple as creating or extending a 'bright line test' for capital gains.

http://www.demographia.com/dhi2020.pdf

In the Demographia study, former Prime Minister Bill English is quoted as saying: Housing affordability is complex in the detail — governments intervene in many ways — but is conceptually simple. It costs too much and takes too long to build a house in New Zealand. Land has been made artificially scarce by regulation that locks up land for development. This regulation has made land supply unresponsive to demand. From an investment point of view, we’ve traditionally told clients that have wanted to pursue residential property investment that they needed to treat it like a business — their own property business. They can hope for (but can’t guarantee) that house prices will rise. Therefore, they need to ensure they have a property that makes sense from a rent and cashflow perspective. They need to consider the time and cost of capital improvement and realise that they don’t own the “median house”. They own a physical property that renters use and inevitably damage, and their property will depreciate and will need maintenance to improve it. Some who have undertaken residential property investment on this basis and approached it thoughtfully, like a business owner, have done very well. But the government is now saying that investing in residential real estate is not a business, so interest expenses will not be an allowable deduction like it is in any other business. Additionally, turning over a property investment within 10 years might also have significant additional tax consequences. The end result is likely to be that the smaller and more leveraged investors might increasingly begin to look elsewhere to grow their wealth, like the sharemarket. New Zealanders are unlikely to suddenly lose their love-affair with residential property. Those feelings have been nurtured by generations of New Zealanders being able to successfully gain leveraged exposure to an asset class that has, over time, steadily appreciated in value. Critically, those leveraged capital gains have historically been ‘tax free’ and with interest rate deductibility benefits!

The bricks and mortar appeal of investing in housing has, for a long time, resonated with Kiwis in a way that better performing assets classes have never been able to match. However, in light of the recent tax changes, it is possible the rate of future capital appreciation in this space might slow. That’s certainly what the government will be hoping. Some investors may think twice before investing and some may change their strategy entirely. But it would be a brave person to suggest that this will mark the end of residential property investing. The bricks and mortar appeal of investing in housing has, for a long time, resonated with Kiwis in a way that better performing assets classes have never been able to match. While that might change, we wouldn’t bet my house on it.

Disclosure statements are available on request and free of charge.

Q1 2021 talking points Table of Contents

Key market movements for the quarter ............................................................................................................................................ 1 International shares............................................................................................................................................................................2 Emerging markets shares .................................................................................................................................................................2 New Zealand shares ..........................................................................................................................................................................2 Australian shares.................................................................................................................................................................................3 International fixed interest................................................................................................................................................................3 New Zealand fixed interest ..............................................................................................................................................................4 Risk factor summary ...............................................................................................................................................................................6 Unscreened model portfolios versus index portfolios ................................................................................................................... 7 SRI model portfolios versus index portfolios ................................................................................................................................... 7 Talking points for absolute performance..........................................................................................................................................8 Talking points for relative performance ............................................................................................................................................9 Disclaimer and Notes ........................................................................................................................................................................... 10 Appendix 1: Full index, fund and expectation performance tables ........................................................................................... 11

Key market movements for the quarter The first quarter of 2021 saw generally broadly positive returns for riskier assets supported by the rollout of the Covid-

19 vaccines paired with ongoing supportive fiscal and monetary policy.

The start of the quarter was volatile with the siege of the US Capitol Building threatening to overshadow or disrupt President Biden’s inauguration on January 21. However, the 46th US president eventually took office without incident.

Biden’s early executive orders included rejoining the Paris Climate Agreement, directing the government to rejoin the

World Health Organization, and the American Rescue Plan Act of 2021. The latter was a $1.9 trillion stimulus package to support the US’s recovery from the pandemic and recession, including direct payments to most Americans, funds

for vaccine distribution and other business and healthcare support.

One of the most interesting stories of the quarter was the price action of several small US companies, most notably

GameStop, a brick-and-mortar retailer of video games. An internet forum targeted GameStop’s share price pushing it

up by as much as 30 times in early January. Their aim was to hurt hedge funds who were known to be betting against

this firm. The initial price rise had its intended consequence as hedge funds were forced to exit their positions

crystalising significant losses. However, as quickly as the price had shot up, momentum quickly turned, and the share price plummeted back towards its earlier range. Ironically, retail investors who joined the party late ended up on the wrong side of the price movements, while others who bet on GameStop’s decline profited as the share price fell. The

net impact on markets was negligible as GameStop and the companies involved represented very minor weights, but it served as a reminder of the risks in holding concentrated positions. It also highlighted an understated impact that

web forums can have on markets and shone a spotlight on the regulators shortcomings in monitoring these sorts of

areas.

The first quarter also saw the anniversary of the fastest market correction ever seen - during February and March 2020.

The subsequent 12 month returns for many asset classes reflect the sharp subsequent recovery from those lows, providing a stark reminder of the merits of a disciplined long term investment approach.

International shares

With global vaccination programmes underway, an improving economic outlook along with continued government

support has meant improving prospects of companies’ future revenue and profitability. This has been very positive for

most share markets. In the US, the flagship S&P 500 Index (total returns in USD), advanced +6.2% for the quarter for a remarkable +56.4% return over the past 12 months.

In Europe, share market performance was also very strong. The MSCI Europe ex UK Index (in local currency) gained

+8.4% through the quarter and, during March, this index surpassed its highest pre-crisis level. The US market had achieved this feat over 6 months ago, which highlights the relative difference in each regions’ industrial composition

and the impact of the virus on their respective economies. Even so, the MSCI Europe ex UK Index gained +40.0% over the last 12 months.

British equities were also strong, although did not increase at the same rate as their neighbours. In GBP terms the FTSE

100 advanced +3.9% for the quarter and +18.4% for the last 12 months. Japanese equities were among the best in

developed markets in the quarter as a relatively weak Japanese Yen enhanced the revenue of exporters. The MSCI Japan Index jumped +8.9% for the quarter for a +43.5% return over the last 12 months.

Small capitalisation companies generally outperformed larger companies in the quarter and also posted higher returns

over the last 12 months. Economically sensitive industries such as energy, industrials, and financials were the best

performing as the prospect of strong economic growth drove their prices higher. Defensive industries such as utilities (eg power companies) and consumer staples (eg food producers) are typically less volatile and advanced at a slower rate. Healthcare and information technology – sectors that had thrived through the pandemic – lagged through the

quarter, although information technology remains near the top over the last 12 months.

The New Zealand dollar was generally weak versus foreign currencies and this meant that unhedged foreign assets outperformed. In New Zealand dollar terms, the MSCI World ex Australia Index delivered a quarterly return of +6.2% on a hedged basis and +8.1% unhedged. The rolling 12 month return for the New Zealand dollar hedged index was +49.7% while the unhedged index gained ‘just’ +31.4%.

Emerging markets shares

Emerging market equities generated gains as well, albeit less than developed markets. The vaccine roll out in these nations has been slower than in developed nations and high infection rates again meant social restrictions in some countries. Oil heavy economies such as Russia and Saudi Arabia were among the best performing nations as renewed

global demand for oil pushed prices up. Taiwan was also strong led by large semiconductor producers who produced

good results. Korea and India produced small gains while regional heavyweight, China, struggled in the face of ongoing US-China tensions, even under the new US administration.

In unhedged New Zealand dollar terms, the MSCI Emerging Markets Index produced a quarterly return of +5.4%, for a +35.8% return over the last 12 months.

New Zealand shares

Although the Royal New Zealand Yacht Squadron proved to be world beaters, domestic equities took on a little water in the first quarter of 2021. It was a handful of disappointing results from the larger firms and the announcement of a

1 percent drop in our GDP during the last quarter of 2020 (worse than expectations) that knocked us right off our foils. In aggregate the broad S&P/NXZ 50 Index declined -3.9%.

Dairy companies Synlait Milk and a2 Milk were among the poorest performers as multiple earnings downgrades soured

investor demand. Synlait’s largest client is a2 Milk, and a2 has seen demand for their infant powder dry up through the latter half of last year, negatively impacting both firms reported profit expectations.

Meridian and Contact energy also had volatile quarters, and each ended down more than -20%. Both had enjoyed a

strong end to 2020 as high demand for these clean energy companies from international investors had pushed their

prices up. However, during the first quarter, Standard and Poors signalled the expansion of their global clean energy

index from 30 holdings up to 100, slashing Meridian and Contact’s weightings. Investors tracking this index then needed to reduce their holdings in both companies which pushed each firm’s price well down.

At the other end of the spectrum, Fletcher Building enjoyed another strong quarter as did The Warehouse group who

reported a record profit late in the quarter.

Australian shares

Australian share market returns were strong over the quarter. The S&P/ASX 100 (the largest 100 companies in the Australian market) returned +4.5% in Australian dollar terms while the S&P/ASX Small Ordinaries Index (the companies

ranked 101 to 300 in the Australian share market) delivered +2.1%. Over the last 12 months small capitalisation

companies have been very strong with the S&P/ASX Small Ordinaries Index up +52.1% versus +36.8% for the top 100

companies.

The strongest performing group in Australia was financials where Westpac led the rally on the back of strong profit

reporting through the quarter. The market sees an improving outlook for the banking sector with a strong economy and a thriving housing market in particular helping profit projections.

Heavyweight miners BHP Group and Rio Tinto posted small gains, however many of the mid cap gold miners posted losses as the price of gold fell during the quarter harming these firms’ prospects.

Returns to unhedged New Zealand investors were slightly enhanced by a small appreciation in the Australian dollar

over the quarter.

International fixed interest

expectations and the market began to price in interest rate increases earlier than the consensus at the start of the year. The US 10-year yield – the yardstick for global yields – increased to 1.74%, effectively returning it to pre-Covid levels.

These yields are now at the lower end of the broad range observed in the decade following the GFC. Many developed market government yields saw similar moves with the 0.83% increase in the US being matched in Australia with the UK not far behind. Yields in the European union also rose although by smaller magnitudes. The Japanese 10 year was relatively unchanged.

The return of investing from a bond comes from three sources: The carry or yield at the start of the period (the income you will receive over the period), the expected price return or ‘roll down return’ (this is the return we expect to occur

as a bond moves towards its maturity due to the difference in yields of different aged bonds), and the unexpected price 3

return (this is the impact of unexpected moves or changes in the shape of the yield curve). At the start of the quarter

the market was exhibiting both very low yields and curves were very flat and so the first two sources of return above were very low. The impact of the better-than-expected economic recovery that caused the unexpected spike in yields

completely overwhelmed the other two sources of returns and bonds were negative across the board. Longer duration bonds were hit the hardest, while corporate bonds performed slightly better than government bonds. The FTSE World

Government Bond Index 1-5 Years (hedged to NZD) declined -0.4% while the broader Bloomberg Barclays Global

Aggregate Bond Index (hedged to NZD) returned -2.5% for the quarter.

These declines are among the worst seen in this asset class since the turn of the century, however the impact of Covid-

19 on both equity and bond markets has generated some short term results (both good and bad) which have been far from normal. During other periods of yield spikes the carry and roll down return have compensated for the unexpected capital losses from the spikes.

As is often the case in riskier markets, extending the analysis period closer to the recommended minimum holding period finds performance has been broadly in line with expectation. In Q1 of last year yields compressed dramatically

as governments slashed interest rates and delivered massive spending plans to bridge the economic gap caused by the lockdowns. At the time this led to outsized gains on bonds as this surprise drop in yields delivered positive price

action. What we’ve seen in Q1 of this year is largely a reversal of that move and when we look at the annualised performance of bonds over longer time periods, we quickly find returns that are a lot closer to long term expected

averages, such as the Bloomberg Barclays Global Aggregate Bond Index (hedged to NZD) which has returned +4.0% pa over the 3 years to end March 2021.

It should also be noted that although the increase in yields contributed to a negative quarter for bonds, it also serves to increase the expected return of these same assets going forward. With yields increased and curves now exhibiting

more steepness, the first two sources of bond returns have increased, and this asset class looks as appealing as ever.

The final silver lining within this period of higher volatility in bond markets is the diversification benefits we have seen in portfolios. This negative performance on fixed income assets occurred alongside another very strong performance

from the riskier equities. The flipside of this was exhibited during the initial Covid crisis early last year where high quality fixed income assets benefitted (at that time) from a drop in yields just when equities were delivering large losses. This

is precisely the sort of diversification benefits we expect from pairing these different asset classes together in portfolios; when one does poorly, the other will often perform well and help carry the portfolio.

Of course, equities are always more volatile and generally decide which direction the portfolio will head in the short

term, but often the fixed income assets can at least serve as some sort of shock absorber to dampen portfolio volatility.

New Zealand fixed interest

Yields in New Zealand followed the global trend and spiked with the NZ 10-year yield closing the quarter at 1.84%,

0.82% above its starting point. The impact was negative on performance, although generally less so here than overseas as our market has a relatively shorter average time until maturity and the yield changes were less amplified.

Government bonds generally outperformed credit securities, and shorter maturity bonds that have less price sensitivity to rising interest rates outperformed longer maturity bonds, but generally all parts of this asset class posted losses.

The S&P/NZX A-Grade Corporate Bond Index declined -2.1% over the quarter, and the rolling 12 month return has

been +1.9%. Longer term performance remains robust with both the 3 and 5 year annualised average coming in at 4.0%, while the 10 year return is +5.0% per annum.

The longer duration, but higher quality S&P/NZX NZ Government Bond Index declined -3.4% for the quarter and has retreated -1.6% over the preceding 12 months.

New Zealand One-Month Bank Bill Yields Index

(hedged to NZD)

Bloomberg Barclays Global Aggregate Bond Index

(hedged to NZD)

FTSE World Government Bond Index 1-5 Years

S&P/NZX A-Grade Corporate Bond Index

MSCI Emerging Markets Index (gross div.)

MSCI World ex Australia Index (net div.)

(net div., hedged to NZD)

MSCI World ex Australia Index

+0.2%

+1.4%

+2.2%

+1.3%

-13.8%

-10.6%

-20.9%

-24.0%

-14.5%

S&P/NZX 50 Index (gross with imputation credits)

S&P/ASX 200 Index (total return)

2020

Index Name

+0.1%

+2.4%

+0.6%

+3.4%

+9.3%

+10.2%

+18.2%

+20.8%

+16.9%

2020

+0.1%

+0.7%

+0.2%

+1.7%

+7.0%

+5.4%

+6.6%

+0.8%

+2.9%

2020

+0.1%

+0.8%

+0.2%

-1.0%

+10.1%

+4.6%

+11.7%

+12.5%

+11.5%

2020

+0.1%

-2.5%

-0.4%

-2.1%

+5.4%

+8.1%

+6.2%

+5.8%

-3.9%

2021

+0.3%

+1.4%

+0.6%

+1.9%

+35.8%

+31.4%

+49.7%

+45.0%

+28.9%

year

+1.1%

+4.0%

+2.6%

+4.0%

+8.1%

+14.2%

+12.4%

+10.5%

+15.7%

years

+1.5%

+3.6%

+2.3%

+4.0%

+12.2%

+13.2%

+13.6%

+9.8%

+14.3%

years

+2.2%

+5.5%

+3.5%

+5.0%

+4.9%

+11.0%

+12.0%

+5.6%

+15.2%

years

movement in the value of the NZD. Index returns are before all costs and tax. Returns are annualised for time periods greater than one year.

cash

New Zealand

fixed interest

International

fixed interest

New Zealand

markets shares

Emerging

International

Australian

New Zealand

Asset Class

Table 1: Asset class returns to 31 March 2021

Risk factor summary • •

The Q1 equity risk premium was strongly positive overseas, but negative in New Zealand.

With market volatility still high, there was wide dispersion in returns across companies and industries. Economically

sensitive industries such as energy, financials, materials and industrials generally outperforming the broad market. Defensive sectors such as healthcare, consumer staples and utilities lagged.

• • •

Lower relative price companies outperformed and the value premia was positive in all regions.

Smaller companies were generally strong too, led by New Zealand and developed markets.

The profitability factor was generally negative. However, the exposure to this factor is significantly lighter than that to size and value and its detraction was overcome by the larger factors.

•

Yields moved sharply higher in the US, Australia and UK but increased only slightly in Europe and Japan. These

changes caused a negative term premium and longer term bonds underperformed shorter dated bonds. •

New Zealand yields spiked higher following the positive economic news detailed above and this increase in yields

meant a decrease in price for a negative term premium.

•

Credit spreads widened a little in New Zealand, so corporate bonds generally underperformed government bonds thanks to a negative credit premium. Credit spreads were relatively unchanged overseas

Table 2 – Risk factor premiums for quarter Market premium New Zealand Australia Developed markets Emerging markets

– + + +

Value premium

+ + + +

Size premium

+ – + +

REIT/utilities exclusions

Profitability impact

n/a

+ o o

– – +

Term premium

Credit premium

n/a

– –

–

Unscreened model portfolios versus index portfolios Table 3 – Three month, twelve month and ten year unscreened model portfolio vs index return

Last 3 months’ return Last 12 months’ return

Portfolio

20/80

30/70

40/60

50/50

Model

-0.2%

0.4%

1.5%

2.5%

Outperformance

-0.4%

-0.2%

0.4%

0.8%

Index

7.7%

11.1%

Index

Model

10.5%

Outperformance

2.8%

Index

5.6%

Model

Last 10 years’ return

0.2%

Outperformance

Long term expected returns

0.6%

70/30

80/20

90/10

3.7%

5.0%

6.4%

8.0%

1.4%

1.9%

2.5%

3.3%

1.7%

2.4%

14.6%

19.4%

24.0%

28.8%

3.5%

4.6%

5.3%

5.9%

6.4%

0.3%

0.1%

5.4%

1.1%

60/40

6.3% 5.8%

14.8% 6.9% 7.0%

0.0%

6.4%

18.7% 7.5% 7.7%

-0.3% 6.8%

22.9%

3.1%

33.9%

27.3% 6.6%

3.9%

39.2% 31.9% 7.3%

7.9%

8.4%

8.8%

-0.5%

-0.7%

-1.0%

8.4% 7.3%

9.1%

7.8%

98/2 9.3%

4.7%

5.4%

44.7%

49.4%

7.9%

8.4%

36.8% 9.2%

4.0%

41.0% 9.5%

9.8%

10.4%

10.9%

8.3%

8.7%

9.0%

-1.2%

-1.5%

Note – model portfolio returns are after investment management fees, whereas index returns are gross.

 Overall, quarterly performance for all portfolios was strongly positive for aggressive portfolios compared to their relevant index portfolio. Defensive portfolios however underperformed due to the negative term premia.

 For the last 12 months, all portfolios were significantly positive and all outperformed their relevant index portfolio.  Portfolio returns over longer periods remain positive: 10 year returns range from 5.9% pa for the 20/80 to 9.5% pa

for the 98/2 broadly in line with our long term expected returns. The higher risk portfolios are however trailing the index portfolios.

SRI model portfolios versus index portfolios Table 4 – Three month, twelve month and ten year SRI model portfolio vs index returns

Last 3 months’ return Last 12 months’ return Last 10 years’ return

Portfolio

20/80

30/70

40/60

50/50

60/40

70/30

80/20

90/10

98/2

Model

-1.5%

-0.9%

-0.2%

0.6%

1.5%

2.4%

3.3%

4.3%

5.2%

Outperformance

-1.5%

-1.2%

-1.0%

-0.8%

-0.5%

-0.2%

0.1%

0.3%

Index

7.5%

22.2%

26.3%

9.6%

10.2%

10.8%

0.8%

0.7%

0.6%

Index

Model

0.0%

0.3%

9.9%

13.8%

Outperformance

2.4%

3.0%

Index

5.7%

6.6%

5.4%

5.8%

Model

Outperformance

Long term expected returns

6.8% 1.1%

0.8%

2.0%

18.0%

22.2%

26.6%

3.5%

4.0%

4.5%

10.9%

14.4%

7.6%

8.3%

1.0%

1.4%

7.4% 0.9% 6.2%

18.2% 9.0% 8.1%

0.8% 6.5%

8.8% 6.9%

2.6%

3.3%

31.4%

36.6%

5.1%

6.0%

9.5% 7.3%

30.7%

4.0%

4.6%

42.1%

46.8%

6.9%

7.7%

35.2% 11.3%

0.6%

39.1% 11.7%

10.1%

10.7%

11.2%

7.7%

8.1%

8.3%

0.6%

0.5%

Note – model portfolio returns are after investment management fees, whereas index returns are gross.

 Quarterly performances of the SRI model portfolios were also strong, albeit less positive than the unscreened portfolios. A reduced exposure to the value factor, and increased exposure to the term factor contributed to the lower outperformance.

 Longer term returns remain strong and over 10 years range from +6.8% pa for the 20/80 to +11.7% pa for the 98/2, exceeding both the index portfolios and our long term expected returns.

Talking points for absolute performance  Q1 was another strong quarter for diversified portfolios especially those taking more risk.  The 12 month returns were astronomical after coming off a very low base on 31 March 2020 very near the nadir of the market impact of the Covid-19 pandemic.

 After four quarters where equities dominated the headlines, the most notable asset class return in Q1 2021 came in international fixed interest. With yields spiking back to pre-Covid levels in most developed markets there was negative

price action as the present value of future coupon payments and return of principal for bonds were discounted by

increased yields. The increase in yields was not the largest we have seen in a single quarter but moves of a similar magnitude in the past have always come from a higher base. This meant there was very little positive yield to offset

the negative repricing and the result was relatively large negative returns by fixed income standards. Figure 1 below

shows a histogram of all quarterly returns for the Bloomberg Barclays Global Aggregate Bond Index (hedged to NZD) since records began in 1999.

Figure 1: Range of quarterly returns of International Fixed Interest: Q2 1999 to Q1 2021

Bloomberg Barclays Global Aggregate Bond Index (hedged to NZD) 1 April 1999 to 31 March 2021 30

Key: Q2 2020 Q3 2020 Q4 2020 Q1 2021

2.40% 0.70% 0.84% -2.49%

Negative Quarters (14%) Positive Quarters (86%) 20

Q2 2012

+2.81% Q4 2004

+1.18% Q4 2003

+2.25% Q2 2009

+2.79% Q1 2019

+1.18% Q3 2017

+2.12% Q3 2015

+2.77% Q2 2019

Q3 2009

Q1 2009

+0.99% Q4 2017

+2.08% Q3 2014

+2.72% Q1 2014

+3.73% Q3 2001

+0.74% Q1 2002

+0.98% Q2 2001

+2.03% Q1 2000

+2.71% Q3 2012

+3.73% Q2 2002

+0.73% Q3 2020

+0.98% Q4 2009

+1.92% Q1 2012

+2.61% Q4 2002

+3.71% Q3 2011

+0.70% Q2 2006

+0.98% Q3 2016

+1.78% Q1 2007

+2.56% Q3 2019

+3.65% Q3 2007

Q2 2007

+0.57% Q3 2003

+0.97% Q4 2001

+1.72% Q4 2018

+2.47% Q1 2003

+3.48% Q4 2014

-0.04% Q3 2018

+0.54% Q1 2011

+0.94% Q4 2013

+1.65% Q2 2000

+2.46% Q2 2020

+3.16% Q1 2008

Q2 2005

Q4 2010

-0.04% Q1 2006

+0.50% Q4 1999

+0.87% Q4 2020

+1.52% Q4 2011

+2.40% Q1 2010

+3.15% Q1 2004

+4.08% Q1 2016

-0.87% Q2 1999

-0.05% Q2 2008

+0.26% Q2 2018

+0.84% Q4 2015

+1.52% Q1 2005

+2.40% Q3 2000

+3.15% Q4 2007

+3.90% Q3 2006

-0.91% Q2 2013

-0.23% Q2 2004

+0.19% Q3 1999

+0.79% Q3 2005

+1.52% Q4 2012

+2.36% Q3 2008

+3.11% Q1 2001

+3.88% Q3 2004

-0.64%

+0.02%

+0.77%

+1.50%

+2.26%

+3.01%

+3.76%

+4.92%

+5.59%

5.25%

Q4 2008

-1.41%

4.50%

Q3 2002

-2.02%

3.75%

+3.85% Q4 2000

-2.49%

3.00%

+3.10% Q3 2010

2.25%

+2.33% Q2 2011

1.50%

+1.51% Q4 2005

0.75%

+0.79% Q1 2017

0.00%

+0.06% Q1 2018

-0.75%

-0.63% Q4 2019

-1.50%

-1.29% Q2 2015

-2.25%

Q4 2016

7.50%

+2.90% Q2 2014

Q1 2021

-3.00%

-3.75%

+2.94% Q2 2010

+1.37% Q2 2017 +1.22% Q1 2013

+2.96% Q2 2016

+1.41% Q1 2020

6.75%

+2.98% Q2 2003

+1.49% Q3 2013

6.00%

Q1 2015 Q4 2006

Source: Consilium, more portfolios and indices available on request

 As you can see the Q1 2021 return (highlighted in blue) is the worst single quarter on record. It is however also comfortably within the normal range of returns this asset class can deliver. We have also highlighted three quarters that preceded this one. This included a +2.4% in Q2 last year, and when we calculate the cumulative return through

this 12 month period, we find a +1.4% return, broadly in line with expectations given the prevailing market conditions

before Covid hit.

Talking points for relative performance The main sources of outperformance for model portfolios relative to index portfolios during Q1 2021 were as follows:

•

Size tilt in New Zealand outperformed: Large caps again lagged in New Zealand with several of the bigger names declining and dragging the market down (a2 Milk: -28.6%, Meridian: -26.6%, Contact: -19.8%). The

portfolios take a higher exposure to smaller capitalisation companies and this tilt was beneficial for the

quarter. The Advanced Beta fund migrated its mandate to become a pure index tracker during the quarter and delivered a touch more than its style index, the S&P/NZX 50 Portfolio Index.

•

Value tilt in Australia outperformed: In Australia, the tilt towards lower relative price companies means an overweight to the financials sector (Westpac: +27.9%, ANZ: +26.0%, NAB: +16.7%), and underweights to

healthcare (CSL: -4.7%) and information technology (Afterpay: -12.7%) all of which contributed to the positive

value premium over the quarter. •

Value tilt in Developed Markets outperformed: All of Dimensional’s developed markets equity trusts in the portfolios (Core, Value and Small) take varying tilts towards companies of lower relative price in order to

harness the value premium. In general, this premium was positive through the quarter as value names outperformed growth. Information technology underperformed in the quarter and underweights here

(Apple: -5.2%, Adobe: -2.3%, and Salesforce: -2.1%) were beneficial as were underweights to some of the

relatively more expensive consumer discretionary names (Amazon: -2.3% and Tesla: -2.7%). Overweights to industrials (John Deere: +43.3%) also enhanced the value premium.

•

Size tilt in Developed Markets outperformed: Similarly, all of Dimensional’s developed markets equity trusts

in the portfolios (Core, Value and Small) take varying tilts towards smaller market capitalisation companies in

order to harness the size premium. The Global Small trust is one the most diversified trusts in the portfolio with over 4,500 holdings. No single name added a significant amount in isolation, rather the entire space thrived on the back of the ongoing positive vaccine and economic news.

•

Value tilt in Emerging Markets outperformed: Leading performers in the lower relative price (value) segment

of emerging markets equities were led by materials (sector average was +16% versus +5% for the broad market), while consumer discretionary (e.g. Chinese electric car manufacturer Nio lost -17.8%) and some of

the bigger IT names (Samsung: -0.8%) underperformed. The relative positioning of the fund on these three industries drove a positive value premium. Big energy names Reliance (+3.7%) and Petrobras (-20%) were relatively poor in spite of the renewed demand for fuel in response to the opening of economies.

•

Longer duration global bonds underperformed: As we mentioned earlier, longer duration bonds generally

underperformed in a rising yield environment. The index portfolios take very little duration risk and so the negative term premia was a source of underperformance for our portfolios through the quarter. •

Global bond trust underperformed: Within international fixed interest the global bond trust lost more than

the broad market. This was due in part to overweights to the Australian United States and Canadian dollar curves which were steepest at the start of the period and exhibited the highest expected returns. These

curves were among the biggest movers (European and Japanese curves moved very little) and the

overweight was a relative detractor for the fund and portfolios. These curves remain the steepest and therefore hold higher expected returns and so the fund remains overweight these currencies.

•

SRI portfolios underperformed unscreened portfolios: The SRI portfolios have smaller exposure to the value

factor and more exposure to longer duration bonds, both of which slightly reduced the returns relative to the unscreened portfolios.

•

SRI portfolios underperformed unscreened portfolios: On balance, the SRI exclusions were negative through

the quarter as energy companies in particular fared well for example BHP (+11%), Chevron (+29%) and Exxon Mobil (+42%). Conversely, Nestle (excluded for labour rights controversies) lost -2.4%.

Disclaimer and Notes Table 5 - Strategy benchmarks Asset class

Index

New Zealand equity

S&P/NZX 50 Index (gross with imputation credits)

International equity (developed markets)

MSCI World ex Australia Index (net div.)*

Australian equity

International equity (emerging markets) New Zealand fixed interest International fixed interest New Zealand cash

S&P/ASX 200 Index (total return)

MSCI Emerging Markets Index (gross)

S&P/NZX A-Grade Corporate Bond Index

FTSE World Gov't Bond Index 1-5 Yrs (hedged NZD) New Zealand One-Month Bank Bill Yields Index

* to reflect model portfolio strategy, this index is hedged in equal ratio as the developed market strategy for each model portfolio.



Model portfolios are designed and supplied by the Consilium Investment Committee (CIC).



Model portfolio returns are net of underlying management fees, but gross of custodial and adviser monitoring fees.



Index portfolios comprise exactly the same asset class weights and hedging strategy as model portfolios, but index portfolio returns assume a comparable



The major asset class indices chosen for this analysis are for broad comparison purposes only and do not precisely replicate the investment strategies or



The indices are unable to be invested in and therefore depict a theoretical pre-cost investment return.



Individual investment portfolios that deviate from model portfolios will experience different returns.



Past returns are no guarantee of future returns.

investment into a selection of major asset class indices.

factor tilts employed in the underlying model portfolios.

have been custom built by the Consilium Investment Committee to create period returns that best reflect the risks the

funds are systematically taking (in particular the risk tilts). Many of these factor specifications have been estimated using

publicly sourced returns series and are often not the exact specification the fund manager uses (for example the Australian Value factor).

For more information on the assumptions used to create the following data please contact the Consilium Investment Committee.

Table 6 – New Zealand Equities 1 Month

3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

5 Years Std Dev

10 Years Std Dev

Inception Date

2.92

-3.87

7.21

28.93

15.65

14.32

15.15

11.45

10.29

Jul-06

S&P/NZX 10 Index (Gross with ICs) #1-10

2.89

-6.59

20.62

16.70

14.67

12.78

S&P/NZX 50 Portfolio Index (Gross with ICs)

2.68

-2.50

13.46

N/A

12.54

S&P/NZX SmallCap Index (Gross with ICs) #51+

4.90

4.05

26.85

16.20

18.49

14.90

Marke t re turn:

S&P/NZX 50 Index (Gross with ICs) #1-50 Othe r i ndi ce s of i nte re st: S&P/NZX 20 Index (Gross with ICs) #1-20

2.72

S&P/NZX MidCap Index (Gross with ICs) #11-50

2.81

S&P/NZX All Real Estate Index (Gross with ICs)

0.49

-5.19

-0.07

-4.08

3.99

5.94

11.50 4.25

23.93

13.74

11.64

Aug-09

17.70

15.63

16.56

43.24

14.52

15.08

17.25

26.32

15.37

10.65

13.33

14.91

N/A

12.54

N/A

Jul-12

13.08

N/A

12.30

N/A

Jan-15

14.91

N/A

12.54

N/A

Jul-12

14.64

N/A

12.42

N/A

Aug-14

40.94 99.38

16.47

15.02

14.91

16.85

11.39

10.45

Aug-09

13.44

11.27

Aug-09

10.51

Oct-05

12.91

N/A

Jul-12

Aug-09

Fund e xpe ctati ons vs styl e i ndi ce s S&P/NZX 50 Portfolio Index (Gross with ICs)

2.68

-2.50

13.46

40.94

16.47

Styl e re turn

-0 .2 4

+1 .3 7

+6 .2 5

+1 2 .0 1

+0 .8 2

+0 .6 0

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .2 5 % pa)

-0 .2 4

0 .3 2

-0 .6 7

-1 .74

-2 .2 1

-1 .8 3

Harbour NZ Equity Adv. Beta (net of fees, with ICs)

S&P/NZX 50 Portfolio Index (Gross with ICs)

2.44

2.68

-2.18

-2.50

12.79

13.46

39.20

40.94

14.26

16.47

Styl e re turn

-0 .2 4

+1 .3 7

+6 .2 5

+1 2 .0 1

+0 .8 2

+0 .6 0

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .3 5 % pa)

0 .1 4

1 .1 7

1 .3 0

1 .40

-0 .5 2

-0 .2 8

SmartShares NZ Core Equity (net, with ICs)

2.81

-1.32

14.76

42.34

15.95

Quarterly summary:

Positive style return for both funds.

Both funds left portfolios during April

Table 7 – Australian Equities 1 Month

3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

Marke t re turn: S&P/ASX 200 Index (Total Return)

5 Years Std Dev

10 Years Std Dev

Inception Date

4.62

5.82

19.07

45.03

10.50

9.82

5.60

16.52

15.08

Feb-86

Othe r i ndi ce s of i nte re st: S&P/ASX 100 Index (Total Return) S&P/ASX 300 Index (Total Return) S&P/ASX Small Ordinaries Index (Total Return)

4.71 4.47 2.93

6.03 5.71 3.62

19.40 19.05 16.73

44.29 45.95 60.52

10.75 10.58 9.16

9.86 9.89 10.26

5.83 5.51 1.84

16.39 16.61 19.94

15.03 15.12 18.04

Feb-86 Feb-86 Feb-86

MSCI Australia Small Cap Index (net div.) MSCI Australia Index (net div., AUD) Size Factor ('SMB'. Source: MSCI Aust Small Cap mius MSCI Aust.)

3.84 4.55 0.70

4.27 6.34 -2.07

17.18 20.12 -2.94

71.00 42.80 28.20

11.46 10.13 1.33

11.55 9.54 2.01

3.43 5.26 -1.83

20.43 16.52 3.91

18.18 15.22 2.95

Jan-99 Feb-86

S&P/ASX 200 Value TR S&P/ASX 200 Growth TR Value Factor ('HML'. Source: ASX 200 Value minus ASX 200 Growth)

7.01 2.04 4.97

10.13 1.32 8.80

28.73 10.36 18.37

50.56 39.25 11.32

6.69 14.05 -7.36

7.68 11.74 -4.07

4.14 6.76 -2.62

18.60 15.50 3.10

16.44 14.57 1.87

May-10 May-10

S&P/ASX 300 A-REIT Index (Total Return) S&P/ASX 300 EX a-reit Index (Total Return)

8.56 4.20

0.93 6.05

13.11 19.47

53.37 45.47

8.76 10.70

5.54 10.25

8.37 5.31

23.19 16.37

18.92 15.11

Feb-86 Sep-00

5.08 +0 .46 4.42 -0 .6 6

6.62 +0 .8 0 5.72 -0 .9 0

21.23 +2 .1 5 20.30 -0 .9 3

53.22 +8 .1 9 55.17 +1 .9 5

9.77 -0 .72 9.62 -0 .1 5

9.70 -0 .1 1 10.44 +0 .74

4.78 -0 .8 2 5.03 +0 .2 5

17.74

15.80

May-10

18.03

16.15

Aug-06

3.92 -0 .70 3.56 -0 .3 6

4.94 -0 .8 7 5.01 +0 .0 7

18.19 -0 .8 9 18.58 +0 .3 9

67.21 +2 2 .1 8 71.57 +4.3 6

11.33 +0 .8 3 9.57 -1 .76

11.56 +1 .74 9.98 -1 .5 8

3.80 -1 .8 0 2.37 -1 .43

19.51

17.46

May-10

20.29

18.19

Nov-00

6.16 +1 .5 4 4.22 -1 .9 3

9.52 +3 .70 11.57 +2 .0 5

26.83 +7.76 32.55 +5 .72

51.39 +6 .3 6 65.80 +1 4.41

7.78 -2 .72 10.21 +2 .43

8.67 -1 .1 5 12.41 +3 .74

4.14 -1 .46 4.71 +0 .5 7

18.06

16.16

May-10

19.57

17.60

Jul-99

5.08 +0 .46 4.57 -0 .5 1

6.62 +0 .8 0 4.08 -2 .5 4

21.23 +2 .1 5 18.47 -2 .75

53.22 +8 .1 9 56.51 +3 .2 8

9.77 -0 .72 N/A

9.70 -0 .1 1 N/A

4.78 -0 .8 2 N/A

17.74

15.80

May-10

N/A

Jan-19

4.47 -0 .1 5 4.49 +0 .0 1

5.71 -0 .1 1 5.70 -0 .0 2

19.05 -0 .0 3 18.97 -0 .0 8

45.95 +0 .9 2 45.73 -0 .2 2

10.58 +0 .0 8 10.39 -0 .1 8

9.89 +0 .0 7 9.72 -0 .1 6

5.51 -0 .0 9 5.35 -0 .1 6

16.61

15.12

Feb-86

16.60

15.10

Nov-98

Fund e xpe ctati ons vs styl e i ndi ce s Aust. Core Expectation (incREIT Mkt + 0.20.SMB + 0.15.HML)

Styl e re turn

Dimensional Australian Core Equity Trust (net of fees) Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .2 8 % pa) Aust. Small Expectation (exREIT Mkt + 0.75.SMB + 0.05.HML)

Styl e re turn

Dimensional Australian Small Company Trust (net of fees) Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .6 1 % pa) Aust. Value Expectation (exREIT Mkt + 0.05.SMB + 0.40.HML)

Styl e re turn

Dimensional Australian Value Trust (net of fees) Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .3 4% pa) Aust. Sust. Expectation (incREIT Mkt + 0.20.SMB + 0.15.HML)

Styl e re turn

Dimensional Australian Sustainability Trust (net of fees) Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .3 1 % pa) iShares Aust. Equity Expectation (ASX 300)

Styl e re turn

iShares Indexed Australian Equity Fund Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .1 1 % pa)

Quarterly summary:

Positive style returns for funds with value tilts. Size detracted in Australia. All funds’ tracking errors within tolerance bands, no EDD flags.

Table 8 – International equity (developed markets) Marke t re turns:

MSCI World ex Australia Index (hedged to NZD, net div.) Hedging impact (MSCI World ex Aust NZD - MSCI World ex Aust) Othe r i ndi ce s of i nte re st ( NZD unhe dge d) :

MSCI World ex Australia Small Cap Index (net div.)

6.22

18.70

49.66

12.45

13.59

12.00

-2.65

-1.90

+5.59

+18.30

-1.74

+0.39

+0.98

5.70

13.04

28.78

54.58

12.85

13.45

11.15

7.26

7.89

13.03

30.59

13.95

13.36

12.98

13.14

10.82

12.79

33.58

18.12

16.05

14.92

13.42

17.63

14.10

2.08

4.11

4.18

14.24

8.13

9.38

6.30

9.40

4.56

6.76

Negative currency returns reflect a relative strength in the NZD (and vice versa)

British Pound

European Monetary Unit

3.46

12.92

7.73

13.12

19.77

13.60

4.63

10.89

6.59

12.95

32.09

-14.56

3.86

1.20

-5.17

6.99

9.55

1 Month

3 Months

4.67

9.49

8.16

Feb-86

11.13

Jan-99

12.36

Feb-86

14.02

Feb-86

-1.96

10.80

13.31

-1.00

8.08

2.20

0.89

9.89

13.02

Feb-86

12.05

Feb-86 Feb-86

10.30

10.47

Feb-86

-1.02

5.08

4.88

Jan-91

3.65

4.26

4.10

Jan-91

13.26

16.27

7.63

3.56

7.41

15.08

13.45

Jan-01

6 Months

1 Year

3 Years

5 Years

10 Years

5 Years Std Dev

10 Years Std Dev

Inception Date

11.18

14.93

13.54

Jul-01

9.68

12.84

9.93

Jan-99

-10.56

56.64

-4.13

9.39

-3.16

26.42

-5.96

Feb-86

14.32

3.60

0.40

Jan-99

11.97

6.58

-0.43

0.12

Feb-86

-0.46

-0.19

Jul-01

11.57

12.48

-2.83

-17.03

Inception Date

11.83

14.77 2.30

S&P Developed REIT Index (net div.)

12.16

-9.15

-6.29

-2.39

10.11

-0.63

9.31

1.99

9.26

13.44

-1.02

-5.26

Profitability Factor ('RMW'. Source: Dartmouth University)

10.24

12.68

8.13

0.56

3.15

20.54

8.39

8.90

11.03

-0.21

-1.11

14.59

7.53

13.21

1.15

0.56

2.37

7.91

26.93

-5.28

-9.78

14.19

19.39

3.02

5.57

Global Core (NZD Hdgd) Expectation (1.0x Market + 0.15x SMB + 0.15x HML)

26.02

-3.93

Value Factor ('HML'. Source: Dartmouth University)

Fund e xpe ctati ons vs styl e i ndi ce s

31.36

-0.40

-1.32

Size Factor ('SMB'. Source: Dartmouth University)

11.31

4.31

7.99

Japanese Yen

12.44

10 Years

S&P 500 Index

United States Dollar

13.70

5 Years

6.22

MSCI Europe ex UK Index (net div.)

15.78

3 Years

MSCI ACWI Index (net div.) (ie including emerging markets)

MSCI United Kingdom Index (net div.)

12.96

1 Year

9.53

MSCI Japan Index (net div.)

14.04

6 Months

MSCI World ex Australia Value Index (net div.)

MSCI World Index (net div.) (ie including Aust)

10 Years Std Dev

3 Months

6.96

MSCI World ex Australia Index (net div.)

5 Years Std Dev

1 Month

7.81

Jan-91

Styl e re turn

+0.37

+3.27

+7.72

+6.98

-2 .76

-0 .76

-0.82

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .3 6 % pa)

+0.32

-0.36

-1 .1 7

-0.95

+0 .1 9

-0.86

-0 .71

10.47

15.45

14.15

May-09

14.19

N/A

Jul-16

14.96

N/A

Jun-16

9.69

14.03

12.15

Jan-91

10.15

15.97

13.72

Sep-00

8.61

14.76

13.10

Jan-91

Dimensional Global Core Equity Trust – NZD Hedged Class Units (net of fees) Global Sustainability Expectation (1.0x NZD Mkt + 0.15x SMB + 0.15x HML)

4.99 4.67

9.13

9.49

25.25 26.42

55.69 57.90

9.87

Styl e re turn

+0.37

+3.27

+7.72

+8.25

+1 .74

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .3 8 % pa)

+0.08

-1 .5 9

-2.68

+1 .1 3

+0 .77

(GSUST expection has varied to match mandate)

Dimensional Global Sustainability Trust - NZD Hedged Class Units (net of fees) Global Small Expectation (1.0x Market + 0.75x SMB + 0.10x HML)

4.75

6.23

7.90

12.78

23.74

25.74

59.04 49.13

9.77

11.97

12.30

Styl e re turn

-0 .73

+4.6 6

+1 2.62

+1 7.77

-4.42

-0.91

-1 .3 4

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .6 5 % pa)

+0.80

+1 .2 3

+4.0 0

+3 .48

+0 .73

-0.26

+0 .46

Dimensional Global Small Company Trust (net of fees)

Global Value Expectation (1.1x Market + 0.10x SMB + 0.50x HML)

7.03 9.74

14.02 17.21

29.74 30.18

52.61

38.97

10.50 8.47

12.03

10.92

Styl e re turn

+2 .78

+9.09

+1 7.0 6

+7.6 1

-5 .72

-2.28

-2 .42

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .46 % pa)

-0 .1 2

-0 .79

-2 .75

-2.98

-2 .44

-1 .1 7

-0.94

7.67

15.61

13.72

Sep-99

6.96

8.13

13.12

31.36

14.19

13.21

11.03

12.68

11.57

Feb-86

Dimensional Global Value Trust (net of fees)

EthicallyC Equities Expectation (MSCI World ex Australia Index (net div.)) Vanguard Ethically Conscious International Shares Index Fund (UnHedged)

Styl e re turn

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .2 0 % pa)

Vang Intl. Shares Expectation (MSCI World ex Australia Index (net div.)) Vanguard International Shares Index Fund (Unhedged)

Styl e re turn

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .1 8 % pa)

AMP ACWI Expectation (MSCI ACWI 69% Hedged)

9.62

7.10

16.42

6.04

-1 .5 3

-0.01

31.35

N/A

Nov-18

6.96

8.13

13.12

31.36

14.19

13.21

11.03

12.68

11.57

Feb-86

11.08

12.43

11.37

Jul-97

11.73

12.49

11.24

Jan-99

N/A

Dec-17

7.26

+0.30

4.36

7.93

-0 .1 9

6.47

12.92

-0.20

17.81

30.40

-0.96

45.42

14.13

-0.06

13.39

Styl e re turn

-0 .74

-0.39

+0 .48

+0 .73

-0.83

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .40 % pa)

-0.82

-0.33

-0.99

-3.51

-1 .41

AMP Capital All Country Global Shares Index Fund

9.75

-1 .0 8

11.59

35.99

+0 .1 4

7.04

27.42

3.53

6.14

16.82

41.90

11.98

13.30

+0.09

13.97

-0.23

N/A

+0.06 -0.91

Quarterly summary:

Positive style returns for almost all.

Dimensional Global Sustainability Trust (NZD Hedged) with significant quarterly outperformance relative to expectation. EDD Flag.

All other funds’ tracking errors within tolerance bands, no further flags.

Table 9 – International equity (emerging markets) 1 Month

3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

5 Years Std Dev

10 Years Std Dev

Inception Date

2.24

5.18

15.73

34.28

7.55

11.85

4.54

11.58

12.11

Jan-99

5.04 4.37 2.23

10.92 7.06 5.96

24.65 21.03 16.86

59.88 29.31 37.63

6.39 3.63 7.55

9.36 8.21 11.52

4.25 1.89 4.53

15.10 12.31 12.00

14.13 12.74 12.29

Jan-99 Jan-99 Jan-99

-3.04 2.98 3.69 5.81 7.86 8.86

2.58 14.26 4.69 8.29 -7.26 8.10

4.89 29.37 33.10 20.51 16.82 20.87

22.70 65.07 61.93 50.67 25.15 23.30

9.49 23.88 10.79 10.44 -5.50 9.31

15.85 21.95 14.54 10.95 7.81 13.97

8.21 12.53 6.96 5.38 -3.98 0.86

14.60 15.91 16.58 19.13 31.63 21.90

16.37 14.58 15.91 20.04 28.58 23.87

Jan-99 Jan-99 Jan-99 Jan-99 Jan-99 Jan-99

Size Factor ('SMB'. Source: Dartmouth University) Value Factor ('HML'. Source: Dartmouth University) Profitability Factor ('RMW'. Source: Dartmouth University)

4.33 2.18 0.96

4.07 4.79 1.26

11.01 1.89 -1.99

4.38 8.42 -7.09

0.31 -2.08 -0.12

2.18 -2.32 1.33

0.29 -0.11 3.14

8.40 5.02 4.26

6.98 5.13 4.19

Jan-00 Jan-00 Jan-00

MSCI Emerging Markets Real Estate Index (net div.)

4.35

9.13

6.42

2.69

-1.50

N/A

Oct-16

Styl e re turn

4.37 +2 .1 2

7.06 +1 .8 8

21.03 +5 .3 0

29.31 -4.9 7

3.63 -3 .9 2

8.21 -3 .6 4

1.89 -2 .6 5

12.31

12.74

Jan-99

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .71 % pa)

+1 .6 2

+4.3 2

+4.0 3

+8 .9 4

-0 .5 1

+0 .5 9

+0 .1 7

2.07

13.82

13.97

Oct-00

Styl e re turn

2.23 -0 .0 1

5.96 +0 .78

16.86 +1 .1 3

37.63 +3 .3 5

7.55 -0 .0 1

11.52 -0 .3 4

4.53 -0 .0 1

12.00

12.29

Jan-99

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .5 5 % pa)

+0 .3 4

-0 .1 9

-0 .3 4

-1 .5 0

-0 .43

-0 .3 2

-0 .48

11.75

12.13

Oct-10

Marke t re turn:

MSCI Emerging Markets Index (net div.) Othe r i ndi ce s of i nte re st ( NZD unhe dge d) :

MSCI Emerging Markets Small (net div.) MSCI Emerging Markets Value Index (net div.) MSCI Emerging Markets IMI (net div.) MSCI MSCI MSCI MSCI MSCI MSCI

China Index (net div.) Taiwan Index (net div.) Korea Index (net div.) India Index (net div.) Brazil Index (net div.) Russia Index (net div.)

5.98

2.57

11.38

5.77

25.06

16.52

38.25

3.13

36.13

7.12

8.80

11.19

4.05

Quarterly summary:

Positive style returns for both funds.

Dimensional Emerging markets with significant quarterly outperformance relative to expectation. EDD Flag iShares EM IMI’s tracking errors within tolerance bands, no EDD flag.

Table 10 – New Zealand fixed interest 1 Month

3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

Marke t re turn: S&P/NZX A-Grade Corporate Bond Index

5 Years Std Dev

10 Years Std Dev

Inception Date

0.24

-2.06

-3.09

1.92

4.03

3.99

5.04

2.30

2.02

Sep-94

Othe r i ndi ce s of i nte re st: New Zealand One-Month Bank Bill Yields Index Average NZ six-month term deposit S&P/NZX NZ Government Bond Index

0.02 0.08 0.71

0.06 0.24 -3.43

0.13 0.60 -6.17

0.27 1.75 -1.61

1.14 2.68 3.61

1.47 2.91 3.26

2.20 3.46 4.67

0.20 0.19 3.60

0.26 0.21 3.36

Feb-86 Apr-65 Jul-85

Styl e re turn

0.24 -

-2.06 -

-3.09 -

1.92 -

4.03 -

3.99 -

5.04 -

2.30

2.02

Sep-94

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .45 % pa)

+0 .1 0

+0 .5 1

+0 .8 1

+1 .0 5

-0 .1 0

-0 .2 9

-0 .47

2.14

1.81

Mar-09

Fund e xpe ctati ons vs styl e i ndi ce s Harbour Bond Fund Expectation (NZX Corp A Index) Harbour Corporate Bond Fund

0.34

-1.56

-2.29

2.96

3.93

3.70

4.57

NB. S&P/NZX A-Grade Corporate Bond Index has a 3-4y modified duration, while the S&P/NZX NZ Government Bond Index has a 5-6y modified duration.

Quarterly summary:

Expectation for Harbour Corporate Bond Fund is market return.

Harbour Corporate Bond Fund’s tracking error outside tolerance bands and is an EDD flag.

Table 11 – International fixed interest 1 Month 3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

5 Years Std Dev 0.98

0.98

Feb-86

Marke t re turn: FTSE World Government Bond Index 1-5 Years

('FWGBI 1-5y')

Othe r i ndi ce s of i nte re st ( al l NZD he dge d) FTSE World Government Bond Index 1-3 Years * ('FWGBI 1-3y') FTSE World Government Bond Index 3-5 Years *('FWGBI 3-5y') Bloomberg Barclays Global Treasury Bond Index * ('BGTBI')

0.03

-0.38

-0.22

0.58

2.59

2.34

3.50

0.04 0.00 -0.20

-0.06 -0.80 -2.66

0.06 -0.60 -2.39

0.61 0.58 -1.02

2.18 3.18 3.66

2.10 2.68 3.22

3.03 4.13 5.49

10 Years Inception Std Dev Date

(* NZD Hedged index return estaimted from AUD hedged series)

Bloomberg Barclays Global Aggregate Bond Index 1-3 Years Bloomberg Barclays Global Aggregate Bond Index T e rm Pre m i um f or ~7 ye ars durati on Cre di t Pre m i um at 1 -3 ye ars durati on Cre di t Pre m i um at 7-9 ye ars durati on

('BGAB 1-3') ('BGAB All')

( BG T BI - FW G BI 1 -3 y) ( BG ABI 1 -3 - FW G BI 1 -3 ) ( BG ABI Al l - BG T BI)

0.03

-0.02

0.26

1.37

2.34

3.37

0.57

0.62

Sep-00

-0.41

-2.49

-1.68

1.39

3.99

3.57

5.53

2.86

2.76

Feb-99

-0.24 0.04 -0.21

-2.60 0.77 0.17

-2.45 0.85 0.72

-1.64 0.79 2.42

1.48 -0.84 0.33

1.12 -0.34 0.35

2.45 -0.76 0.04

Fund e xpe ctati ons vs styl e i ndi ce s Bloomberg Barclays Global Aggregate Bond Index 1-3 Years (hedged to NZD Styl e re turn

Dimensional Two-Year Diversified Fixed Interest Trust NZD Class (net of fees)

0.03

-0.02

0.26

1.37

+0 .0 1

+0 .3 5

+0 .48

+0 .79

2.34

-0 .2 5

+0 .0 1

2.34

-0 .1 3

3.37

0.57

0.62

Sep-00

N/A

Feb-17

2.34

3.50

0.98

Feb-86

1.28

1.84

Mar-04

0.02

0.08

0.31

1.73

1.96

-0.01

0.10

0.05

0.36

-0.38

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

0.03

-0.38

-0.22

0.58

2.59

Dimensional Diversified Fixed Interest Trust NZD Class (net of fees)

0.05

-0.01

0.24

1.64

2.31

2.19

3.97

0.03

0.36

0.46

1.06

-0.28

-0.14

0.47

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .2 5 % pa)

Styl e re turn

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .2 8 % pa)

Barcl ays G l obal Aggre gate E xpe ctati on Funds: Barclays Global Aggregate Bond Index (hedged to NZD)

-0.41

Styl e re turn

-0 .44

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .40 % pa)

+0 .3 5

AMP Capital Hedged Global Fixed Interest Index Fund

Dimensional Global Bond Trust - NZD Class Units (net of fees)

Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .3 5 % pa)

Dimensional Global Bond Sustainability Trust - NZD Class Units (net of fees) Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .3 9 % pa)

Vanguard Ethically Conscious Global Aggregate Bond Index Fund – NZD He Fund tracki ng e rror ( ne t of re tai l T E R, curre ntl y 0 .2 8 % pa)

-0.06 -0.65

-0 .2 4

-0.67

-0 .2 6

-0.37

+0 .0 4

-2.49

-2 .1 1

-2.46

+0 .0 3

-4.00

-1 .5 1

-4.04

-1 .5 5

-2.88

-0 .3 9

-1.68

-1 .45

-1.95

-0 .2 8

-2.65

-0 .9 7

-2.75

-1 .0 7

-2.08

-0 .40

1.39

+0 .8 1

0.71

-0 .6 9

3.76

+1 .40

3.99

+1 .2 3

+2 .0 3

5.53

2.86

2.76

Feb-99

3.55

N/A

Dec-17

-0 .44

+2 .3 6

+0 .5 6

+0 .3 7

3.94

N/A

4.09

N/A

Dec-11

3.66

N/A

May-18

1.54

N/A

Sep-18

+2 .2 6

+0 .1 4

4.56

3.57

Quarterly summary:

Negative term premia led to generally negative style returns.

All funds’ tracking errors within tolerance bands, no EDD flags.

sourced from publicly available information and/or provided by the investment managers, we are not able to guarantee its accuracy. Past performance, whether actual or simulated, is no guarantee of future performance. This document does not disclose all the risks of any transaction type described herein, and the recipient should understand any terms including relevant risk factors and any legal, tax and accounting considerations applicable to them.

Portfolio returns vs benchmarks Model portfolio and index portfolio returns to 31 March 2021

Weightings

Asset allocation

Returns Mar 21 Quarter

1 year

3 years

Long term 5 years

expected

10 years

Growth

Income

Model

Index

Model

Index

Model

Index

Model

Index

Model

Index

-0.2%

0.2%

10.5%

7.7%

5.2%

5.1%

4.9%

5.9%

5.6%

5.4%

0.4%

0.6%

14.6%

11.1%

6.0%

6.2%

6.0%

5.9%

6.4%

6.3%

5.8%

1.5%

1.1%

19.4%

14.8%

6.7%

7.3%

6.9%

7.0%

6.9%

7.0%

6.4%

2.5%

1.7%

24.0%

18.7%

7.4%

8.3%

7.8%

8.1%

7.5%

7.7%

6.8%

3.7%

2.4%

28.8%

22.9%

7.9%

9.3%

8.6%

9.1%

7.9%

8.4%

7.3%

5.0%

3.1%

33.9%

27.3%

8.5%

10.2%

9.4%

10.1%

8.4%

9.1%

7.8%

6.4%

3.9%

39.2%

31.9%

8.9%

11.2%

10.1%

11.1%

8.8%

9.8%

8.3%

8.0%

4.7%

44.7%

36.8%

9.3%

12.1%

10.8%

12.1%

9.2%

10.4%

8.7%

9.3%

5.4%

49.4%

41.0%

9.5%

12.8%

11.3%

12.9%

9.5%

10.9%

9.0%

strategy Defensive

Aggressive

returns

Index returns to 31 March 2021 The indices used to calculate the index portfolio returns are as follows: Asset Class

Index

New Zealand equity

S&P/NZX 50 Index Gross with Imputation

Australian equity

Index returns p.a. Quarter

1 year

3 years

5 years

10 years

-3.9%

28.9%

15.7%

14.3%

15.2%

S&P/ASX 200 Index (Total Return)

5.8%

45.0%

10.5%

9.8%

5.6%

Intl equity (developed mkts)

MSCI World ex Australia Index (net div., hedged to NZD)

6.2%

49.7%

12.4%

13.6%

12.0%

Intl equity (developed mkts)

MSCI World ex Australia Index (net div.)

8.1%

31.4%

14.2%

13.2%

11.0%

Intl equity (emerging mkts)

MSCI Emerging Markets Index (gross div.)

5.4%

35.8%

8.1%

12.2%

4.9%

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

-2.1%

1.9%

4.0%

5.0%

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

-0.4%

0.6%

2.6%

2.3%

3.5%

New Zealand cash

30 Day Bank Bills

0.1%

0.3%

1.1%

1.5%

2.2%

Notes:

manager fees, but gross of custodial and adviser monitoring fees

2021 Q1 Partner Firm monitoring Certificate from Consilium Investment Committee (CIC) Quarterly monitoring: In the Partner Firm Service Agreement and Consilium Investment Committee Policy and Procedures Manual, the CIC outlined the following process for reviewing underlying investments. All investment securities are reviewed on a quarterly basis and performance is measured against appropriate benchmark indices. Where a security’s performance is consistent with its mandate and in line with broad style and/or asset class returns, no further action will generally be taken. However, a security may be placed on an ‘enhanced due diligence’ list, and subjected to a higher degree of scrutiny, for any of the following reasons: -

A change in the primary portfolio manager

A significant change in the fund management company’s majority owner or ownership structure

A more than 25% fall in the fund’s assets under management over a rolling one-year period (due to

outflows, not market movement)

Total fund assets falling below our minimum fund size thresholds at any time

A change in the fund’s investment style, diversification and/or risk factor tilting

An increase in the fund’s fees

The fund exhibited quarterly tracking error versus a relevant benchmark outside its monitoring

The fund exhibited a persistent deviation in tracking error versus a relevant benchmark outside its

thresholds

monitoring thresholds, measured over a rolling three-year basis, minus fees and allowing a volatility

threshold appropriate for each fund -

An extraordinary event which, in the opinion of the Investment Committee, may impact on the

manager’s ability to comply with the fund mandate in future

We completed the monitoring of all of the above aspects for all underlying funds in the Partner Firm portfolios and found the following: 1.

Harbour Corporate Bond Fund: Q1 2021 outperformance The trust outperformed the benchmark by +0.51%, which exceeds our monitoring bands. Our initial conversations with Harbour have linked the outperformance of the fund to the relative duration positioning vs the benchmark, combined with the funds allocation to inflation linked securities.

Dimensional Global Sustainability Trust (NZD): Q1 2021 underperformance The trust underperformed its custom benchmark by 1.91%, which exceeds our monitoring bands. Our initial analysis highlights the trusts socially responsible exclusions as the main source of underperformance.

Dimensional Emerging Markets Trust: Q1 2021 outperformance The trust outperformed the benchmark by 4.32%, which exceeds our monitoring bands. Our initial analysis highlights the trusts greater risk tilts to both small and value companies compared to the benchmark as the source of outperformance.

We will be undertaking an analysis of all three flags over the coming weeks, and we are aiming to have completed papers summarising our findings in the next three months.

Update on prior flagged actions: 1.

Harbour Corporate Bond Fund: Q4 2020 outperformance Investigation COMPLETED. Our analysis highlighted the quarterly outperformance was a result of several contributing factors throughout the quarter, largely attributable to the funds relative duration and yield curve positioning compared to the benchmark. The funds security selection, particularly the allocation to BBB rated securities, lead to outperformance of the fund relative to the benchmark. The funds exposure levels remained broadly within historical observations and we conclude that the identified risk exposures are consistent with the trust’s mandate, and we identified no unexpected or unexplained risks. Based on all the above, the committee was satisfied with the source of deviation and remain confident that Harbour is not taking any unknown risks and the fund remains an integral part of the New Zealand Fixed Income strategy.

Harbour Corporate Bond Fund: Mandate breach – duration breach Investigation COMPLETED. Harbour notified us of a passive duration breach during the fourth quarter of 2020. The 2050 Auckland Council Bond settled within the index days after it had settled in the fund. As a result the relative duration of the fund decreased, breaching the tolerance thresholds. Harbour identified the key person risk associated with maintaining the relative duration thresholds and have since spread this task across the team. The corrective trades had no negative impacts on the performance of the trust. We are satisfied that Harbour have taken the appropriate measures to ensure that the fund will be managed appropriately moving forward.

Harbour Corporate Bond Fund: Mandate breach – Ineligable purchase Investigation COMPLETED. Harbour notified us of a breach in the fourth quarter of 2020, with the purchase of an ineligible security, a National Australia Bank AUD denominated bond. Harbour have adjusted their pre-trade process to ensure all new assets are eligible for purchase before the trade is complete. The asset was transferred to another fund before settlement and there were no costs incurred by the fund. We are satisfied that Harbour are taking the appropriate measures to ensure that the fund will be managed appropriately moving forward. The changes being implemented by Harbour should mitigate the potential for these breaches to occur in the future, minimising risks for all parties.

Dimensional: Change in key parties Investigation COMPLETED. Dimensional have added The Bank of New York Mellon to their foreign exchange

counterparties. Dimensional have a very thorough approach to undertaking their own due diligence on counterparties and we were satisfied they are taking the appropriate measures and the investors in hedged versions of DFAs funds are not exposed to any dangerous counterparty risk.

New Business: - Implementation of Harbour Asset Management NZ Equity index tracker and SRI funds complete. -

Implementation of SRI Emerging Markets fund complete.

Approved products list ongoing.

Consilium Winter Update April – June 2021 P1 P4 P7

Market commentary Key market movements for the quarter Online trading? Check your overconfidence at the door

Consilium 209 Cambridge Terrace Christchurch 8013 03 353 1007 support@consilium.co.nz www.consilium.co.nz

It still seems extraordinary that something we knew virtually nothing about just 18 months ago, has so utterly dominated global news, our feelings of economic and personal wellbeing, and the normal functioning of our daily lives, ever since. Of course, we are talking about Covid-19. Given the highly unusual circumstances surrounding the pandemic, the evolution of our collective response to it has conformed quite closely to the five stages of grief outlined in the Kübler-Ross Grief Cycle1: 1.

Denial: This virus won't affect us.

2. Anger: You're restricting our freedom by making us stay at home?!

3. Bargaining: If we wear a mask and social distance, everything will be fine, right?

4. Sadness: In spite of everything, there is still no end in sight.

5. Acceptance: Ok, this isn’t going away; we have to figure out how to carry on.

While individual countries have been wrestling with various approaches to Covid-19 suppression or elimination, an emerging international theme in recent weeks has been a move towards Stage 5 – Acceptance. This theme, propelled by rapidly advancing vaccination programmes internationally, marks another important step on the global road to recovery.

Living with Covid-19 In the UK, newly installed Health Secretary Sajid Javid said the country would “have to learn to live with” community transmission in order to restore freedoms and that “no date we choose comes with a zero risk from Covid”. Similarly, in Australia, Prime Minister Scott Morrison recently outlined a four-phase plan for the country to move from trying to suppress Covid-19 to living with the virus once enough of its population is vaccinated.

The Kübler-Ross Grief Cycle model was originally used to describe the common stages of grief that applied to terminally ill patients.

A widespread adoption of this mindset would inevitably mean that our current ‘blunt instruments’ of rolling lockdowns and blanket travel bans would eventually be replaced by measured pragmatism.

As vaccination rates continue to grow and the global economy continues to turn its attention towards living more effectively with Covid-19, it also reinforces the likelihood that the global recovery currently underway, may have more upside to come.

The strong global economic growth evident in recent quarters is not difficult to understand. Fiscal policy (government spending) and monetary policy (interest rate management) are both still highly stimulatory, and households in many countries have also had access to increased cash reserves resulting from lower spending due to lockdowns and reduced travel. These factors, in conjunction with supply side constraints due to shipping issues and raw material bottlenecks has, in recent months, seen demand comfortably outstripping supply. This has resulted in sharp price increases around the globe, with average inflation in May across the 37 OECD2 countries reported to be growing at its fastest pace since October 2008. This has had some market observers buzzing about the potential for the world economy to move towards more persistent higher inflation. As we reported last quarter, there are plausible arguments both for and against this.

The inflation question Even as we write this, the debate continues between central bankers and the general market about whether these recent price hikes are likely to be transitory or something more permanent. For the moment at least, the argument is being won by the central bankers who maintain that today’s inflation spurt is due to nothing more than the unleashing of considerable pent-up demand, which is likely to be temporary, and will gradually revert back to a more reasonable level.

Markets overview Global share markets were again generally very strong over the second quarter. The main US3 market recorded another impressive gain of 8.5% and positive investor sentiment was also observed, in different measure, around the globe. Across other notable international developed markets, Europe (excluding the UK)4 gained 7.1% and the UK4 itself delivered a solid 5.8%. Japan4 was something of an outlier returning just 0.2% with the nation appearing divided about whether or not they could (or should) continue with their scheduled hosting of the Olympic Games in July (the decision was made to proceed).

Emerging market returns painted a broadly similar picture. Of the four largest emerging market constituents, China4 returned 2.1%, while South Korea4, Taiwan4 and India4 posted quarterly results of 4.4%, 4.6%, and 8.8% respectively. Higher crude oil prices helped drive strong gains in both Russia and Brazil, with these markets jumping 11.1% and 9.3% respectively. In aggregate, the emerging markets asset class delivered 5.1%5 over the three months from April to June. For the second quarter in a row, the ‘battle of the Tasman’ was decisively won by Australia6 with our near neighbour returning an impressive 8.3% return while the New Zealand7 market delivered just 0.9%.

Global share markets were again generally very strong over the second quarter.

This is also the view of our own Reserve Bank of New Zealand, who noted in their 26 May monetary policy statement that “a range of domestic and international factors are expected to lift headline inflation above 2% for a period, but these factors are expected to be temporary”.

What’s been conspicuous over the most recent quarter is that equity investors don’t appear to have been remotely distracted by this debate. Even if there may be a little more inflation on the horizon, it generally means the prices most businesses are charging for their goods and services are going up. That’s not necessarily a bad thing for future business profitability! Of course, it’s not quite that simple. Cost pressures, supply constraints and other factors will all have a role to play in influencing corporate profitability, but a small uptick in prices does not, in itself, mark the death-knell for equities.

Organisation for Economic Co-operation and Development.

Following an extended period where New Zealand shares have generally outperformed their Australian counterparts, investor optimism about the global recovery, and the broad-based strength evident in commodities and metals prices, may be creating a stronger tailwind for the Australian market.

Fixed interest markets experienced a slight hiatus following the previous quarter’s inflation-hyped yield spike, as investor expectations moderated. The Federal Reserve policy meeting in June was keenly anticipated and ultimately delivered a slight shift in tone, with the committee indicating that US interest rates were likely to rise earlier than initially expected. While seemingly an endorsement of the previous quarter’s yield spike, it more pertinently reinforced the Federal Reserve’s likely intolerance of an inflation overshoot by removing the assurance of indefinite policy/stimulus support.

In the end, far from spurring further increases in longer term Treasury yields, market participants were comfortable allowing these yields to slowly drift lower. As a result, the US 10-year Treasury yield declined from 1.74% to 1.47% over the quarter, which had a positive impact on quarterly returns from the international fixed interest asset class. Around the rest of the world, government yield curves were relatively less affected than in the US, with most other global Treasuries trading within fairly narrow ranges. With minimal price action outside the US, the World Government Bond Index8 was essentially flat for the quarter, gaining 0.1%, while the Global Aggregate Bond Index9 containing more credit and duration exposure was up 1.0%. On 26 May, the Reserve Bank of New Zealand (RBNZ) once again held New Zealand’s overnight cash rate (OCR) at 0.25% and signaled very little change in their expectations. Embedded in their review was the continued projection that our OCR will begin to increase in New Zealand from around the middle of 2022. With the market viewing this as a largely business-as-usual update, New Zealand’s 10-year government bond yield was almost unchanged over the quarter and the New Zealand Corporate A Grade Bond Index10 advanced 0.3%.

Conditions remain favourable for growth assets Overall, it continues to be an excellent time to be a diversified investor, and particularly so if you have a reasonable exposure to growth assets. The significant fiscal and monetary support that has helped propel asset markets over the last 15 months will evolve as circumstances dictate, but any change will only be incremental.

While residential property prices seem to have dominated local headlines recently, those keeping an eye on other traditional (and more liquid) asset classes, like shares, will have noticed some stunning returns coming from these markets as well. This should mean the supportive share market environment we have enjoyed of late, looks set to remain broadly in place for a little longer yet.

While residential property prices seem to have dominated local headlines recently, those keeping an eye on other traditional (and more liquid) asset classes, like shares, will have noticed some stunning returns coming from these markets as well. For example, in local currency terms, the highly influential US sharemarket3 has delivered 40.8% in the last 12 months alone; by any measure a very significant return. What’s perhaps more surprising than the strength of these returns is that they have occurred in a global environment, which is still very much focused on waging a war against Covid-19. As nations progressively turn their energies towards constructively managing the ongoing threat of Covid-19 whilst getting on with life, it will be interesting to see how this may further influence investment market returns in the months ahead.

3 4 5 6 7 8 9 10

S&P 500 Index (total return in USD) MSCI Country and regional indices (gross dividend in local currency) MSCI Emerging Markets Index (gross dividend in USD) S&P/ASX 200 Index (total return in AUD) S&P/NZX 50 Index (gross with imputation) FTSE World Government Bond Index 1-5 Years, hedged to NZD Bloomberg Barclays Global Aggregate Bond Index, hedged to NZD S&P/NZX A-Grade Corporate Bond Index

Key market movements for the quarter The second quarter of 2021 again saw generally positive returns for riskier assets, this was supported by the rollout of the Covid-19 vaccines paired with ongoing supportive fiscal and monetary policy. Many developed nations saw falling rates of infection, resulting in loosening of restrictions which helped propel economic output and consumer spending. These, in turn, strengthened the outlook for future economic growth which pushed markets higher. Covid infection rates generally reduced in developed nations as mass immunisation started to yield results. Vaccination rates globally are trending upwards and at the end of June, over 40 million Covid-19 vaccine doses were being administered daily. 50% of the US and the UK populations had been fully vaccinated.

Although the global supply chain remains stretched (e.g. new car production has been held back by a global semiconductor shortage), corporate reporting and economic indicators through the quarter were generally positive and in line with market expectations. We remain in a so called ‘goldilocks’ environment for share markets where strong growth and accommodative monetary and fiscal policy (i.e. low interest rates and high levels of government expenditure) are very conducive to growth in company earnings.

Fears of runaway inflation dominated the headlines early in the quarter. The reopening of economies following the relaxation of lockdowns in the US in particular, unleashed pent-up consumer demand. Coupled with a generally higher supply of money through government spending programmes, very low interest rates, and ongoing supply chain issues, this spike in demand quickly translated into higher prices. Central banks generally signalled they expect this inflationary pulse to be transitory, rather than a significant and persistent issue. This message was accompanied by the clear indication that central banks remain ready and willing to use the tools at their disposal to curb unsustainable levels of inflation, most notably by increasing interest rates in the future and tapering current asset purchase programmes.

 +7.6% (hedged to NZD)

+7.7%

(unhedged)

International shares

The quarter was relatively plain sailing. The US’s flagship S&P 500 Index (total returns in USD) enjoyed another strong quarter, advancing +8.5% for the quarter for a remarkable +40.8% return over the past 12 months. In Europe, share market performance was also very strong. The MSCI Europe ex UK Index (in local currency) gained +7.1% through the quarter led by Switzerland (+10.0%) and France (+8.6%). The MSCI Europe ex UK Index has gained +30.3% over the last 12 months. British equities were also strong, although again did not increase at the same rate as their neighbours. In GBP terms, the FTSE 100 advanced +4.8% for the quarter, however most of these gains were generated in April and May as concerns about the impact of the rapidly spreading delta variant began to weigh on growth expectations in June. Japanese equities lagged developed markets peers with their state of emergency continuing until late June. With the Tokyo Olympic games set to commence 23 July, these protective measures were considered a necessity. The MSCI Japan Index increased by +0.2%. The performance of small capitalisation companies generally lagged larger companies in the quarter, although still held the upper hand over the last 12 months. Economically sensitive industries such as telecommunications and energy were among the best while utilities struggled. The real estate sector enjoyed a good quarter after generally lagging since the emergence of Covid in early 2020. In New Zealand dollar terms, the MSCI World ex Australia Index delivered a quarterly return of +7.6% on a hedged basis and +7.7% unhedged. The rolling 12-month return for the New Zealand dollar hedged index was +36.2%, while the unhedged index gained ‘just’ +28.3%. Source: MSCI World ex-Australia Index (net div.)



Emerging markets shares

Emerging market equities generated gains as well, albeit lower than developed markets. Slower vaccine roll outs, and the delta variant, contributed to an increase in infection rates, especially in India, which weighed on investor sentiment. +5.0% A relatively strong US dollar and the prospect of increasing interest rates also had a negative impact, as most companies in these nations issue debt in US dollars. Both of these contribute to increasing debt servicing costs which will impact profits. In spite of these impediments, most emerging share markets delivered gains. Brazil and Russia were the best performing heavyweights as the recovering global demand for oil pushed crude prices up, enhancing profit expectations for companies (and countries) more exposed to this sector. Korea, Taiwan and India all had middling gains, while China lagged the group as internal regulators increased scrutiny on many of the larger companies here. In unhedged New Zealand dollar terms, the MSCI Emerging Markets Index produced a quarterly return of +5.0%, for a +30.5% return over the last 12 months. Source: MSCI Emerging Markets Index (gross div.)

 +0.9%

New Zealand shares Domestic equities again lagged other markets through the quarter with the broad S&P/NXZ 50 Index returning +0.9%. This result was directly due to a relative underperformance of the larger companies on the exchange. a2 Milk continued its recent slide, down -25% for the quarter and now a phenomenal -70% lower than its share price high of only 12 months ago. Other large companies Ryman (-13.3%), Auckland Airport (-7.1%), and Air New Zealand (-7.2%) struggled with their corporate earnings announcements generally falling short of market expectations. Air New Zealand continues to battle in this challenging environment and are clearly hampered by the lack of clarity about the prospects for a general reopening in the border anytime soon. At the other end of the spectrum, Contact Energy (+18.2%) saw positive price action as their clean energy solutions stimulated investment inflows from foreign investors and along with Mainfreight (+10.9%) and Infratil (+10.1%) manged to keep the index in the black. Source: S&P/NZX 50 Index (gross with imputation credits)



Australian shares

Australian share market returns were strong over the quarter. The S&P/ASX 100 (the largest 100 companies in the Australian market) and the S&P/ASX Small Ordinaries Index (the companies ranked 101 to 300 in the Australian share +6.8% market) both returned +8.5% in Australian dollar terms. Over the last 12 months small capitalisation companies have been a bit stronger with the S&P/ASX Small Ordinaries Index up +33.2% versus +27.9% for the top 100 companies. Among the top performers were Rio Tinto (+14.4%) who benefited from continued increases in global demand for the industrial metals they mine, and Commonwealth Bank (+16.0%) who are set to write more (and larger) loans due to strong rebound in the Australian residential property market. Returns to unhedged New Zealand investors were slightly reduced by a small depreciation in the Australian dollar over the quarter. Source: S&P/ASX 200 Index (total return)



International fixed interest

The main event for market observers in international fixed interest markets was how the US Federal Reserve would react to increasing inflationary pressures. The US consumer price index, which measures the average increase in the price of +0.1% goods for American consumers, had been persistently low following the global financial crisis in 2008. This year however, due to the economic resurgence brought about by the reduction in many Covid restrictions, prices have been trending upwards and the index clocked in at +5% for the year ended May 2021, the largest 12-month increase since 2008. Contributors to this surge in prices have been the very things that bridged the gap through the lockdowns 12 months ago: accommodative monetary and fiscal policy, and a gradual unwind of the social restrictions put in place to limit the spreading of the virus. The fiscal stimulus pumped into the economy (relief packages) and record low interest rates have resulted in consumers having access to more money, and – with restrictions relaxing – a greater inclination to spend it. Add in some supply side constraints (raw material shortages, shipping delays etc) and prices for many goods have been squeezed higher. In the short term, central banks have sought to stimulate an economy wounded by Covid, but in the long term the management of inflation risks will increasingly be their focus. With inflation pressures becoming more evident, the central banks will be reviewing the tools at their disposal to manage this. The fiscal support they have been offering through the crisis can be pared back and monetary policy changes can also deliver higher short term interest rates – if considered necessary – as another mechanism to dampen inflationary pressures. This is precisely what the US federal reserve signalled late in the quarter. They elected to keep their official interest rate at the current record low, but signalled an expectation to raise interest rates sooner than previously expected. This was a clear signal to the market of their likely intolerance of allowing sustained levels of inflation above their long term target level. This announcement caused shorter term yields to spike – the US 2-year yield rose to 0.25% from 0.16% where it has stubbornly been sitting since the crisis began. The longer term US 10-year yield actually declined from 1.74% to 1.47% as the notion that above target inflation in the future might be tolerated was quashed in the Federal Reserve’s June update. The UK and Australia followed a broadly similar path to that of the US and both had relatively stable quarters, as did Japan. After bucking the trend in the March quarter, European yields picked up through April and May in particular. The German 10-year bond yield increased 0.09%, the French by 0.18% and the Italian by 0.16%

Broadly, this meant longer duration bonds outperformed shorter duration bonds. Credit spreads narrowed and are now on average tighter than pre-Covid levels, helping corporate bonds outperform government bonds. The FTSE World Government Bond Index 1-5 Years (hedged to NZD) made +0.1% for the quarter and the same return over 12 months. The broader Bloomberg Barclays Global Aggregate Bond Index (hedged to NZD) returned +1.0% for the quarter, but is flat over the 12 months to end June. Source: FTSE World Government Bond Index 1-5 Years (hedged to NZD)



New Zealand fixed interest

With an eye to their dual mandate of stable 2% inflation and maximum sustainable employment, the Reserve Bank of New Zealand (RBNZ) again elected to leave the official cash rate at 0.25%. With inflation nearing the mid-point of the +0.3% target 1% - 3% range, and the unemployment rate having pulled back to 4.7% (very near to pre-lockdown levels), it is easy to conclude the existing policy settings are fulfilling those objectives. In its most recent announcements, the bank has signalled an expectation of hikes in the Official Cash Rate (OCR) commencing as soon as this year, and continuing through to a level of around 2% in 2024, and the market is broadly in consensus with these projections. With no real catalyst - endogenous or exogenous - yields in New Zealand were relatively unchanged through the quarter. The NZ 10-year yield closing the quarter at 1.80%, 0.04% below its starting point which meant very small gains for this asset class this quarter. Government bonds underperformed corporate bonds, while longer maturity bonds outperformed shorter maturity bonds, but generally all parts of this asset class posted negligible returns through the quarter. The S&P/NZX A-Grade Corporate Bond Index rose +0.3% for the quarter and is the only asset class with a negative 12-month return at -1.2%. Longer term performance remains robust, with both the 3- and 5-year annualised average returns coming in at +3.7% and the 10-year return is +4.9% per annum. The longer duration, but higher quality S&P/NZX NZ Government Bond Index rose +0.2% for the quarter and has retreated -3.6% over the preceding 12 months. Source: S&P/NZX A-Grade Corporate Bond Index

Table 1: Asset class returns to 30 June 2021 Asset Class

Index Name

3 months

1 year

3 years

5 years

10 years

New Zealand shares

S&P/NZX 50 Index (gross with imputation credits)

+0.9%

+11.2%

+13.2%

+14.0%

+15.2%

Australian shares

S&P/ASX 200 Index (total return)

+6.8%

+28.2%

+8.9%

+11.8%

+7.2%

MSCI World ex Australia Index (net div., hedged to NZD)

+7.6%

+36.2%

+13.8%

+14.9%

+12.8%

MSCI World ex Australia Index (net div.)

+7.7%

+28.3%

+13.9%

+15.4%

+12.7%

Emerging markets shares

MSCI Emerging Markets Index (gross div.)

+5.0%

+30.5%

+10.5%

+13.9%

+6.4%

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

+0.3%

-1.2%

+3.7%

+4.9%

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

+0.1%

+2.5%

+2.1%

+3.4%

New Zealand cash

New Zealand One-Month Bank Bill Yields Index

+0.1%

+0.3%

+1.0%

+1.4%

+2.1%

International shares

Online trading? Check your overconfidence at the door A question we’ve been asked quite a few times within the last year goes something like this, “So my son is investing on Sharesies. What do you think of them…?” It’s a great question and one we thought deserved an article of its own. Sharesies, Hatch and other digital trading platforms easily accessible by smartphones have grown enormously popular in recent years. Sharesies claims to have 350,000 users which would be about 7% of the population of New Zealand. That’s a remarkable achievement. There are a number of positive aspects to these digital trading platforms. Easy to access and requiring only a small amount of cash to begin investing, they appeal to younger investors, and we now see New Zealanders investing (and saving) at a younger age. The result will hopefully be an increase in financial literacy born out of experience. However, it’s a more nuanced question as to whether or not these platforms are leading to successful investing outcomes. Successful compared to what? Compared to term deposits? Compared to the average return of the market? The answer depends on the basis of the comparison. Unfortunately, we don’t have data available from these New Zealand platforms so it’s hard to evaluate the average performance of their investors. While online trading platforms have only recently gained popularity in New Zealand, they have been around internationally since the 1990s. In the United States, Ameritrade, E-trade, Scottrade and more recently Robinhood, are all examples of online trading platforms. Having access to this longer-term international data lets us assess performance by looking at the evidence. The academic peer-reviewed evidence shows a fairly consistent pattern. Those who trade online, and especially those who trade frequently, typically do worse than the market return. One of the first studies of online trading platforms was conducted in 2000 by Dr Brad Barber (University of California, Davis) and Dr Terrance Odean (University of California, Berkeley), titled “Online Investors: Do the Slow Die First?"1

Easy to access and requiring only a small amount of cash to begin investing, they appeal to younger investors, and we now see New Zealanders investing (and saving) at a younger age. Their general conclusion was that investors who switched to trading online traded “more actively, more speculatively, and less profitably than before – lagging the market by more than 3% annually.” That raises the question; if investors are less successful, why do they do it? The authors say their findings can be explained by, “overconfidence, augmented by self-attribution bias, the illusion of knowledge, and the illusion of control.” In other words, investors do worse because they give themselves too much credit when they are just fortunate with their picks, and they have a strong self-belief whether or not they actually have stock picking ability. Lastly, they feel like they have more control over investing outcomes than they really do.

Barber, Brad M. and Odean, Terrance, Online Investors: Do the Slow Die First? (December 1999). EFA 0335, Available at SSRN: https://ssrn.com/abstract=219242 or http://dx.doi.org/10.2139/ssrn.219242

After the adoption of trading by smartphone, investors are also more likely to purchase risky and lottery-type assets and to chase hot investments on their non-smartphone trading platforms as well. Sources: 66,465 households with accounts at a large discount broker during 1991 to 1996, Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: https://ssrn.com/abstract=219228 or http://dx.doi.org/10.2139/ ssrn.219228

This result isn’t surprising. In 2002 the same authors published an article in the Journal of Finance called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors.”2 In this study they discovered that of 66,465 households that had an account with a discount share trading platform, the ones that traded shares most frequently underperformed the market by 6.5% per annum (i.e. an average high-trading return of 11.4% compared to a market return of 17.9%). The average household with a trading account underperformed by 1.5% (i.e. an average household return of 16.4% compared to a market return of 17.9%). Perhaps more relevant is a recent European study on the impact of technology on individual investors. In February 2021, Drs Ankit Kalda, Benjamin Loos, Alessandro Previtero and Andreas Hackethal, published "Smart(Phone) Investing? A within Investor-Time Analysis of New Technologies and Trading Behavior.”3 The authors looked at the period from 2010 to 2017 and the results of two European banks that introduced online trading via mobile devices.

Below is a summary of a some of their key findings: •

•

• •

•

Smartphone users were about 8 years younger and 13% more likely to be males compared to nonusers.

Smartphones increased the purchasing of riskier and lottery-type assets and the chasing of past returns by 67%. Smartphone trades involved assets with higher volatility. Smartphones increased the probability by 71% of buying assets in the top decile of the past performance distribution. Smartphone investors chased performance evidenced by the fact that 68% of purchases involved assets that had earned above median returns in the recent past.

After the adoption of trading by smartphone, investors are also more likely to purchase risky and lottery-type assets and to chase hot investments on their non-smartphone trading platforms as well. Perhaps this academic speak can be better understood in light of a recent headline grabbing story "GameStop stock price crashes as Robinhood app restricts trading."4

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: https://ssrn.com/abstract=219228 or http://dx.doi.org/10.2139/ssrn.219228

Kalda, Ankit and Loos, Benjamin and Previtero, Alessandro and Hackethal, Andreas, Smart(Phone) Investing? A within Investor-Time Analysis of New Technologies and Trading Behavior (January 13, 2021). SAFE Working Paper No. 303, Available at SSRN: https://ssrn.com/abstract=3765652 or http://dx.doi.org/10.2139/ssrn.3765652

https://www.abc.net.au/news/2021-01-29/gamestop-stock-price-crash-as-robinhood-restricts-buying-shares/13101670

“ONLINE INVESTORS: DO THE SLOW DIE FIRST?" Takeaway: Online investors traded more actively, more speculatively, and less profitably than before – lagging the market by more than three percent annually.

“TRADING IS HAZARDOUS TO YOUR WEALTH" Takeaway: Investors that traded shares most frequently underperformed the market by 6.5% per annum. The overall household with a trading account underperformed by 1.5%.

“SMART(PHONE) INVESTING?"

Takeaway: Smartphones increase by 67% the purchasing of riskier and lottery-type assets and by 71% the chasing of past returns by buying assets in the top decile of the past performance distribution.

The idea that individual investors may be more inclined to buy a share after its price has gone up is behaviourally intuitive, but it’s not a particularly profitable strategy, at least according to most long-term measures. Novice investors using the trading app/platform Robinhood bid up the value of a video game store called GameStop. The decision to invest in that business was not based on any careful evaluation of the business’s future prospects. Many investors piled in based on speculation alone. When it crashed some of those investors lost money. This experience highlights a broader trend the authors of the Smart(Phone) Investing article bring to light. While smartphones offer convenience, that convenience sometimes comes with a cost of increased risk and reduced returns from lottery-like stocks which have historically produced worse than average subsequent returns. The infographic above provides a snapshot of the three academic articles. These results are not particularly surprising. While in many ways Sharesies provides easier access to investing, we know from years of experience that investing isn’t easy. What feels intuitive is often misguided and can lead to poor long-term outcomes. The idea that individual investors may be more inclined to buy a share after its price has gone up is behaviourally intuitive, but it’s not a particularly profitable strategy, at least according to most long-term measures.

It’s no accident that advertisements for online trading platforms generally show the brands of some of the world’s most successful technology companies with good recent performance. But what young investors don’t realise is that those investments are also some of world’s most expensive companies based on earnings and prices. That doesn’t make them a bad investment. But a concentrated investment in those companies is far riskier than the ‘investing is easy’ advertising would lead you to believe. In summary, if you have kids using online trading platforms in a casual way with small amounts invested, we believe this can result in many positive outcomes. It will increase their comfort with investing and likely lead to an increase in financial literacy. However, it may also lead to overconfidence, and the weight of evidence suggests you (and they) should expect outcomes lower than the market average. When it comes to smart investing, the same principals always apply, regardless of age. If your kids are investing large amounts of assets they can’t afford to lose, they should probably seek a second opinion.

Q2 2021 talking points Table of Contents

Key market movements for the quarter The second quarter of 2021 again saw generally positive returns for riskier assets supported by the rollout of the

Covid-19 vaccines paired with ongoing supportive fiscal and monetary policy. Many developed nations saw falling

rates of infection, and the resulting loosening of restrictions helped propel economic output and consumer spending. These, in turn, strengthened the outlook for future economic growth which pushed markets higher.

Covid infection rates generally reduced in developed nations as mass immunisation started to yield results.

Vaccination rates globally are trending upwards and at the end of June, over 40 million Covid-19 vaccine doses were

being administered daily. 50% of the US and the UK populations had been fully vaccinated. Even so, late in the quarter the more infectious delta variant of the virus caused spikes in some parts of the world.

Although the global supply chain remains stretched (for example new car production has been held back by a global

semiconductor shortage), corporate reporting and economic indicators through the quarter were generally positive

and in line with market expectations. We remain in a so called ‘goldilocks’ (not too hot, not too cold) environment for share markets where strong growth and accommodative monetary and fiscal policy (i.e. low interest rates and high levels of government expenditure) are very conducive to growth in company earnings.

Fears of runaway inflation dominated the headlines early in the quarter. The reopening of economies following the relaxation of lockdowns in the US in particular unleashed pent-up consumer demand. Coupled with a generally

higher supply of money through government spending programmes, very low interest rates, and ongoing supply

chain issues, this spike in demand quickly translated into higher prices. Central banks generally signalled they expect this inflationary pulse to be transitory rather than a significant and persistent issue. This message was accompanied by the clear message that central banks remain ready and willing to use the tools at their disposal to curb

unsustainable levels of inflation, most notably by increasing interest rates in the future and tapering current asset purchase programmes.

International shares

Apart from a dip during May as markets priced in the US Federal Reserve’s stern words regarding their willingness to raise interest rates if need be, the quarter was relatively plain sailing. The US’s flagship S&P 500 Index (total returns in USD) enjoyed another strong quarter advancing +8.5% for the quarter for a remarkable +40.8% return over the past 12 months. In Europe, share market performance was also very strong. The MSCI Europe ex UK Index (in local currency) gained +7.1% through the quarter led by Switzerland (+10.0%) and France (+8.6%). Nordic nations such as Denmark (+12.1%) and Finland (+10.3%) outperformed. The MSCI Europe ex UK Index has gained +30.3% over the last 12 months. British equities were also strong, although again did not increase at the same rate as their neighbours. In GBP terms the FTSE 100 advanced +4.8% for the quarter although most of these gains were generated in April and May as concerns about the impact of the rapidly spreading delta variant began to weigh on growth expectations in June. Japanese equities lagged developed markets peers with their state of emergency continuing until late June. With the Tokyo Olympic games set to commence 23 July these protective measures were considered a necessity. The MSCI Japan Index increased by +0.2% for the quarter and was up +28.9% over the last 12 months. The performance of small capitalisation companies generally lagged larger companies in the quarter although still held the upper hand over the last 12 months. Economically sensitive industries such as telecommunications and energy were among the best while utilities struggled, especially power companies relying on increasingly expensive commodities. The real estate sector enjoyed a good quarter after generally lagging since the emergence of Covid in early 2020. The New Zealand dollar was strong relative to the United States dollar, but weak versus the European euro and British pound and for a diversified investor these results largely netted out. In New Zealand dollar terms, the MSCI World ex Australia Index delivered a quarterly return of +7.6% on a hedged basis and +7.7% unhedged. The rolling 12 month return for the New Zealand dollar hedged index was +36.2% while the unhedged index gained ‘just’ +28.3%.

Emerging markets shares

Emerging market equities generated gains as well, albeit lower than developed markets. Slower vaccine roll outs, and

the delta variant, contributed to increase in infection rates, especially in India, which weighed on investor sentiment. A relatively strong US dollar and the prospect of increasing interest rates also had a negative impact as most companies

in these nations issue debt in US dollars. Both of these contribute to increasing debt servicing costs which will impact profits.

In spite of these impediments, most emerging share markets delivered gains. Brazil and Russia were the best performing heavyweights as the recovering global demand for oil pushed crude prices up, enhancing profit expectations for companies (and countries) more exposed to this sector. Korea, Taiwan and India all had middling gains, while China lagged the group as internal regulators increased scrutiny on many of the larger companies here.

In unhedged New Zealand dollar terms, the MSCI Emerging Markets Index produced a quarterly return of +5.0%, for a +30.5% return over the last 12 months.

New Zealand shares

Domestic equities again lagged other markets through the quarter with the broad S&P/NXZ 50 Index returning +0.9%. This result was directly due to a relative underperformance of the larger companies on the exchange.

a2 Milk continued its recent slide, down -25% for the quarter and now a phenomenal -70% lower than its share price

high of only 12 months ago. Other large companies Ryman (-13.3%), Auckland Airport (-7.1%), and Air New Zealand

(-7.2%) struggled with their corporate earnings announcements generally falling short of market expectations. Air New

Zealand continues to battle in this challenging environment and are clearly hampered by the lack of clarity about the prospects for a general reopening in the border anytime soon.

At the other end of the spectrum, Contact Energy (+18.2%) saw positive price action as their clean energy solutions

stimulated investment inflows from foreign investors and along with Mainfreight (+10.9%) and Infratil (+10.1%) manged

to keep the index in the black.

Australian shares

Australian share market returns were strong over the quarter. The S&P/ASX 100 (the largest 100 companies in the Australian market) and the S&P/ASX Small Ordinaries Index (the companies ranked 101 to 300 in the Australian share market) both returned +8.5% in Australian dollar terms. Over the last 12 months small capitalisation companies have been a bit stronger with the S&P/ASX Small Ordinaries Index up +33.2% versus +27.9% for the top 100 companies. Among the top performers were Rio Tinto (+14.4%) who benefited from continued increases in global demand for the industrial metals they mine, and Commonwealth Bank (+16.0%) who are set to write more (and larger) loans due to strong rebound in the Australian residential property market. Returns to unhedged New Zealand investors were slightly reduced by a small depreciation in the Australian dollar over the quarter.

International fixed interest

price of goods for American consumers, had been persistently low following the global financial crisis in 2008. This

year however, due to the economic resurgence brought about by the reduction in many Covid restrictions, prices have been trending upwards and the index clocked in at +5% for the year ended May 2021, the largest 12 month increase

since 2008. Contributors to this surge in prices have been the very things that bridged the gap through the lockdowns

12 months ago: accommodative monetary and fiscal policy, and a gradual unwind of the social restrictions put in place

to limit the spreading of the virus. The fiscal stimulus pumped into the economy (relief packages) and record low

interest rates have resulted in consumers having access to more money, and – with restrictions relaxing – a greater

inclination to spend it. Add in some supply side constraints (raw material shortages, shipping delays etc) and prices for many goods have been squeezed higher.

In the short term, central banks have sought to stimulate an economy wounded by Covid, but in the long term the

management of inflation risks will increasingly be their focus. With inflation pressures becoming more evident, the central banks will be reviewing the tools at their disposal to manage this. The fiscal support they have been offering

through the crisis can be pared back and monetary policy changes can also deliver higher short term interest rates –

if considered necessary – as another mechanism to dampen inflationary pressures. This is precisely what he US federal

reserve signalled late in the quarter. They elected to keep their official interest rate at the current record low, but signalled an expectation to raise interest rates sooner than previously expected. This was a clear signal to the market of their likely intolerance of allowing sustained levels of inflation above their long term target level.

This announcement caused shorter term yields to spike – the US 2 year yield rose to 0.25% from 0.16% where it has

stubbornly been sitting since the crisis began. The longer term US 10-year yield actually declined from 1.74% to 1.47%

as the notion that above trend inflation in the future might be tolerated was quashed in the Federal Reserve’s June update.

The UK and Australia followed a broadly similar path to that of the US and both had relatively stable quarters, as did Japan.

After bucking the trend in the March quarter, European yields picked up through April and May in particular. The German 10-year bond yield increased 0.09%, the French by 0.18% and the Italian by 0.16%

Broadly, this meant longer duration bonds outperformed shorter duration bonds. Credit spreads narrowed and are now on average tighter than pre-Covid levels, and this helped corporate bonds outperform government bonds.

The FTSE World Government Bond Index 1-5 Years (hedged to NZD) made +0.1% for the quarter and has the same

return over 12 months while the broader Bloomberg Barclays Global Aggregate Bond Index (hedged to NZD) returned +1.0% for the quarter, but is flat over the 12 months to end June.

New Zealand fixed interest

target 1% - 3% range, and the unemployment rate having pulled back to 4.7% (very near to pre-lockdown levels), it is

easy to conclude the existing policy settings are fulfilling those objectives. In its most recent announcements, the bank has signalled an expectation of hikes in the Official Cash Rate (OCR) commencing as soon as this year through to a level of around 2% in 2024 and the market is broadly in consensus with these projections.

With no real catalyst - endogenous or exogenous - yields in New Zealand were relatively unchanged through the

quarter. The NZ 10-year yield closing the quarter at 1.80%, 0.04% below its starting point which meant very small gains for this asset class this quarter.

Government bonds underperformed corporate bonds, while longer maturity bonds outperformed shorter maturity bonds, but generally all parts of this asset class posted negligible returns through the quarter.

The S&P/NZX A-Grade Corporate Bond Index rose +0.3% for the quarter and is the only asset class with a negative 12 month return at -1.2%. Longer term performance remains robust with both the 3 and 5 year annualised average returns coming in at +3.7%, while the 10 year return is +4.9% per annum.

The longer duration, but higher quality S&P/NZX NZ Government Bond Index rose +0.2% for the quarter and has retreated -3.6% over the preceding 12 months.

New Zealand One-Month Bank Bill Yields Index

Index (hedged to NZD)

Bloomberg Barclays Global Aggregate Bond

(hedged to NZD)

FTSE World Government Bond Index 1-5 Years

S&P/NZX A-Grade Corporate Bond Index

MSCI Emerging Markets Index (gross div.)

MSCI World ex Australia Index (net div.)

(net div., hedged to NZD)

MSCI World ex Australia Index

S&P/ASX 200 Index (total return)

credits)

S&P/NZX 50 Index (gross with imputation

Index Name

+0.2%

+1.4%

+2.2%

+1.3%

-13.8%

-10.6%

-20.9%

-24.0%

-14.5%

2020

+0.1%

+2.4%

+0.6%

+3.4%

+9.3%

+10.2%

+18.2%

+20.8%

+16.9%

2020

+0.1%

+0.7%

+0.2%

+1.7%

+7.0%

+5.4%

+6.6%

+0.8%

+2.9%

2020

+0.1%

+0.8%

+0.2%

-1.0%

+10.1%

+4.6%

+11.7%

+12.5%

+11.5%

2020

+0.1%

-2.5%

-0.4%

-2.1%

+5.4%

+8.1%

+6.2%

+5.8%

-3.9%

2021

+0.1%

+1.0%

+0.1%

+0.3%

+5.0%

+7.7%

+7.6%

+6.8%

+0.9%

2021

+0.3%

+0.0%

+0.1%

-1.2%

+30.5%

+28.3%

+36.2%

+28.2%

+11.2%

year

+1.0%

+4.3%

+2.5%

+3.7%

+10.5%

+13.9%

+13.8%

+8.9%

+13.2%

years

+1.4%

+3.2%

+2.1%

+3.7%

+13.9%

+15.4%

+14.9%

+11.8%

+14.0%

years

+2.1%

+5.4%

+3.4%

+4.9%

+6.4%

+12.7%

+12.8%

+7.2%

+15.2%

years

movement in the value of the NZD. Index returns are before all costs and tax. Returns are annualised for time periods greater than one year.

cash

New Zealand

fixed interest

International

fixed interest

New Zealand

markets shares

Emerging

International

Australian

New Zealand

Asset Class

Table 1: Asset class returns to 30 June 2021

Risk factor summary • •

The Q2 equity risk premium was strongly positive overseas, but flat in New Zealand.

Volatility has returned to more typical levels than has been the norm since the Covid crisis began and dispersion

across sectors was relatively low. Information technology, energy and real estate sectors were the best, while materials, industrials and utilities lagged.

•

Lower relative price companies underperformed and the value premia was negative in developed markets, although positive in emerging markets.

• •

Smaller companies outperformed locally and in emerging markets, but lagged in developed markets.

The profitability factor was mixed. However, the exposure to this factor is significantly lighter than that to size and value and its detraction was overcome by the larger factors.

•

Yields were relatively stable after a spike during the March quarter; down a little in the US and Australia, and up

a little in Europe. On balance, longer term bonds outperformed shorter dated bonds for a positive term premium.

•

The New Zealand yield curve was also relatively stable, flattening a little which meant longer term bonds slightly outperformed shorter term positions.

•

Credit spreads tightened a little both in New Zealand and overseas, so corporate bonds generally outperformed government bonds.

Table 2 – Risk factor premiums for quarter Market premium New Zealand Australia Developed markets Emerging markets

o + + +

Value premium n/a

– – +

Size premium

+ o – +

REIT/utilities exclusions

Profitability impact

n/a

– – o

Term premium

Credit premium

n/a

+ o –

+ o

Unscreened model portfolios versus index portfolios Table 3 – Three month, twelve month and ten year unscreened model portfolio vs index return

Last 3 months’ return Last 12 months’ return Last 10 years’ return

Portfolio

20/80

30/70

40/60

50/50

60/40

70/30

80/20

90/10

98/2

Model

1.8%

2.3%

2.8%

3.3%

3.8%

4.4%

4.9%

5.4%

5.8%

Outperformance

0.6%

0.5%

0.4%

0.2%

0.1%

-0.1%

-0.4%

-0.6%

Index

4.8%

Model

5.9%

Outperformance

0.3%

Index

Model

Outperformance

Index

Long term expected returns

1.2%

6.9%

1.7%

2.3%

9.9%

13.7%

2.1%

2.9%

3.9%

5.6%

6.4%

5.4%

5.8%

7.0%

6.5% 0.1%

2.9%

3.6%

25.3%

29.6%

34.0%

4.6%

5.2%

5.8%

6.5%

7.0%

7.2%

7.8%

8.4%

-0.3%

-0.5%

6.4%

5.8%

21.2%

12.8%

0.0%

5.0%

17.3%

9.8%

7.2%

4.3%

8.1%

6.8%

16.0%

8.9% 7.3%

19.5% 9.0%

23.1%

37.7%

27.0%

30.3%

9.5%

10.1%

10.5%

-1.0%

-1.3%

-1.5%

9.7%

10.5%

7.8%

8.3%

-0.7%

6.5%

11.3% 8.7%

7.4%

12.0% 9.0%

Note – model portfolio returns are after investment management fees, whereas index returns are gross.

 Overall, quarterly performance was positive for all portfolios and broadly in line with their relevant index portfolios. Aggressive portfolios slightly underperformed due to the negative value premia.

 For the last 12 months, all portfolios were strongly positive and all significantly outperformed their relevant index portfolio.

 Portfolio returns over longer periods remain positive: 10 year returns range from 5.9% pa for the 20/80 to 10.5% pa for the 98/2 outpacing our long term expected returns. The higher risk portfolios are trailing the index portfolios.

SRI model portfolios versus index portfolios Table 4 – Three month, twelve month and ten year SRI model portfolio vs index returns

Last 3 months’ return Last 12 months’ return Last 10 years’ return

Portfolio

20/80

30/70

Model

2.1%

2.5%

Outperformance

1.0%

Index

Model

1.1%

70/30

3.1%

3.6%

4.2%

4.8%

1.0%

0.9%

6.0%

9.0%

12.2%

1.7%

2.5%

Model

6.9%

Outperformance

1.1%

Long term expected returns

60/40

2.0%

4.3%

Index

50/50

1.5%

Index

Outperformance

40/60

5.8% 5.4%

6.5%

9.1%

3.1%

2.6% 15.5% 11.8% 3.7%

3.3%

18.9%

14.7% 4.3%

4.6%

22.6%

26.4%

17.7% 4.8%

8.6%

9.4%

10.2%

10.9%

1.1%

1.0%

0.9%

0.8%

5.8%

7.6%

6.2%

8.5% 6.5%

9.3% 6.9%

5.5%

4.0%

7.8% 6.7%

80/20

0.9%

90/10

98/2

6.3%

6.9%

0.9%

0.8%

5.4% 30.5%

6.1%

33.9%

20.9%

24.3%

11.6%

12.3%

12.8%

0.7%

0.6%

5.5%

10.1%

10.9%

7.3%

7.7%

6.2%

11.6% 8.1%

27.1% 6.7%

12.2% 8.3%

Note – model portfolio returns are after investment management fees, whereas index returns are gross.

 Quarterly performances of the SRI model portfolios were also strong, delivering even more than the unscreened

portfolios. A reduced exposure to the value factor, and increased exposure to the term factor contributed to the outperformance.

 Longer term returns remain strong and over 10 years range from +6.9% pa for the 20/80 to +12.8% pa for the 98/2, exceeding both the index portfolios and our long term expected returns.

Talking points for absolute performance  Q2 was another strong quarter for diversified portfolios especially those taking more risk. The 12 month returns were

significantly positive thanks to an accommodative environment and the strong recovery from the economic crisis through the back half of 2020.

 After enjoying strong relative returns over recent years New Zealand equities have struggled so far in 2021. Developed

markets have broadly been performing very strongly this year due to ongoing accommodative government policy and relaxing social restrictions thanks to higher global vaccination rates. These returns have generally ranged from

13% to 19% as illustrated in figure 1. The S&P/NZX 50 Index however has struggled and its six month return to end

June has been negative.

Figure 1: Cumulative performance of developed markets equities indices to 30 June 2021 +25.0% +20.0% +15.0% +10.0% +5.0% -5.0% -10.0% 31-Dec-20

31-Jan-21

28-Feb-21

31-Mar-21

30-Apr-21

31-May-21

USA (S&P 500)

France (CAC 40)

Germany (DAX)

UK (FTSE 100)

Australia (S&P/ASX 200)

NZ (S&P/NZX 50)

30-Jun-21

Source: MorningStar. Returns are for gross indices with dividends reinvested and are unhedged in New Zealand Dollars.

 Major contributors to the New Zealand market lagging were: o

The defensive composition of our market: While the average exposure to defensive sectors such as Healthcare

and Utilities is less than 10% in developed markets in aggregate, both of these are over 20% in New Zealand.

With the strengthening global economy, more cyclical and sensitive sectors (such as Financials and Information Technology) have outperformed and the local market underweight here has led to the NZX 50 lagging. o

Some specific companies have detracted: A second slightly different attribute of the New Zealand share market

is our relatively shallow investment universe. We only have 50 companies in our main share market index whereas Australia has 200, the US 500, and developed markets in aggregate over 1500.This relatively low level

of diversification in New Zealand means the fortunes of the largest single companies can have a disproportionate

impact on our market. So far in 2021 this is exactly what has happened. Fisher and Paykel represents a staggering

14% of the S&P/NZX 50 and, after a great 2020 where the firm benefitted from the pandemic, vaccination rates are contributing to reduced hospitalisations which have negatively affected the company’ share price. A2 milk

is a former heavyweight in New Zealand and its profit projections have been weakening significantly with Chinese

demand in particular diminishing over recent history which has in turn decimated the share price. Finally, large renewable electricity generators Meridian, Mercury and Contact have struggled through the year in part due to

reduced share holder demand from foreign investors as other clean energy options have allowed these foreign investors to diversify.

These idiosyncratic risks are best mitigated through diversification and allocating across many nations and industries

worldwide.

Talking points for relative performance The main sources of relative performance for model portfolios versus index portfolios during Q2 2021 were as follows:

•

Size tilt in New Zealand outperformed: Large caps again lagged in New Zealand as discussed above. The

constrained Portfolio index beat unconstrained NZX 50 by 92bps through the quarter. The newly relaunched

Harbour NZ Index Shares Fund delivered the Portfolio index return. •

Value tilt in Developed Markets underperformed: All of Dimensional’s developed markets equity trusts in the

portfolios (Core, Value and Small) take varying tilts towards companies of lower relative price in order to

harness the value premium. In general, this premium was negative through the quarter as value names underperformed growth. Information technology was one of the best sectors in the quarter (Nvidia: +50%, Apple: +12%, Paypal: +20%, Microsoft: +15%) and underweights here detracted as did underweights to some

of the relatively more expensive communication companies (Facebook: +18%, Alphabet (Google): +21%).

Underperformance from underweights in some of the more expensive Healthcare companies helped offset this (Daiichi Sankyo: -26%, Johnson & Johnson: +1.1%).

•

Size tilt in Developed Markets underperformed: Similarly, all of Dimensional’s developed markets equity trusts

in the portfolios (Core, Value and Small) take varying tilts towards smaller market capitalisation companies in

order to harness the size premium. The Global Small trust is one the most diversified trusts in the portfolio with over 4,500 holdings. The most notable mover in the small cap space was American movie theatre chain

AMC Entertainment which increased a remarkable +450% through the quarter on the back of relaxing of

restrictions and significant buying pressures from internet forum traders. Due to the already high relative price, the portfolio did not hold this company and even at a tiny holding of 0.05% for the cap weighted index

this meant 17bps of performance which the DFA Small Companies Trust missed out on.

•

Value tilt in Emerging Markets outperformed: Leading performers in the lower relative price (value) segment

of emerging markets equities were energy (+16%), materials (+9%), and industrials (+10%). Notable performance came from overweights in Taiwanese shipping company Evergreen Marine (up +344% after

Evergreen was cleared from the Suez canal), China Steel (+57%), Brazilian petrochemical Petrobas (+48%) and Russian natural gas producer Gazprom (+27%). •

Longer duration global bonds outperformed: Following a sharp spike in yields in Q1 in the US, Q2 saw a

small drift down helping longer duration bonds generally outperform. The index portfolios take very little

duration risk and so the positive term premia was a source of outperformance for our portfolios through the quarter. •

Global bond trust outperformed: Within international fixed interest, the global bond trust made more than the broad market. This was due in part to overweights to the Australian, United States and Canadian dollar

curves which were the steepest at the start of the period and exhibited the highest expected returns. European yields moved up and the underweight here insulated that trust from that negative price impact.

•

SRI portfolios outperformed unscreened portfolios: The SRI portfolios have smaller exposure to the value factor and more exposure to longer duration bonds, both of which slightly enhanced the returns relative to the unscreened portfolios.

•

SRI exclusions broadly netted out: High environmental impact exclusions were mixed (Exxon Mobil: +15%,

Woodside Petroleum: -8.6%, BHP: +5.9%) as were social screens (Nestle (excluded for labour rights

controversies) lost -2.4%, Australian gambling machine manufacturer Aristocrat Leisure made +24%, and weapons provider Boeing down -5.7%). On balance the exclusions had an immaterial positive impact.

Disclaimer and Notes Table 5 - Strategy benchmarks Asset class

Index

New Zealand equity

S&P/NZX 50 Index (gross with imputation credits)

International equity (developed markets)

MSCI World ex Australia Index (net div.)*

Australian equity

International equity (emerging markets) New Zealand fixed interest International fixed interest New Zealand cash

S&P/ASX 200 Index (total return)

MSCI Emerging Markets Index (gross)

S&P/NZX A-Grade Corporate Bond Index

FTSE World Gov't Bond Index 1-5 Yrs (hedged NZD) New Zealand One-Month Bank Bill Yields Index

* to reflect model portfolio strategy, this index is hedged in equal ratio as the developed market strategy for each model portfolio.



Model portfolios are designed and supplied by the Consilium Investment Committee (CIC).



Model portfolio returns are net of underlying management fees, but gross of custodial and adviser monitoring fees.



Index portfolios comprise exactly the same asset class weights and hedging strategy as model portfolios, but index portfolio returns assume a comparable



The major asset class indices chosen for this analysis are for broad comparison purposes only and do not precisely replicate the investment strategies or



The indices are unable to be invested in and therefore depict a theoretical pre-cost investment return.



Individual investment portfolios that deviate from model portfolios will experience different returns.



Past returns are no guarantee of future returns.

investment into a selection of major asset class indices.

factor tilts employed in the underlying model portfolios.

have been custom built by the Consilium Investment Committee to create period returns that best reflect the risks the

funds are systematically taking (in particular the risk tilts). Many of these factor specifications have been estimated using

publicly sourced returns series and are often not the exact specification the fund manager uses (for example the Australian Value factor).

For more information on the assumptions used to create the following data please contact the Consilium Investment Committee.

Table 6 – New Zealand Equities 1 Year

3 Years

5 Years

10 Years

5 Years Std Dev

-3.05

11.21

13.16

13.99

15.20

11.51

-7.22

1.69

13.14

12.78

14.39

13.05

-0.77

23.83

14.22

14.80

N/A

12.49

9.26

59.92

1 Month 3 Months 6 Months Market return:

S&P/NZX 50 Index (Gross with ICs) #1-50

2.79

0.86

3.56

-0.67

2.33

1.77

10 Years Inception Std Dev Date 10.31

Jul-06

11.80

Aug-09

Other indices of interest: S&P/NZX 10 Index (Gross with ICs) #1-10

S&P/NZX 20 Index (Gross with ICs) #1-20

2.68

S&P/NZX MidCap Index (Gross with ICs) #11-50

1.74

S&P/NZX 50 Portfolio Index (Gross with ICs)

S&P/NZX SmallCap Index (Gross with ICs) #51+

2.05

S&P/NZX All Real Estate Index (Gross with ICs)

1.18

-0.16

-5.34

3.17

3.10

5.01

2.39

-1.78

7.77

28.27 21.07

14.51

14.87

16.28

11.50

10.52

11.19

Aug-09

10.47

Oct-05

13.59

15.58

17.48

13.38

13.94

10.58

12.78

12.86

14.80

14.09

17.49

17.18

N/A

Aug-09

Jul-12

18.36

14.76

Aug-09

N/A

12.49

N/A

Jul-12

N/A

Apr-21

14.80

N/A

12.49

N/A

Jul-12

N/A

Apr-21

Fund expectations vs style indices S&P/NZX 50 Portfolio Index (Gross with ICs)

2.33

1.77

-0.77

23.83

14.22

Style return

-0.46

+0.92

+2.28

+12.62

+1.06

+0.81

Fund tracking error (net of retail TER, currently 0.09% pa)

0.04

-0.01

N/A

Harbour NZ Index Shares Fund (net of fees, with ICs)

S&P/NZX 50 Portfolio Index (Gross with ICs)

2.37

2.33

1.77

N/A

-0.77

N/A

23.83

N/A

14.22

Style return

-0.46

+0.92

+2.28

+12.62

+1.06

+0.81

Fund tracking error (net of retail TER, currently 0.09% pa)

0.39

-1.62

N/A

Harbour Sustainable NZ Shares Fund (Gross with ICs)

2.72

0.16

N/A

Quarterly summary:

Positive style return for both funds.

New index tracking mandate delivered the index return.

New SRI fund established mid-April. It’s May/June returns were broadly in line with the unscreened index.

Table 7 – Australian Equities 1 Month

3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

Market return: S&P/ASX 200 Index (Total Return)

5 Years Std Dev

10 Years Std Dev

Inception Date

3.09

6.83

13.04

28.21

8.92

11.75

7.23

16.36

14.93

Feb-86

Other indices of interest: S&P/ASX 100 Index (Total Return) S&P/ASX 300 Index (Total Return) S&P/ASX Small Ordinaries Index (Total Return)

2.97 3.09 3.92

7.01 7.02 7.03

13.46 13.13 10.90

28.33 28.91 33.66

9.24 9.10 7.94

11.86 11.86 11.83

7.45 7.18 4.02

16.22 16.46 19.94

14.87 14.97 17.89

Feb-86 Feb-86 Feb-86

MSCI Australia Small Cap Index (net div.) MSCI Australia Index (net div., AUD) Size Factor ('SMB'. Source: MSCI Aust Small Cap mius MSCI Aust.)

4.08 2.53 -1.55

6.92 6.96 -0.04

11.48 13.73 -2.25

34.44 28.47 5.97

10.55 8.36 2.19

13.36 11.53 1.83

5.41 6.89 -1.48

20.40 16.34 4.06

18.07 15.06 3.01

Jan-99 Feb-86

S&P/ASX 200 Value TR S&P/ASX 200 Growth TR Value Factor ('HML'. Source: ASX 200 Value minus ASX 200 Growth)

2.45 3.79 -1.34

5.03 8.83 -3.80

15.67 10.27 5.40

32.54 24.02 8.52

5.46 12.21 -6.75

9.33 14.00 -4.67

5.50 8.68 -3.18

18.42 15.38 3.04

16.29 14.47 1.82

May-10 May-10

S&P/ASX 300 A-REIT Index (Total Return) S&P/ASX 300 EX a-reit Index (Total Return)

6.42 2.86

9.25 6.86

10.27 13.33

34.34 28.54

7.57 9.21

6.82 12.29

9.89 6.99

23.33 16.17

18.92 14.94

Feb-86 Sep-00

3.20 +0.10 3.19 -0.01

6.45 -0.38 6.76 +0.31

13.49 +0.45 12.86 -0.63

31.42 +3.20 32.98 +1.57

8.56 -0.36 8.27 -0.29

11.55 -0.21 12.31 +0.76

6.44 -0.79 6.84 +0.40

17.60

15.66

May-10

17.90

15.99

Aug-06

Aust. Small Expectation (exREIT Mkt + 0.75.SMB + 0.05.HML) Style return Dimensional Australian Small Company Trust (net of fees) Fund tracking error (net of retail TER, currently 0.61% pa)

3.95 +0.86 5.09 +1.14

6.64 -0.19 8.03 +1.39

11.91 -1.13 13.44 +1.53

33.45 +5.23 40.10 +6.65

10.52 +1.59 9.60 -0.91

13.44 +1.69 12.02 -1.42

5.71 -1.51 4.63 -1.08

19.43

17.35

May-10

20.27

18.05

Nov-00

Aust. Value Expectation (exREIT Mkt + 0.05.SMB + 0.40.HML) Style return Dimensional Australian Value Trust (net of fees) Fund tracking error (net of retail TER, currently 0.34% pa)

2.40 -0.69 1.50 -0.90

5.34 -1.49 5.18 -0.16

15.36 +2.32 17.35 +1.98

32.21 +4.00 39.78 +7.57

6.57 -2.35 7.79 +1.22

10.47 -1.29 13.57 +3.10

5.62 -1.61 6.42 +0.80

17.84

16.00

May-10

19.34

17.42

Jul-99

Aust. Sust. Expectation (incREIT Mkt + 0.20.SMB + 0.15.HML) Style return Dimensional Australian Sustainability Trust (net of fees) Fund tracking error (net of retail TER, currently 0.31% pa)

3.20 +0.10 3.66 +0.46

6.45 -0.38 7.84 +1.39

13.49 +0.45 12.24 -1.26

31.42 +3.20 34.22 +2.80

8.56 -0.36 N/A

11.55 -0.21 N/A

6.44 -0.79 N/A

17.60

15.66

May-10

N/A

Jan-19

3.09 -0.01 3.07 -0.01

7.02 +0.19 6.97 -0.05

13.13 +0.09 13.06 -0.07

28.91 +0.70 28.71 -0.20

9.10 +0.18 8.93 -0.18

11.86 +0.10 11.69 -0.16

7.18 -0.05 7.01 -0.17

16.46

14.97

Feb-86

16.45

14.95

Nov-98

iShares Aust. Equity Expectation (ASX 300)

Style return

iShares Indexed Australian Equity Fund Fund tracking error (net of retail TER, currently 0.11% pa)

Quarterly summary:

Negative style returns for funds with value tilts.

All funds’ tracking errors within tolerance bands, no EDD flags.

Table 8 – International equity (developed markets) 1 Month Market returns:

MSCI World ex Australia Index (hedged to NZD, net div.)

3 Months

2.45

7.61

14.31

1 Year

3 Years

36.20

13.84

-0.54

+0.11

10.98

14.90

12.65

15.32

13.56

27.93

13.69

15.26

12.52

12.12

11.24

18.63

29.98

17.43

18.15

16.81

15.82

21.20

6.15

5.46

13.62

12.92

2.93

-7.68

0.43

1.71

9.69

11.97

-2.11

+7.85

-0.07

MSCI World ex Australia Small Cap Index (net div.)

3.84

4.82

18.49

41.38

MSCI World Index (net div.) (ie including Aust)

5.50

7.83

16.34

8.46

2.23

MSCI ACWI Index (net div.) (ie including emerging markets) S&P 500 Index

4.59

5.00

7.30

6.05

18.10

15.60

28.35

27.01

28.57

MSCI Japan Index (net div.)

3.33

-0.37

MSCI Europe ex UK Index (net div.)

2.54

7.75

14.86

-0.42

-4.33

-10.28

1.03

-0.09

-2.57

1.15

MSCI United Kingdom Index (net div.) United States Dollar Japanese Yen British Pound

European Monetary Unit

Negative currency returns reflect a relative strength in the NZD (and vice versa)

5.88

3.63

-0.09

1.02

0.25

2.46 0.77 -1.00

Size Factor ('SMB'. Source: Dartmouth University)

Value Factor ('HML'. Source: Dartmouth University)

-1.97

S&P Developed REIT Index (net div.)

Fund expectations vs style indices Global Core (NZD Hdgd) Expectation (1.0x Market + 0.15x SMB + 0.15x HML)

4.25

4.12

1.11

15.25

25.71

3.06

8.41

13.91

7.27

13.37

15.40

10.28 15.10

9.53

11.78

11.84

13.18

6.12

10.66

9.80

12.43

-1.16

-1.03

-1.51

10.66

-0.54

1.76

-0.31

7.68

0.83

-1.05 0.52

-3.57

1.20

-0.95

8.99

13.00

7.98

0.21

-1.07

11.38

13.52

11.48

Inception Date Jul-01

Feb-86

Jan-99

11.82

Feb-86

11.02

Jan-99

12.28

12.38

13.88 13.28

Feb-86 Feb-86

Feb-86

Feb-86 Feb-86

Feb-86

8.52

10.39

Feb-86

5.09

4.90

Jan-91

4.03

4.04

9.26

-3.27

10.84

5.33

-10.28

-6.59

-4.20

10.24

5.40

10.17

20.69

24.70

6.48

5.31

8.94

15.24

13.52

Jan-01

1 Month

3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

5 Years Std Dev

10 Years Std Dev

Inception Date

11.91

14.90

13.52

Jul-01

2.31

0.95

6.34

-0.13

16.43

0.11

41.68

4.36

10.93

2.79

13.88

3.35

8.09

Jan-99

-5.25

0.71

Profitability Factor ('RMW'. Source: Dartmouth University)

12.83

10 Years Std Dev 12.95

-0.06

MSCI World ex Australia Value Index (net div.)

14.86

5 Years Std Dev 14.06

-2.80

Other indices of interest (NZD unhedged):

10 Years

12.30

16.42

Hedging impact (MSCI World ex Aust NZD - MSCI World ex Aust)

5 Years

12.72

7.67

MSCI World ex Australia Index (net div.)

5.24

6 Months

Jan-91

Style return

-1.49

-1.27

+2.12

+5.48

-2.92

-0.99

-0.92

Fund tracking error (net of retail TER, currently 0.36% pa)

-0.09

+0.10

-0.27

-0.56

+0.09

-0.66

11.25

15.44

14.13

May-09

15.15

15.65

N/A

14.34

N/A

Jul-16

16.28

16.63

N/A

14.71

N/A

Jun-16

11.23

13.52

11.99

Jan-91

11.63

15.46

13.57

Sep-00

10.34

14.22

12.91

Jan-91

Dimensional Global Core Equity Trust – NZD Hedged Class Units (net of fees)

Global Sustainability Expectation (1.0x NZD Mkt + 0.15x SMB + 0.15x HML)

0.86

6.44

0.95

6.34

16.16

16.43

41.11

42.29

11.02

Style return

-1.49

-1.27

+2.12

+6.09

+1.31

Fund tracking error (net of retail TER, currently 0.38% pa)

+0.25

+0.62

-1.02

-0.51

+1.13

(GSUST expection has varied to match mandate)

Dimensional Global Sustainability Trust - NZD Hedged Class Units (net of fees)

Global Small Expectation (1.0x Market + 0.75x SMB + 0.10x HML)

1.20

3.36

6.96 5.33

15.42 18.79

41.78

39.66

8.88

13.22

13.95

Style return

-1.89

-2.34

+2.37

+11.31

-5.03

-1.46

-1.49

Fund tracking error (net of retail TER, currently 0.65% pa)

-0.56

-0.60

+0.62

+1.79

+0.11

-0.32

+0.40

Dimensional Global Small Company Trust (net of fees)

Global Value Expectation (1.1x Market + 0.10x SMB + 0.50x HML)

2.80

4.73

1.96

6.06

19.41

24.31

41.45

39.95

8.99 8.45

13.63 12.77

Style return

-3.28

-1.61

+7.89

+11.60

-5.46

-2.63

-2.38

Fund tracking error (net of retail TER, currently 0.46% pa)

-0.36

-1.33

-2.39

-5.91

-2.70

-1.73

-1.10

9.24

15.19

13.56

Sep-99

5.24

7.67

16.42

28.35

13.91

15.40

12.72

12.30

11.48

Feb-86

Dimensional Global Value Trust (net of fees)

EthicallyC Equities Expectation (MSCI World ex Australia Index (net div.))

Style return

Vanguard Ethically Conscious International Shares Index Fund (UnHedged)

Fund tracking error (net of retail TER, currently 0.20% pa)

Vang Intl. Shares Expectation (MSCI World ex Australia Index (net div.)) Vanguard International Shares Index Fund (Unhedged)

Style return

Fund tracking error (net of retail TER, currently 0.18% pa)

AMP ACWI Expectation (MSCI ACWI 69% Hedged)

1.60

4.73

5.69

8.29

21.93

5.75

+0.62

-0.50

-0.02

28.33

N/A

Nov-18

5.24

7.67

16.42

28.35

13.91

15.40

12.72

12.30

11.48

Feb-86

12.78

12.07

11.28

Jul-97

12.82

12.44

11.20

Jan-99

N/A

Dec-17

4.93

-0.31

7.87

+0.20

3.03

7.21

16.43

+0.01

14.14

27.96

-0.39

34.59

13.88

-0.03

14.45

Style return

-0.24

-0.37

-0.82

+0.22

-0.54

Fund tracking error (net of retail TER, currently 0.40% pa)

+0.21

+0.18

-0.17

-0.61

-1.54

AMP Capital All Country Global Shares Index Fund

11.05

+0.45 -

15.92

34.04

3.24

7.38

13.98

33.99

12.91

15.41

+0.01

15.45

-0.30

N/A

+0.06

-0.94

Quarterly summary:

Negative style returns for funds with value tilts.

All funds’ tracking errors within tolerance bands, no EDD flags.

Table 9 – International equity (emerging markets) 1 Month 3 Months 6 Months Market return:

1 Year

3 Years

5 Years

10 Years

5 Years Std Dev

10 Years Inception Std Dev Date

MSCI Emerging Markets Index (net div.)

4.13

5.14

10.58

29.64

10.01

13.45

6.04

11.59

12.00

Jan-99

Other indices of interest (NZD unhedged): MSCI Emerging Markets Small (net div.) MSCI Emerging Markets Value Index (net div.) MSCI Emerging Markets IMI (net div.)

6.05 3.36 4.07

11.16 5.76 5.64

23.29 13.22 11.94

51.17 30.27 32.20

11.14 6.59 10.21

12.34 10.11 13.34

6.34 3.51 6.10

15.21 12.28 11.98

14.12 12.63 12.17

Jan-99 Jan-99 Jan-99

MSCI MSCI MSCI MSCI MSCI MSCI

3.74 4.29 5.07 2.91 9.15 7.98

2.18 7.00 4.74 6.82 22.80 13.93

4.82 22.26 9.66 15.67 13.89 23.16

17.60 57.36 53.43 44.35 35.30 27.99

9.21 26.73 13.68 10.70 9.68 14.07

17.08 24.24 16.65 12.33 10.15 16.81

9.55 14.05 8.25 7.34 -0.76 3.63

14.43 15.59 16.55 19.22 30.87 22.09

16.24 14.55 15.83 19.95 28.74 23.91

Jan-99 Jan-99 Jan-99 Jan-99 Jan-99 Jan-99

Size Factor ('SMB'. Source: Dartmouth University) Value Factor ('HML'. Source: Dartmouth University) Profitability Factor ('RMW'. Source: Dartmouth University)

0.20 2.88 -0.95

6.12 5.35 -1.98

10.44 10.40 -0.75

15.46 9.24 -3.63

2.64 -0.13 -0.97

3.24 -1.42 0.81

1.01 0.40 2.45

8.38 5.27 4.24

7.09 5.24 4.16

Jan-00 Jan-00 Jan-00

MSCI Emerging Markets Real Estate Index (net div.)

-0.63

-6.09

2.48

-1.60

-1.79

N/A

Oct-16

Style return

3.36 -0.77

5.76 +0.62

13.22 +2.64

30.27 +0.63

6.59 -3.42

10.11 -3.34

3.51 -2.53

12.28

12.63

Jan-99

Fund tracking error (net of retail TER, currently 0.71% pa)

+0.03

+1.55

+6.30

+7.88

-0.19

+0.76

+0.42

3.93

13.74

13.83

Oct-00

MSCI Emerging Markets IMI (Net Div.)

Style return

4.07 -0.05

5.64 +0.50

11.94 +1.36

32.20 +2.56

10.21 +0.20

13.34 -0.11

6.10 +0.06

11.98

12.17

Jan-99

Fund tracking error (net of retail TER, currently 0.55% pa)

+0.59

-0.10

-0.31

-1.10

-0.48

-0.44

-0.52

5.58

11.79

12.04

Oct-10

MSCI EM SRI Select Reduced Fossil Fuel Index (net div.) Style return

7.34 +3.21

10.38 +5.24

13.51 +2.93

41.86 +12.22

12.52 +2.51

12.70 -0.74

N/A N/A

13.37

N/A

Jun-13

Fund tracking error (net of retail TER, currently 0.25% pa)

-0.16

-0.21

-0.29

-0.63

+0.69

N/A

Aug-16

China Index (net div.) Taiwan Index (net div.) Korea Index (net div.) India Index (net div.) Brazil Index (net div.) Russia Index (net div.)

Fund expectations vs style indices

DFA EM Expectation (MSCI EM Value Index) Dimensional Emerging Markets Trust (net of fees)

iShares Indexed Emerging Markets IMI Equity Fund

iShares MSCI Emerging Markets SRI ETF

3.39

4.67

7.17

7.31

5.54

10.17

19.52

11.63

13.22

38.15

31.10

41.23

6.40

9.73

13.21

10.87

12.90

N/A

Quarterly summary:

iShares MSCI EM SRI (SUSM) joins this analysis. Positive style returns for all three funds.

All funds’ tracking errors within tolerance bands, no EDD flags.

Table 10 – New Zealand fixed interest 1 Month

3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

Market return: S&P/NZX A-Grade Corporate Bond Index

5 Years Std Dev

0.27

0.26

-1.81

-1.20

3.74

4.87

2.33

2.03

Sep-94

Other indices of interest: New Zealand One-Month Bank Bill Yields Index Average NZ six-month term deposit S&P/NZX NZ Government Bond Index

0.02 0.07 0.09

0.07 0.21 0.21

0.13 0.45 -3.22

0.27 1.33 -3.60

1.00 2.48 3.32

1.36 2.79 2.87

2.14 3.36 4.36

0.20 0.23 3.61

0.28 0.23 3.35

Feb-86 Apr-65 Jul-85

0.27 -

0.26 -

-1.81 -

-1.20 -

3.74 -

4.87 -

2.33

2.03

Sep-94

2.17

1.82

Mar-09

Fund expectations vs style indices Harbour Bond Fund Expectation (NZX Corp A Index) Harbour Corporate Bond Fund

Style return

Fund tracking error (net of retail TER, currently 0.45% pa)

0.05

-0.22

-0.04

-0.30

-1.59

+0.22

-0.51

+0.69

3.59

-0.16

3.46

-0.28

4.34

-0.53

10 Years Inception Std Dev Date

NB. S&P/NZX A-Grade Corporate Bond Index has a 3-4y modified duration, while the S&P/NZX NZ Government Bond Index has a 5-6y modified duration.

Quarterly summary:

Expectation for Harbour Corporate Bond Fund is market return.

Harbour Corporate Bond Fund’s tracking error inside tolerance band. No EDD flag.

Table 11 – International fixed interest

10 Years Inceptio Std n Date Dev

1 Month

3 Months

6 Months

1 Year

3 Years

5 Years

10 Years

5 Years Std Dev

-0.10

0.08

-0.29

0.09

2.53

2.11

3.36

0.95

0.98

Feb-86

-0.08 -0.13 0.42

0.02 0.18 0.68

-0.05 -0.62 -2.00

0.21 -0.07 -1.25

2.07 3.19 3.79

1.91 2.42 2.70

2.93 3.95 5.33

-0.04 0.51

0.13 1.01

0.10 -1.50

0.60 0.02

2.23 4.28

2.15 3.18

3.25 5.40

0.55 2.75

0.63 2.74

Sep-00 Feb-99

0.50 0.09 0.09

0.66 -0.05 0.33

-1.96 0.72 0.50

-1.47 0.67 1.27

1.72 -0.96 0.49

0.79 -0.27 0.47

2.40 -0.70 0.07

-0.04 +0.06 0.02 0.06

0.13 +0.04 0.11 -0.01

0.10 +0.40 0.19 0.09

0.60 +0.51 0.67 0.07

2.23 -0.30 1.83 -0.40

2.15 +0.04 N/A

3.25 -0.10 N/A

0.55

0.63

Sep-00

N/A

Feb-17

-0.10 -0.12 -0.01

0.08 0.18 0.10

-0.29 0.17 0.46

0.09 0.71 0.62

2.53 2.15 -0.38

2.11 1.88 -0.24

3.36 3.69 0.33

0.95

0.98

Feb-86

1.17

1.80

Mar-04

Style return

0.51 +0.62

1.01 +0.93

-1.50 -1.21

0.02 -0.07

4.28 +1.74

3.18 +1.06

5.40 +2.04

2.75

2.74

Feb-99

AMP Capital Ethical Leaders Hedged Global Fixed Interest Index Fund Fund tracking error (net of retail TER, currently 0.40% pa)

0.43 -0.08

0.87 -0.14

-1.62 -0.11

-0.48 -0.50

3.79 -0.49

N/A

Dec-17

Dimensional Global Bond Trust - NZD Class Units (net of fees) Fund tracking error (net of retail TER, currently 0.35% pa)

1.08 +0.57

2.17 +1.16

-1.91 -0.41

1.04 +1.02

5.10 +0.82

3.75 +0.58

N/A

4.02

N/A

Dec-11

Dimensional Global Bond Sustainability Trust - NZD Class Units (net of fees) Fund tracking error (net of retail TER, currently 0.39% pa)

1.03 +0.52

2.19 +1.18

-1.94 -0.43

1.00 +0.98

5.17 +0.89

N/A

May-18

Vanguard Ethically Conscious Global Aggregate Bond Index Fund – NZD Hedged Fund tracking error (net of retail TER, currently 0.28% pa)

0.62 +0.11

1.02 +0.01

-1.89 -0.38

-0.29 -0.30

N/A

Sep-18

Market return: FTSE World Government Bond Index 1-5 Years

('FWGBI 1-5y')

Other indices of interest (all NZD hedged) FTSE World Government Bond Index 1-3 Years * ('FWGBI 1-3y') FTSE World Government Bond Index 3-5 Years *('FWGBI 3-5y') Bloomberg Barclays Global Treasury Bond Index * ('BGTBI') (* NZD Hedged index return estaimted from AUD hedged series)

Bloomberg Barclays Global Aggregate Bond Index 1-3 Years ('BGAB 1-3') Bloomberg Barclays Global Aggregate Bond Index ('BGAB All') Term Premium for ~7 years duration Credit Premium at 1-3 years duration Credit Premium at 7-9 years duration

(BGTBI - FWGBI 1-3y) (BGABI 1-3 - FWGBI 1-3) (BGABI All - BGTBI)

Fund expectations vs style indices Bloomberg Barclays Global Aggregate Bond Index 1-3 Years (hedged to NZD) Style return Dimensional Two-Year Diversified Fixed Interest Trust NZD Class (net of fees) Fund tracking error (net of retail TER, currently 0.25% pa) FTSE World Government Bond Index 1-5 Years (hedged to NZD)

Style return

Dimensional Diversified Fixed Interest Trust NZD Class (net of fees) Fund tracking error (net of retail TER, currently 0.28% pa) Barclays Global Aggregate Expectation Funds: Barclays Global Aggregate Bond Index (hedged to NZD)

Quarterly summary:

Generally positive style returns for all funds.

All funds’ tracking errors within tolerance bands, no EDD flags.

Disclaimer: The material contained in this report has been prepared based upon information that Consilium NZ Limited believes to be reliable but may be subject to

typographical or other errors. Consilium has taken every care in preparing this information, which is for client education purposes only. Although the data has been

Portfolio returns vs benchmarks Model portfolio and index portfolio returns to 30 June 2021

Weightings

Asset allocation

Returns Jun 21 Quarter

1 year

3 years

Long term 5 years

10 years

expected

Growth

Income

Model

Index

Model

Index

Model

Index

Model

Index

Model

Index

1.8%

1.2%

6.9%

4.8%

5.3%

5.0%

5.1%

4.9%

5.9%

5.6%

5.4%

2.3%

1.7%

9.9%

7.0%

6.0%

6.2%

6.1%

6.5%

6.4%

5.9%

2.8%

2.3%

13.7%

9.8%

6.8%

7.1%

7.3%

7.2%

6.4%

3.3%

2.9%

17.3%

12.8%

7.5%

8.2%

8.3%

8.5%

7.8%

8.1%

6.9%

3.8%

3.6%

21.2%

16.0%

8.1%

9.2%

9.7%

8.4%

8.9%

7.3%

4.4%

4.3%

25.3%

19.5%

8.6%

10.2%

10.9%

9.0%

9.7%

7.8%

4.9%

5.0%

29.6%

23.1%

9.1%

11.2%

11.1%

12.1%

9.5%

10.5%

8.3%

5.4%

5.8%

34.0%

27.0%

9.6%

12.3%

12.0%

13.3%

10.1%

11.3%

8.7%

5.8%

6.5%

37.7%

30.3%

9.9%

13.1%

12.7%

14.3%

10.5%

12.0%

9.1%

strategy Defensive

Aggressive

returns

Index returns to 30 June 2021 The indices used to calculate the index portfolio returns are as follows: Index returns p.a.

Asset Class

Index

New Zealand equity

S&P/NZX 50 Index Gross with Imputation

0.9%

11.2%

13.2%

14.0%

15.2%

Australian equity

S&P/ASX 200 Index (Total Return)

6.8%

28.2%

8.9%

11.8%

7.2%

Intl equity (developed mkts)

MSCI World ex Australia Index (net div., hedged to NZD)

7.6%

36.2%

13.8%

14.9%

12.8%

Intl equity (developed mkts)

MSCI World ex Australia Index (net div.)

7.7%

28.3%

13.9%

15.4%

12.7%

Intl equity (emerging mkts)

MSCI Emerging Markets Index (gross div.)

5.0%

30.5%

10.5%

13.9%

6.4%

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

0.3%

-1.2%

3.7%

4.9%

Quarter

1 year

3 years

5 years

10 years

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

0.1%

2.5%

2.1%

3.4%

New Zealand cash

30 Day Bank Bills

0.1%

0.3%

1.0%

1.4%

2.1%

Notes:

manager fees, but gross of custodial and adviser monitoring fees

SRI Portfolio returns vs benchmarks Model portfolio and index portfolio returns to 30 June 2021

Weightings SRI Asset allocation

Jun 21 Quarter

Growth

Income

4.2%

Defensive

Aggressive

SRI Long

Returns

Model

1 year

3 years

5 years

term

10 years

expected

Index

Model

Index

Model

Index

Model

Index

Model

Index

returns

2.1%

1.1%

6.0%

4.3%

6.5%

5.1%

5.9%

5.0%

6.9%

5.8%

5.4%

2.5%

1.5%

9.0%

6.5%

7.6%

6.1%

7.2%

6.2%

7.8%

6.7%

5.8%

3.1%

2.0%

12.2%

9.1%

8.7%

7.2%

8.4%

7.4%

8.6%

7.6%

6.3%

3.6%

2.6%

15.5%

11.8%

9.7%

8.2%

9.7%

8.6%

9.4%

8.5%

6.7%

3.3%

18.9%

14.7%

10.7%

9.2%

10.9%

9.8%

10.2%

9.3%

7.1%

4.8%

4.0%

22.6%

17.7%

11.8%

10.2%

12.1%

11.0%

10.9%

10.1%

7.5%

5.5%

4.6%

26.4%

20.9%

12.8%

11.1%

13.4%

12.1%

11.6%

10.9%

7.9%

6.3%

5.4%

30.5%

24.3%

13.8%

12.0%

14.6%

13.2%

12.3%

11.6%

8.4%

6.9%

6.1%

33.9%

27.1%

14.6%

12.7%

15.6%

14.2%

12.8%

12.2%

8.7%

Index returns to 30 June 2021 The indices used to calculate the index portfolio returns are as follows: Index returns p.a.

SRI Asset allocation

Index

New Zealand equity

S&P/NZX 50 Index Gross with Imputation

0.9%

11.2%

Australian equity

S&P/ASX 200 Index (Total Return)

6.8%

28.2%

8.9%

11.8%

7.2%

Intl equity (developed mkts)

MSCI World ex Australia Index (net div., hedged to NZD)

7.6%

36.2%

13.8%

14.9%

12.8%

Intl equity (developed mkts)

MSCI World ex Australia Index (net div.)

7.7%

28.3%

13.9%

15.4%

12.7%

Intl equity (emerging mkts)

MSCI Emerging Markets Index (net div)

5.0%

30.1%

10.1%

13.5%

6.1%

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

0.3%

-1.2%

3.7%

4.9%

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

0.1%

2.5%

2.1%

3.4%

New Zealand cash

30 Day Bank Bills

0.1%

0.3%

1.0%

1.4%

2.1%

Notes: standard unscreened market indices in each asset class.

underlying manager fees, but gross of custodial and adviser monitoring fees

Quarter

1 year

3 years 13.2%

5 years 14.0%

10 years 15.2%

2021 Q2 Partner Firm Monitoring Certificate from Consilium Investment Committee (CIC) Quarterly monitoring: In the Partner Firm Service Agreement and Consilium Investment Committee Policy and Procedures Manual, the CIC outlined the following process for reviewing underlying investments. All investment securities are reviewed on a quarterly basis and performance is measured against appropriate benchmark indices. Where a security’s performance is consistent with its mandate and in line with broad style and/or asset class returns, no further action will generally be taken. However, a security may be placed on an ‘enhanced due diligence’ list, and subjected to a higher degree of scrutiny, for any of the following reasons: -

A change in the primary portfolio manager

A significant change in the fund management company’s majority owner or ownership

structure

A more than 25% fall in the fund’s assets under management over a rolling one-year period

(due to outflows, not market movement)

Total fund assets falling below our minimum fund size thresholds at any time

A change in the fund’s investment style, diversification and/or risk factor tilting

An increase in the fund’s fees

The fund exhibited quarterly tracking error versus a relevant benchmark outside its

monitoring thresholds

The fund exhibited a persistent deviation in tracking error versus a relevant benchmark

outside its monitoring thresholds, measured over a rolling three-year basis, minus fees and

allowing a volatility threshold appropriate for each fund -

An extraordinary event which, in the opinion of the Investment Committee, may impact on the manager’s ability to comply with the fund mandate in future

We completed the monitoring of all of the above aspects for all underlying funds in the Partner Firm portfolios and found the following: 1.

Dimensional: Change in key party Addition of The Royal Bank of Canada as an eligible FX Hedge Counterparty.

2. Dimensional Two-year Diversified Fixed Interest Trust Dimensional changed the mandate of the trust, introducing a sustainability overlay. This change also resulted in a change in the trusts name to the Dimensional Two-year Sustainability Fixed Interest Trust.

We will be undertaking an analysis of all two flags over the coming weeks, and we are aiming to have completed papers summarising our findings in the next three months.

Update on prior flagged actions: 1.

Harbour Corporate Bond Fund: Q1 2021 outperformance Investigation COMPLETED. Our analysis highlighted the quarterly outperformance was a result of several contributing factors throughout the quarter, most notably the funds relative duration positioning compared to the benchmark. The funds security selection, particularly the funds allocation to inflation linked bonds and BBB rated securities, also contributed to outperformance of the fund relative to the benchmark. The funds exposure levels always remained inside mandate and broadly in line with historical observations. This has been a volatile period for this asset class and the increase in volatility has been the primary source of the increased tracking error over the recent quarters.

2. Dimensional Global Sustainability Trust (NZD): Q1 2021 underperformance Investigation COMPLETED. The attribution analysis shows that against the MSCI World ex Australia Index, we can see that the fund outperformed the market, with this outperformance resulting from the size and value tilts taken by the trust. Against the custom benchmark however, the underperformance is attributable to the funds SRI exclusions, with the Energy sector in particular outperforming throughout the quarter (26.3% vs 7.9%). There is currently insufficient evidence for us to be able to expect a positive premium from SRI investing, so this feature does not impact the expected returns of our custom benchmark. We remain satisfied the identified risk exposures are consistent with the trust mandate, and we identified no unexpected or unexplained risks.

3. Dimensional Emerging Markets Trust: Q1 2021 outperformance Investigation COMPLETED. Our analysis highlighted that the outperformance in the March quarter was attributable to structural elements of the trust, particularly the tilts towards value and small companies. Significantly outperforming deep value sectors led to positive relative performance throughout the March 2021 quarter. We remain satisfied the identified risk exposures are consistent with the trust mandate, and we identified no unexpected or unexplained risks. New Business: - Approved products list ongoing. -

SAA review ongoing.

Consilium Spring Update July – September 2021 P1 P4 P7

Market commentary Key market movements for the quarter Anchors away: The influence of what you know on what you don't

The third quarter of 2021 generally delivered small positive returns to diversified investors.

While it's human nature to enjoy seeing the value of your investment portfolio increase quickly, it’s also not reasonable for us to expect large gains each quarter. In fact, if markets got too far ahead of themselves, it could increase the chances of a future correction. In that context, a small positive return can sometimes be more reassuring than a large one. Following the extended strong bounce-back from the Covid-19 market crash in March 2020, the recent quarter represented both a consolidation of those prior gains and an opportunity for the market to digest new information.

And what a considerable amount of new information there was to digest.

A small positive return can sometimes be more reassuring than a large one. One relatively recent development has been the emergence of an evolving energy crisis across both Europe and China, resulting in record price increases in commodities used to generate electricity and heat; namely oil, natural gas and coal.

About 40% of the UK's energy comes from renewable sources, but the reliability of a renewable supply can be problematic. With low winds across Europe and the UK in their northern summer, wind power generation waned, forcing these regions to turn to

Consilium 209 Cambridge Terrace Christchurch 8013 03 353 1007 support@consilium.co.nz www.consilium.co.nz

gas and coal. UK petrol prices have also hit an eightyear high with widespread reports of petrol stations running dry. In a similar vein, demand for natural gas has been surging in China, as low water levels restricted hydropower generation and severe coal shortages affected electricity supply. A combination of coal shortages, toughening emissions standards and strong demand from manufacturers and industry, pushed coal prices to record highs and triggered widespread curbs on usage.

Chequered pathway back to normal

With much of the developed world having abandoned strategies designed to eliminate Covid-19 and instead opting to “live with it”, there has been a continued reorientation underway globally whereby individuals, businesses and governments are exploring pathways back towards normal, or "postCovid normal". Increasingly, this is being reflected in many countries through a relaxation in previous social and business restrictions, and in some cases travel restrictions. Unfortunately, on the trade front, the pathway back to normal faces some significant hurdles, at least in the near term. Anyone who has recently tried to buy consumer goods from overseas, will already have a sense of this – shortages and delays are now commonplace – but why is this? It’s what can happen when an extremely complex system gets disrupted.

Unfortunately, restarting the global manufacturing machine after the lockdown turned out to be anything but seamless. Inflation – temporary or permanent?

And that leads to the question that policymakers and market participants are now grappling with – are these price rises likely to be temporary or something more permanent?

Supply chain breakdown

During the first half of 2020, when much of the global economy went into lockdown, demand for most consumer goods came to a near standstill. In short order, manufacturing capacity was cut, sailings by container ships were cancelled, and workers everywhere were furloughed or displaced.

By the second half of 2020, following massive fiscal and monetary stimulus by most central banks, consumers started flooding online retailers with new orders. Manufacturing restarted and international trade resumed. The global economic switch was suddenly turned back on.

Unfortunately, restarting the global manufacturing machine after the lockdown turned out to be anything but seamless. The vast and interconnected system that continuously moves raw materials and finished products all around the globe, requires predictability and precision. But with the advent of Covid, both had been lost. And, when the switch did turn back on, it occurred when thousands of shipping containers were stuck in the wrong place. Many containers that carried millions of protective face masks to Africa and South America early in the pandemic today remain empty and uncollected because shipping companies, aiming to make up for lost time and lost profitability, decided to direct their vessels towards their most profitable routes between Asia and North America or Europe.

With significantly fewer containers suddenly in circulation, this resulted in an immediate imbalance between the supply and demand for usable shipping space. Unfortunately, it is this global supply chain breakdown that is directly contributing to the spike in transportation costs we are now witnessing, as well shortages in key manufacturing components, order backlogs and frustrating delivery delays. Perhaps most obvious of all, we are seeing these effects coalesce all around us in the form of rising consumer prices.

Inflation measures have certainly gone up but that only reflects what we already know – that many prices have already increased. It doesn’t tell us how persistent those price rises may prove to be. In fact, if recent price rises can largely be attributed to supply chain issues, which are likely to be remedied in time, then the idea that the current inflation spike will only be temporary may have more credence. Earlier in the year, long term interest rates rose sharply as forward-looking markets were anticipating a global economic acceleration would propel both growth and inflation rates higher. However, as the year has progressed, several of the world’s largest economies have recently had their future economic growth projections revised downwards in light of these existing manufacturing and supply side constraints. At least temporarily, this paints a picture of rising inflation and reducing growth – a relatively rare condition (known as stagflation) that most central bankers are extremely wary of.

Interest rate arm wrestle

After losing momentum from April through to early September, long term bond yields – led by the 10-year US Treasury bond – rose again during the second half of September following policy meetings from the Bank of England and the US Federal Reserve, both indicating a need to consider raising interest rates in the wake of rising inflation. Although many of the current inflationary forces are still seen as transitory, persistent disruptions in supply chains and surging energy costs have increased fears that inflation might last longer than anticipated. This added impetus to the increase in global yields from mid-September. Weighing into this debate, Federal Reserve Chairman Jerome Powell said they anticipate the current surge in prices, due primarily to supply-chain bottlenecks, continuing into next year before fading. He said the Federal Reserve doesn’t expect the current inflation spike to “lead to a new inflation regime, in which inflation remains high year after year.”

Powell also conceded that the Federal Reserve faced a situation it hasn’t encountered for a very long time: an emerging tension between the bank’s two primary objectives of low, stable inflation and high employment. The dilemma for Federal Reserve rate setters is that any movement towards increasing interest rates to dampen inflation is likely to be negative for economic growth, which could in turn lead to increased unemployment. The world continues to watch developments in this space with keen interest.

China struggles

Outside of the major markets, China also hit the headlines for a range of reasons recently, not least of which being the relatively poor performance of the Chinese sharemarket last quarter.

Chinese shares have always been subject to something of a “China discount” in respect of the perceived additional political risk, but investors appeared to be surprised by the speed and swiftness with which large parts of the economy have been targeted for new regulations.

A regulatory crackdown on social media and education firms contributed to weaker share prices in those areas. Companies with exposure to property also suffered as a result of the government’s clampdown on leverage coupled with a liquidity crisis at Evergrande, a very large Chinese property developer. There was even a Chinese ban on cryptocurrency transactions announced on 24 September which knocked the price of bitcoin. As if that wasn’t enough, a rush by provincial authorities to meet strict national carbon-emissions targets, together with tight supplies of coal, have led to power shortages, which could in turn weigh on both the wider economy and asset prices.

But... not all doom and gloom

So, on the surface – where the media tend to search for their headlines – the new information presented during the quarter seemed rather negative. It might be one explanation as to why returns during the quarter were fairly flat. However, when you scratched a little deeper, there was often better news to be found.

Globally, most countries have successfully reduced the spread of the highly infectious delta strain via a combination of vaccines and increased mobility restrictions. And, with global vaccination rates still climbing, there is a sense of the tide slowly turning in this global fight. It is far from an immediate salve but is a brighter light at the end of the tunnel. On this pathway towards greater personal and economic freedoms, we can begin to consider the impact this might have on trade, business profitability and economic prosperity. Taken together, the International Monetary Fund and World Bank see an average global growth rate next year of 4.6%. This may be a touch below the current growth rate, but this is still a very healthy rate of annual growth for the world economy relative to its pre-Covid pace of around 3%.

As if that wasn’t already enough, a rush by provincial authorities to meet strict national carbon-emissions targets, together with tight supplies of coal, has led to power shortages, which could in turn weigh on both the wider economy and asset prices. A global reopening with increasing vaccination rates may also help reduce inflation pressures as the business community consistently gets back to work. Earnings volatility should reduce as supply chain pressures ease and businesses incur less of the stop/ start disruptions they have experienced with respect to operations and earnings. And while global interest rates may have commenced an upward path, they are likely to remain highly attractive (by historical standards) for quite some time, providing significant ongoing support to share markets. Covid-19 will go down in history as a global health disaster and an extraordinary economic disrupter. It is rare that the world is so utterly unprepared for something so seismic. But, while its health impact may linger long into the future, its longterm economic impact – in aggregate – may be considerably less devastating.

Key market movements for the quarter The quarter started on a positive note for most markets but gains generally eased in September amid concerns of rising inflation, worries about China, and energy shortages in Europe.

The New Zealand share market performed better than most developed markets with the economic growth rate (2.8% in the second quarter) reported to be much stronger than expected. Before heading into a new lockdown in the third quarter, New Zealand’s economy was enjoying high employment, relatively strong household and business balance sheets, and the expectation of ongoing fiscal support from the New Zealand government.

Key interest rates changed little internationally although, as inflation fears strengthened, the focus returned to the likely size and timing of future interest rate hikes around the globe. Rising yields on US Treasuries in September underlined the market view that rate hikes could be brought forward in addition to an earlier tapering in their asset purchase programme. In August, New Zealand was poised to be one of the first developed nations to commence raising interest rates; its first hike in seven years. This was only stymied at the eleventh hour as New Zealand went into another Covid-related lockdown, with the highly anticipated first move upwards in rates being deferred until early October.

 +0.5% (hedged to NZD)

+1.3%

(unhedged)

International shares

In the USA, the flagship S&P 500 Index (total returns in USD) was in line with the broad market, gaining +0.6% for the quarter. Strong company earnings supported the index through July and August, but growth and inflation concerns late in the quarter saw US shares retrace their steps in September. European markets followed a similar pattern, with weakness later in the period due to rising energy prices and concerns that supply-chain bottlenecks would drive inflation higher. Although the headline returns for USA and Europe were similar, the drivers of returns varied quite markedly. In the USA, leading performers were in the large capitalisation space, with financials and utilities sectors leading the way. In Europe, it was small capitalisation companies that generally outperformed, with the energy sector, in particular, recording strong gains. After generally lagging over the last couple of years, the UK market performed a little better than its European peers over the quarter with the MSCI UK Index gaining +2.2%. Increased merger and acquisition activity helped drive market sentiment overall, while weakening economic indicators were otherwise reflected in a wide dispersion in company returns across sectors. All of these results paled next to the Japanese market where the MSCI Japan Index increased by +5.3% with corporate profit results, purchase orders and capital expenditure plans all looking relatively strong. The quarter also saw the surprise resignation of Prime Minister Yoshihide Suga who was replaced by Fumio Kishida, an establishment politician considered to be a safe, if unexciting, choice to guide Japan through the next stage of its post-Covid recovery. In New Zealand dollar terms, the MSCI World ex-Australia Index delivered a quarterly return of +0.5% on a hedged basis and +1.3% unhedged. The rolling 12-month return for the New Zealand dollar hedged index was +28.4% while the unhedged index gained +23.4%. Source: MSCI World ex-Australia Index (net div.)

 -6.8%

Emerging markets shares

Emerging market equities struggled in the third quarter which saw a sell-off in Chinese shares, concerns over continued supply chain disruptions, and worries over the implications of higher food and energy prices in some markets. Regulatory actions in China were the initial trigger for market weakness. These were compounded by the re-imposition of some Covid-19 restrictions, power shortages, and worries about possible systemic financial system risks stemming from the potential collapse of Chinese property developer Evergrande. Brazil was also weak as above-target inflation continued to rise and the central bank there responded with further interest rate hikes, while the South Korean market was impacted by falling prices for dynamic random access memory chips (DRAM) as well as general supply chain concerns. In stark contrast, net energy exporters generally outperformed, most notably Colombia, Russia, Kuwait, Saudi Arabia, Qatar and the UAE. India also delivered a strong gain, with investor sentiment boosted by a recent stream of initial public offerings. In unhedged New Zealand dollar terms, the MSCI Emerging Markets Index produced a quarterly return of -6.8%, for a +13.6% return over the last 12 months. Source: MSCI Emerging Markets Index (gross div.)

 +5.2%

New Zealand shares New Zealand was one of the better performing global developed share markets through the quarter with the S&P/NXZ 50 Index returning +5.2%. With underlying economic conditions still broadly favourable and the market ‘looking through’ the ongoing Covid uncertainties, it was generally the larger companies within the index which performed better than the smaller capitalisation firms. The most significant contributions came from firms in the Healthcare and Industrials sectors. In the Healthcare sector, it was Pacific Edge leading the charge with a gain of 24.4% following strong interest in a retail placement to help support their US growth strategy. Ryman Healthcare also performed strongly, up 15.0% after announcing record first quarter sales and continued expansion in Melbourne. In the Industrials sector, the continuation of a stellar year for Mainfreight saw their share price advance another 26.6%. On 1 September, they announced significantly improved revenue and profitability figures compared with the same 22-week period last year. All sectors made a positive contribution over the quarter with the exception of the Consumer Discretionary sector, where the increased lockdown restrictions likely had a more immediate impact. SkyCity Entertainment, down -6.8% for the quarter, was the worst affected in this sector. Source: S&P/NZX 50 Index (gross with imputation credits)

 -0.7%

Australian shares In spite of a September sell-off, the Australian share market also returned a positive quarter in local currency terms, with the S&P/ASX 200 Index (total return) in Australian dollars gaining 1.7%. In direct contrast to the New Zealand market, the largest capitalisation firms generally struggled over the quarter, while good returns were delivered by the mid and small capitalisation end of the market. Within the large capitalisation space, it was the Materials sector that caused the largest drag on performance, with market heavyweights BHP (-17.0%) and Fortescue Metals (-26.9%) delivering disappointing returns on the back of weakening iron ore prices and, in BHPs case, an underperforming energy business. Offsetting this was a positive contribution from all other sectors, and, in particular, a good performance from the important (i.e. sizable) Financials sector, where a number of firms recorded strong double digit returns, including Clearview Wealth (+38.0%), Challenger (+18.0%), Suncorp Group (+17.4%) and Macquarie Group (+16.4%). Returns to unhedged New Zealand investors were slightly slightly negative due to a depreciation in the Australian dollar over the quarter. Source: S&P/ASX 200 Index (total return)



International fixed interest

While the US 10-year Treasury Bond yield finished the quarter at 1.49%, only one basis point higher than it closed in June, it was the pathway to get there that interested markets. Yields fell initially, as the rapid economic recovery appeared to +0.0% be moderating. However, as the market's focus turned to rising inflation and the prospect of the withdrawal of monetary policy support, yields rose back to the levels seen at the start of the quarter. The Federal Reserve also recalibrated expectations regarding their ongoing asset purchase programme, suggesting they could commence a tapering of asset purchases as early as November 2021 and completed by mid-2022, earlier than originally expected. The UK 10-year yield increased from 0.72% to 1.02%, with the move occurring in September. As with the Federal Reserve, there was clear signalling from Bank of England policymakers that rate rises might be warranted before the end of the year. Recent economic indicators came out worse than expected, while year-on-year consumer price inflation rose to 3.2% in August, the highest since 2012. The German 10-year yield was one basis point lower at -0.19%, while Italy’s 10-year yield finished 0.04% higher at 0.86%. In spite of worries about inflation and higher energy prices, economic activity continued at a robust pace across Europe. Having come out of lockdowns relatively late, the region appeared to benefit from a similar release of pent-up demand that had been witnessed elsewhere. In August, Eurozone inflation recorded a decade high 3.4% per annum. With little overall movement in international yield curves over the quarter, returns for high quality, low duration bonds were largely flat, while investment grade and higher yielding credit securities generally outperformed government bonds. The FTSE World Government Bond Index 1-5 Years (hedged to NZD) made +0.0% for the quarter, while the broader Bloomberg Global Aggregate Bond Index (hedged to NZD) returned +0.1%. Source: FTSE World Government Bond Index 1-5 Years (hedged to NZD)

 -1.3%

New Zealand fixed interest At its 18 August 2021 meeting, the Reserve Bank of New Zealand (RBNZ) once again elected to leave the official cash rate at 0.25% however, it was only the recent return to Level 4 lockdown that deferred the anticipated increase in interest rates. The Monetary Policy Committee advised this was only a delay due to the sudden increase in health uncertainties, not a change in their planned approach. This was subsequently verified on 6 October when they announced an increase in New Zealand’s official cash rate from 0.25% to 0.50%. Faced with clear signalling about inflation concerns and higher interest rates, the NZ 10-year yield, after bottoming out at 1.49% in late July, rose steadily throughout August and September to close the quarter at 2.01%. This led to negative quarterly returns for both the corporate and government bond indexes. Over the quarter, the movement up in yields was slightly larger for shorter duration bonds, resulting in a ‘flattening’ of the New Zealand yield curve. This culminated in shorter duration bonds performing a little worse than longer duration bonds. The S&P/NZX A-Grade Corporate Bond Index fell -1.3% for the quarter, while the longer duration but higher quality S&P/NZX NZ Government Bond Index fell -1.2% for the quarter. Source: S&P/NZX A-Grade Corporate Bond Index

Table 1: Asset class returns to 30 September 2021 Asset Class

Index Name

3 months

1 year

3 years

5 years

10 years

New Zealand shares

S&P/NZX 50 Index (gross with imputation credits)

+5.2%

+13.7%

+13.2%

+13.5%

+16.1%

Australian shares

S&P/ASX 200 Index (total return)

-0.7%

+26.3%

+8.2%

+10.3%

+8.7%

MSCI World ex Australia Index (net div., hedged to NZD)

+0.5%

+28.4%

+12.0%

+13.8%

+14.7%

MSCI World ex Australia Index (net div.)

+1.3%

+23.4%

+11.7%

+15.1%

+14.0%

Emerging markets shares

MSCI Emerging Markets Index (gross div.)

-6.8%

+13.6%

+7.5%

+10.8%

+7.5%

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

-1.3%

-4.1%

+2.9%

+3.1%

+4.5%

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

+0.0%

-0.1%

+2.5%

+2.0%

+3.2%

New Zealand cash

New Zealand One-Month Bank Bill Yields Index

+0.1%

+0.3%

+0.9%

+1.3%

+2.1%

International shares

Anchors away: The influence of what you know on what you don’t.

Let’s say someone asks you a benign question such as, “Are there more or less than 100 countries in Africa?” What would your answer be? Most people would say, “less,” and they’d be right. You are then asked a follow-up question, “So how many countries are in Africa?” Think about it for a moment and remember your guess. The answer will be revealed at the end of this article! As you may have realised, the question is a set-up. By first asking you if there are more than 100 countries, you are being “anchored” to a number. Although you know that number sounds implausibly high, by stating the number as part of the question, evidence suggests that it will influence your next guess. Two well-known psychologists, Amos Tversky and Nobel Prize winner Daniel Kahneman (Tversky would also have won had he lived) showed this in a paper titled, “Judgment Under Uncertainty: Heuristics and Biases¹”. The paper was published in the journal Science, and showed that even random information, such as the last two digits of your phone number or the outcome of spinning a wheel, could affect someone’s guess as to how many countries are in Africa.

According to Investopedia², anchoring is “a behavioural finance term to describe an irrational bias towards an arbitrary benchmark figure.” Perhaps a better definition is provided by the Corporate Finance Institute that says, “anchoring bias occurs when people rely too much on pre-existing information or the first information they find when making a decision.”³

One study showed that the amount of food participants in the study wanted to eat was influenced by whether they first imagined being served a large or small portion. The Decision Lab⁴ provides a useful example of anchoring bias in real life, “Imagine you’re out shopping for a present for a friend. You find a pair of earrings that you know they’d love, but they cost $100, way more than you budgeted for. After putting the expensive earrings back, you find a necklace for $75, still more than your budget, but hey, it’s cheaper than the earrings!” There are plenty of non-financial examples as well. One study showed that the amount of food participants in the study wanted to eat was influenced

¹ Tversky, Amos, and Daniel Kahneman. “Judgment under Uncertainty: Heuristics and Biases.” Science 185, no. 4157 (1974): 1124–31. http://www.jstor.org/ stable/1738360. ² https://www.investopedia.com/terms/a/anchoring.asp

³ https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/anchoring-bias ⁴ https://thedecisionlab.com/biases/anchoring-bias/

by whether they first imagined being served a large or small portion.⁵ Many of us have similar stories. While travelling in the Middle East (when travel was a thing) a colleague saw an artifact he liked and asked the boy tending the shop what it cost. The answer was absurdly high. When he turned to walk away, the boy called out with a steep discount. The haggling began and the man walked away with the artifact thinking he had negotiated a discount in the order of 75%. He was dismayed to find later that he paid double it’s true price. He bought into the high anchor. In New Zealand, there is one prominent consumer goods store where everything... everything… always appears on sale. Now, if every item you sell at your store is at a sale price, then the sale price isn’t the sale price at all… it’s the real price. But it feels good to think you got it on sale, doesn’t it? This is also a form of anchoring. We have often seen the effect of anchoring on the behaviour of individual investors. Some may even sound familiar.

A common example is an investor who has a large amount of money sitting in the UK which they want to spend or bring over to New Zealand. They are hesitant to exchange the money at the moment because the exchange rate is close to 2:1 ($2 NZD for £1). They remember the 3:1 days and want to wait until those days come back. Here an investor is anchored to a ratio from the past. It’s possible that the exchange rate will return to that level but that will have nothing to do with the past, only with the future. By the way, the rates haven’t been at 3:1 since 2006. In another example, an investor says to us, “New Zealand is a better place to invest because it achieves higher returns.” Whilst this has been true in aggregate over the last decade, what does that mean about the future? "Very little", we’d say. Other businesses around the world are not going to capitulate their plans for growth to make it easy for New Zealand businesses to perform better. This year, the NZX 50 has had returns hovering around 0%, whereas MSCI world returns are up over 10%.⁶

⁵ Marchiori, D., Papies, E. K., & Klein, O. (2014). The portion size effect on food intake. An anchoring and adjustment process? Appetite, 81, 108-115. https://doi. org/10.1016/j.appet.2014.06.018 ⁶ Correct as of end August 2021

When we talk with clients, we try to work through all the anchors they have in their mind regarding recent market activity or prior investing experiences. If necessary, we help articulate the arguments and provide the evidence that leads to prudent choices. So how do you avoid anchoring bias? Unfortunately, it’s very difficult. Anchoring bias is one of the most common and well researched of all cognitive biases. Essentially, going with the bias feels good and intuitive. Countering the bias feels awkward. Because of this, asking someone to think it over won’t often work as thinking about it just reinforces the emotion behind the bias. One method that could work was outlined in a 20-year-old study entitled, “Overcoming the inevitable anchoring effect: Considering the opposite compensates for selected accessibility”.⁷ In this study, the authors show that individuals who were car experts were asked if the price of a car was too high or too low (the initial price of the car was the anchor). They were then asked to provide a better estimate. However, before they gave their estimate, they had to articulate their argument against the anchor price. Those that did were less susceptible to the anchor than those that gave no counterargument. Let's illustrate this with an idea that is anchored in information that may be out of date. You give a counter idea, but they just aren’t willing to take on new information. You say to them, “firstly share why your idea is right. Then share why my idea is wrong. Next share why my idea is right, then last share why your idea is wrong. At the end let’s review together all the arguments and decide which to go with”. By making the argument themselves, against their own idea, they become willing to accept new information.

The most common method to overcome the effect of anchoring is experience. Experience provides some counter to an anchoring bias. For example, if we knew from experience what artifacts in Middle Eastern shops should cost, we’d be less likely to overpay. In that example, it was inexperience that allowed the anchor to be so influential. When we talk with clients, we try to work through all the anchors they have in their mind regarding recent market activity or prior investing experiences. If necessary, we help articulate the arguments and provide the evidence that leads to prudent choices. While we’re not saying that we aren’t influenced by anchoring, years of experience teaches you practical wisdom, caution, processes and governance which provide the means for careful and thoughtful choices. Speaking of experience, some of you probably knew from experience that there are exactly 54 countries in Africa. If you didn’t, anchoring suggests more of you guessed high than low. Either way, knowledge may help overcome the anchoring challenge and if it doesn’t, it may win you a point on a future pub quiz.

⁷ Mussweiler, T., Strack, F., & Pfeiffer, T. (2000). Overcoming the inevitable anchoring effect: Considering the opposite compensates for selective accessibility. Personality and Social Psychology Bulletin, 26(9), 1142-1150. https://doi. org/10.1177/01461672002611010

Portfolio returns vs benchmarks

Model portfolio and index portfolio returns to 30 September 2021

Weightings

Asset allocation

Returns Sep 21 Quarter

1 year

3 years

Long term 5 years

10 years

expected

Growth

Income

Model

Index

Model

Index

Model

Index

Model

Index

Model

Index

-0.1%

0.1%

4.9%

3.3%

4.8%

4.6%

4.7%

4.6%

5.9%

5.6%

5.4%

0.2%

0.3%

7.7%

5.5%

5.7%

6.8%

6.6%

5.9%

0.3%

0.5%

11.0%

7.9%

6.2%

6.5%

6.6%

6.9%

7.6%

7.5%

6.4%

0.3%

0.5%

14.3%

10.3%

6.8%

7.4%

7.6%

8.0%

8.4%

8.5%

6.9%

0.4%

17.7%

12.8%

7.2%

8.2%

8.4%

9.1%

9.2%

9.5%

7.3%

0.4%

0.3%

21.3%

15.5%

7.7%

9.1%

9.3%

10.2%

10.0%

10.5%

7.8%

0.4%

0.2%

25.1%

18.3%

8.0%

9.8%

10.1%

11.3%

10.8%

11.4%

8.3%

0.3%

0.0%

28.9%

21.0%

8.3%

10.6%

10.9%

12.3%

11.5%

12.4%

8.7%

0.3%

-0.2%

32.0%

23.2%

8.5%

11.2%

11.5%

13.2%

12.1%

13.1%

9.1%

strategy Defensive

Aggressive

returns

Index returns to 30 September 2021 The indices used to calculate the index portfolio returns are as follows: Asset Class

Index

New Zealand equity

S&P/NZX 50 Index Gross with Imputation

Australian equity

S&P/ASX 200 Index (Total Return)

Intl equity (developed mkts) Intl equity (developed mkts) Intl equity (emerging mkts) New Zealand fixed interest

Index returns p.a. Quarter

1 year

3 years

5 years

10 years

5.2%

13.7%

13.2%

13.5%

16.1%

-0.7%

26.3%

8.2%

10.3%

8.7%

MSCI World ex Australia Index (net div., hedged to NZD)

0.5%

28.4%

12.0%

13.8%

14.7%

MSCI World ex Australia Index (net div.)

1.3%

23.4%

11.7%

15.1%

14.0%

MSCI Emerging Markets Index (gross div.)

-6.9%

13.3%

7.1%

10.4%

7.1%

S&P/NZX A-Grade Corporate Bond Index

-1.3%

-4.1%

2.9%

3.1%

4.5%

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

0.0%

-0.1%

2.5%

2.0%

3.2%

New Zealand cash

30 Day Bank Bills

0.1%

0.3%

0.9%

1.3%

2.1%

Notes:

underlying manager fees, but gross of custodial and adviser monitoring fees

SRI Portfolio returns vs benchmarks Model portfolio and index portfolio returns to 30 September 2021

Weightings SRI Asset allocation

Growth

Income

20 30

Defensive

Aggressive

SRI Long

Returns Sep 21 Quarter

1 year

3 years

5 years

term

10 years

expected

Model

Index

Model

Index

Model

Index

Model

Index

Model

Index

returns

0.1%

0.2%

3.5%

2.9%

6.1%

4.6%

5.5%

4.7%

6.8%

5.8%

5.4%

0.5%

6.3%

5.2%

7.1%

5.6%

6.7%

5.9%

7.9%

6.9%

5.8%

0.7%

0.8%

9.1%

7.5%

8.1%

6.6%

7.9%

7.1%

8.9%

8.0%

6.3%

0.8%

0.9%

11.9%

10.0%

9.0%

7.5%

9.1%

8.2%

9.9%

9.0%

6.7%

0.9%

14.8%

12.5%

9.9%

8.3%

10.2%

9.3%

10.8%

10.0%

7.1%

0.8%

0.9%

17.7%

15.0%

10.7%

9.1%

11.3%

10.3%

11.8%

10.9%

7.5%

0.7%

0.8%

20.7%

17.5%

11.5%

9.9%

12.5%

11.4%

12.7%

11.9%

7.9%

0.6%

23.8%

20.2%

12.4%

10.6%

13.6%

12.4%

13.6%

12.8%

8.4%

0.3%

0.4%

26.3%

22.3%

12.9%

11.1%

14.4%

13.1%

14.2%

13.5%

8.7%

Index returns to 30 September 2021 The indices used to calculate the index portfolio returns are as follows: SRI Asset allocation

Index

New Zealand equity

S&P/NZX 50 Index Gross with Imputation

Australian equity

S&P/ASX 200 Index (Total Return)

Intl equity (developed mkts)

MSCI World ex Australia Index (net div., hedged to NZD)

Intl equity (developed mkts) Intl equity (emerging mkts)

Index returns p.a. Quarter 5.2%

1 year 13.7%

3 years

5 years

13.2%

13.5%

10 years 16.1%

-0.7%

26.3%

8.2%

10.3%

8.7%

0.5%

28.4%

12.0%

13.8%

14.7%

MSCI World ex Australia Index (net div.)

1.3%

23.4%

11.7%

15.1%

14.0%

MSCI Emerging Markets Index (net div)

-6.9%

13.3%

7.1%

10.4%

7.1%

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

-1.3%

-4.1%

2.9%

3.1%

4.5%

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

0.0%

-0.1%

2.5%

2.0%

3.2%

New Zealand cash

30 Day Bank Bills

0.1%

0.3%

0.9%

1.3%

2.1%

Notes: standard unscreened market indices in each asset class.

underlying manager fees, but gross of custodial and adviser monitoring fees

2021 Q3 Partner Firm monitoring Certificate from Consilium Investment Committee (CIC)

Quarterly monitoring: In the Partner Firm Service Agreement and Consilium Investment Committee Policy and Procedures Manual, the CIC outlined the following process for reviewing underlying investments. All investment securities are reviewed on a quarterly basis and performance is measured against appropriate benchmark indices. Where a security’s performance is consistent with its mandate and in line with broad style and/or asset class returns, no further action will generally be taken. However, a security may be placed on an ‘enhanced due diligence’ list, and subjected to a higher degree of scrutiny, for any of the following reasons: -

A change in the primary portfolio manager

A significant change in the fund management company’s majority owner or ownership

structure

A more than 25% fall in the fund’s assets under management over a rolling one-year period

(due to outflows, not market movement)

Total fund assets falling below our minimum fund size thresholds at any time

A change in the fund’s investment style, diversification and/or risk factor tilting

An increase in the fund’s fees

The fund exhibited quarterly tracking error versus a relevant benchmark outside its

monitoring thresholds

The fund exhibited a persistent deviation in tracking error versus a relevant benchmark

outside its monitoring thresholds, measured over a rolling three-year basis, minus fees and

allowing a volatility threshold appropriate for each fund -

An extraordinary event which, in the opinion of the Investment Committee, may impact on the manager’s ability to comply with the fund mandate in future

We completed the monitoring of all of the above aspects for all underlying funds in the Partner Firm portfolios and found the following: 1.

Harbour New Zealand Equity Funds: Change in fund management personnel During the September quarter, Harbour informed us that Portfolio Manager Susanna Lee would be stepping down into the role of Senior Research Analyst. While Craig Stent would remain and lead both New Zealand Equity funds.

2. Harbour NZ Index Shares Fund: Short term tracking error During the September quarter Harbour notified us that the Harbour NZ Index Shares fund had experienced short term tracking error, due to a large inflow resulting in cash drag. 3. DFA Emerging Markets Value Trust: increase in management fee Dimensional informed us that the management fee for the Emerging Markets Value Trust had increased by 2bps to 0.73%. We will be undertaking an analysis of all three flags over the coming weeks, and we are aiming to have completed papers summarising our findings in the next three months.

Update on prior flagged actions: 1.

Dimensional: Addition of the Royal Bank of Canada as an eligible FX hedge counterparty Investigation COMPLETED. Dimensional’s approach to undertaking due diligence on counter

parties is thorough. This is not limited to the initial DD, and due diligence on counterparties is an

ongoing process. We remain satisfied that DFA are taking significant measures to ensure that the funds will be managed appropriately, minimising risks for all parties.

2. Dimensional Two-year Diversified Fixed Interest Trust Investigation COMPLETED. Dimensional changed the mandate of the trust, introducing a sustainability overlay. This change also resulted in a change in the trusts name to the Dimensional

Two-year Sustainability Fixed Interest Trust. Our expectations for the trust have not changed and the

trust will now be eligible for SRI models in the future.

New Business: - SAA review ongoing.

Consilium Summer Update October – December 2021 P1 P5 P8 P10

Market commentary Key market movements for the quarter You can’t put a number on happiness Randomness of returns

While the late 2021 rise of Omicron seemed to cast renewed uncertainty over the outlook for 2022 (in much the same way Delta did a year earlier), the markets overall were relatively unaffected.

Consilium 209 Cambridge Terrace Christchurch 8013 03 353 1007 support@consilium.co.nz www.consilium.co.nz

The fourth quarter of 2021 rounded out another year when developed share markets posted strong returns, despite ongoing uncertainties relating to global supply chains, inflation, interest rates and, of course, emerging variants of Covid-19. Market performance continued to be driven more by supportive economic and financial data such as positive economic growth, low interest rates, and good corporate earnings.

While many uncertainties remain, we need to remember that all current information, even in matters where the outcome is uncertain, is already factored into prevailing market prices.

This attribute of market pricing is always useful to keep in mind because it helps explain the apparent paradox of how markets can still go up when bad news is announced. It can often occur when the market was expecting something even worse to happen! If the confirmed bad news turns out to be better than the news the market had priced in, then prices will often have room to adjust upwards.

It also provides some explanation for how markets have behaved as new Covid variants have emerged. While the late 2021 rise of Omicron seemed to cast renewed uncertainty over the outlook for 2022 (in much the same way Delta did a year earlier), the markets overall were relatively unaffected. This suggests the markets did not view the threat of Omicron to be anything out-of-the-ordinary; at least not when compared to our experience over the prior 21 months.

2021 recap

Following a quite extraordinary year in 2020, which saw the unwelcome arrival of Covid-19, 2021 was a year of transition mixed with hope for a return to normalcy. It was also a year that showed, yet again, the difficulty of making investment decisions based on predictions of where markets will go.

Coming out of a volatile 2020, investors sought signals as to which way the global economy was headed. The distribution of vaccines and the easing of lockdowns helped foster an economic rebound, but the emergence of new Covid variants was a constant reminder that we weren’t in a post-Covid world just yet.

Despite these challenges, global gross domestic product grew strongly, completing the transition from recovery to expansion and eventually surpassing its pre-pandemic peak. While at the nadir of the crisis in 2020, high unemployment looked set to be a long-term issue. However, as the economic recovery progressed in 2021 it was increasingly accompanied by labour shortages, supply chain issues, and fears of rising inflation.

Prices increased rapidly in essential areas such as food and energy, and the media was filled with speculation about where inflation would go, what was causing it, how long it might last, and what could, or should, be done in response.

Supply chain update

It’s too early to be definitive, but the significant supply chain disruptions in 2021, largely linked to Covid-19-related production constraints and transportation bottlenecks, may already have peaked. Although, if true, it may still take some time for this to eventually filter through to the prices we pay for many goods and services. Supply chain backlogs historically adjust quite rapidly after periods of stress, as the market responds to higher demand and rebuilds inventory.

Whilst the Covid-induced shutdown contributed to a global supply chain fracture of a magnitude rarely seen outside of a major global war, the recent indications from global shipping indices are that the seeds of a recovery may be underway. The chart below shows recent declines in both the Baltic Dry Index (dry bulk freight costs) and in the HARPEX Shipping Index (weekly container shipping rates). This is a positive sign that supply chain disruptions could be slowly abating and freight-related pricing pressures might begin to slowly ease.

Energy prices

While the below shipping data looks encouraging, the same cannot be said for energy prices.

The global economic recovery is boosting demand for oil and gas at a time when supply growth is static. While governments have been encouraging energy companies to spend more money on renewable energy sources, this has often come at the expense of spending on traditional energy exploration and production. And, while renewables may be the longterm future, for the immediate future it is still oil and gas that powers much of the world. This relative underinvestment on traditional energy sources means existing supplies are not only tight, but in many cases set to shrink further, particularly if reduced emissions targets are to be met. Until such time as a significant transition to renewable energy sources can be achieved, traditional energy prices look likely to stay elevated.

Global shipping indices signal easing supply pressures

Source: Schroders, Refinitiv Datastream. Data as at 17 November 2021. 603207

Whilst the Covidinduced shutdown contributed to a global supply chain fracture of a magnitude rarely seen outside of a major global war, the recent indications from global shipping indices are that the seeds of a recovery may be underway.

Rising geopolitical tensions

As the year drew to a close there was considerable speculation that Russia could be planning an invasion of the Ukraine in early 2022 as tens of thousands of Russian troops were observed near the Ukranian border. The roots of conflict between Russia and Ukraine have a history that dates all the way back to the Middle Ages but, at its heart, it boils down to Moscow's unwillingness to accept Ukraine's independence.

The annexation of Crimea from the Ukraine in March 2014 marked a recent turning point in relations and the beginning of what some now refer to as an ‘undeclared war’ between the two countries.

On the diplomatic stage, U.S. Deputy Secretary of State Wendy Sherman began negotiations on 10 January with her Russian counterpart Sergei Ryabkov, over Russia’s military buildup and on Moscow’s security demands from Western countries. Disappointingly, and not at all surprisingly, even before this meeting began both sides had publicly dismissed expectations of a breakthrough.

NZ residential property

A report from independent real estate consultancy firm Knight Frank highlighted New Zealand’s residential real estate prices led the world over the last five years (up 60%), although slipping to third on the index this year. Some of the contributing factors behind this strong performance are widely acknowledged: • New Zealanders have historically been highly enthusiastic property investors.

• New Zealand has enjoyed strong positive net migration (up to March 2021). • There is a relative scarcity of housing stock currently available.

• The recent availability of extremely low mortgage interest rates. • Housing has been seen as an appealing investment option for many Kiwi’s unexpectedly grounded due to Covid lockdowns.

However, with interest rates in New Zealand now on the rise and pipeline building consents much higher, there are reasons to think the pace of the recent price rises could ease in 2022. This is particularly so with net migration remaining static due to closed international borders. In the year to March 2021, the New Zealand population increased by 91,680 due to strong net migration, while in the following 12 months this figure understandably slumped to just 3,229.

It is unclear what migration trends we should expect when New Zealand’s borders do finally reopen. While a return to pre-Covid migration rates is unlikely, some commentators are speculating that New Zealand could even see a net population outflow as displaced or disgruntled workers chase better employment opportunities offshore. Alternatively, New Zealand’s low infection and mortality rates throughout the pandemic have not gone unnoticed on the world stage, so it’s equally possible that our net migration rates could be boosted by a surge in ‘safe haven’ demand.

China lowers lending ratio

In December, in a move designed to support their ailing real estate market along with the broader Chinese economy, the People’s Bank of China (PBOC) reduced the level of capital required to be held by domestic banks by 0.5 percentage points.

This followed a similar cut in July and came as several of the largest property developers in China had begun defaulting on their debt. By requiring Chinese banks to hold a lower proportion of deposits on reserve, the PBOC is effectively encouraging local banks to lend more money to businesses and consumers.

This is being interpreted as a sign of concern from the Chinese authorities about the current weakness in the Chinese property market, which accounts for about a quarter of China’s economic activity.

It also marks an interesting contrast in approach to western central banks such as the Bank of England or the US Federal Reserve, which are both looking to tighten, not relax, their monetary conditions.

A return to conventional monetary policy?

In 2020, aiming to defy a potentially devastating economic outcome from Covid-19, global central banks quickly provided unprecedented levels of financial support to markets. Almost two years later, albeit with a very hefty price tag, this strategy seems to have achieved its goal.

Apart from an initial slump in Feb/Mar 2020, markets have continued to function effectively. Many companies were able to survive or even thrive in the intervening months, and unemployment levels in key developed markets are now significantly lower than most 2020 projections.

Now however, with global economic growth indicators remaining positive and inflation spiking around much of the world (even if only temporarily), central bankers are reviewing the extent to which this significant financial stimulus may still be required. The higher inflation rates alone are an indicator that the patient is ‘responding to the medication’, and that perhaps they can begin to look to reduce the dosage. In fact, given the wording of many central bank monetary policy target agreements which are specifically aimed at controlling inflation within specific parameters, the existing levels of financial stimulus are likely to become harder and harder to maintain.

As quantitative easing programmes gradually begin to wind down and the world takes a collective step back towards a more conventional monetary policy approach, this creates another uncertainty. After years of abnormally accommodative policy settings, weaning the patient off this stimulatory financial medication entirely is unlikely to be a smooth transition.

What lies ahead?

We could offer you our best guess, but if we did you should be skeptical.

In spite of interpreting some of the information currently available in the markets in an effort to provide a broader context, there is sadly no reliable link between this information and future market performance, especially in the short term. Thankfully, it’s not a problem we grapple with alone.

Chasing returns is one thing; managing risk is something else entirely. Knitting these two together is where good advice and a prudent investment plan sit. In truth, all investors, including all professional investors, suffer from the same problem. We just don’t know, and can’t know with certainty, what the future holds. Over a long term horizon, shares will always have greater performance potential than bonds, and this continues to hold true today even though share markets have generally been performing very well for a long time. With interest rates still at relatively low levels in developed markets, overall return expectations from all fixed interest assets remains more subdued, at least for the time being.

However, given the much higher risk (variation in returns) that accompanies share market investments, investors with a high exposure to shares will inevitably need to navigate a fairly bumpy path. To balance out the bumps, maintaining a diversified portfolio of risk premia, including an appropriate mixture (for you) of higher risk and lower risk assets, will almost always be the best approach. The mistake a lot of individual investors make on their own account is they will often unwittingly end up taking investment risks not well suited to their needs. Chasing returns is one thing; managing risk is something else entirely. Knitting these two together is where good advice and a prudent investment plan sit.

And, as all great advisers know, optimising your investments isn't just a mechanical discussion about risk and return, it’s about creating and managing a portfolio of assets that can allow you to achieve your goals without interfering with the rest of your life.

Key market movements for the quarter The quarter started on a positive note for most share markets which, aside from a November lull, mostly ended the year strongly. It was a slightly different story in bond markets, with a weak start extending to early November, and generally a small recovery thereafter. Developed sharemarkets benefited from signs of economic resilience and good corporate earnings, leading to international developed market shares generating the best returns over the quarter. Economic growth continues to look relatively robust in spite of ongoing concerns about supply bottlenecks, rising inflation, potential central bank policy changes and the emergence of the Omicron variant of Covid-19. By comparison, the New Zealand sharemarket wasn’t as rewarding to investors, with consumer and business confidence both waning. Overall, key interest rates were relatively unchanged internationally, although not without some intra-quarter volatility, as inflation fears and uncertainties about Omicron both impacted sentiment at times.

 +8.1% (hedged to NZD)

+8.7%

(unhedged)

International shares

International developed sharemarkets generally enjoyed a strong final quarter of the year. In the USA, the flagship S&P 500 Index (total returns in USD) shrugged off an indifferent month in November and delivered an impressive +11.0% for the quarter. By year end, investors were seemingly less concerned about the rising spread of Omicron, or the potential speed of the Federal Reserve asset tapering. Instead, investors were taking their cues from robust corporate earnings reports and a generally stable/positive economic outlook. The technology sector was one of the strongest performers over the quarter, with chipmakers especially strong. Real estate companies also performed well, as investors expect e-commerce growth to drive further demand for industrial warehousing. European markets followed a similar pattern. While a number of countries introduced restrictions on sectors such as travel and hospitality to try and reduce the spread of the new variant, the equity markets drew support from early data indicating a lower risk of severe illness. Utilities and IT companies were amongst the top performers for the quarter along with a rebounding luxury goods sector. The UK market also performed well with the MSCI UK Index gaining +5.2%. This was once again slightly below the average return for the region, with the MSCI Europe ex UK Index returning +7.0%. A number of defensive areas in the UK outperformed, including some of the large internationally diversified consumer staples groups. However, domestically focused areas such as UK consumer-facing retailers and housebuilders were volatile as speculation about changes in UK base interest rates picked up, and the share prices of travel and leisure companies were buffeted by the latest Omicron related restrictions. Despite an increasingly positive outlook, Japan trailed all the major markets for the quarter, with the MSCI Japan Index declining by -0.9%. Japan’s general election was held in October (where the ruling Liberal Democratic Party was returned with a solid majority) and there was some initial uncertainty over the new Covid variant. This may have temporarily obscured the improving economic news. In particular, the strength of the rebound in industrial production as automobile output began to recover from the temporary weakness caused by the global semiconductor shortage. While the Japanese share market regained some ground in December, it was too little too late to salvage a positive quarter. In New Zealand dollar terms, the MSCI World ex-Australia Index delivered a quarterly return of +8.1% on a hedged basis and +8.7% unhedged. The rolling 12 month return for the New Zealand dollar hedged index was +24.3% while the unhedged index gained +28.3%. Source: MSCI World ex-Australia Index (net div.)

 -0.5%

Emerging markets shares

Emerging market shares generally underperformed developed markets. Turkey was the weakest index market amid extreme volatility in the currency. The Central Bank of Turkey lowered its overnight interest rates by 4.0% over the quarter, but this only fuelled already rampant domestic inflation which ended the year at an eye-watering 36.1%. Unsurprisingly, the Turkish Lira has been coming under significant pressure. In other key emerging nations – Brazil underperformed as the central bank continued to hike interest rates in response to rising inflation; Russia lagged as geopolitical tensions with the West ratcheted up amid a build-up of Russian troops on the Ukraine border; and China finished in negative territory as concerns over slowing growth persisted. In contrast, Egypt, Peru and UAE all posted double-digit gains in US Dollar terms, while Taiwan (aided by a strong performance from semiconductor manufacturers) Indonesia and Mexico all recorded solid gains and outperformed. In unhedged New Zealand dollar terms, the MSCI Emerging Markets Index produced a quarterly return of -0.5%, culminating in a +2.7% return over the last 12 months. Source: MSCI Emerging Markets Index (gross div.)

 -1.7%

New Zealand shares

New Zealand was one of the poorer performing global developed sharemarkets over the quarter with the S&P/NXZ 50 Index returning -1.7%, dragged down by a general underperformance from larger capitalisation companies. This concluded a relatively subdued calendar year for the New Zealand market, with the index up a mere +0.2%, one of the worst developed markets for the year after delivering in the upper echelon in recent years. New Zealand’s economic outlook remains positive. An extremely tight labour market is providing strong job security, and third quarter GDP data released in December showed that lockdowns hadn’t damaged economic activity as much as feared. Whilst Covid-19 continues to create uncertainty, New Zealand’s high vaccination rates are considered a strong positive. However, consumer and business confidence deteriorated in December. For households, high inflation is eroding purchasing power. There is an increasing awareness of higher interest rates in the pipeline and the growing challenge this might present to the housing market. For businesses, labour shortages, cost pressures and supply chain disruptions were also weighing on confidence. On the local share market, winners and losers were quite evenly split amongst the top 50 companies for the quarter, although there was, as always, a wide dispersion of individual returns. An earnings upgrade saw Steel and Tube’s share price jump +50.5% over the quarter. Similarly, Sky Network Television announced significant permanent cost savings and revenue growth, which saw their share price leap in early December, closing out the quarter with a gain of +37.8%. Meanwhile, even though Ryman Healthcare produced a solid enough profit result for the first half of the year in trying conditions for the sector, it experienced a gradual decline in share price. Ryman ended the fourth quarter -18.3% lower, effectively giving up its gains from the previous quarter. Source: S&P/NZX 50 Index (gross with imputation credits)



Australian shares

The Australian sharemarket (ASX 200 Total Return Index) returned +2.1% quarter in local currency (returns to unhedged New Zealand investors were increased by a small appreciation in the Australian dollar over the quarter). +3.6% While all parts of the market contributed positively, it was the mid capitalisation companies (those ranked 51 to 100 in the index) which performed the strongest, gaining +5.8%. The materials and utilities sectors both produced positive double-digit results, while energy companies, information technology and, to a lesser extent financials, all struggled. Fortescue Metals rebounded from a horror third quarter by gaining +28.4% on the back of a more than 20% rally in iron ore prices from mid November. Also aiding sentiment, was news that subsidiary Fortescue Future Industries (FFI) will become the largest supplier of green hydrogen to the United Kingdom after signing a multi-billion-pound deal. A notable underperformer during the quarter was Magellan Financial Group which forecast a 6% decrease in its fiscal 2022 revenues, after a UK-based wealth manager ended a contract with the company. The mandate, Magellan's largest, accounted for an estimated 12% of its revenues, and news of its departure sent Magellan’s shares to their sharpest fall on record, closing the quarter down -40.0%. The 2021 calendar year return was a robust +16.2% in New Zealand dollars. Source: S&P/ASX 200 Index (total return)

 -0.4%

International fixed interest

Bond markets were buffeted over the quarter by concerns of persistent elevated inflation, hawkish central bank policy shifts and the emergence of the Omicron Covid-19 variant. Overall, 10 year government yields were largely unchanged. Yields had been drifting downwards for most of the quarter before reversing in the final weeks of the year. Yield curves also tended to flatten in this process, with shorter-dated bonds hit harder as central bank rhetoric increasingly suggested an earlier reduction in existing financial stimulus and/or earlier action on interest rate hikes. Most notably, the US Federal Reserve (Fed) policy committee suggested in December that their tapering of asset purchases could be accelerated. The US 10 year Treasury yield overall was little changed for the quarter, moving from 1.49% to 1.51%. However, it reached a high of 1.71% in October amid elevated inflation and expectations of policy tightening, then a low of 1.34% in early December amid fears over the Omicron Covid-19 variant. The US 2 year yield increased from 0.28% to 0.73% over the quarter. The UK 10 year yield fell from 1.02% to 0.97%, dropping sharply in early November as the Bank of England (BoE) unexpectedly elected not to raise rates. The BoE did, however, raise rates in December. Germany’s 10 year yield was little changed, from -0.19% to -0.18%, but this reflected a late surge with the yield having fallen below -0.40% in December. Corporate bonds lagged government bonds for the quarter. Within the investment grade bond universe, the US market saw modestly positive total returns (local currency), but Europe weakened. The FTSE World Government Bond Index 1-5 Years (hedged to NZD) returned -0.4% for the quarter, while the broader Bloomberg Global Aggregate Bond Index (hedged to NZD) returned +0.2%. This meant a negative year for global bonds with returns of -0.7% and -1.2% respectively. Source: FTSE World Government Bond Index 1-5 Years (hedged to NZD)

 -1.4%

New Zealand fixed interest At both their 6 October and 24 November meetings, the Reserve Bank of New Zealand (RBNZ) elected to increase the official cash rate by 0.25%, taking this benchmark rate from 0.25% to 0.75% over the quarter. At their November meeting, the committee noted that global inflation had increased due to the rapid recovery in global demand, combined with significant supply chain bottlenecks and labour shortages in some sectors. Ongoing higher government spending and monetary policy stimulus in many countries was contributing to strong demand. However, there was also considerable uncertainty about the persistence of global inflationary pressures. The committee noted they expected inflation to remain high in the near term, before returning to the midpoint of their target band over the next two years. Investors largely held with the view that the RBNZ would continue to steadily hike the official cash rate (OCR) in 0.25% increments until August 2022, before continuing with hikes at a slower pace. Over the quarter, the New Zealand 10 year government bond yield, climbed from 2.02% at the beginning of October to a peak of 2.68% on 12 November, before easing back to close the year at 2.33%, a yield increase of 0.31% over the quarter. The New Zealand 2 year government bond yield followed a similar pattern opening the quarter at 1.03% and ending the year at 1.98%, a yield increase of 0.95%. Similar to the effects seen overseas, this flattening of the local yield curve and rising yield environment overall, generally meant negative short term returns for bonds of all durations. The S&P/NZX A-Grade Corporate Bond Index fell -1.4% for the quarter and -4.4% for the year, while the longer duration but higher quality S&P/NZX NZ Government Bond Index fell -1.8% for the quarter and -6.2% for the year. Source: S&P/NZX A-Grade Corporate Bond Index

Table 1: Asset class returns to 31 December 2021 3 months

1 year

3 years

5 years

10 years

S&P/NZX 50 Index (gross with imputation credits)

-1.7%

+0.2%

+14.8%

+14.7%

+16.1%

S&P/ASX 200 Index (total return)

+3.6%

+16.2%

+14.1%

+10.3%

+8.5%

MSCI World ex Australia Index (net div., hedged to NZD)

+8.1%

+24.3%

+20.6%

+14.4%

+14.7%

MSCI World ex Australia Index (net div.)

+8.7%

+28.3%

+21.1%

+15.5%

+14.3%

Emerging markets shares

MSCI Emerging Markets Index (gross div.)

-0.5%

+2.7%

+10.6%

+7.2%

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

-1.4%

-4.4%

+2.0%

+3.2%

+4.1%

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

-0.4%

-0.7%

+1.9%

+2.0%

+3.0%

New Zealand cash

New Zealand One-Month Bank Bill Yields Index

+0.2%

+0.4%

+0.8%

+1.2%

+2.0%

Asset Class

Index Name

New Zealand shares Australian shares

International shares

You can’t put a number on happiness

“What is your number?” That is the catch phrase of a popular advertisement that runs and re-runs amongst financial advising companies. The premise is a good one, namely that they are going to determine how much you need for retirement and then aim to help you hit that goal.

Every year, with new information, the number changes. And we need to update our advice along with this new information.

These types of campaigns are popular as many people will have a jolt of panic at some point just past mid-life, where they think, “Will I have enough for my retirement? I’d better get prepared.” Having a target ‘number’ can help you to understand just how big the mountain you must climb, really is.

We also find that surprises on the upside, such as unexpectedly large inheritances or a surplus when downsizing a property, are more common than you’d think.

Recently, Massey University produced a retirement expenditure guideline report, sponsored by Consilium and Financial Advice New Zealand, that attempted to define a target amount that was relevant to all New Zealanders. That’s a huge effort and as advisers we’re thankful for anything that gives the general public a wakeup call on how much retirement actually costs. Even though efforts to define a number are useful, looking at a single number in isolation does not always tell the full story. There’s often both technical and psychological reasons that need to be further explored. First, all numbers have huge assumptions built into them. The purpose of a number is to give retirees a map as they prepare for retirement, but unfortunately the landscape retirees face is constantly changing, and outdated maps aren’t very useful. So what changes? Well, markets never do what you expect. Your life and health and spending needs aren’t always what you expect. For many, their family related spending is a real challenge to forecast.

In our view, the best advice isn’t just about the number. Every year, with new information, the number changes. And we need to update our advice along with this new information. Instead of looking at a single number as the answer, we focus on the best decisions you can make today based on the information you currently know, including your best guess and our best experience of what the future holds. Next year, with more information, the number may change and so should the advice. So that’s the technical reason. The more interesting reason is that pursuing a number doesn’t necessarily lead to greater fulfilment in life, at least not directly. When you have a target number, the assumption is that the money is the destination or the object to reach for within a financial plan. Our experience teaches us otherwise. What we’ve learned is that money is the just the fuel to help you reach the destination. In his book Happiness Studies, Tal Ben-Shahar analyses what makes humans happy. He finds there are five components to our wellbeing. Derek Hagen,

a financial behaviour expert and founder of Money Health Solutions, summarises the five components as follows: • Spiritual wellbeing: this involves being in the present moment and having a sense of purpose. • Physical wellbeing: this represents not only basic needs, rest, exercise, and nutrition, but also attending to the mind-body connection. • Intellectual wellbeing: keeping our minds active, solving interesting problems, and being curious. • Relational wellbeing: cultivating our interpersonal relationships and having a healthy relationship with ourselves. • Emotional wellbeing: this represents not only cultivating positive emotions and coping with negative emotions, but also accepting all emotions as they arise and giving ourselves permission to be human. Together these elements form the acronym SPIRE.

Physical

Spiritual

SPIRE

Emotional

Intellectual

Relational

But did you notice the glaring omission from Tal BenShahar’s list above? Financial wellbeing isn’t one of the elements that makes humans happy. Surprised? We were at first, but upon reflection, perhaps less so. We have met investors who tell us they have very specific financial goals. They want to be a millionaire by age 45. Or perhaps they’d like to build a portfolio to a value of $5,000,000. Or they want to live on $100,000 per year (inflation adjusted) the rest of their lives. Or perhaps less specific, but just as common, is the professional or executive that wants to climb the corporate ladder.

What shouldn’t change is the pursuit of wellbeing and making decisions on how best to use wealth to accelerate the enduring elements of a complete and happy life. In all of these examples, the common theme is that financial wellbeing is the goal. For many of these goals, one could find a number to determine what all of that will cost. Steven Covey, author of the 7 Habits of Highly Effective People said, it’s easy “to work harder and harder at climbing the ladder of success only to discover it’s leaning against the wrong wall.” We understand perfectly why investors want to focus on a number. In fact, we empathise because we’ve done the same. Money is a critical part of our lives and it’s common to have financial goals embedded into a plan. But our experience working with many investors over a long period of time is that money is not a destination, nor a real source of happiness. Instead, money is the means, the transportation if you will, to help you achieve and enhance your wellbeing. When Tal Ben-Shahar defined spiritual, physical, intellectual, relational and emotional wellbeing (SPIRE), he described states of being that are ends in themselves. Money can be used to support and help achieve any part of SPIRE. Thus, when it comes to designing the best financial plan, the goal is to find for each individual investor, those underlying elements they believe will really bring them enduring happiness and wellbeing. Once we know this, the goal is to draft a plan in a way that the money will energise those pursuits. Maybe that does involve a ‘number’ to help us clarify what saving, spending and allocation decisions we need to make. But we also need to be mindful that the number will change over time. What shouldn’t change is the pursuit of wellbeing and making decisions on how best to use wealth to accelerate the enduring elements of a complete and happy life. So, if we can, we’d like to change the ‘what’s your number’ question into something more holistic, like “what makes you truly happy?” While we know you can’t put a price on happiness, you do get to decide what happiness looks like to you. And we’ll work alongside you, helping to manage the plan (and the numbers!), in order to get you there.

4.3%

7.7%

13.0%

14.1%

20.0%

25.2%

5.9%

6.0%

-36.3% 10.0%

-33.1% 25.7%

-25.3% 24.1%

13.4%

-36.2%

10.4%

-11.9% 11.5%

Global large shares

Global value shares

Global small shares

Emerging markets shares

2003

25.7%

24.1%

2002

12.1%

6.5%

Portfolio 50/50

Lowest

11.8%

13.4%

22.2%

5.6%

4.3%

5.9%

6.3%

7.7%

9.5%

11.7%

13.0%

14.1%

20.0%

21.0%

25.1%

25.2%

2004

11.7%

6.3%

2005

6.3%

7.3%

9.1%

10.0%

12.2%

15.7%

15.8%

17.9%

19.7%

21.5%

22.3%

41.7%

2005

12.2%

7.3%

9.1%

6.3%

17.9%

19.7%

41.7%

22.3%

15.8%

15.7%

21.5%

10.0%

2006

2007

2008

5.9%

5.5%

5.9%

7.7%

13.8%

16.0%

16.6%

20.3%

21.5%

24.9%

28.3%

29.6%

38.3%

2006

16.0%

7.7%

5.5%

2009

-32.8% 18.9%

1.8%

4.5%

-23.5% 15.9%

-21.5%

-21.9%

-4.3% 2.7%

15.4%

5.7%

17.0%

18.9%

43.5%

42.1%

2009

17.0%

3.1%

3.5%

-35.6%

-32.8%

-28.7%

-23.5%

-21.9%

1.8%

3.1%

3.5%

4.5%

5.7%

9.5%

-21.5% 11.8%

-20.8% 15.9%

-8.2%

8.3%

15.4%

15.2%

2008

-8.2%

8.3%

15.2%

-20.8% -38.5%

-7.9%

-5.5%

-4.3%

-0.3%

2.7%

3.5%

8.6%

8.9%

18.2%

27.5%

2007

3.5%

8.6%

8.9%

9.5%

-20.8% 11.8%

27.5% -38.5% 43.5%

-7.9%

-5.5%

-0.3%

18.2% -35.6% 42.1%

-0.3%

38.3% -20.8% -28.7%

24.9%

28.3%

13.8%

21.5%

16.6%

29.6%

20.3%

2011

2012 24.2%

-9.0%

-5.5%

-5.5% 11.0%

9.1%

9.4%

-10.5% 15.0%

-1.0%

1.5%

2.4%

3.0%

3.4%

4.0%

6.3%

7.8%

8.7%

9.1%

10.7%

17.4%

15.1%

2010

9.1%

3.0%

6.3%

8.7%

15.1%

3.4%

-18.4%

-10.5%

-9.0%

-5.5%

-1.0%

0.1%

2.7%

8.3%

9.3%

11.2%

2011

0.1%

2.7%

8.3%

9.3%

0.1%

11.2%

2.7%

6.3%

7.2%

9.1%

9.4%

11.0%

11.6%

12.4%

15.0%

17.7%

24.2%

20.5%

2012

12.4%

2.7%

7.2%

6.3%

17.7%

20.5%

10.7% -18.4% 11.6%

17.4%

1.5%

4.0%

7.8%

2.4%

2010

2013

-2.3%

1.9%

2.2%

2.7%

3.1%

3.9%

9.1%

16.5%

27.0%

32.7% 27.0%

2013

9.1%

2.7%

2.2%

1.9%

3.1%

3.9%

-2.3%

32.7%

27.0%

3.9%

16.5%

2014

1.8%

3.1%

3.4%

7.4%

9.0%

9.3%

10.6%

11.1%

17.5%

28.7% 24.2%

2014

9.0%

3.4%

11.1%

7.4%

28.7%

24.2%

3.1%

7.4%

9.3%

10.6%

1.8%

17.5%

2015

-2.6%

3.3%

4.4%

4.5%

5.8%

6.2%

9.0%

13.5%

13.6%

14.1%

14.5% 14.2%

2015

6.2%

3.3%

4.5%

5.8%

14.2%

14.5%

-2.6%

14.1%

9.0%

13.5%

4.4%

13.6%

2016

2.3%

3.8%

4.1%

5.3%

5.8%

9.0%

9.9%

10.0%

10.4% 10.1%

2016

9.0%

2.3%

5.8%

4.1%

3.8%

9.9%

10.4%

10.0%

5.3%

9.0%

10.1%

2017

1.9%

4.0%

5.0%

5.8%

12.3%

13.9%

14.9%

18.5%

20.1%

20.4%

35.0% 23.6%

2017

12.3%

1.9%

4.0%

5.8%

5.0%

13.9%

35.0%

20.4%

14.9%

20.1%

18.5%

23.6%

-9.5%

-8.8%

-7.4%

-5.5%

-3.3%

-2.0%

-0.1%

1.8%

1.9%

4.4%

6.0%

10.9%

2018

-2.0%

1.9%

1.8%

4.4%

-0.1%

10.9%

-9.5%

-8.8%

-5.5%

-3.3%

-7.4%

6.0%

2018

2019

2020

5.0%

11.0%

8.6%

-7.4%

8.5%

4.2%

14.6%

3.5%

2.7%

21.8%

28.3%

28.2%

16.2%

0.2%

2021

1.5%

5.2%

7.5%

14.3%

18.5%

21.1%

22.6%

23.0%

25.5%

27.0%

32.4% 31.6%

2019

14.3%

1.5%

7.5%

5.2%

-14.5%

-7.4%

0.4%

4.2%

5.0%

5.4%

6.0%

8.5%

8.6%

11.0%

14.6%

2020

6.0%

0.4%

5.4%

-4.4%

-1.2%

0.2%

0.4%

2.7%

3.5%

7.9%

16.2%

21.8%

28.2%

28.3%

38.6%

2021

7.9%

0.4%

-1.2%

-4.4%

23.0% -14.5% 38.6%

32.4%

18.5%

25.5%

21.1%

27.0%

22.6%

31.6%

Source: NZ equities: NZSX 50 Index (Gross Dividends) from Jan 2002 to Dec 2015. S&P/NZX 50 Index (Gross with Imputation) from Jan 2016 to present. Australian equities: S&P/ASX 200 Index (Total Return) Global large equities: MSCI World Index (net div., AUD) Global value equities: MSCI World Value Index (net div., AUD) Global small equities: MSCI World Small Cap Index (net div., AUD) Emerging markets equities: MSCI Emerging Markets Index from Jan 2002 to Dec 2015. MSCI Emerging Markets (Gross Div.) from Jan 2016 to present. NZ property: New Zealand Property Index (Gross Dividends) from Jan 2002 to Dec 2015 S&P/NZX All Real Estate Index (Gross with ICs) from Jan 2016 to present. Global property: UBS Global Real Estate Index (Gross Dividends) from Jan 2002 to Dec 2014. S&P Developed REIT Index (net div.) from Jan 2015 to present. NZ fixed interest: NZX 10 Yr Govt Bonds from Jan 2002 to May 2003. ANZ Corporate A Bonds from Jun 2003 to Jun 2015. S&P/NZX A-Grade Corporate Bond Index Jul2015 to present. Hedged global bonds: Citigroup World Government Bond Index Hedged to NZD Jan 2002 to Dec 2012. Bloomberg Barclays Global Aggregate Bond Index (hedged to NZD) Jan 2013 to present. New Zealand cash: NZ One Month Bank Bill Yields. 50/50 portfolio: portfolio returns net of manager fees, but gross of tax, adviser and platform fees.

-36.3%

6.0%

-36.2%

-33.1%

6.3%

-25.3%

-20.1% 10.0%

-11.9% 11.5%

-5.1%

-1.2%

5.7%

25.6%

11.8%

-5.1%

New Zealand cash

10.4%

5.6%

5.7%

Hedged global bonds

Highest

4.3%

6.3%

6.5%

12.1%

New Zealand fixed interest

Global property

New Zealand property

9.5%

21.0%

-20.1% 22.2%

Australian shares

2004

25.1%

2003

25.6%

2002

New Zealand shares

-1.2%

7.4%

3.9%

6.6%

5.6%

7.2%

10.5%

7.0%

7.4%

4.0%

5.4%

7.7%

10.2%

Avg

Randomness of returns

Portfolio returns vs benchmarks

Model portfolio and index portfolio returns to 31 December 2021

Weightings

Assett allocation n

Growth

Income

20 30

strategy Defensive

Aggressive

Returns Decc 211 Quarter Model

Index

0.1%

0.4%

0.5%

0.8%

1.0%

1.4%

1.5%

1 year Model

3 years

Index

Model

1.7%

1.9%

3.4%

3.5%

5.6%

2.0%

2.1%

Long g term m 5 years

10 0 years

Index

Model

Index

5.3%

5.1%

4.8%

6.7%

6.6%

5.7%

5.3%

8.0%

8.3%

7.9%

7.2%

9.3%

2.6%

10.4%

9.2%

2.8%

3.3%

13.1%

3.4%

4.0%

4.1%

4.7%

expected d returns

Model

Index

4.7%

5.7%

5.5%

5.4%

5.9%

6.6%

6.4%

5.9%

6.7%

7.1%

7.5%

6.4%

9.9%

7.5%

8.2%

8.3%

8.5%

6.9%

10.6%

11.5%

8.4%

9.4%

9.1%

9.5%

7.3%

11.4%

11.8%

13.1%

9.2%

10.5%

10.0%

10.5%

7.8%

15.9%

13.7%

13.1%

14.7%

10.0%

11.7%

10.7%

11.5%

8.3%

4.8%

18.9%

16.0%

14.2%

16.4%

10.7%

12.8%

11.5%

12.5%

8.7%

5.5%

21.5%

18.0%

15.1%

17.7%

11.3%

13.8%

12.1%

13.3%

9.1%

Index returns to 31 December 2021 The indices used to calculate the index portfolio returns are as follows: Indexx returnss p.a.

Assett Classs

Index

New Zealand equity

S&P/NZX 50 Index Gross with Imputation

-1.7%

0.2%

14.8%

14.7%

Australian equity

S&P/ASX 200 Index (Total Return)

3.6%

16.2%

14.1%

10.3%

8.5%

Intl equity (developed mkts)

MSCI World ex Australia Index (net div., hedged to NZD)

8.1%

24.3%

20.6%

14.4%

14.7%

Intl equity (developed mkts)

MSCI World ex Australia Index (net div.)

8.7%

28.3%

21.1%

15.5%

14.3%

Intl equity (emerging mkts)

MSCI Emerging Markets Index (net div.)

-0.5%

2.4%

10.2%

6.8%

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

-1.4%

-4.4%

2.0%

3.2%

4.1%

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

-0.4%

-0.7%

1.9%

2.0%

3.0%

New Zealand cash

30 Day Bank Bills

0.2%

0.4%

0.8%

1.2%

2.0%

Notes:

manager fees, but gross of custodial and adviser monitoring fees

Quarter

1 year

3 years

5 years

10 0 years 16.1%

SRI Portfolio returns vs benchmarks Model portfolio and index portfolio returns to 31 December 2021

Weightings SRII Assett allocation

Growth

Defensive

Aggressive

Income

SRII Long g

Returns Decc 211 Quarter

1 year

3 years

5 years

term m

10 0 years

expected d

Model

Index

Model

Index

Model

Index

Model

Index

Model

Index

returns

0.3%

0.1%

0.9%

1.3%

6.6%

5.0%

5.8%

4.8%

6.6%

5.6%

5.4%

0.7%

0.5%

2.7%

2.9%

8.2%

6.6%

7.0%

6.0%

7.7%

6.7%

5.8%

1.2%

1.1%

4.8%

10.0%

8.3%

7.2%

8.8%

7.8%

6.3%

1.8%

1.6%

6.9%

6.6%

11.6%

9.9%

9.4%

8.4%

9.8%

8.9%

6.7%

2.3%

2.2%

9.2%

8.6%

13.3%

11.5%

10.6%

9.5%

10.7%

9.9%

7.1% 7.5%

2.9%

2.7%

11.4%

10.6%

15.0%

13.1%

11.7%

10.6%

11.7%

10.9%

3.5%

3.2%

13.6%

12.4%

16.7%

14.6%

12.8%

11.6%

12.6%

11.8%

7.9%

4.1%

3.9%

16.1%

14.6%

18.4%

16.2%

13.9%

12.6%

13.5%

12.7%

8.4%

4.6%

4.3%

17.9%

16.1%

19.7%

17.4%

14.7%

13.4%

14.1%

13.4%

8.7%

Index returns to 31 December 2021 The indices used to calculate the index portfolio returns are as follows: Indexx returnss p.a.

SRII Assett allocation

Index

New Zealand equity

S&P/NZX 50 Index Gross with Imputation

-1.7%

0.2%

14.8%

14.7%

16.1%

Australian equity

S&P/ASX 200 Index (Total Return)

3.6%

16.2%

14.1%

10.3%

8.5%

Intl equity (developed mkts)

MSCI World ex Australia Index (net div., hedged to NZD)

8.1%

24.3%

20.6%

14.4%

14.7%

Intl equity (developed mkts)

MSCI World ex Australia Index (net div.)

8.7%

28.3%

21.1%

15.5%

14.3%

Intl equity (emerging mkts)

MSCI Emerging Markets Index (net div)

-0.5%

2.4%

10.2%

6.8%

New Zealand fixed interest

S&P/NZX A-Grade Corporate Bond Index

-1.4%

-4.4%

2.0%

3.2%

4.1%

International fixed interest

FTSE World Government Bond Index 1-5 Years (hedged to NZD)

-0.4%

-0.7%

1.9%

2.0%

3.0%

New Zealand cash

30 Day Bank Bills

0.2%

0.4%

0.8%

1.2%

2.0%

Notes: standard unscreened market indices in each asset class.

underlying manager fees, but gross of custodial and adviser monitoring fees

Quarter

1 year

3 years

5 years

10 0 years

2021 Q4 Partner Firm monitoring Certificate from Consilium Investment Committee (CIC)

A change in the primary portfolio manager

A significant change in the fund management company’s majority owner or ownership

structure

A more than 25% fall in the fund’s assets under management over a rolling one-year period

(due to outflows, not market movement)

Total fund assets falling below our minimum fund size thresholds at any time

A change in the fund’s investment style, diversification and/or risk factor tilting

An increase in the fund’s fees

The fund exhibited quarterly tracking error versus a relevant benchmark outside its

monitoring thresholds

The fund exhibited a persistent deviation in tracking error versus a relevant benchmark outside its monitoring thresholds, measured over a rolling three-year basis, minus fees and

allowing a volatility threshold appropriate for each fund -

An extraordinary event which, in the opinion of the Investment Committee, may impact on the manager’s ability to comply with the fund mandate in future

We completed the monitoring of all of the above aspects for all underlying funds in the Partner Firm portfolios and found the following: 1.

Dimensional Global Small Company Trust: Q4 2021 outperformance The Dimensional Global Small Company Trust outperformed its market benchmark by +1.85% which exceeds our monitoring bands. Our initial analysis indicates the trusts fund selection contributed to outperformance.

2. Dimensional Global Core Equity Trust: Q4 2021 outperformance The Dimensional Global Core Equity Trust outperformed its custom benchmark by +2.33% which exceeds our monitoring bands. Our initial analysis indicates the trusts tilts towards profitability contributed to outperformance. 3. Dimensional Global Sustainability Trust: 3-year outperformance The Dimensional Global Sustainability Trust outperformed its long-term custom benchmark expectations by +2.64% which exceeds our monitoring bands. Our initial analysis indicates the trusts tilts towards profitability contributed to outperformance. 4. Dimensional Global Value Trust: 3-year underperformance The Dimensional Global Value Trust underperformed its long-term custom benchmark expectations by -3.13% which exceeds our monitoring bands. 5. Vanguard Ethically Conscious International Shares Index Fund: 3-year outperformance The Vanguard Ethically Conscious International Shares Index Fund outperformed its long-term market benchmark by +1.90% which exceeds our monitoring bands. 6. Dimensional Two-year Diversified Fixed Interest Trust: 3-year underperformance The Dimensional Two-year Diversified Fixed Interest Trust underperformed its long-term market benchmark by -0.55% which exceeds our monitoring bands. 7.

Dimensional Emerging Markets Value Trust: Fund outflow Dimensional signalled that the Emerging Markets Value Trust experienced a greater than 25 percent decrease in the funds NAV during the fourth quarter of 2021.

8. Vanguard Funds: Change in personnel Vanguard informed us of a change in the company’s structure throughout the quarter. The CIC have determined that this change will have no impact on the ongoing management of the funds and no EDD is required as a result of this change. We will be undertaking an analysis of all eight flags over the coming weeks, and we are aiming to have completed papers summarising our findings within the next three months.

Update on prior flagged actions: 1.

Harbour New Zealand Equity Funds: Change in fund management personnel Investigation COMPLETE. During the September quarter, Harbour informed us that Portfolio Manager Susanna Lee would be stepping down into the role of Senior Research Analyst. While Craig Stent would remain and lead both New Zealand Equity funds. We are satisfied that the ongoing management and support of the funds will not be materially affected by this change.

2. Harbour NZ Index Shares Fund: Short term tracking error Investigation COMPLETE. During the September quarter Harbour notified us that the Harbour NZ Index Shares fund had experienced short term tracking error, due to a large inflow resulting in cash drag. Harbour is managing cash (and the fund in general) in line with the mandate and, aside from this unusual combination of events, are otherwise doing an excellent job implementing this index tracking strategy. 3.

DFA Emerging Markets Value Trust: increase in management fee Investigation COMPLETE. Dimensional informed us that the management fee for the Emerging Markets Value Trust had increased by 2bps to 0.73%. The CIC are satisfied with Dimensional’s reasoning behind the increase in the overall management costs for the fund.

New Business: - Strategic Asset Allocation review o

2021 Analysis of Risk Premiums and Expected Returns

SAA implementation ongoing

Quarterly Due Diligence Enhanced due diligence reports

03.

Harbour Corporate Bond Fund

Enhanced due diligence for the quarter ended 31 December 2020

Enhanced due diligence trigger An enhanced due diligence (EDD) on a fund may be required for any number of reasons. Please refer to the CIC Policy and Procedures Manual for more detail. The trigger for this analysis was short term tracking error. Fund: Harbour Corporate Bond Fund (“the fund”) Benchmark: S&P/NZX A-Grade Corporate Bond Index (“the benchmark”) Fund return: -0.74%, Benchmark return: -1.05%, Deviation: +0.42%, Tolerance: ±0.30%

Enhanced due diligence checklist Check

Result

Satisfactory

Has the investment mandate changed?

✓

Were the risk levels acceptable and within mandate?

Yes

✓

Were there any special considerations?

Yes

✓

Conclusion Our analysis highlighted the quarterly outperformance was a result of several contributing factors throughout the quarter, largely attributable to the funds relative duration and yield curve positioning compared to the benchmark. The funds security selection, particularly the funds allocation to BBB rated securities, which saw relative outperformance throughout the quarter, led to outperformance of the fund relative to the benchmark. Even so the funds exposure levels remained broadly within historical observations and we conclude that the identified risk exposures are consistent with the trust’s mandate, and we identified no unexpected or unexplained risks. Based on all the above, the committee was satisfied with the source of deviation and remain confident that Harbour is not taking any unknown risks and the fund remains an integral part of the New Zealand Fixed Income strategy. For further detail please see the appendix on the following pages.

May 2021

Appendix: Supporting analysis 1. Tracking error chart Figure 1 - Quarterly deviation from custom benchmark

Source: Consilium

2. Review of the investment mandate The Harbour product disclosure statement (PDS) applicable to Q4 2020 was dated 1 July 2020. The stated

objective of the trust is:

The Fund provides access to favourable income yields through a diversified portfolio of primarily investment grade corporate bond fixed interest securities.

The CIC has frequent dialogue with the fund manager, and we are satisfied there has been no change to the strategy/mandate without our knowledge.

3. Investigation with the fund management team We approached Harbour regarding the outperformance of the fund throughout the quarter, Harbours

responses are summarised below.

The fourth quarter of 2020 saw large interest rate movements, which benefited the fund relative to the index, both in terms of the direction of these moves (duration) as well as the shape of the move (yield curve

positioning) with long rates moving more than short-dated rates. Outperformance was predominantly lead

by the lower rated securities outperforming throughout the quarter, particularly the funds allocation to BBB securities, which are not included in the benchmark.

Duration positioning (14bps performance attribution) The fund on average holds 0.25 (years) less duration than the benchmark over the quarter as shown in Figure 2 below. Harbour made note that the funds relative duration throughout the quarter was within it’s typical long-term range, as shown in figure 3. However, given market movements were sharp within the fourth quarter of 2020, this resulted in a meaningful attribution.

Figure 2 – Duration relative to the benchmark

Figure 3 – Long term duration relative to the benchmark

Source: Harbour Asset Management

Yield curve positioning (12bps performance attribution)

The fund’s duration was more concentrated in shorter dated maturities within the fourth quarter, as shown in figure 4. These securities were sold-off less than the longer term maturities which were held more within the benchmark. Figure 4 – Relative yield curve positioning and yield movements

Security Selection With credit marginally tighter, lower grade credit outperformed during the quarter, this benefited the fund owing to its holdings of BBB credit versus zero allocation in the benchmark, this accounted for 9bps. On a sector basis, credit outperformed governments and therefore the Fund’s allocation to government securities detracted 8bps (adjusted for duration). While the 2 percent holding of inflation linked bonds clawed back 3bps. The fund also benefited by 7bps from its 4.8 percent combined holding in asset-backed and mortgagebacked securities. The remainder was made up across several other sectors. Harbour Compliance Reports Harbour also provided us with their compliance reports from throughout the quarter. These reports included the two flags brought to our attention in our other EDD paper. The remainder of the reports show that the fund was compliant with it’s mandate throughout the fourth quarter of 2020.

Disclaimer: The material contained in or attached to this report has been prepared based upon information that Consilium NZ Limited believes to be reliable

but may be subject to typographical or other errors. Consilium has taken every care in preparing this information, which is for client education purposes only. Although the data has been sourced from publicly available information and/or provided by the investment managers, we are not able to guarantee

its accuracy. Past performance, whether actual or simulated, is no guarantee of future performance. This document does not disclose all the risks of any transaction type described herein, and the recipient should understand any terms including relevant risk factors and any legal, tax and accounting

considerations applicable to them.

One or more of the author(s) of this report invest in the analysed security. The author(s) do not know of the existence of any conflicts of interest that might bias the content or publication of this report. Compensation of the author(s) of this report is not based on any outcome of this report.

Harbour Corporate Bond Fund Mandate Breach Enhanced due diligence for the quarter ended 31 December 2020 Enhanced due diligence trigger Consistent with its written policies and procedures, the Consilium Investment Committee (CIC) reviews all

recommended investments on a quarterly basis against a combination of investment performance and

qualitative fund metrics.

In the fourth quarter of 2020, the Harbour Corporate Bond Fund flagged for enhanced due diligence (EDD).

Nature of the EDD flag The EDD flag was due to receiving notification of two breaches of the funds mandate.  

1 November: Passive duration breach

13 November: Purchase of an ineligible security

We were initially notified of these breaches in a meeting with Harbour on November 24th. We later followed up on both breaches via email. Our questions and Harbours respective answers are outlined below.

Passive duration breach Harbour notified us that their positioning in the 2050 Auckland Council Bond settled on September 30, while

the index did not include the bond until early October, as a result the duration of the fund relative to the

benchmark (-0.56) breached the ±0.5 year threshold. 

What actions (if any) have been taken to prevent the fund from having a relative duration breach again? o

As Bloomberg doesn’t populate index changes until COB on the 1st day of the new month,

this aspect of systems slows index changes to 1 day late. However, we get index change

advice a few days before month end. We check these changes when these arrive and diarise

to do this. However, this step did not occur. Mark has been the person receiving these index files and we have reassigned this responsibility across the team.



How long did it take to make corrective trades to address the breach? o

The breach was recognized when our Front Office spreadsheet refreshed on the morning

of the 2nd day of the month. Independently, on the same day the operations team also

recognized the breach via the Bloomberg AIM system and notified the Fixed Income team. We made corrective trades that morning.



Was there any trading costs or market impact incurred that could have been avoided? o

Overall, stocks were purchased at a yield equal to, or slightly preferable to those we would have expected to achieve if we had dealt at the end of the month.

The table below highlights the corrective trades that were made. Ultimately showing there was a net gain as a result of these actions. Stocks purchased and yield details were:

Purchase of an ineligible security Harbour notified us of a further flag throughout the quarter, where they purchased an ineligible security, a National Australia Bank AUD denominated bond. The fund’s mandate allows the purchase of NZD hedged AUD securities, however this bond failed to meet those requirements. 



Was the internal pre-trade tool not used when considering the NAB purchase? o We require the security to be set up in Bloomberg for our system to check compliance. At the time of the order, the security was not set up. It is typically set up around the launch of a deal. The breach was discovered when the security was set-up in AIM. What actions (if any) have been taken to prevent the fund from having another accidental purchase of a restricted security? o In future if the security has not been set-up in AIM we will either test a similar security, or set-up a dummy security with the same characteristics from which to conduct compliance testing. Was there any trading costs or market impact incurred that could have been avoided? o Upon realisation the NAB purchase was transferred to another account before the transaction has settled. As a result there were no costs incurred by the Corporate Bond Fund.

Conclusion Harbours communication around the mandate breach was somewhat underwhelming, considering the

breaches were not filed in their monthly compliance certificates. However, we have been in communication with Harbour and they have assured us their policies have been refined to prevent these breaches occurring

in the future. Harbour have also adjusted their sign out process for completing compliance certificates, to now

include the Portfolio Managers sign off, as well as the Head of Compliance.

We are satisfied that Harbour are taking the appropriate measures to ensure that the fund will be managed

appropriately moving forward. The changes being implemented by Harbour should mitigate the potential for

these breaches to occur in the future, minimising risks for all parties.

Given all above, the CIC assesses that the fund passed this enhanced due diligence flag in relation to a breach in the funds mandate.

May 2021 Disclaimer: The material contained in or attached to this report has been prepared based upon information that Consilium NZ Limited believes to be reliable, but may be subject to typographical or other errors. Consilium has taken every care in preparing this information which is for client education purposes only. Although the data has been sourced from publicly available information and/or provided by the investment managers, we are not able to guarantee its accuracy. Past performance, whether actual or simulated, is no guarantee of future performance. This document does not disclose all the risks of any transaction type described herein, and the recipient should understand any terms including relevant risk factors and any legal, tax and accounting considerations applicable to them.

Change in Key Party

Enhanced due diligence for the quarter ended 31 December 2020 Enhanced due diligence trigger Consistent with its written policies and procedures, the Consilium Investment Committee (CIC) reviews all recommended investments on a quarterly basis against a combination of investment performance and

quantitative fund metrics.

In the fourth quarter of 2020, the below named Dimensional funds (the funds) were flagged for enhanced

due diligence (EDD).      

Dimensional Global Core Equity Trust (NZD)

Dimensional Global Sustainability Trust (NZD)

Dimensional Two-year Diversified Fixed Interest Trust (NZD) Dimensional Five-Year Diversified Fixed Income Trust (NZD)

Dimensional Global Bond Trust (NZD)

Dimensional Global Bond Sustainability Trust (NZD)

Nature of the EDD flag The EDD flag was due to receiving notification of an addition to the funds’ key parties. Dimensional announced the addition of new foreign exchange counterparty The Bank of New York Mellon

Corporation during the fourth quarter of 2020.

The Bank of New York Mellon Corporation The Bank of New York Mellon Corporation is one of the leading investment banking services groups. Based on a diversified and integrated banking model, the Group combines financial strength and proven expertise to provide valuable insights, identify trends and innovate new ideas, all in service of their clients.

Flag – Change in Key Party We previously made contact with Dimensional Fund Advisers (DFA) via our scheduled monthly call to discuss how they undertake due diligence on counterparties before introducing them to their funds. DFA followed up via email with the below response. 

The addition of new FX counterparties requires approval by the Investment Committee. All FX counterparties are reviewed and approved at least annually by the Investment Committee.



We require that all approved 3rd party FX counterparties have an active IFEMA or ISDA contract signed

on the account. These contracts provide legal protection for counterparties in the case there is a default.



A daily process is run to identify if the net currency exposure with any counterparty is greater than 1% of Assets on an account-by-account basis. This exposure represents the total unrealized gain on any

outstanding FX trade. When an account’s exposure is over 1%, we will stop entering into new FX trades

with this counterparty until the number goes back under 1%. If we have a net exposure to a

counterparty that begins to show signs of significant financial issues, we will look to close out our existing exposure to the counterparty. 

From a counterparty monitoring standpoint, two daily credit checks are performed: o

We have an internal tool created to aggregate market data, a report is generated to check

the market implied credit quality of each counterparty. This report is continuously updated

with market pricing which is then charted to look for potential signs of credit issues represented by widening credit spreads. An internal credit rating is then estimated based on this data for

each individual pricing source. Any significant changes in credit quality are immediately passed along and used to discontinue/suspend trading relationships (This process has caused us to stop trading with multiple banks in the past and was later used to reinstate those same

banks). All FX/derivative counterparties currently used by Dimensional are represented on this list.

For accounts with a true minimum ratings requirement, a daily check is run in order to look

for changes in the stated ratings (not the implied ratings) to determine eligible counterparties

Overall, Dimensional have a thorough process in place to manage a change in key party and we believe that this process mitigates any risk as a key party is introduced to Dimensional funds.

Conclusion Dimensional’s approach to undertaking due diligence on counter parties is thorough. This is not limited to

the initial DD, and due diligence on counterparties is an ongoing process. Overall exposure to any single counterparty is capped, severely limiting the single counterparty risk.

We remain satisfied that DFA are taking significant measures to ensure that the funds will be managed appropriately, minimising risks for all parties.

Given all above, the CIC assesses that the funds pass this enhanced due diligence flag in relation to the introduction of an additional key party and the funds remain our recommended vehicles for access to NZD

hedged asset classes.

May 2021

Disclaimer: The material contained in or attached to this report has been prepared based upon information that Consilium NZ Limited believes to be reliable, but may be subject to typographical or other errors. Consilium has taken every care in preparing this information which is for client education purposes only. Although the data has been sourced from publicly available information and/or provided by the investment managers, we are not able to guarantee its accuracy. Past performance, whether actual or simulated, is no guarantee of future performance. This document does not disclose all the risks of any transaction type described herein, and the recipient should understand any terms including relevant risk factors and any legal, tax and accounting considerations applicable to them.

Harbour Corporate Bond Fund

Enhanced due diligence for the quarter ended 31 March 2021 Enhanced due diligence trigger An enhanced due diligence (EDD) on a fund may be required for any number of reasons. Please refer to the CIC Policy and Procedures Manual for more detail. Fund: Harbour Corporate Bond Fund (“the fund”) Benchmark: S&P/NZX A-Grade Corporate Bond Index (“the benchmark”) The trigger for this analysis was short term tracking error (Appendix 1). Fund return: -1.56%, Benchmark return: -2.06%, Deviation: +0.51%, Tolerance: ±0.39%

Enhanced due diligence checklist Check

Result

Satisfactory

Has the investment mandate changed? (Appendix 2)

✓

Were the risk levels acceptable and within mandate (Appendix 3)?

Yes

Were there any special considerations (Appendix 4)?

Yes

✓ ✓

Conclusion Our analysis highlighted the quarterly outperformance was a result of several contributing factors throughout the quarter, most notably the funds relative duration positioning compared to the benchmark. The funds security selection, particularly the funds allocation to inflation linked bonds and BBB rated securities, which saw relative outperformance throughout the quarter, also contributed to outperformance of the fund relative to the benchmark. The funds exposure levels always remained inside mandate and broadly in line with historical observations. This has been a volatile period for this asset class and the increase in volatility has been the primary source of the increased tracking error over the recent quarters. We conclude that the identified risk exposures are consistent with the trust’s mandate. Based on all the above, the committee was satisfied with the source of deviation and remain confident that Harbour is not taking any unexpected risks. The fund remains our recommended vehicle for taking exposure to New Zealand Fixed Income. For further detail please see the appendix on the following pages.

June 2021

Appendix: Supporting analysis 1. Tracking error chart Figure 1 - Quarterly deviation from custom benchmark +0.80% +0.60% +0.40% +0.20% +0.00% -0.20% -0.40% -0.60% -0.80% Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Source: Consilium

2. Review of the investment mandate The Harbour product disclosure statement (PDS) applicable to Q1 2021 was dated 11 February 2020. The stated objective of the trust is:

The Fund provides access to favourable income yields through a diversified portfolio of primarily

investment grade corporate bond fixed interest securities.

The CIC has frequent dialogue with the fund manager, and we are satisfied there has been no change to the strategy/mandate without our knowledge.

3. Investigation with the fund management team We approached Harbour regarding the outperformance of the fund throughout the quarter. Harbour promptly offered to present their findings to us over a video call, to discuss why the differences between the fund and its benchmark led to outperformance in the March quarter 2021. Harbour also provided a written

response via email, which we have summarised below.

The size of market rate movements over the quarter as whole were large, but not remarkable (in absolute terms). However, the month of February was significant, being the second largest monthly index move since

the Global Financial Crisis (in absolute terms). This is significant given the fund was positioned to avoid a meaningful amount of this sell-off, then moved to a close to neutral position and therefore didn’t ‘give back’ any performance during the following month.

Duration positioning (36bps performance attribution) The fund on average held an average duration of 0.13 (years) less than the benchmark over the quarter as shown in Figure 2 below. Harbour made note that the funds relative duration throughout the quarter was within it’s typical long-term range. This resulted in duration adding a significant +36bps of outperformance throughout the quarter. Figure 2 – Duration relative to the benchmark (years)

0.6 0.4 0.2 0 -0.2 -0.4 -0.6

Source: Harbour Asset Management

Inflation Linked Securities (15bps) Inflation became an overwhelming theme in the market and the funds linker position (while still below 3 percent, as shown in Figure 3) contributed 15bps of outperformance. Sharp movements in break even inflation rates throughout the quarter contributed to this outperformance. Figure 3 – Exposure by Inflation Linked Securities 5.0% 4.0% 3.0% 2.0% 1.0% Mar-21

Jan-21

Feb-21

Dec-20

Oct-20

Nov-20

Sep-20

Aug-20

Jul-20

Jun-20

May-20

Apr-20

Mar-20

Jan-20

Feb-20

Dec-19

Oct-19

Fund

Nov-19

Sep-19

Jul-19

Aug-19

Jun-19

Apr-19

May-19

Feb-19

Mar-19

Jan-19

Dec-18

Nov-18

Oct-18

0.0%

Benchmark

Source: Harbour Asset Management

Security Selection (9bps) The fund continues to hold an overweight to BBB securities (Figure 4) with less exposure to Local government Funding Agency (LGFA) securities than the benchmark (Figure 5). BBB spreads tightened more than LGFA spreads, which remained relatively static, this contributed to 9bps of outperformance. Figure 4 – Exposure by credit rating

100 75 50 25 0

Portfolio AAA

Benchmark AA

BBB

Not Classified

Source: Harbour Asset Management

Figure 5 – Exposure by Local Government Funding Agency

50% 40% 30% 20%

Fund

Mar-21

Dec-20

Sep-20

Jun-20

Mar-20

Dec-19

Sep-19

Jun-19

Mar-19

Dec-18

Sep-18

Jun-18

Mar-18

Dec-17

Sep-17

Jun-17

Mar-17

Dec-16

Sep-16

Jun-16

Mar-16

Dec-15

10%

Benchmark

Source: Harbour Asset Management

4. Exposure Levels Harbour acknowledged that the fund signalling for three consecutive quarters may be of concern to the CIC. They provided a brief summary, to describe the performance of the trust in recent history. The below chart demonstrates that Harbour have not changed their investment approach or

position sizing, rather the increased performance volatility of the fund relative to the benchmark, is directly proportional to increased volatility in markets.

The below chart (Figure 6) plots volatility in the market (orange line LHS axis) against the volatility of the Funds performance relative to the index (dark line RHS axis).

Figure 6 – Rolling 1 year tracking error and market volatility (S&P/NZX A Grade Corporate Bond Total Return Index) 4.50%

0.50%

4.00%

0.45%

3.50%

0.40% 0.35%

3.00%

0.30%

2.50%

0.25%

2.00%

0.20%

1.50%

0.15%

1.00%

0.10%

0.50%

0.05%

0.00%

1yr Vol (LHS)

1yr Tracking Error (RHS)

Source: Harbour Asset Management

Figure 7 further shows that the active share taken by the fund throughout the March quarter was in line with the fund’s recent history, and that Harbour were not taking any additional risk. Figure 7 – Harbour Corporate Bond Fund Active Share 70%

65%

60%

55%

50%

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

Jan-20

Apr-20

Jul-20

Oct-20

Jan-21

Source: Harbour Asset Management

Disclaimer: The material contained in or attached to this report has been prepared based upon information that Consilium NZ Limited believes to be reliable but may be subject to typographical or other errors. Consilium has taken every care in preparing this information, which is for client education purposes

only. Although the data has been sourced from publicly available information and/or provided by the investment managers, we are not able to guarantee

its accuracy. Past performance, whether actual or simulated, is no guarantee of future performance. This document does not disclose all the risks of any

transaction type described herein, and the recipient should understand any terms including relevant risk factors and any legal, tax and accounting considerations applicable to them.

Dimensional Emerging Markets Trust Enhanced due diligence for the quarter ended 31 March 2021 Enhanced due diligence trigger An enhanced due diligence (EDD) on a fund may be required for any number of reasons. Please refer to the CIC Policy and Procedures Manual for more detail. Fund: Dimensional Emerging Markets Trust (“the trust”) Benchmark: MSCI Emerging Markets Value Index (net div AUD) (“the benchmark”) The trigger for this analysis was short term tracking error (Appendix 1). Fund return: 11.38%,

Benchmark return: 7.06%, Deviation: +4.32%, Tolerance: ±3.10%

Enhanced due diligence checklist Check

Result

Satisfactory

Has the investment mandate changed? (Appendix 2)

✓

Was relative performance attributable to known structural elements? (Appendix 3, 4)

Yes

✓

Were the risk levels acceptable? (Appendix 5)

Yes

✓

Were there any special considerations?

✓

Conclusion Our analysis highlighted that the outperformance in the March quarter was attributable to structural elements of the trust, particularly the tilts towards value and small companies. Significantly outperforming deep value sectors led to positive relative performance throughout the March 2021 quarter. We notice that the fund’s relative price to book ratio is at its lowest point in its history (figure 3). We remain satisfied the identified risk exposures are consistent with the trust mandate, and we identified no unexpected or unexplained risks. Based on all the above, the committee was satisfied that the Dimensional Emerging Markets Trust is not taking any unknown risks and remains an integral part of the Emerging Markets Equity strategy. For further information please see the appendix on the following pages.

May 2021

Appendix: Supporting analysis 1. Tracking error chart Figure 1 - Quarterly deviation from custom benchmark

2. Review of the investment mandate The Dimensional product disclosure statement (PDS) applicable to Q1 2021 was dated 26 May 2020. The

stated objective of the trust is:

The investment objective of the Trust is to provide long-term capital growth by gaining exposure to a diversified portfolio of Value Companies associated with approved emerging markets.

The Trust is not managed with the objective of achieving a particular return relative to a benchmark index. However, to compare the performance of the Trust with a broad measure of market performance, reference may be made to the MSCI Emerging Markets Index (net div.).

The CIC has frequent dialogue with the fund manager, and we are satisfied there has been no change to the strategy/mandate without our knowledge.

3. Investigation with the fund management team The trusts performance commentary (in AUD) for the quarter states: The trust returned 9.7% over the quarter, leading the MSCI Emerging Markets Index by 6.1% and the MSCI Emerging Markets Value Index by 4.3%. The trust’s focus and emphasis on value

stocks was the primary driver of outperformance as the value premium was positive. Additionally, the portfolio’s emphasis on stocks with smaller market capitalizations benefitted relative performance, as small and cap stocks outperformed large caps.

Size and value premiums were positive across many global markets. Energy and financial sectors

were the best performers overall and led the value stock charge. Looking back one year, just after the 2020 market bottom, small value stocks have outperformed large growth stocks by 29% globally and equities have risen 27%.

In the first quarter of 2021, small cap and large cap value stocks returned 9.6% and 8.5%

respectively, while growth stocks returned 1.4%. The trust held 17% greater weight in small and micro caps than the MSCI Emerging Markets Value Index. The trust held 25% lesser weight in

growth and deep growth stocks than the MSCI Emerging Markets Value Index. For example, the

trust was underweight growth stocks such as Nio which underperformed the market and is held by both indices.

4. Attribution Analysis Table 2 – Allocation attribution by size for the Emerging Markets Trust relative to MSCI Emerging Markets Value Index

Avg Weights Portfolio Mega Large Mid Small

Micro

32.5% 26.3% 17.4% 13.2% 10.2%

Avg Weights Benchmark

Additional Portfolio Weight

Segment Return

Outperfor mance*

Allocation Attribution

28.6%

-15.7% -2.3%

5.6%

0.22%

0.1%

7.3%

-1.4%

9.9%

2.8%

48.2% 17.2% 5.0% 0.3%

Source: Dimensional Fund Advisors and Consilium calculations

8.2% 9.9%

13.4% 14.1%

0.2%

-0.01%

6.3%

0.52%

7.0%

*Relative to the total index return of +7.03%

0.00%

0.69%

Allocation attribution by size finds a cumulative impact of +142bps.

Table 3 – Allocation attribution by book to market ratio for the Emerging Markets Trust relative to MSCI Emerging Markets Value Index

Avg Weights Benchmark

Additional Portfolio Weight

Segment Return

Outperfor mance*

Allocation Attribution

-8.7%

-0.1%

-7.1%

0.62%

2.9%

19.1%

-16.2%

2.9%

-4.2%

0.68%

19.2%

25.7%

-6.5%

6.0%

-1.1%

0.07%

76.8%

45.3%

31.5%

11.4%

4.3%

1.37%

Avg Weights Portfolio Deep Growth Growth Value Deep Value

0.5%

9.2%

Source: Dimensional Fund Advisors and Consilium calculations

*Relative to the total index return of +7.03%

Allocation attribution by book to market ratio shows a cumulative impact of +273bps.

5. Analysis of risk exposure Figure 2 – Aggregate price to book ratio of trust and benchmark 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2

DFA Emerging Markets Trust

Mar-21

Sep-20

Mar-20

Sep-19

Mar-19

Sep-18

Mar-18

Sep-17

Mar-17

Sep-16

Mar-16

Sep-15

Mar-15

Sep-14

Mar-14

Sep-13

Mar-13

Sep-12

Mar-12

Sep-11

Mar-11

Sep-10

Mar-10

MSCI Emerging Markets Value Index (net div., AUD)

Source: Consilium

Figure 3 – Aggregate price to book ratio of trust relative to benchmark 2.5% -2.5% -7.5% -12.5% -17.5% -22.5% -27.5%

Mar-21

Sep-20

Mar-20

Sep-19

Mar-19

Sep-18

Mar-18

Sep-17

Mar-17

Sep-16

Mar-16

Sep-15

Mar-15

Sep-14

Mar-14

Sep-13

Mar-13

Sep-12

Mar-12

Sep-11

Mar-11

Sep-10

Mar-10

-32.5%

Source: Consilium

Figure 4 – Weighted average total market capitalisation (NZD million) of trust and benchmark 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000

DFA Emerging Markets Trust

Mar-21

Sep-20

Mar-20

Sep-19

Mar-19

Sep-18

Mar-18

Sep-17

Mar-17

Sep-16

Mar-16

Sep-15

Mar-15

Sep-14

Mar-14

Sep-13

Mar-13

Sep-12

Mar-12

Sep-11

Mar-11

Sep-10

Mar-10

MSCI Emerging Markets Value Index (net div., AUD)

Source: Consilium

Figure 5 – Weighted average total market capitalisation of trust relative to benchmark 2.5% -7.5% -17.5% -27.5% -37.5% -47.5% -57.5%

Mar-21

Sep-20

Mar-20

Sep-19

Mar-19

Sep-18

Mar-18

Sep-17

Mar-17

Sep-16

Mar-16

Sep-15

Mar-15

Sep-14

Mar-14

Sep-13

Mar-13

Sep-12

Mar-12

Sep-11

Mar-11

Sep-10

Mar-10

-67.5%

Source: Consilium

only. Although the data has been sourced from publicly available information and/or provided by the investment managers, we are not able to guarantee

its accuracy. Past performance, whether actual or simulated, is no guarantee of future performance. This document does not disclose all the risks of any

transaction type described herein, and the recipient should understand any terms including relevant risk factors and any legal, tax and accounting considerations applicable to them.

Dimensional Global Sustainability Trust Enhanced due diligence for the quarter ended 31 March 2021 Enhanced due diligence trigger An enhanced due diligence (EDD) on a fund may be required for any number of reasons. Please refer to the CIC Policy and Procedures Manual for more detail. Fund: Dimensional Global Sustainability Trust (NZD) (“the trust”) Custom Benchmark: Consilium GSUT Expectation (NZD) (“the benchmark”) The trigger for this analysis was short term tracking error (Appendix 2) Fund return: 7.90%,

Custom Benchmark return: 9.81%, Deviation: -1.91%, Tolerance: ±1.73%

Enhanced due diligence checklist Check

Result

Satisfactory

Has the investment mandate changed? (Appendix 3)

✓

Was relative performance attributable to known risk tilts and/or exclusions? (Appendix 4, 5)

Yes

✓

Were the risk levels acceptable? (Appendix 6)

Yes

✓

Were there any special considerations?

✓

Conclusion Our analysis highlighted that the underperformance in the March quarter was attributable to structural elements of the trust. The attribution analysis shows that against the MSCI World ex Australia Index, we can see that the fund outperformed the market, with this outperformance resulting from the size and value tilts taken by the trust. Against the custom benchmark however, the underperformance is attributable to the funds SRI exclusions, with the Energy sector in particular outperforming throughout the quarter (26.3% vs 7.9%). An example of this is the trusts exclusion of Exxon Mobil Corporation, which returned 41.6% during the quarter, this led to -11bps of relative underperformance. There is currently insufficient evidence for us to be able to expect a positive premium from SRI investing, so this feature does not impact the expected returns of our custom benchmark. We remain satisfied the identified risk exposures are consistent with the trust mandate, and we identified no unexpected or unexplained risks. Based on all the above, the committee was satisfied that the Dimensional Global Sustainability Trust passed this EDD review. For further information please see the appendix on the following pages.

May 2021

Appendix: Supporting analysis 1. Custom benchmark The style benchmark used to measure this trust’s expected quarterly returns is a custom index created by the CIC. This custom index includes consideration of the expected risk tilts from this trust rather than just a broad market return which was assumed when previously using the MSCI World ex Australia Index (NZD). The factor exposures to construct the custom index have been evaluated from a multiple regression performed in May 2020. For this trust, the custom index is specified in table 1 below. Table 1 – Specification of Consilium Global Sustainability Expectation

Factor

Factor loading

Risk Free

1.00x

Market

1.00x

Factor definition Ken French Risk Free Rate Ken French Market factor minus Ken French Risk Free Rate

Size

0.15x

Ken French Developed Market Size Factor

Value

0.15x

Ken French Developed Market Value Factor

Profitability

nil

Notes

This is the average return on the three Ken French small portfolios minus the average return on the three Ken French big portfolios. This is the average return on the two Ken French value portfolios minus the average return on the two Ken French growth portfolios. .

Source: Consilium calculations, Ken French Five Factor Model

Using a custom index for attribution analysis or analysis of relative fundamentals such as aggregate price to book or weighted average market capitalisation poses a difficulty. As the custom index is not maintained by an index provider there is no average underlying company exposures for the custom index and so attribution

analysis or analysis of relative fundamentals is impossible.

When performing these analyses, we instead employ the closest benchmark available for which these analyses can be completed. For this trust that is the MSCI World ex Australia Index (NZD).

2. Tracking error chart Figure 1 - Quarterly deviation from custom benchmark +2.50% +2.00% +1.50% +1.00% +0.50% +0.00% -0.50% -1.00% -1.50% -2.00% -2.50%

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Source: Consilium

3. Review of the investment mandate The Dimensional product disclosure statement (PDS) applicable to Q1 2021 was dated 26 May 2020. The

stated objective of the trust is:

The investment objective of the Trust is to provide long-term capital growth by gaining exposure

to a diversified portfolio of securities associated with approved developed markets (excluding Australia), with increased emphasis on higher expected return securities, and adjusted to take into account certain environmental and sustainability impact and social considerations.

The CIC has frequent dialogue with the fund manager, and we are satisfied there has been no change to the strategy/mandate without our knowledge.

4. Investigation with the fund management team The trusts performance commentary (NZD class) for the quarter states: The trust returned 7.9% over the quarter, leading the MSCI World ex Australia Index by 1.7%.

The portfolio’s emphasis on value stocks and small cap stocks drove outperformance, as both size and value premiums were positive for the quarter.

Energy and financial sectors were the best performers overall and led the value stock charge.

Looking back one year, just after the 2020 market bottom, small value stocks have outperformed large growth stocks by 29% globally and equities have risen 27%.

The profitability premium was slightly negative overall, but within growth stocks, those with

higher profitability outperformed. As a result, the emphasis had a negligible impact on relative performance. The portfolio’s emphasis on companies with low emissions intensity detracted from

relative performance, as companies with lower emissions underperformed. Ultimately, positive value and size premiums dominated, and the portfolio outperformed for the quarter.

5. Attribution Analysis Table 2 – Allocation attribution by size for the Global Sustainability Trust relative to MSCI World ex Australia Index

Mega Large Mid

Small

Micro

Avg Weights Portfolio

Avg Weights Benchmark

Additional Portfolio Weight

Segment Return

19.8%

21.4%

-1.6%

9.6%

46.6% 12.8% 11.1% 9.3%

71.7% 6.2% 0.7% 0.0%

Source: Dimensional Fund Advisors and Consilium calculations

Outperfor mance*

Allocation Attribution

0.18%

-25.2%

7.2%

-0.7%

6.6%

11.8%

3.9%

10.5% 9.3%

10.3% 19.1%

1.7%

-0.03%

2.4% 11.2%

0.25% 1.04%

0.26%

*Relative to the total index return of +7.90%

Allocation attribution by size finds a cumulative impact of +171bps.

Table 3 – Allocation attribution by price to book for the Global Sustainability Trust relative to MSCI World ex Australia Index

Deep Growth Growth Value

Deep Value

Avg Weights Portfolio

Avg Weights Benchmark

Additional Portfolio Weight

Segment Return

20.7%

23.8%

-3.1%

4.6%

17.4% 26.1% 35.4%

21.8% 27.2% 27.1%

Source: Dimensional Fund Advisors and Consilium calculations

Outperfor mance*

Allocation Attribution

-4.4%

0.3%

-7.6%

0.34%

-1.1%

9.3%

1.4%

-0.02%

8.3%

16.1%

-3.3% 8.2%

*Relative to the total index return of +7.90%

0.10%

0.68%

Allocation attribution by price to book (value tilt) finds a cumulative impact of +110bps.

6. Analysis of risk exposure Figure 2 – Aggregate price to book ratio of trust and benchmark 3.5 3 2.5 2 1.5 1 0.5 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21

DFA Global Sustainability Trust NZD Hedged Class MSCI World ex Australia Index (net div., hedged to NZD) Source: Consilium

Figure 3 – Aggregate price to book ratio of trust relative to benchmark 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21

-12.0%

Source: Consilium

We note that the change in relative price to book during the first half of 2020 is consistent with the funds strategy migrating away from its initial large cap positioning, moving towards a core (size and value tilted) strategy.

Figure 4 – Weighted average total market capitalisation (NZD million) of trust and benchmark 600,000 500,000 400,000 300,000 200,000 100,000

Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21

DFA Global Sustainability Trust NZD Hedged Class MSCI World ex Australia Index (net div., hedged to NZD) Source: Consilium

Figure 5 – Weighted average total market capitalisation of trust relative to benchmark 2.5% -2.5% -7.5% -12.5% -17.5% -22.5% -27.5% -32.5% Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21

-37.5%

Source: Consilium

only. Although the data has been sourced from publicly available information and/or provided by the investment managers, we are not able to guarantee

its accuracy. Past performance, whether actual or simulated, is no guarantee of future performance. This document does not disclose all the risks of any

transaction type described herein, and the recipient should understand any terms including relevant risk factors and any legal, tax and accounting considerations applicable to them.

Dimensional Two-Year Sustainability Fixed Interest Trust Enhanced due diligence for the quarter ended 30 June 2021 Enhanced due diligence trigger An enhanced due diligence (EDD) on a fund may be required for any number of reasons. Please refer to the CIC Policy and Procedures Manual for more detail.

In the second quarter of 2021, the Dimensional Two-year sustainability fixed interest trust (the trust) flagged for enhanced due diligence (EDD) due to a change in the fund’s mandate.

Background Dimensional Fund Advisers (DFA) signalled their intent to modify the mandate of the trust, to include a

sustainability overlay, towards the end of 2020. This change was then implemented on August 2nd 2021.

The sustainability overlay has had no impact on the duration or credit strategy of the trust, with the overlay

following the same implementation style as other DFA sustainability trusts. The overlay has had no impact on the trusts expected return, resulting in no flow on effects to Consilium portfolios.

Given DFA follow the same implementation style with sustainability overlays, we will draw comparison to the Dimensional Global Bond Trust (GBT), which has a sustainable counterpart, the Dimensional Global Bond Sustainability Trust (GBST), to measure the magnitude of the sustainability overlay on the trust.

Mandate The SRI overlay is almost identical to that employed by Dimensional’s existing international bond SRI fund (the

Global Bond Sustainability Trust). The primary consideration of the approach is environmental impacts from

company emissions, including greenhouse gas emissions and potential emissions from fossil fuel reserves. There are also screens addressing socially responsible issues such as factory farming, cluster munitions,

landmines, nuclear weapons, tobacco, child labour, alcohol, gambling and adult entertainment.

Fundamental Characteristics (GBT and GBST) An inspection of details of the two Global Bond funds’ as at the end of August 2021 further reinforces the

parallels in their mandates. As at the end of August the two funds exhibited the following characteristics:

Table1: Characteristics of GBT and GBST as at August end 2021 Average

Global Bond Trust Global Bond

Sustainability Trust

duration

Yield to

maturity

Government

Corporate

Number of

7.86y

1.49%

57.2%

33.7%

316

7.81y

1.49%

57.3%

34.4%

481

issuers

holdings

Source: Dimensional

Figure 1: Maturity profile of underlying bonds in GBT and GBST as at end August 2021 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

0-1 Years

1-5 Years Global Bond Trust

5-10 Years

10+ Years

Global Bond Sustainability Trust

Source: Dimensional

The two funds exhibit similar levels of credit and term risk as was indicated when the fund initially launched in

2018. We can expect that the Sustainability overlay will also have no significant impact on the fund’s credit and term risk levels.

Impact on expectations Given the sustainability overlay is not expected to impact the trusts exposure to credit or term risks, the CIC is satisfied that the expected return characteristics of the trust will remain unchanged. However, for comparative purposes, we have compared weekly returns for both GBT and GBST, to show the corelation of these two trusts. The expectation is to show that we can expect the Two-year Sustainability Fixed Interest Trust to deliver the same expected returns characteristics as the predeceasing Two-year Diversified Fixed Interest Trust.

Chart 1: Comparison of weekly returns

Global Bond Sustainability Trust (NZD)

0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 -0.8 -1 -1.2 -1.4

-1.5

-1

-0.5

Global Bond Trust (NZD)

0.5

Chart 1 above shows the two trusts exhibit … correlation with a R2 value of 0.9689. The data points in red, relate to March 2020, where amidst the Covid-19 market crisis credit spreads increased resulting in a negative

term premium. The subtle differences in the makeup of both funds had a greater impact on fund performance throughout this highly volatile period. The green data point however, corresponds with April 2018, when the

Global Bond Sustainability trust was initially implemented. Given the remaining 177 weeks of data feature an R2 of 0.9967 we can see the two funds feature high levels of correlation. Given this, we can expect the impact

of the sustainability overlay to have minimal impact on the funds expected returns, and therefore no impact on the expected returns of the portfolios.

Summary As of October 2021, the CIC are nearing completion of the 2021 SAA review, given the timeframe, we believe

it would be inappropriate to make adjustments to portfolio asset allocations. However, we anticipate the

Dimensional Two-year Sustainability Trust will form an integral part of the 2021 solutions, with the trust now being eligible for SRI portfolios.

In light of all of the above, the committee remains satisfied the Dimensional Two-year Sustainability Trust has

passed the EDD review.

November 2021 Disclaimer: The material contained in or attached to this report has been prepared based upon information that Consilium NZ Limited believes to

be reliable, but may be subject to typographical or other errors. Consilium has taken every care in preparing this information which is for client

education purposes only. Although the data has been sourced from publicly available information and/or provided by the investment managers,

we are not able to guarantee its accuracy. Past performance, whether actual or simulated, is no guarantee of future performance. This document does not disclose all the risks of any transaction type described herein, and the recipient should understand any terms including relevant risk factors and any legal, tax and accounting considerations applicable to them.

Change in Key Party

Enhanced due diligence for the quarter ended 30 June 2021 Enhanced due diligence trigger Consistent with its written policies and procedures, the Consilium Investment Committee (CIC) reviews all

recommended investments on a quarterly basis against a combination of investment performance and

quantitative fund metrics.

The Royal Bank of Canada The Royal Bank of Canada is a multinational financial services company and one of the largest bank in Canada,

with CAD 844 billion assets under management, as of 2020. The Royal Bank of Canada is an institution with a

purpose-driven, principles-led approach to delivering leading performance, and creating value for our clients

and communities.

Flag – Change in Key Party We previously made contact with Dimensional Fund Advisers (DFA) via our scheduled monthly call to discuss

how they undertake due diligence on counterparties before introducing them to their funds. DFA followed up via email with the below response. 

The addition of new FX counterparties requires approval by the Investment Committee. All FX counterparties are reviewed and approved at least annually by the Investment Committee.



We require that all approved 3rd party FX counterparties have an active IFEMA or ISDA contract signed

on the account. These contracts provide legal protection for counterparties in the case there is a default.



outstanding FX trade. When an account’s exposure is over 1%, we will stop entering into new FX trades with this counterparty until the number goes back under 1%. If we have a net exposure to a

counterparty that begins to show signs of significant financial issues, we will look to close out our existing exposure to the counterparty.



From a counterparty monitoring standpoint, two daily credit checks are performed: o

We have an internal tool created to aggregate market data, a report is generated to check

the market implied credit quality of each counterparty. This report is continuously updated with market pricing which is then charted to look for potential signs of credit issues represented

by widening credit spreads. An internal credit rating is then estimated based on this data for each individual pricing source. Any significant changes in credit quality are immediately

passed along and used to discontinue/suspend trading relationships (This process has caused us to stop trading with multiple banks in the past and was later used to reinstate those same banks). All FX/derivative counterparties currently used by Dimensional are represented on this list.

For accounts with a true minimum ratings requirement, a daily check is run in order to look

for changes in the stated ratings (not the implied ratings) to determine eligible counterparties

Overall, Dimensional have a thorough process in place to manage a change in key party and we believe that

this process mitigates any risk as a key party is introduced to Dimensional funds.

Conclusion Dimensional’s approach to undertaking due diligence on counter parties is thorough. This is not limited to

the initial DD, and due diligence on counterparties is an ongoing process. Overall exposure to any single

counterparty is capped, severely limiting the single counterparty risk.

We remain satisfied that DFA are taking significant measures to ensure that the funds will be managed appropriately, minimising risks for all parties.

Given all above, the CIC assesses that the funds pass this enhanced due diligence.

November 2021

Harbour NZ Index Shares Fund

Enhanced due diligence for the quarter ended 30 September 2021

Enhanced due diligence trigger An enhanced due diligence (EDD) on a fund may be required for any number of reasons. Please refer to the CIC Policy and Procedures Manual for more detail.

In the third quarter of 2021, the Harbour New Zealand Index Shares Fund (the ‘fund’) flagged for enhanced due diligence (EDD) due to a reported one-day tracking error on 23 August of 0.15%.

Background On 1 September we were advised by Harbour that the fund returned 5.15% in August versus a benchmark return of 5.29% - a difference of approximately 0.15%.

This tracking error was primarily a result of Harbour receiving and implementing a $60m inflow into the fund

in three tranches of $20m.

Harbour arranged for the investor to split the $60m inflow into three tranches of $20m each. This was

arranged with the intention of seeking to minimise both the implementation costs and the potential for any

unanticipated cash drag. The $20m tranche sizing was selected following an internal analysis of the NZ market which suggested such an amount would, under normal liquidity conditions, be easily accommodatable.

The first and third tranches had no relative impact on the fund performance. However, on 23 August the market movement on the day was outsized relative to the normal daily volatility. The local market opened

up sharply and closed up 2% on the day. However, with the market “gapping” up on opening, Harbour were prevented from getting the cash into the market, thereby creating an effective cash drag.

The market was up 2% for the day and daily market movements of this magnitude are extremely unpredictable. Over the last year the average daily move has been 0.08%, so this move reflected close to a three standard deviation event.

On the next page is a distribution of the last 20 years of daily returns of the index (approx. 5049 days) and it

is quickly apparent that +2% is one of the largest 25 or so ‘up’ days in this entire series, with many of the tail outcomes occurring in extreme risk periods such as the GCF and Covid (i.e extremely abnormal market conditions).

+2% day within the tails of the distribution

The general mechanics of how inflows are managed by this fund are as follows: Cash flows are known to the registry the night before and applied to the fund the following afternoon at the prior night’s closing unit price. The fund manager is informed regarding the cash position in the morning. Mandate rules are that orders can only be placed into the market once the fund manager is informed that the cash is in the fund, otherwise the fund becomes leveraged.

In general, Harbour seek to minimise cash drag by only holding 0.15% to 0.20% of cash in the fund, so larger

inflows have the ability to create negative (or positive) cash drag, depending on market characteristics on any single day where large flows may occur.

Over the course of the previous few months, cash balances had both a positive and negative impact on the relative performance of the fund depending on the direction of the market on the day.

Up until 23 August, the fund was actually ahead of its benchmark by around 0.07%, reflecting several influences, including the element of cash held over the day of implementation.

Impact of the tracking error The total impact on fund performance from the $20m inflow on 23 August was approximately 0.15%. At the time, the $20m inflow represented around 8% of the fund’s NAV. This meant the overall impact on

the fund was approximately 8% of fund NAV multiplied by an approximate 2% price “gap”, equating to an approximate 0.15% underperformance.

Outlook Due to the absence of an adequate NZX equities futures market, it’s currently not possible to equitise large

cash flows (i.e. gain an effective equity exposure equivalent to the inflow) by using futures contracts. However, Harbour are part of a cornerstone group that is working to re-establish a liquid futures market in New Zealand and this is currently expected to begin middle of 2022.

For larger cashflows going forwards Harbour will continue to work with clients and to monitor/assess the potential impact of cash drag. They have also agreed to split large cash flows that are known, in advance and

are unable to transition in specie.

With the fund now having grown over $400m, Harbour have agreed to have a maximum single inflow cap of $20m (which is effectively a cap of 5% of NAV based on a $400m fund size, and a gradually reducing

percentage as the fund grows). In the event the fund falls below $400m in the future, Harbour have agreed to move to a maximum percentage of FUM cap (rather than a dollar inflow cap).

Summary Explicit transaction costs in the fund were only 0.01% in August, so the tracking error that impacted returns during the month was related to an unfortunate confluence of events - a relatively large cash inflow, combined with an unusually large market movement.

Without a functioning liquid futures market in New Zealand, this cash drag risk cannot currently be entirely

removed, but it can be mitigated by implementing meaningful inflow caps, which we have subsequently put in place with Harbour.

It should also be noted that “gap” risk is often more commonly experienced on negative days in the market (as the market reacts to significant new international information), and on these instances a sizable inflow

would more likely lead to positive tracking error as a result of temporarily (and unavoidably higher) cash

balance at the start of the trading day.

Overall Harbour are managing cash (and the fund in general) in line with the mandate and, aside from this

unusual combination of events, are otherwise doing an excellent job implementing this index tracking strategy. In light of all above, the committee remains satisfied the Harbour NZ Index Shares Fund remains our preferred unscreened exposure to the New Zealand equity market and, as such, the fund has passed this EDD review.

November 2021

Disclaimer: The material contained in or attached to this report has been prepared based upon information that Consilium NZ Limited believes to

be reliable, but may be subject to typographical or other errors. Consilium has taken every care in preparing this information which is for client

education purposes only. Although the data has been sourced from publicly available information and/or provided by the investment managers,

Change in Lead Portfolio Manager

Enhanced due diligence for the quarter ended 30 September 2021 Enhanced due diligence trigger Consistent with its written policies and procedures, the Consilium Investment Committee (CIC) reviews all recommended investments on a quarterly basis against a combination of investment performance and quantitative fund metrics.

Nature of the EDD flag The EDD flag was due to receiving notification of a change in the funds’ primary portfolio management team. Harbour announced that NZ Equity Portfolio Manager Susanna Lee would be stepping back from her role and taking on the role of Senior Research Analyst during the third quarter of 2021.

Flag – Change in Primary Portfolio Management Team Prior to this change departure, Susanna was regularly listed in the quarterly due diligence materials we receive from Harbour as one of the two key fund management personnel (alongside Craig Stent) responsible for

management of the following funds:  

Harbour NZ Index Shares Fund

Harbour Sustainable NZ Shares Fund

Susanna has been with Harbour for several years, previously working as a Senior Research Analyst, Susanna

became the Portfolio Manager for the Harbour NZ Equity Advanced Beta Fund. Alongside Craig Stent,

Susanna lead the transition of this fund, to the newly formed Harbour NZ Shares Index Fund, as well as the release of the Harbour Sustainable NZ Shares Fund.

The decision for Susanna to step down from Portfolio Management, returning to her role as Senior Research

Analyst is due to personal reasons. Susanna no longer wishes to work full-time and would like to spend more time with her family. As a result, Susanna and the team at Harbour believe it would be more appropriate for

her to take on the role as Senior Research Analyst. Here she can still provide analytical insights into the management of the funds, with her experience as a Portfolio Manager.

The fact that Susanna will remain within the Harbour team, ensures that Harbour are not losing any skills

within the organisation. However, it does present a slight element of key person risk with Craig Stent, the only

Portfolio Manager for both of the NZ Equity Funds. Harbour promote a team-based management approach

whereby the investment management process and decision-making is not dependent on any one individual.

Here we believe this risk will be mitigated, especially considering there is an ex Portfolio Manager still within the team.

Conclusion We are satisfied that the ongoing management and support of the funds will not be materially affected by

Susanna’s change of role, due to: 1.

The fact that the fund mandates are stable, well established and unchanged.

Harbour fosters a team approach to portfolio management, reducing the impact (or influence) of

The mandates follow an index tracking methodology rather than subjectively driven. any individual.

Given all above, the CIC assesses that the funds pass this enhanced due diligence flag in relation to a change

in the primary portfolio manager and remain our preferred New Zealand Equity exposures.

December 2021

Enhanced Due Diligence for a Change in Fund Fees

Enhanced due diligence for the quarter ended 30 September 2021

Enhanced due diligence trigger Consistent with its written policies and procedures, the Consilium Investment Committee (CIC) reviews all recommended investments on a quarterly basis against a combination of investment performance and qualitative fund metrics.

In the third quarter of 2021, the Dimensional Emerging Markets Value Trust flagged for enhanced due

diligence (EDD).

The EDD flag was due to receiving notification of a change in the funds’ fees. Dimensional announced the

management costs had increased for the fund, with an increase of 0.02% to 0.73%.

Review We contacted Dimensional to discuss why the management fee of the fund had increased, Dimensional responded with the below.

The management cost of 0.73% is made up of the below fees and costs:   

Management Fee = 0.71% Expense Recoveries = 0.01% Indirect Costs = 0.01%

The 0.02% increase in the overall management cost is due to an increase in expense recoveries and indirect costs incurred throughout the 2021 Financial Year. The 0.01% increase in Expense Recoveries are the expenses recovered from the trust in the Financial Year 2021. These are abnormal expenses relating to regulatory changes, including a tax service fee for a Taiwanese tax reclaim and legal advice on RG97 requirement for reporting transactional and operation costs in periodic statements. The 0.01% increase for Indirect costs relates to Securities lending costs for the Emerging Markets Trust. This includes a fee paid to an agent under a securities lending agreement, this fee is a percentage of securities lending income that is retained by the agent, and the net income is retained by the applicable trust. Dimensional informed us that these costs are covered within the Product Disclosure Statement of the trust. While these fees will not always be applicable to the total management costs of the underlying funds, there is potential for these additional fees to occur when required. Ultimately these fees will be passed onto investors, however they are to reflect the actions taken by Dimensional in the best interests of the investor and the funds performance. Ultimately the Dimensional Emerging Markets Value Trust’s fee increasing to 0.73% impacts the Consilium 98/2 portfolio most significantly, with an increase in the portfolios weighted average fee by 0.003%.

Conclusion The CIC are satisfied with Dimensional’s reasoning behind the increase in the overall management costs for the fund. While fee increases are not desirable within underlying funds, the Emerging Markets Value Trust remains the optimal funds to gain access to Emerging Markets.

Given the 2021 Strategic Asset Allocation Review is underway the CIC will use this information in the upcoming review. Therefore, the CIC assesses that the funds pass this enhanced due diligence flag.

December 2021 Disclaimer: The material contained in or attached to this report has been prepared based upon information that Consilium NZ Limited believes to be reliable, but may be subject to typographical or other errors. Consilium has taken every care in preparing this information which is for client education purposes only. Although the data has been sourced from publicly available information and/or provided by the investment managers, we are not able to guarantee its accuracy. Past performance, whether actual or simulated, is no guarantee of future performance. This document does not disclose all the risks of any transaction type described herein, and the recipient should understand any terms including relevant risk factors and any legal, tax and accounting considerations applicable to them.

Articles Investment related articles and whitepapers published throughout the year: Guidance on tax implications of deferral of investment into FIF assets – January 2021 Consilium Investment Committee’s approach to socially responsible investing – May 2021 CIC Approved Products List – October 2021 2021 Annual model portfolio peer comparison (unscreened) 2021 Annual model portfolio peer comparison (SRI)

04.

Guidance on tax implications of deferral of investment into FIF assets As we get closer to the end of the tax year it is reasonable to consider the implications of making new investments into FIF growth assets, and whether it might be more beneficial to defer investment until the start of the new tax year (01 April). This question arises because purchasing assets before the end of March establishes the opening FIF values for tax purposes for the following year. The benefit of not establishing opening FIF values until April could be as much as 1.65% (for a 33% tax bracket investor). Therefore, consideration may be given as to whether it is expected to be more advantageous for a client to invest now (and establish FIF values for the next tax year), or to wait until the new tax year before establishing FIF values (and thereby gain an FIF exemption for the year ending 31 March 2022). Depending on the investors tax bracket and portfolio, there comes a point sometime in March or February that the expected tax benefit is higher than the expected return. We have run the numbers and have evaluated the time at which a client would be more likely to benefit via a tax exemption in FY2022 than they would from additional expected return between now and the end of March 2021. Given our set of assumptions, the “tipping point” at which the expected benefits of the tax exemption outweigh the expected short term investment return depends only on the investors marginal tax rate, and the portfolio they will be trading into (SRI or not). We calculate the tipping points are as follows:

Investors marginal tax rate Portfolio:

33%

30%

17.5%

10.5%

Unscreened

8-Feb-21

13-Feb-21

4-Mar-21

15-Mar-21

SRI

4-Feb-21

9-Feb-21

1-Mar-21

13-Mar-21

If you are building a portfolio for an investor after the appropriate date above, the client is more likely to benefit from a tax exemption in the next tax year than we would expect them to gain in investment performance over the remainder of this tax year. On this basis we generally recommend deferring the purchase of new FIF assets until April 2nd. The remainder of the portfolio (i.e. the non FIF assets) can be implemented immediately. In the context of model portfolios, the complete list of FIF assets is as follows: 

Dimensional Australian Core Equity Trust



Dimensional Australian Small Company Trust



Dimensional Australian Value Trust



Dimensional Australian Sustainability Trust



Dimensional Global Core Equity Trust (NZD)



Dimensional Global Small Company Trust



Dimensional Global Value Trust



Dimensional Global Sustainability Trust (NZD)



Dimensional Emerging Markets Trust



Vanguard Ethically Conscious International Shares Index Fund

Until we see how markets actually perform this is only a theoretical exercise. Although this is based on an analysis of daily expected returns, there is still every chance the remaining time before the end of this tax year (even up to the 31st of March on its own) could deliver investment performance that would exceed next year’s potential tax benefits. There is also a chance that next year the FIF assets make a loss and there will be no tax exemption benefit. All we can do today is look at the balance of probabilities. Based on the above we suggest you carefully consider the merits of implementing new FIF asset purchases once these tipping point dates are reached. Absent any other compelling information, we would generally recommend that once a relevant tipping point date is reached, that you delay the implementation of the FIF portion of a new portfolio until April 2nd. This might involve holding additional cash (or perhaps a shortterm term-deposit), for an additional few weeks.

Likelihood FIF assets return more than expected tax benefit (unscreened portfolios):

Likelihood FIF assets return more than expected tax benefit (SRI portfolios):

Consilium Investment Committee’s approach to socially responsible investing Contents SRI overview ............................................................................................................................................... 2 What is socially responsible investing? ............................................................................................ 2 ESG Integration .................................................................................................................................. 2 Negative screening ........................................................................................................................... 3 Positive screening ............................................................................................................................. 3 Thematic investments ...................................................................................................................... 3 Impact investing ................................................................................................................................ 3 Shareholder advocacy and investor representation ................................................................ 3 Challenges in building SRI model portfolios .................................................................................. 4 Our SRI approach ..................................................................................................................................... 4 Portfolio characteristics........................................................................................................................ 5 Reduced environmental impact .................................................................................................... 5 Reduced exposure to socially harmful industries ..................................................................... 6 Appendix 1: How our chosen SRI funds may make investment decisions ................................. 8 Harbour Asset Management.............................................................................................................. 9 Dimensional Fund Advisors .............................................................................................................. 10 Vanguard............................................................................................................................................... 13 iShares .................................................................................................................................................... 15 Socially responsible investing (SRI) has become an important consideration for many New Zealand investors as they become more aware and considerate of where their hard earned savings are being invested. In this paper we explore the different ways one can invest responsibly, explain how the Consilium Investment Committee (CIC) navigates the challenges in building robust investment portfolios than satisfy these investor needs, and detail the portfolios currently recommended to partner firms and adopted by the Synergy Investment Programme. 1

SRI overview What is socially responsible investing? Socially responsible investing (SRI) is the broad term used for an investment approach which seeks to consider a company’s broader impact on society, and/or the environment in which it operates, in addition to seeking a financial return. SRI can be implemented on a spectrum ranging from very soft changes to more stringent approaches. We now explore different techniques along the responsible and ethical investment spectrum which is illustrated in Figure 1 below. You will notice traditional investment (agnostic to company impact) and philanthropy (no financial return) sit outside this representation of the SRI spectrum. Figure 1: Responsible and Ethical Investment Spectrum

Source: RIAA, Consilium Investment Committee

ESG Integration

This is the first step along the responsible investing spectrum. ESG integration is the consideration of environmental, social and governance factors when making investment decisions. Fund managers may not specifically exclude companies to satisfy investor preferences but will instead take ESG information into account in an attempt to enhance risk adjusted returns.

Negative screening

When SRI funds are selecting which companies to invest into, the most common approach is to utilise a ‘negative screening’ process. This process specifically seeks to exclude certain companies or industries assessed as having a negative impact on the environment (e.g. high carbon emissions) or on society (e.g. selling tobacco). The remaining companies are usually then allocated to proportional to their market weight. Positive screening

In addition to excluding the worst offenders, some SRI funds include an overweight allocation to firms deemed ‘best-in-class’. For example, an electricity provider using predominantly hydro power will get a higher weight than one using coal burners. This is known as a ‘positive screening’ process. Thematic investments

Rather than starting with the broad market and excluding companies, thematic investing instead selects only companies with a common theme. This could be environmental themes such as clean energy, electric vehicles or forestry, or social themes such as healthcare innovation, aging population or supporting companies with the best inclusion and diversity records. These are often very concentrated portfolios and may be held alongside broader diversified portfolios. Impact investing

At the far end of the SRI investment spectrum is impact investing. This strategy invests into projects that promote a positive social or environmental impact, often ahead of the pursuit of financial gains. The investment is often used to fund specific projects via securities such as green bonds (e.g., Auckland council raised $200m specifically earmarked to help fund Auckland’s electric trains and associated infrastructure). Shareholder advocacy and investor representation

Across the spectrum, a common service SRI funds perform is shareholder advocacy. Regardless of whether they are SRI or not, almost all funds will vote at shareholder meetings in favour of policies and appointments that are likely to financially benefit the investors. Many SRI funds will take this a step further when representing their investors, giving greater consideration during the voting process to the social and environmental impact that individual initiatives or issues may have. In addition to voting policies, some investment managers will take a proactive role in encouraging a company to act responsibly. When assessing individual companies, SRI funds can also consider criteria such as the level of community investment (e.g. financial and other support they provide the community) or stakeholder wellbeing (e.g. treatment of their immediate or outsourced labour force).

Challenges in building SRI model portfolios One of the challenges associated with building SRI portfolios is that investments are selected, at least partly, on qualitative factors (whether a company is deemed to be suitably socially responsible), as well as more quantitative factors (whether a company also has prospects of delivering a strong financial return). The dilemma is, the more companies that are excluded from the potential investment universe, the less the number of eligible companies that remain. This limits diversification benefits, increases concentration risk and results in less reliable final portfolios. The second challenge when providing a model SRI solution, is to clearly state the criteria being used to construct the underlying investment portfolios. As individual investors will never unanimously agree on whether certain companies engage in practices that are sufficiently socially responsible, it is important we educate all investors about the specific company selection criteria that is implemented in these solutions.

Our SRI approach Our approach is to build robust portfolios that accommodate as many responsible investing preferences as possible, without compromising philosophy. Due to the degree of subjectivity surrounding the merits of different SRI strategies, we do not attempt to satisfy the highest possible SRI objectives of all potential investors. To do so would require the adoption of the most restrictive investment criteria possible which, in turn, would limit our ability to build and deliver robust investment portfolios from the allowable universe. Instead, we seek funds that place an emphasis on supporting higher levels of social and environmental responsibility, whilst remaining faithful to the prized investment attributes at the core of our investment philosophy - favouring low cost, widely diversified and nonspeculative investments. Once we have funds that are deemed to be representative of their chosen asset class, charging a reasonable fee (i.e. in the lowest quartile amongst the peer group), and that adopt a systematic non forecasting approach, we then build investment portfolios from the eligible components.

Our approach is to build robust portfolios that accommodate as many responsible investing preferences as possible without compromising philosophy This approach has evolved in recent years as attractive new products have increasingly become available to us, and we expect it will continue to evolve going forwards. From April 2021 however, we are proud to have been able to build portfolios with the following characteristics. Portfolio characteristics We detail how each fund manager implements their own strategy in Appendix 1 but this section looks at the aggregate impact at a portfolio level. Using an independent data source 1, we are able to compare the funds we have used to broad indices to evaluate the reduced environmental impact. This type of reporting is evolving, and not all portfolios are 100% complete, especially for fixed income. Even so, it gives a strong indication of the impact that investing into these SRI portfolios has relative to buying the entire market. Reduced environmental impact

Almost all selected funds include a focus on reducing or removing exposure to companies that have a high environmental impact, in particular with respect to carbon and other greenhouse gas emissions. Consideration of a company’s water use and waste management policies is also common. Figure 2 below illustrates the significant reduction in involvement in various fossil fuel extraction and production companies. For example, our portfolios have a greater than 75% reduction in exposure to firms that are involved in fossil fuels (1.93% vs 8.80%).

Sustainalytics via Morningstar

Figure 2: Illustration of portfolio and index involvement in fossil fuel industries

Source: Sustainalytics via Morningstar, Consilium Investment Committee

Reduced exposure to socially harmful industries

Our SRI portfolios invest in funds that have no indirect investments in companies with more than an incidental proportion of revenue generated by the production, manufacturing or significant sales of:    

Controversial weapons (such as anti-personnel landmines, cluster munitions, chemical,

or biological weapons) Nuclear weapons, or of components developed or significantly modified for exclusive use in nuclear weapons or providing auxiliary services related to nuclear weapons Civilian firearms Tobacco

While the above represent minimum exclusions, most funds within our portfolios also take into account additional factors when considering their investments. Where applicable, these additional factors may include some, or all, of the following:        

Human rights violations Child labour Alcohol Gambling Recreational cannabis Pornography

Factory farming activities or other animal welfare violations Nuclear power 6

By aggregating the individual fund exposures, we can evaluate the portfolios’ exposure to these industries or products that may be considered harmful to society. Figure 3 below illustrates the significant reductions. The exposure to addictive substances and services has been reduced by 80% and the exposure to weapons has been reduced by almost 75%. Figure 3: Illustration of portfolio and index involvement by product

Product involvement (asset weighted)

1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% -

Portfolio Expo. Index Expo.

Alcohol

Gambling

Tobacco

Palm Oil

Fur & Specialty Leather

0.36%

0.03%

0.09%

0.05%

0.03%

0.11%

0.59%

0.12%

1.09%

0.72%

0.56%

0.07%

0.99%

0.50%

1.34%

1.28%

Controversi Military Small Arms al Weapons Contracting

Nuclear

Source: Sustainalytics via Morningstar, Consilium Investment Committee

Appendix 1 below details how each fund manager implements their SRI considerations within their own funds. SRI has been evolving significantly over the last 10 years and our solution has evolved with it. We will continue to champion these values with fund managers and in the investment marketplace in general. Our aim is to always strive to meet the growing investor demand for robust investment solutions that embrace a nuanced SRI investment approach.

Appendix 1: How our chosen SRI funds may make investment decisions Each fund manager implements subtly different approaches in their SRI funds. The following section looks at each fund and their individual SRI approach. Figure 4 provides an overview matrix of our current exclusions. This shows all funds currently in our SRI portfolios and highlights which industries and practices they avoid and/or seek to reduce their exposure to.

Figure 4: Our portfolios’ exclusions matrix

Harbour Sustai nabl e NZ Share s Fund

Exclusion of

com panies with m eaningful revenue from :

Emerging Market Equities

New Zealand Fixed Interest

International Fixed Interest

Exclusions and Exclusions and best-in-class Exclusions only best-in-class tilting tilting

No explicit SRI approach

Exclusions only

Exclusions and best-in-class tilting

Australian Equities

Exclusions and best-in-class tilting

Greenhouse gas emissions intensity

☑

☒

☑

Potential emissions from reserves

☑

☒

☑

Human rights violations

☑

☒

☑

☒

Child labour

☑

☒

☑

Animal welfare

☑

☒

☑

☒

☑

Cluster munitions

☑

n/a

☑

Nuclear armaments

☑

n/a

☑

Civilian firearms

☑

n/a

☑

Tobacco

☑

n/a

☑

Alcohol

☑

☒

☑

Gambling

☑

☒

☑

Pornography

☑

n/a

☑

Nuclear Power

n/a

☑

☒

☑

n/a

☑

☒

SRI Approach

Exclusion of com panies involved with controversies related to:

Di m e nsi onal G l obal Bond Sustai nabi l i ty T rust ( NZD)

New Zealand Equities

Asset Class

Exclude or underweight top contributors to em issions

Harbour NZ Corporate Bond Fund

Vanguard E thi cal l y Consci ous G l obal Aggre gate Bond Inde x Fund ( NZD)

Vanguard E thi cal l y Di m e nsi onal Di m e nsi onal Consci ous Austral i an G l obal Inte rnati onal i Share s MSCI Sustai nabi l i ty Sustai nabi l i ty Share s Inde x E M SRI UCIT S ETF T rust T rust ( NZD) Fund

Ke y: ☑: Means companies involved in this ssue are excluded

International Equities

n/a: Means this issue is not present in this asset class

☒: Means this issue has not been excluded

We then take a closer look at exactly how each fund manager implements subtly different approaches in their SRI funds.

Harbour Asset Management Harbour manages two funds in our SRI portfolio, the Harbour Sustainable NZ Shares Fund and the Harbour Corporate Bond Fund. The Harbour Sustainable NZ Shares Fund is passively managed tracking the companies in the S&P/NZX 50 Portfolio Index, with exclusions to companies that are large carbon emitters, as well as companies that are exposed to alcohol, gambling, munitions, recreational cannabis, adult entertainment, nuclear armaments, firearms, child labour and companies with human right violations. There are further positive and negative tilts to the remaining companies (a total 5% tilt in each direction) based on Harbour’s proprietary Corporate Behaviour Score. For the ethical values relating to alcohol, tobacco, gambling, recreational cannabis, adult entertainment and controversial weapons the fund uses a strict zero percent revenue exposure threshold in the manufacturing phase of these activities. For tobacco and alcohol sales the fund uses a 10% revenue exposure threshold and 0% for the other ethical exclusions. The zero percent thresholds reflect the intolerance for any business exposure to the activities whereas for alcohol and tobacco sales the fund uses a materiality threshold to recognise where these exposures are not the core product/source of revenue (e.g. a supermarket). For the controversy related exclusions (child labour and human rights violations) the fund uses compliance with the UN Global Compact as assessed by the fund’s external ESG research provider as the investment criteria. A ‘fail’ assessment is made where a company is implicated in one or more severe controversy cases under the UN Global Compact framework that are either ongoing or concluded within the last three years. In terms of large carbon emitters, the fund uses an absolute measure of total carbon emissions (scope 1, 2 and 3) with the threshold set at 1.5m tonnes of Co2e. This measure provides comparability between companies involved in different industries that emit in different ways. The threshold has been set to capture the largest absolute emitters in the investment universe but also allows companies that materially reduce their emissions below the level to be rewarded by qualifying for inclusion in the portfolio. Conversely, any company that has emissions that rise above the threshold would subsequently be excluded. As at April 2021 the fund excludes four firms for high carbon emissions (Genesis Energy, Z Energy, Air New Zealand, and Fonterra Shareholders Fund) and one firm for gambling (SkyCity Entertainment). These five firms represented just over 7% of the index. The Harbour Sustainable NZ Shares Fund has a 0.10% pa fund management total expense ratio. The Harbour Corporate Bond Fund is the only fund in our portfolios that does not explicitly implement any SRI considerations. The asset class however includes very few underlying companies involved in undesirable industries. The Harbour Corporate Bond Fund has a 0.25% pa fund management total expense ratio.

Dimensional Fund Advisors Dimensional manages three of the funds in our SRI portfolios: The Dimensional Australian Sustainability Trust, the Dimensional Global Sustainability Trust (NZD), and the Dimensional Global Bond Sustainability Trust (NZD). All three trusts build on Dimensional’s risk tilted investment approach by adding a Sustainability overlay. Dimensional’s approach to sustainability investing is to “Emphasise environmental sustainability while targeting higher expected returns”. It is focused on the following principles: • Apply Dimensional’s core equity methodology that emphasises the sources of higher expected returns while minimising turnover and trading costs. This involves tilts towards sources of higher expected returns (such as smaller companies, higher relative value companies, term risk or credit risk) consistent with the rest of the DFA offerings. • Systematically evaluate company sustainability metrics across all major industries. • Emphasise investment in companies acting in more environmentally sound ways than their industry counterparts, acknowledging the shared responsibility for environmental impact that exists among the supply and demand sides of markets Dimensional applies a sustainability scoring system within each industry to emphasise investment in companies with higher sustainability scores and minimise or exclude investment in companies with lower scores. The score is a function of Greenhouse Gas Emissions Intensity 2, Land Use and Biodiversity, Toxic Spills and Releases, Operational Waste and Water Management. • Exclude or underweight companies based on other key environmental and social sustainability considerations while maintaining broad diversification Dimensional funds will exclude or underweight top contributors to greenhouse gas emissions and companies based on potential emissions from reserves. The social screens include Factory Farming, Cluster Munitions and Landmines, Nuclear Weapon Systems, Tobacco, Companies cited for severe child labour controversies, Alcohol, Gambling, Adult Entertainment and Personal Firearms. Adopting these principles results in portfolios with still high levels of diversification as illustrated by figure 5, and significantly reduced emissions exposure as illustrated by figures 6 and 7.

Greenhouse Gas Emissions Intensity represents a company’s most recently reported or estimated Scope 1 (direct) + Scope 2 (indirect) greenhouse gas emissions normalized by sales in USD (metric tons per USD million sales). Greenhouse gases included are the seven gases mandated by the Kyoto Protocol: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride (SF6), and nitrogen trifluoride (NF3).

Figure 5: Number of holdings of Sustainability and unscreened trusts - 31 December 2020 Sustainability fund Dimensional Australian Sustainability Trust: Dimensional Global Sustainability Trust: Dimensional Global Bond Sustainability Trust: Source: Dimensional Fund Advisors

#holdings 335 3,941 463

Unscreened fund Dimensional Australian Core Trust: Dimensional Global Core Trust: Dimensional Global Bond Trust:

#holdings 438 5,946 371

Difference -103 (-24%) -2005 (-34%) +92 (+25%)

Figure 6: Illustration of fund and benchmark emissions exposure 3 - 31 December 2020

GREENHOUSE GAS EMISSIONS INTENSITY Tons CO2e/million sales

300 250 200

244

210 138

150

100

50 0

400

S&P/ASX 300 Index

Dimensional Australian Sustainability Trust

MSCI World ex Australia Index

Dimensional Global Sustainability Trust

18 Bloomberg Barclays Global Aggregate Bond Index

Dimensional Global Bond Sustainability Trust

POTENTIAL EMISSIONS FROM RESERVES

372

Megatons CO2

350 300 250

167

200 150

107

100

50 0

0 S&P/ASX 300 Index

Dimensional Australian Sustainability Trust

0 MSCI World ex Australia Index

Dimensional Global Sustainability Trust

0 Bloomberg Barclays Global Aggregate Bond Index

Dimensional Global Bond Sustainability Trust

These charts illustrate emissions intensity (the level of CO2 emissions per unit of sales revenue) is 55% to 93% lower for the companies held by the sustainability trust when compared to the relevant benchmark portfolio, while potential emissions from reserves, such as coal, oil and gas, have been completely eliminated.

Greenhouse Gas Emissions Intensity represents a company’s recently reported or estimated Scope 1 (direct) + Scope 2 (indirect) greenhouse gas emissions in carbon dioxide equivalents (CO2e) normalized by sales in USD (metric tons CO2e per USD million sales). Greenhouse gases included are the seven gases mandated by the Kyoto Protocol: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride (SF6), and nitrogen trifluoride (NF3). This methodology is subject to change with data developments or other findings or events. Potential Emissions from Reserves is a theoretical estimate of carbon dioxide produced if a company’s reported reserves of oil, gas, and coal were converted to energy, given estimated carbon and energy densities of the respective reserves. This methodology is subject to change with data developments or other findings or events. Certain information incorporated herein has been provided by Institutional Shareholder Services Inc. (“ISS”), and by MSCI ESG Research Inc. (“ESG”). Although Dimensional Fund Advisors’ information providers, including without limitation, ESG and its affiliates (the “ESG Parties”), obtain information from sources they consider reliable, none of the ESG Parties warrants or guarantees the originality, accuracy, and/or completeness of any data herein. None of the ESG Parties makes any express or implied warranties of any kind, and the ESG Parties hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with respect to any data herein. None of the ESG Parties shall have any liability for any errors or omissions in connection with any data herein. Further, without limiting any of the foregoing, in no event shall any of the ESG Parties have any liability for any direct, indirect, special, punitive, consequential, or any other damages (including lost profits) even if notified of the possibility of such damages. These Emissions figures are as at the date shown and are subject to change. They are non-binding and indicative only. Investors should consider the current PDS in deciding whether to invest in the trusts, or to continue to hold their investments in the trusts. Bloomberg Barclays data provided by Bloomberg Finance L.P. MSCI data copyright MSCI 2021, all rights reserved.

Figure 7: Illustration of Weight Distribution by Sustainability Score (global equities fund as at 31 December 2020)

Source: Dimensional

For further illustrations of the Dimensional trust’s please view each fund’s latest sustainability reports on Dimensional’s public websites at the following links: Dimensional Australian Sustainability Trust:

https://au.dimensional.com/en/-/funds/australia/sustainability-report/sustainability-report-australian-sustainability-trust.pdf

Dimensional Global Sustainability Trust (NZD):

https://au.dimensional.com/en/-/funds/australia/sustainability-report/sustainability-report-global-sustainability-trust.pdf

Dimensional Global Bond Sustainability Trust (NZD):

https://au.dimensional.com/en/-/funds/australia/sustainability-report/sustainability-report-global-bond-sustainability-trust.pdf

The funds have the following fund management total expense ratio. Figure 8: Fund expense ratios for Dimensional funds

Fund Dimensional Australian Sustainability Trust: Dimensional Global Sustainability Trust: Dimensional Global Bond Sustainability Trust:

0.28% 0.36% 0.35%

Vanguard Vanguard manages two of the funds in our SRI portfolios: Vanguard Ethically Conscious International Shares Index Fund and the Vanguard Ethically Conscious Global Aggregate Bond Index Fund. Both funds are index tracking funds meaning the fund’s weightings are determined by a third party index provider. The Vanguard Ethically Conscious International Shares Index Fund tracks the FTSE Developed ex Australia Choice Index. It offers low-cost access to a broadly diversified range of securities that excludes companies with significant business activities involving fossil fuels, nuclear power, alcohol, tobacco, gambling, weapons, adult entertainment and a conduct related screen based on severe controversies. Once FTSE has excluded companies based on the prohibited product and conduct screens the remaining companies are assigned market capitalisation weights. The screened index has 1626 constituents relative to 2022 for the unscreened parent index (396 fewer companies, a 20% reduction). The screened index has a very similar risk profile to the unscreened parent index and exhibits broadly the same expected returns and volatility. The Vanguard Ethically Conscious International Shares Index Fund has a 0.20% pa fund management total expense ratio. The Vanguard Ethically Conscious Global Aggregate Bond Index Fund tracks the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index. In constructing the Index, using MSCI research, Bloomberg Barclays (the Index provider) excludes the securities of issuers that engage in activities in, and/or derive revenue (above a threshold specified by the Index provider) from, fossil fuels, nuclear power, alcohol, tobacco, gambling, weapons and adult entertainment. This index methodology also excludes the securities that have a controversy score above a threshold specified by MSCI. Where MSCI has insufficient or no data available to adequately assess a particular security relative to the ethically conscious criteria of the Index, these securities may not be excluded. Investors should be aware that the index methodology only screens the securities of issuers that are researched by MSCI. The screening process does not review government securities, and certain securitised assets and company structures, particularly government related corporations and non-listed companies. Accordingly, securities issued by non-screened entities may also be contained in the Index that is tracked by the Fund. The investments in the Fund are predominantly rated BBB- or higher by Standard & Poor’s or equivalent ratings agency. The Fund is hedged to New Zealand dollars so the value of the Fund is relatively unaffected by currency fluctuations. The risk profile of this index is close to that of the Bloomberg Barclays Global Aggregate Bond Index which is commonly used as a broad market index for international fixed interest. As the screens are only on corporate bonds the fund holds slightly more government treasuries than this index (as at 31 December 2020 the fund held 54.0% relative to 52.6% for Vanguards unscreened fund). This is also means a slightly higher credit rating on average than its unscreened equivalent as illustrated in figure 9 below.

Figure 9: Comparison of Vanguard bond fund's credit rating exposure breakdown 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Vanguard EC Bond Fund Unscreened alternative

AAA

42.2% 40.2%

16.5%

22.7%

16.7%

BBB

NOT RATED

19.1%

0.8%

17.5%

23.2%

1.1%

Source: Vanguard. Unscreened alternative is Vanguards Global Aggregate Bond Index (Hedged) ETF (VBND)

The Ethically Conscious screens do not have a significant impact on the fund’s duration profile compared to its unscreened equivalent as illustrated in figure 10 below. Both have an effective duration of 7.5 years. Figure 10: Comparison of Vanguard bond fund's maturity exposure breakdown 25% 20% 15% 10% 5% 0% Vanguard EC Bond Fund Unscreened alternative

Under 3 3- 12 Months Months 4.10% 3.50%

0.70% 0.60%

1-3 Years

20.20% 20.60%

3-5 Years

16.60% 17.00%

5-7 Years

13.50% 13.10%

7 - 10 Years

14.10% 13.30%

10 - 20 Years

12.50% 13.10%

20 - 30 Over 30 Years Years

16.00% 16.30%

2.30% 2.50%

Source: Vanguard. Unscreened alternative is Vanguards Global Aggregate Bond Index (Hedged) ETF (VBND)

As at April 2021, the fund holds 4,700+ bonds across 1,300+ issuers from 48 developed and emerging nations. The Vanguard Ethically Conscious Global Aggregate Bond Index Fund has a 0.28% pa fund management total expense ratio.

iShares iShares manages the emerging markets fund in our SRI portfolios: the iShares MSCI EM SRI UCITS ETF. Similar to the Vanguard funds, this fund is an index tracker seeking to replicate the returns of the MSCI EM SRI Select Reduced Fossil Fuel Index. The MSCI Emerging Markets SRI Select Reduced Fossil Fuels Index is based on the MSCI Emerging Markets Index, its parent index, and includes large and mid-cap securities across 27 Emerging Markets countries. The index is designed for investors seeking a diversified SRI benchmark comprised of companies with strong sustainability profiles while avoiding companies incompatible with values screen or having exposure to fossil fuels through extraction and production activities, power generation activities or reserves ownership. Constituent selection is based on research provided by MSCI ESG Research. MSCI SRI Select Reduced Fossil Fuels Indices are constructed by applying a combination of values and climate change based exclusions and a Best-in-Class selection process. The securities of companies incompatible with values and climate change based screens are ineligible to be included in the index. Additionally, securities that are not existing constituents of the index must have, and maintain, an MSCI ESG Rating above BBB and the MSCI ESG Controversies score above 3 to be eligible. The Index is float-adjusted market capitalisation weighted and a 5% capping is applied on issuer weights in the index. For more information please visit the index provider’s website https://www.msci.com/indexmethodology and search for the keyword ‘fossil’. The outcome is a relatively more concentrated portfolio (just 178 companies compared to the 1300+ in the unconstrained parent index), but with very strong ESG characteristics. This fund is an ETF (the only one in the portfolios) and so does have some important attributes attached to it. The first is the higher trading costs. The fund is a USD denominated fund listed on the London Stock Exchange. This means when this fund is traded it will incur brokerage of 0.40% (with a minimum fee of USD 50). It is recommended that small orders be placed through the pooled orders functionality to help reach this minimum brokerage amount. As the fund is denominated in foreign currency there will also be a foreign exchange fee applied when purchasing the required US dollars. The fee is a proportion of the amount converted and for the NZD/USD pair the fee is 50 PIPs. A PIP is a percentage in point which is the smallest price change that a given exchange rate can make, in this case $0.0001. For example, to sell $10,000 NZD and purchase USD at an exchange rate of 0.72 USD/NZD, you will pay approximately $69 NZD in fees. The final point to consider in buying and selling an ETF is that the value of the ETF is decided by market participants rather than an administrator. This can mean that during periods of high volatility the valuation price used may deviate from the net asset value of the fund. This is predominantly due to timing differences in the valuation of the underlying companies (which happens at the end of each trading session for each individual nation), and the last trade that occurs on the exchange in London. Over the long term these fluctuations cancel out and the performance of the underlying companies drives the ETFs returns. 15

Disclaimer The material contained in this report has been prepared based upon information that Consilium NZ Limited believes to be reliable but may be subject to typographical or other errors. Consilium has taken every care in preparing this information, which is for client education purposes only. Although the data has been sourced from publicly available information and/or provided by the investment managers, we are not able to guarantee its accuracy. Past performance, whether actual or simulated, is no guarantee of future performance. This document does not disclose all the risks of any transaction type described herein, and the recipient should understand any terms including relevant risk factors and any legal, tax and accounting considerations applicable to them.

CIC Approved Products List – Oct 2021 Overview One of the most important steps in any portfolio construction process is the selection of the underlying securities. The Consilium Investment Committee (CIC) maintains an approved products list (APL) that itemises the funds the committee believes will be best suited for model portfolio solutions consistent with an evidence-based investment philosophy. In general, that means a list of funds that best represent the following attributes – broad asset class coverage, stable investment mandates, low investment cost, high liquidity, non-forecasting strategies and, where applicable, reliable exposure to proven risk factors. This document details the fund selection process including the criteria applied to approve a fund, as well as listing all approved products (appendix 1). An overview of the APL’s characteristics (by asset class, fund structure, fund manager and mandate) is contained in appendix 2. This paper is also supplemented by the 2021 APL dashboard spreadsheet which allows users to filter the entire APL to assist in the search for funds that best meet their specific requirements. Users of the APL are able to view selections via two different fund dashboards. The first details traditional fund specific metrics (such as funds under management, fund costs or the benchmark index being tracked). The second details metrics provided by Morningstar’s Sustainalytics team that analyses the fund through a responsible investing lens (such as involvement in products which have a high environmental or social impact). Both dashboards include comparison to peer group averages. This list of approved products will be used for the CIC’s 2021 Strategic Asset Allocation review, and the CIC recommends to advisers following the same investment philosophy to utilise this wider APL list when selecting alternative funds according to individual client requirements. It should be noted that the inclusion of a fund on the APL does not necessarily mean that the CIC undertakes rigorous monitoring of the fund. This level of ongoing scrutiny is reserved only for the funds recommended for investment in model portfolios. The list of recommended funds that are currently monitored quarterly are detailed in appendix 3. The 2021 APL is the first APL produced by the CIC to include exchange traded funds (ETFs) outside of Australasia, and at 250 approved products, this is the largest APL we have ever produced. The new funds are predominantly foreign ETFs that result from a widening in the acceptable investment domicile criteria. Almost all of these ETFs are index trackers available on American or European stock exchanges. Investing in ETFs involves different challenges than investing in managed funds and we have included some notes on this in appendix 4. The 2021 APL also includes a significant increase in the number of approved funds that include some form of socially responsible investing mandate (SRI); from 19 in 2019 to 57 this year. As is the case for unscreened funds, all approved SRI funds are also required to exhibit characteristics that are broadly consistent with an evidence-based investment philosophy. One important criteria for SRI funds to demonstrate is having a sufficiently high level of diversification to adequately capture the broad asset class returns. This is often more challenging for SRI funds which tend to exclude certain parts of the asset class when seeking to satisfy specific investor preferences – more exclusions, means less diversification. For this reason, approved SRI funds are generally limited to those with ESG integration and negative or positive screening, but not those with thematic or impact investing mandates, which are typically much more concentrated. We are excited to be considering this APL as part of the 2021 SAA review and all approved fund options will be analysed during the expected risk and return phase of the review. 1

Selection process Approved products have been subjected to the process outlined below.

Primary source Our primary source for finding APL candidates is the MorningStar Direct database. The universe of potentially investable securities for New Zealand domiciled investors includes: 

Managed funds registered for investment in New Zealand (typically local PIEs or mutually recognised AUTs*)



Exchange Traded Funds available for purchase on major overseas exchanges

This created an initial candidate list of 17,000+ ETFs and 4,000+ managed funds. We then screened this initial list using MorningStar data to come up with a much shorter list of funds that warranted detailed research. * Note – there is no definitive list (either within Morningstar Direct or available publicly) that confirms which AUTs are mutually recognised for distribution in New Zealand. Accordingly, our inclusion of AUTs within the APL relies upon a fund-by-fund verification of their status. This comes from a combination of our existing knowledge/experience, our observation of AUTs being marketed locally, and direct communication with Australian based fund managers. As a result, there is a chance that we have not captured all qualifying AUTs, or that newly approved funds are not currently mutually recognised.

Preliminary filters The initial candidate list included funds across all conceivable asset classes, including a range of asset groups that we chose to exclude from investment consideration. In the opinion of the committee, these were either not separate asset classes requiring an allocation over and above a normal market weight allocation (i.e. commodities, infrastructure), or they fail some other asset filtering test with respect to quality, liquidity etc (i.e. hedge funds, private equity, junk bonds, or crypto currencies). Our first screen was to remove any funds that did not belong to the following MorningStar broad categories: 

Global Equity



Global Fixed Income



Global Emerging Markets Equity



US Equity



US Fixed Income



New Zealand Equity



New Zealand Fixed Income



Australia Equity



Australia Fixed Income



Emerging Markets Fixed Income



Real Estate Sector Equity

The resulting list included some very narrow fund allocations within the equity asset classes (for example, funds comprising only healthcare companies, or only containing Mexican equities). Accordingly, the second step was to remove most single sector funds and most single country funds, except for: 

Single country funds allocating to New Zealand, Australia or the United States



Real Estate only funds

Within the fixed income funds there were also many foreign options either unhedged or hedged into currencies other than the New Zealand Dollar. We removed all of these. The list also included ETFs listed on multiple exchanges. Where possible, we removed any duplicate listings that were not flagged as the primary exchange.

Asset class categorisation Funds and ETFs that survived the above preliminary filters were then categorised into classifications based on both MorningStar’s broad category classes (shown above) and the fund’s factor exposure to both value and size. Each fund was grouped into one of twelve style categories defined by the fund’s factor exposure to both value and size. Calculating the fund’s size exposure and value exposure allowed the fund to be classified as either value, growth or blend and either small, mid, large or all caps. A fund’s factor exposure was calculated using regression analysis, using at least three years of the fund’s returns provided by MorningStar. Funds without three years of returns were classified using MorningStar’s similarly defined style box classification (which excludes the ‘all caps’ group). Using Ken French factor premia and regressing each fund’s returns on the market, size and value factor premia, factor betas for each fund were calculated. Aggregate factors explaining less than 80% of the fund’s return variation (i.e. R2 < 0.8) were instead classified using MorningStar’s style box classification. A summary of the factor size categorisation is highlighted below (note, HML stands for high minus low and measures the value factor. SMB stands for small minus big and measures the size factor). The term “significant” in the following table refers to statistically significant regression coefficients with a p-value of 5%. Value:

HML > 0.05 & significantly greater than zero

Small:

SMB > 0.5 & significantly greater than zero

Growth:

HML < -0.05 & significantly less than zero

Mid:

0.05 < SMB < 0.5 & significantly greater than zero

Blend:

HML statistically insignificant from zero

Large:

SMB < -0.05 & significantly less than zero

All:

SMB statistically insignificant from zero

With categorisations complete, we looked at each group in isolation to identify the largest (in terms of assets under management) and cheapest options within each category. Funds with fees in the lowest quartile and with assets under management above the median value within their class category were retained. This process left only 585 short listed funds.

Qualitative review Funds that survive the above quantitative filters were then considered in greater detail by validating the data provided by MorningStar against the fund managers published figures and reviewing their following qualitative features.



Investment style and philosophy - investments should be non-speculative and compatible with an asset class investment philosophy. This philosophy is based on the assumption that markets are largely efficient and engaging in active management or speculating in concentrated positions is only likely to increase volatility and costs. Removing these mandates leaves funds employing index tracking strategies or those with systematic risk tilted approaches.



Representation - an investment must broadly represent the risk and return characteristics contained in a fair sample of an asset class or sub-asset class (such as large, value or small companies) so that effective asset class and portfolio construction can be achieved.



Liquidity - investments should be able to be redeemed for cash within one week. All ETFs satisfy this restriction.



Quality of execution - a fund should demonstrate low turnover and light market impact of trading.



Diversification - a fund should own the majority of available securities within its defined asset class or subasset class.



Consistency of risk exposure - a fund should demonstrate consistency in the application of risk exposures, regardless of market or economic conditions.



Track record - the fund should typically have a minimum track record of at least 12 months.



Performance since inception vs benchmark - the fund should demonstrate that it is capturing the return of the asset class. In some cases, suitable benchmarks may not be available, and the CIC will take that into consideration.

Results With screening complete, we have our 2021 approved products list. This is detailed in appendix 1. The new APL has a number of noteworthy features, some high level breakdowns are presented in detailed in appendix 2.

Notable additions 

The biggest change is the addition of a 130 foreign ETFs. These include listings in various exchanges from New York to Paris and of various currencies. This gives us significantly more choice, generally at lower total expense ratios. These do however come with drawbacks relating to tax slippage (foreign withholding tax) and increased transaction costs (brokerage and foreign exchange costs).



The fund managers with the most entries are Blackrock/iShares with 57 entries and Vanguard with 52. These are predominantly ETFs listed in the US or the UK with strategies based in offshore companies across equities, fixed interest and real estate.



Smartshares is the third most represented fund manager in the 2021 APL with 35 entries. This includes 19 ETFs and 16 unlisted PIEs under the Superlife banner. It should be noted that many of Smartshares’ foreign strategies are simply holding foreign ETFs. This makes these PIEs tax convenient, but not necessarily very tax

efficient as they will still be subject to the tax slippage that foreign ETFs and AUTs are prone to. The magnitude of this slippage is to be determined during the next phase of the SAA review. 

Among domestic additions Kernel joins the APL with five funds: The NZX 20 tracker, the NZ 50 ESG Tilted fund, the NZ Commercial Property Fund, the Global Green Property Fund, and the S&P Global 100 tracker. Kernel S&P Global 100 was included in recognition of its low cost, non-forecasting mandate and tax effective PIE structure. However, although the fund exhibited a high correlation to the broad market users should note very clearly that there is a considerable concentration within the top 10 holdings in this fund.

Notable omissions 

Direct listed property companies were previously on our APL but have been removed from this version. Funds holding a portfolio of property companies remain.



All AUD hedged funds with NZD hedged classes have been removed.



Due to an increase in investor demand in part due to the significant increase fiscal spending around the world there has been a recent trend of infrastructure funds launching. These are designed to invest in companies exposed to the development and/or provision of infrastructure projects such as o

airports, ports, roads,

telecommunication hardware (mobile towers, fiberoptics cabling, satellites etc),

electricity transmission,

oil & gas storage and distribution, and

water projects (including distribution, waste-water management, and purification/desalination)

We have elected not to include any of these infrastructure funds in the APL. These funds represent a subsection of the developed market equity asset class and, absent an expected returns basis for tilting towards this specific segment, we remain of the view that an exposure to these business sectors will be more effectively secured through broad market exposure. We do need to note that not every fund on this list is currently available on Consilium Wrap. If you are unable to find the fund on the Wrap then please contact us. If it is not available, we may need to open dialogue with the fund managers, and/or the custodian to make these accessible. In addition, not all investors may be eligible for investment into these securities. Some funds are deemed as Wholesale and only eligible investors may hold these assets. The Wholesale status of each security (if known) is detailed in the spreadsheet. Please also note, the funds identified through this process and listed below have not all been subjected to a rigorous initial due diligence process. Similarly, we have not yet established a research relationship with many of the new managers appearing here. This list of approved funds merely exhibits the most important attributes we seek when building portfolios (low cost, well diversified, systematic mandate, etc). The next step will be assessing how well the funds capture the desired risk factors and how they might fit together to build the best possible portfolios for your investors. Once this pending quantitative phase is complete, we will begin the initial due diligence process on any new fund managers, before bringing the fund into our recommended model portfolios. While we have taken every effort to ensure that this data is accurate, there may be errors, if you find any please do let us know.

Disclaimer: The material contained in or attached to this report has been prepared based upon information that Consilium NZ Limited believes to be reliable, but may be subject to

typographical or other errors. Consilium has taken every care in preparing this information, which is for client education purposes only. Although the data has been sourced from publicly

available information and/or provided by the investment managers and/or third party data vendors, we are not able to guarantee its accuracy. Past performance, whether actual or simulated, is no guarantee of future performance. This document does not disclose all the risks of any transaction type described herein, and the recipient should understand any terms including relevant risk factors and any legal, tax and accounting considerations applicable to them.

Harbour Sustainable NZ Shares

Simplicity NZ Share

Kernel NZ 50 ESG Tilted

Smartshares S&P/NZX 50 ETF

Kernel NZ 20

AMP Capital NZ Shares Index

SuperLife Invest NZ Shares

SuperLife Invest NZ Top 10

SuperLife Invest NZ Top 50

SuperLife Invest S&P/NZX 50

Smartshares NZ Core Equity Trust

Smartshares NZ Top 50

Smartshares NZ Top 10

25006

24262

25039

NZG

24492

24290

24981

24982

24983

24989

23880

FNZ

TNZ

ETFⁿ

PIE, 🚫🚫

PIE

ETFⁿ

PIE, 🚫🚫

PIE

Fund type

0.60%

0.50%

0.49%

0.31%

0.29% ʳ

0.20%

0.15% ʳ

0.10%

0.09% ʳ

Total expense ratio 0.09% ʳ

NZD

Currency

Large-cap Blend

Small-cap Blend

All-cap Blend

Small-cap Blend

Large-cap Blend

All-cap Blend

Mid-cap Blend

Large-cap Blend

Mid-cap Blend

Small-cap Blend

Style

243.9

1,274.4

130.7

11.2

193.7

23.4

163.9

705.4

10.4

40.3

2.6

494.4

176.4

456.0

FUM (NZD millions)

investors only, NZD-H: Fund is hedged to New Zealand Dollars, AUD-H: Fund is hedged to Australian Dollars, ʳ: Fee is after rebate on Consilium Wrap

PIE: Portfolio Investment Entity, AUT: Australian Unit Trust, ETFⁿ: ETF on NZX, ETFᵃ: ETF on ASX, ETFᶠ: ETF on foreign exchange, 🚫🚫: Fund contains SRI screens, W: Fund is eligible for wholesale

Harbour NZ Index Shares Fund

Fund name

23881

Ticker

New Zealand Equities

The 2021 APL in full is presented across the following pages. The funds have been grouped by asset class and sorted by the funds’ total expense ratios (after fund manager rebate available on Consilium Wrap as at the time of publication). The fund type column details each fund’s structure (PIE, AUT, ETF etc), any SRI or wholesale considerations, and also any FX hedging where applicable. The style columns detail the part of the asset class the fund is investing across the size and relative price spectrums. Figures are accurate at the time of analysis, and are subject to change. The Ticker column details the MorningStar code, we will be collecting Consilium Wrap codes for manged funds in the coming months.

Appendix 1: 2021 Approved Products List

iShares Core S&P/ASX 200 ETF

Macquarie Aus Pure Indexed Equities

Vanguard Australian Shares ETF

iShares Australian Equity Index

SPDR® S&P/ASX 200 ETF

State Street Australian Equities Idx Tr

Vanguard Ethically Cnscs Aust Shrs ETF

BT Australian Shares Index W

Dimensional Aust Large Company Trust

Netwealth Australian Equities Index

iShares S&P/ASX 20 ETF

Strategic Australian Equity

Dimensional Australian Core Equity Trust

SPDR® S&P/ASX 50 ETF

Smartshares S&P/ASX 200 ETF

Vanguard MSCI Australian Small Coms ETF

Dimensional Australian Sustainability

Dimensional Australian Value Trust

BetaShares Australian Sustnby Ldrs ETF

SuperLife Invest S&P/ASX 200

Smartshares Aus Top 20

Dimensional Aust Small Company Trust

Smartshares Aus Mid Cap

IOZ.AU

13184

VAS.AU

5084

STW.AU

4872

VETH.AU

15186

6465

12338

ILC.AU

16755

14318

SFY.AU

AUS

VSO.AU

43117

5840

FAIR.AU

24988

OZY

6907

MZY

ETFⁿ

AUT

ETFⁿ

PIE

ETFᵃ, 🚫🚫

AUT

AUT, 🚫🚫

ETFᵃ

ETFⁿ

ETFᵃ

AUT

AUT, W

ETFᵃ

AUT, W

AUT

AUT, W

ETFᵃ, 🚫🚫

AUT, W

ETFᵃ

AUT, W

ETFᵃ

AUT, W

ETFᵃ

Fund type

0.75%

0.61%

0.60%

0.49%

0.34%

0.31%

0.30%

0.29%

0.28%

0.27%

0.24%

0.20%

0.18%

0.16%

0.13%

0.11% ʳ

0.10%

0.09%

Total expense ratio 0.07%

NZD

AUD

NZD

AUD

NZD

AUD

Currency

Small-cap Blend

Small-cap Growth

Large-cap Blend

All-cap Blend

Large-cap Blend

Mid-cap Value

Mid-cap Blend

Small-cap Blend

Mid-cap Blend

All-cap Blend

Mid-cap Value

Large-cap Blend

Mid-cap Blend

Mid-cap Growth

Mid-cap Blend

Style

112.6

306.5

252.1

12.3

1,359.6

811.0

230.6

759.7

18.6

1,070.7

3,066.6

2,315.0

610.8

220.9

631.9

3,412.9

266.6

712.6

6,333.1

1,066.4

11,405.6

1,098.1

6,194.6

1,890.2

FUM (NZD millions)

investors only, NZD-H: Fund is hedged to New Zealand Dollars, AUD-H: Fund is hedged to Australian Dollars, ʳ: Fee is after rebate on Consilium Wrap

BetaShares Australia 200 ETF

Fund name

A200.AU

Ticker

Australian Equities

iShares Core MSCI World All Cap AUDH ETF

Vanguard FTSE Dev World ETF $Dis

HSBC MSCI World ETF

Amundi IS MSCI Wld ESG Lds Slt ETF DR

Amundi IS MSCI World ETF DR

BT International Shares Index W

iShares Screened WS Intl Eq Idx E

State Street International Eqs Idx Tr

Vanguard Etclly Cons Intl Shrs ETF

Vanguard Ethically Cons Intl Shrs Idx

Vanguard International Shares Index

Vanguard MSCI Intl ETF

Invesco MSCI World ETF

Xtrackers MSCI World ETF 1C

iShares MSCI World ESG Scrn ETF USD Acc

iShares Hedged International Equity Idx

iShares International Equity Index

iShares MSCI ACWI Low Carbon Target ETF

Vanguard Intl Shares Sel Exclusions Idx

Vanguard MSCI Intl (Hdg) ETF

Vanguard FTSE All-World UCITS ETF

iShares MSCI World ETF

State Street Climate ESG Intl Eq

IHWL.AU

VDEV.LN

HMWD.LN

SADW.GE

MWRD.FP

15188

43605

4748

VESG.AU

43067

4489

VGS.AU

MXWO.LN

XDWD.LN

SAWD.LN

17495

9154

CRBN.US

41550

VGAD.AU

VWRD.LN

URTH.US

43284

AUT, 🚫🚫, W

ETFᶠ

ETFᵃ, AUD-H

AUT, 🚫🚫, W

ETFᶠ, 🚫🚫

AUT

AUT, AUD-H

ETFᶠ, 🚫🚫

ETFᶠ

ETFᵃ

AUT, W

AUT, 🚫🚫, W

ETFᵃ, 🚫🚫

AUT, W

AUT, 🚫🚫, W

AUT, W

ETFᶠ

ETFᶠ, 🚫🚫

ETFᶠ

ETFᵃ, AUD-H

ETFᶠ

Fund type

0.24%

0.22%

0.21%

0.20%

0.19%

0.18%

0.15%

0.12%

Total expense ratio 0.08%

AUD

USD

AUD

USD

AUD

USD

AUD

EUR

USD

AUD

USD

Currency

Large-cap Blend

All-cap Blend

Large-cap Blend

All-cap Blend

Large-cap Blend

Large-cap Growth

Large-cap Blend

All-cap Blend

Large-cap Blend

All-cap Blend

Style

294.1

1,691.7

9,832.9

2,314.8

722.8

868.0

847.2

1,503.3

1,507.5

11,012.8

3,465.3

2,654.5

18,177.5

610.4

322.0

1,569.0

86.1

5,581.9

3,231.0

514.1

3,731.9

1,432.4

409.5

36,054.5

FUM (NZD millions)

investors only, NZD-H: Fund is hedged to New Zealand Dollars, AUD-H: Fund is hedged to Australian Dollars, ʳ: Fee is after rebate on Consilium Wrap

Vanguard Total World Stock ETF

Fund name

VT.US

Ticker

International Equities – Developed markets including US (Page 1 of 3)

Vanguard Ethically Cons Intl ShrsIdxNZDH

Vanguard Intl Shs Sel Exclusions IdxNZDH

Dimensional Global Large Company Trust

Kernel S&P Global 100

iShares Edge MSCI Wld Val Fctr ETF $Acc

Lyxor MSCI World ETF Dist A/I

SPDR® S&P World ex Australia ETF

CFS Wholesale Index Global Share

State Street International Eqs Idx Hg Tr

Vanguard MSCI International SC ETF

CFS Wholesale Index Global Share-Hedged

Dimensional Glbl Sustainability NZD Hdg

Dimensional Global Core Equity NZD Hgd

Dimensional Global Core Equity Trust

Dimensional Glb Sstnblty Trust Unhdg

Strategic International Equity

Vanguard International Small Companies

iShares All-Country Equity Index D

Smartshares Total World

Russell Invmts Low Carbon Glb Shrs A

Vanguard Intl Small Companies Index Hgd

AMP Capital All Country Glb Shares Idx

Dimensional Global Value Trust

Realindex Global Share-Class A

43069

41589

6466

24692

IWVL.LN

WLD.FP

WXOZ.AU

11333

13185

VISM.AU

13529

41078

23842

14573

41064

16756

15897

43333

TWF

43500

15898

24292

5841

16953

AUT, W

AUT

PIE, 🚫🚫, NZD-H

AUT, W, AUD-H

AUT, 🚫🚫, W

ETFⁿ

AUT

AUT, W

AUT, 🚫🚫

AUT

AUT, NZD-H

AUT, 🚫🚫, NZD-H

AUT, W, AUD-H

ETFᵃ

AUT, W, AUD-H

AUT, W

ETFᵃ

ETFᶠ

PIE

AUT

AUT, 🚫🚫, NZD-H

Fund type

0.46%

0.45%

0.42%

0.41%

0.40%

0.39%

0.38%

0.36%

0.33%

0.32%

0.31%

0.30%

0.29% ʳ

0.29%

0.26%

Total expense ratio 0.26%

AUD

NZD

AUD

NZD

AUD

NZD

AUD

EUR

USD

NZD

AUD

NZD

Currency

All-cap Value

All-cap Blend

Small-cap Blend

Large-cap Blend

All-cap Blend

Small-cap Blend

Mid-cap Value

All-cap Blend

Mid-cap Value

Mid-cap Blend

All-cap Blend

Small-cap Blend

All-cap Blend

Large-cap Blend

Mid-cap Value

All-cap Blend

Large-cap Value

All-cap Blend

Style

3,713.4

497.2

59.6

65.6

871.1

79.1

438.6

1,266.7

2,129.0

264.0

2,096.7

901.7

534.1

974.6

198.4

273.6

2,231.1

230.1

6,510.9

5,357.8

19.1

188.2

1,545.0

FUM (NZD millions) 1,622.4

investors only, NZD-H: Fund is hedged to New Zealand Dollars, AUD-H: Fund is hedged to Australian Dollars, ʳ: Fee is after rebate on Consilium Wrap

Fund name

Ticker

International Equities – Developed markets including US (Page 2 of 3)

Smartshares Total World (NZD Hedged) ETF

iShares MSCI Global Impact ETF

Smartshares Global Equities ESG ETF

BetaShares Global Sustainability Leaders ETF

BetaShares Global Sustainability Leaders ETF (AUD Hdg)

Dimensional Global Small Company Trust

TWH

SDG.US

ESG

ETHI.AU

HETH.AU

6467

iShares Core MSCI Intl Dev Mkts ETF

Vanguard FTSE Developed Markets ETF

Schwab International Equity ETF™

Vanguard FTSE All-Wld ex-US ETF

Vanguard Total International Stock ETF

iShares Core MSCI Total Intl Stk ETF

Schwab International Small-Cap Eq ETF™

Vanguard FTSE All-Wld ex-US SmCp ETF

Vanguard ESG International Stock ETF

Schwab Fundamental Intl Lg Co ETF

iShares Edge MSCI Intl Value Factor ETF

FlexShares Mstar DevMks exUS FctTilt ETF

SPDR® S&P International Small Cap ETF

IDEV.US

VEA.US

SCHF.US

VEU.US

VXUS.US

IXUS.US

SCHC.US

VSS.US

VSGX.US

FNDF.US

IVLU.US

TLTD.US

GWX.US

ETFᶠ

ETFᶠ, 🚫🚫

ETFᶠ

Fund type

AUT

ETFᵃ, 🚫🚫, AUD-H

ETFᵃ, 🚫🚫

ETFⁿ

ETFᶠ, 🚫🚫

ETFⁿ, NZD-H

Fund type

0.40%

0.39%

0.30%

0.25%

0.15%

0.11%

0.09%

0.08%

0.06%

0.05%

Total expense ratio 0.04%

0.65%

0.62%

0.59%

0.54%

0.49%

Total expense ratio 0.46%

USD

Currency

AUD

NZD

USD

NZD

Currency

Small-cap Blend

Mid-cap Value

All-cap Value

Large-cap Value

All-cap Blend

Small-cap Growth

All-cap Blend

Large-cap Blend

All-cap Blend

Large-cap Blend

Style

Small-cap Value

Large-cap Blend

Large-cap Growth

Large-cap Blend

All-cap Growth

All-cap Blend

Style

1,161.9

894.3

1,205.9

7,515.4

2,525.2

11,784.4

4,060.2

37,284.5

56,719.2

69,303.3

35,448.9

199,211.8

7,156.9

12,750.1

FUM (NZD millions)

522.4

200.4

2,742.7

10.3

601.8

FUM (NZD millions) 12.9

investors only, NZD-H: Fund is hedged to New Zealand Dollars, AUD-H: Fund is hedged to Australian Dollars, ʳ: Fee is after rebate on Consilium Wrap

SPDR® Portfolio Developed Wld ex-US ETF

Fund name

SPDW.US

Ticker

International Equities – Developed markets excluding US

Fund name

Ticker

International Equities – Developed markets including US (Page 3 of 3)

JPMorgan BetaBuilders US Equity ETF

iShares Core S&P 500 ETF

iShares Core S&P Total US Stock Mkt ETF

iShares Morningstar U.S. Equity ETF

Schwab US Broad Market ETF™

Schwab US Large-Cap ETF™

SPDR® Port S&P 1500 Comps Stk Mkt ETF

SPDR® Portfolio S&P 500 ETF

Vanguard S&P 500 ETF

Vanguard Total Stock Market ETF

Vanguard US Total Market Shares ETF

iShares Core S&P US Value ETF

iShares Morningstar Mid-Cap ETF

iShares Morningstar Small-Cap ETF

iShares Morningstar Value ETF

iShares S&P 500 ETF

Schwab US Large-Cap Value ETF™

Schwab US Mid-Cap ETF™

Schwab US Small-Cap ETF™

SPDR® Portfolio S&P 500 Value ETF

Vanguard Large-Cap ETF

Vanguard Mid-Cap ETF

Vanguard Value ETF

BBUS.US

IVV.US

ITOT.US

ILCB.US

SCHB.US

SCHX.US

SPTM.US

SPLG.US

VOO.US

VTI.US

VTS.AU

IUSV.US

IMCB.US

ISCB.US

ILCV.US

IVV.AU

SCHV.US

SCHM.US

SCHA.US

SPYV.US

VV.US

VO.US

VTV.US

ETFᶠ

Fund type

0.04%

0.03%

0.02%

Total expense ratio 0.00%

USD

AUD

USD

AUD

USD

Currency

Large-cap Value

Mid-cap Blend

Large-cap Blend

Large-cap Value

Small-cap Value

Mid-cap Value

Large-cap Value

Large-cap Growth

Large-cap Value

Small-cap Value

Mid-cap Blend

Large-cap Value

Large-cap Blend

All-cap Blend

Large-cap Value

Large-cap Blend

All-cap Blend

Large-cap Value

All-cap Blend

Large-cap Value

Large-cap Blend

Style

84,079.0

57,159.8

29,083.5

10,322.5

17,480.2

11,963.7

9,406.0

3,728.8

1,013.8

341.4

1,255.3

11,056.4

2,148.6

273,819.3

241,116.9

10,851.1

5,871.1

34,900.7

24,540.6

1,265.1

43,646.9

332,499.4

367.2

498.3

FUM (NZD millions)

investors only, NZD-H: Fund is hedged to New Zealand Dollars, AUD-H: Fund is hedged to Australian Dollars, ʳ: Fee is after rebate on Consilium Wrap

BNY Mellon US Large Cap Core Equity ETF

Fund name

BKLC.US

Ticker

International Equities – US only (page 1 of 4)

iShares Core S&P Mid-Cap ETF

L&G US Equity ETF

SPDR® Portfolio S&P 400 Mid Cap ETF

SPDR® Portfolio S&P 600 Sm Cap ETF

Vanguard Small-Cap ETF

iShares Core S&P Small-Cap ETF

Vanguard Extended Market ETF

iShares MSCI USA ESG Enh ETF USD Dist

iShares MSCI USA ESG Scrn ETF USD Acc

iShares S&P Mid-Cap ETF

Vanguard Mega Cap ETF

Vanguard Mega Cap Value ETF

Vanguard Mid-Cap Value ETF

Vanguard Small-Cap Value ETF

Vanguard Russell 1000 ETF

Vanguard Russell 1000 Value ETF

iShares ESG MSCI USA Leaders ETF

iShares® ESG Advanced MSCI USA ETF

Vanguard Russell 2000 ETF

Vanguard Russell 3000 ETF

Vanguard S&P 500 Value ETF

Vanguard S&P Mid-Cap 400 ETF

Vanguard S&P Small-Cap 600 ETF

Xtrackers MSCI USA ESG Leaders Eq ETF

IJH.US

LGUS.LN

SPMD.US

SPSM.US

VB.US

IJR.US

VXF.US

EEDS.LN

SASU.LN

IJH.AU

MGC.US

MGV.US

VOE.US

VBR.US

VONE.US

VONV.US

SUSL.US

USXF.US

VTWO.US

VTHR.US

VOOV.US

IVOO.US

VIOO.US

USSG.US

ETFᶠ, 🚫🚫

ETFᶠ

ETFᶠ, 🚫🚫

ETFᶠ

ETFᶠ, 🚫🚫

ETFᶠ

Fund type

0.10%

0.08%

0.07%

0.06%

0.05%

Total expense ratio 0.05%

USD

AUD

USD

Currency

All-cap Blend

Small-cap Value

Mid-cap Value

Large-cap Value

Large-cap Blend

Small-cap Value

Large-cap Value

Large-cap Blend

Large-cap Value

Large-cap Blend

Small-cap Value

Mid-cap Value

Large-cap Value

Large-cap Blend

Mid-cap Blend

Large-cap Blend

Small-cap Growth

Small-cap Value

Small-cap Blend

Small-cap Value

Mid-cap Value

Large-cap Blend

Mid-cap Value

Style

4,431.3

1,651.5

1,491.1

2,173.5

1,124.2

3,749.7

391.9

3,814.7

4,567.5

2,667.4

24,273.2

15,572.2

4,800.3

4,507.1

158.1

3,157.0

2,914.3

19,123.2

86,316.0

50,620.2

4,441.7

5,244.0

340.3

FUM (NZD millions) 80,516.9

investors only, NZD-H: Fund is hedged to New Zealand Dollars, AUD-H: Fund is hedged to Australian Dollars, ʳ: Fee is after rebate on Consilium Wrap

Fund name

Ticker

International Equities – US only (page 2 of 4)

Amundi IS S&P 500 ESG ETF DR-C

Vanguard ESG US Stock ETF

iShares ESG Aware MSCI USA ETF

iShares MSCI USA Value Factor ETF

iShares Russell 2500 ETF

SPDR® S&P 400 Mid Cap Value ETF

SPDR® S&P 600 Small Cap Value ETF

Vanguard Russell 2000 Value ETF

Vanguard S&P Mid-Cap 400 Value ETF

Vanguard S&P Small-Cap 600 Value ETF

iShares ESG Aware MSCI USA Small-Cap ETF

Amundi IS Amundi MSCI USA SRI ETF DR

iShares S&P 500 Value ETF

iShares S&P Small-Cap 600 Value ETF

iShares Russell 1000 Value ETF

iShares Russell Mid-Cap ETF

iShares Russell Top 200 Value ETF

UBS ETF MSCI USA Value USD A dis

iShares MSCI KLD 400 Social ETF

iShares MSCI USA ESG Select ETF

Schwab Fundamental US Large Company ETF

Smartshares US 500

Smartshares US Equities ESG ETF

Nuveen ESG Large-Cap Value ETF

S500.FP

ESGV.US

ESGU.US

VLUE.US

SMMD.US

MDYV.US

SLYV.US

VTWV.US

IVOV.US

VIOV.US

ESML.US

USRI.FP

IVE.US

IJS.US

IWD.US

IWR.US

IWX.US

USVUSY.SW

DSI.US

SUSA.US

FNDX.US

USF

USA

NULV.US

ETFᶠ, 🚫🚫

ETFⁿ, 🚫🚫

ETFⁿ

ETFᶠ

ETFᶠ, 🚫🚫

ETFᶠ

ETFᶠ, 🚫🚫

ETFᶠ

ETFᶠ, 🚫🚫

Fund type

0.35%

0.34%

0.25%

0.20%

0.19%

0.18%

0.17%

0.15%

0.12%

Total expense ratio 0.12%

USD

NZD

USD

EUR

USD

EUR

Currency

Large-cap Value

Large-cap Blend

Large-cap Value

Mid-cap Value

Large-cap Value

Small-cap Value

Large-cap Value

Large-cap Blend

Small-cap Blend

Small-cap Value

Mid-cap Value

Small-cap Value

Mid-cap Value

Small-cap Value

All-cap Value

Large-cap Blend

All-cap Blend

Large-cap Blend

Style

911.0

38.1

297.2

7,366.8

3,027.0

3,579.5

1,085.9

1,322.7

33,827.2

59,645.1

10,186.0

26,677.1

2,745.6

1,403.2

959.7

744.0

712.4

3,754.6

2,114.6

299.6

14,110.3

17,779.2

3,826.7

FUM (NZD millions) 1,809.8

investors only, NZD-H: Fund is hedged to New Zealand Dollars, AUD-H: Fund is hedged to Australian Dollars, ʳ: Fee is after rebate on Consilium Wrap

Fund name

Ticker

International Equities – US only (page 3 of 4)

Nuveen ESG Mid-Cap Value ETF

Nuveen ESG Small-Cap ETF

SuperLife Invest US 500

SuperLife Invest US Large Value

SuperLife Invest US Mid Cap

SuperLife Invest US Small Cap

Smartshares US Large Value

Smartshares US Mid Cap

Smartshares US Small Cap

NUMV.US

NUSC.US

24999

25001

25002

25003

USV

USM

USS

iShares Core MSCI Emerging Markets ETF

Schwab Emerging Markets Equity ETF™

SPDR® Portfolio Emerging Markets ETF

HSBC MSCI Emerg Mkts ETF

iShares® ESG MSCI EM Leaders ETF

iShares Core MSCI EM IMI ETF USD Acc

iShares MSCI EM ESG Enhanced ETF USD Inc

iShares MSCI EM IMI ESG Scrn ETF USD Acc

Xtrackers MSCI Emerging Markets ETF 1C

IEMG.US

SCHE.US

SPEM.US

HMEM.LN

LDEM.US

EIMI.LN

EEDM.LN

SAEM.LN

XMME.LN

ETFᶠ

ETFᶠ, 🚫🚫

ETFᶠ

ETFᶠ, 🚫🚫

ETFᶠ

Fund type

ETFⁿ

PIE

ETFᶠ, 🚫🚫

Fund type

0.18%

0.16%

0.15%

0.11%

Total expense ratio 0.10%

0.51%

0.47%

0.44%

0.40%

Total expense ratio 0.40%

USD

Currency

NZD

USD

Currency

Large-cap Blend

All-cap Blend

Large-cap Blend

Style

Small-cap Blend

Mid-cap Blend

Large-cap Value

Small-cap Blend

All-cap Blend

All-cap Value

All-cap Blend

Small-cap Blend

All-cap Value

Style

7,800.1

2,515.2

227.7

27,881.2

1,254.6

1,596.7

8,408.7

13,089.8

109,345.1

100,307.4

FUM (NZD millions)

76.1

84.0

82.4

11.3

7.5

12.0

79.4

1,473.5

FUM (NZD millions) 202.1

investors only, NZD-H: Fund is hedged to New Zealand Dollars, AUD-H: Fund is hedged to Australian Dollars, ʳ: Fee is after rebate on Consilium Wrap

Vanguard FTSE Emerging Markets ETF

Fund name

VWO.US

Ticker

International Equities – Emerging markets (page 1 of 2)

Fund name

Ticker

International Equities – US only (page 4 of 4)

Amundi IS MSCI Emerging Markets ETF DR C

Amundi IS MSCI Emerging Markets ETF-C $

iShares Emerging Markets IMI Equity Idx

Amundi IS MSCI EMs SRI ETF DR C

iShares ESG Aware MSCI EM ETF

iShares MSCI EM SRI ETF USD Acc

Xtrackers MSCI Em Mkt ESG ETF 1C

UBS ETF MSCI Emerging Mkts SRI USD A dis

Avantis® Emerging Markets Equity ETF

iShares Edge MSCI EM Val Fac ETF USD Acc

Vanguard FTSE Emerging Markets Shrs ETF

Xtrackers MSCI EM Swap ETF 1C

SPDR® MSCI Emerging Markets SmallCap ETF

Vanguard Emerging Markets Shares Index

Smartshares Emerging Markets Eqs ESG ETF

Smartshares Emerging Markets

Dimensional Emerging Mrkts Sustnblty Tr

SuperLife Invest Emerging Markets

iShares MSCI Emerging Markets ETF (AU)

Dimensional Emerging Markets Value Trust

iShares MSCI Emerging Markets Sm-Cp ETF

AEME.FP

AUEM.FP

40927

AMEI.LX

ESGE.US

SUSM.LN

XZEM.LN

MSRUSA.SW

AVEM.US

EMVL.LN

VGE.AU

XMEM.SW

EMSD.LN

4743

EMG

EMF

44100

24971

IEM.AU

6468

EEMS.US

ETFᶠ

AUT

ETFᵃ

PIE

AUT, 🚫🚫

ETFⁿ

ETFⁿ, 🚫🚫

AUT, W

ETFᶠ

ETFᵃ

ETFᶠ

ETFᶠ, 🚫🚫

AUT, W

ETFᶠ

Fund type

0.71%

0.67%

0.63%

0.60%

0.59%

0.58%

0.56%

0.55%

0.49%

0.48%

0.40%

0.33%

0.27%

0.25%

0.24% ʳ

0.20%

Total expense ratio 0.20%

USD

AUD

NZD

AUD

NZD

AUD

USD

AUD

USD

AUD

USD

EUR

Currency

Small-cap Value

Large-cap Value

Large-cap Blend

All-cap Blend

Large-cap Blend

All-cap Blend

Large-cap Blend

Small-cap Value

Large-cap Blend

Large-cap Value

Large-cap Blend

Style

438.2

555.7

892.3

62.4

105.1

130.5

53.3

1,428.7

258.2

1,851.8

684.4

288.0

951.2

1,256.5

1,874.5

2,893.3

9,906.5

1,226.1

1,363.5

7,213.2

FUM (NZD millions) 7,134.9

investors only, NZD-H: Fund is hedged to New Zealand Dollars, AUD-H: Fund is hedged to Australian Dollars, ʳ: Fee is after rebate on Consilium Wrap

Fund name

Ticker

International Equities – Emerging markets (page 2 of 2)

SuperLife Invest NZ Property

Smartshares NZ Property

iShares Global REIT ETF

Kernel Global Green Property

CFS W Index Global Property Securities

Dimensional Global Real Estate Trust

Dimensional Global Real Estate NZD Hdg

Vanguard International Property Secs Idx

SuperLife Invest Global Property

SPDR® Dow Jones Global Real Estate ETF

Vanguard Global ex-US Real Est ETF

Schwab US REIT ETF™

iShares Core US REIT ETF

Fidelity® MSCI Real Estate ETF

Vanguard Real Estate ETF

24980

NPF

REET.US

25037

42209

15778

41541

13426

24975

DJRE.AU

VNQI.US

SCHH.US

USRT.US

FREL.US

VNQ.US

ETFᶠ

ETFᵃ

PIE, NZD-H

AUT, W

AUT, NZD-H

AUT

AUT, W

PIE, 🚫🚫

ETFᶠ

ETFⁿ

PIE

Fund type

0.12%

0.09%

0.08%

0.07%

0.12%

0.50%

0.48%

0.40%

0.37%

0.32%

0.29% ʳ

0.14%

0.54%

0.49%

Total expense ratio 0.29% ʳ

USD

AUD

NZD

AUD

NZD

AUD

NZD

USD

NZD

Currency

Global ex US

Global

New Zealand

Region

42,546.6

2,244.6

2,462.0

7,388.0

8,136.8

353.7

71.8

2,010.8

100.7

544.5

1,480.3

2.5

3,899.2

97.1

36.4

10.4

FUM (NZD millions)

investors only, NZD-H: Fund is hedged to New Zealand Dollars, AUD-H: Fund is hedged to Australian Dollars, ʳ: Fee is after rebate on Consilium Wrap

Kernel NZ Commercial Property

Fund name

24494

Ticker

Real Estate

Smartshares S&P/NZX NZ Government Bd ETF

Harbour NZ Corporate Bond

AMP Capital NZ Fixed Interest Fund

SuperLife Invest S&P/NZX NZ Gov Bd

NGB

23602

23566

24990

Dimensional 2-Yr Sustainability F/I NZD

Dimensional Five-Year Diversified FI NZD

Vanguard Etclly Cons Glb Agg Bd IdxHNZDH

Smartshares Global Aggregate Bond ETF

Dimensional Glbl Bond Sustainability NZD

Dimensional Global Bond Trust NZD

41542

23843

43066

AGG

42163

23856

SuperLife Invest Global Aggregate Bd

PIE, NZD-H

PIE, 🚫🚫, NZD-H

AUT, NZD-H

AUT, 🚫🚫, NZD-H

ETFⁿ, NZD-H

AUT, 🚫🚫, NZD-H

AUT, NZD-H

AUT, 🚫🚫, NZD-H

ETFᶠ, 🚫🚫, NZD-H

ETFᶠ, NZD-H

Fund type

PIE

ETFⁿ

PIE, 🚫🚫

Fund type

0.49%

0.44%

0.41%

0.35%

0.30%

0.28%

0.25%

0.15%

Total expense ratio 0.15%

0.44%

0.35% ʳ

0.25% ʳ

0.20%

Total expense ratio 0.10%

NZD

Currency

NZD

Currency

Style

5.1

72.8

654.2

882.4

496.0

33.9

1,474.7

404.2

1,103.9

275.4

6,172.1

FUM (NZD millions)

0.6

2,230.6

480.3

32.8

377.2

FUM (NZD millions)

investors only, NZD-H: Fund is hedged to New Zealand Dollars, AUD-H: Fund is hedged to Australian Dollars, ʳ: Fee is after rebate on Consilium Wrap

24974

24985

AMP Capital Ethical Leaders Hedged Global Fixed Interest Index Fund SuperLife Invest Overseas Non-gov Bds

iShares Global Aggt Bd ESG ETF NZD H Acc

AGENZX.ID

24291

iShares Core Global Aggt Bd ETF NZD HAcc

Fund name

AGGNZX.ID

Ticker

International Fixed Interest

Simplicity NZ Bond

Fund name

24261

Ticker

New Zealand Fixed Interest

Appendix 2: 2021 Approved Products List at a glance 2021 APL by Asset Class US Real Estate; 4

New Zealand Fixed Income; 5

Global Fixed Income; 11

New Zealand Equity; 14

Global ex US Real Estate; 1

Australia Equity; 24

Global Real Estate; 8 New Zealand Real Estate; 3

Global Emerging Markets Equity; 31

Global Equity; 54

Global ex US Equity; 14 US Equity; 81

2021 APL by Structure

Portfolio Investment Entity (PIE); 30

Australian Unit Trust (AUT); 51 Foreign ETF (not ASX or NZX); 130

NZX ETF; 19

ASX ETF; 20

2021 APL by Fund Manager Harbour Asset Management Limited; 3

Nuveen; 3

Others; 22

DWS Investment S.A. (ETF); 4

iShares/Blackrock; 57

Commonwealth/Colonial Group; 4 BetaShares Capital Ltd; 4 AMP Capital Investors (NZ); 4 Kernel Wealth Limited; 5 Amundi Luxembourg S.A.; 7

Schwab ETFs; 11 Vanguard; 52

SPDR/State Street; 19

DFA Australia Limited; 20

SmartShares Limited; 35

2021 APL by SRI mandate Has SRI exclusions; 57

Unscreened; 193

Vanguard Ethically Conscious Global Aggregate Bond Index Fund (NZD)

Dimensional Global Bond Sustainability Trust (NZD)

Dimensional Global Bond Trust (NZD)

Dimensional Five-Year Diversified Fixed Interest Trust (NZD)

Dimensional Two-Year Diversified Fixed Interest Trust (NZD)

AMP Capital Hedged Global Fixed Interest Index Fund

Harbour NZ Corporate Bond Fund

Dimensional Emerging Markets Trust

iShares MSCI EM SRI UCITS ETF

iShares Emerging Market IMI Equity Index Fund

Vanguard Ethically Conscious International Shares Index Fund

Dimensional Global Sustainability Trust (NZD)

Vanguard International Share Index Fund

Dimensional Global Value Trust

Dimensional Global Small Company Trust

Dimensional Global Core Equity Trust (NZD)

AMP Capital All Country Global Shares Index Fund

Dimensional Australian Sustainability Trust

Dimensional Australian Core Equity Trust

Dimensional Australian Value Trust

Dimensional Australian Small Company Trust

iShares Australian Equity Index Fund

Harbour Sustainable NZ Shares Fund

Fund Harbour NZ Index Shares Fund

✅

Partner Firm Portfolios (Unscreened) ✅

✅

Partner Firm SRI Portfolios

✅

Synergy Classic Portfolios ✅

✅

Synergy SRI Portfolios

✅

Synergy PIE Portfolios ✅

The list of recommended funds that, as at 30 September 2021, are subjected to detailed quarterly monitoring are as follows, along with which portfolio suite they appear in.

It should be noted that the inclusion of a fund on the APL does not necessarily mean that the CIC undertakes rigorous monitoring of the approved fund. This level of ongoing scrutiny is reserved only for the funds recommended for investment in either our partner firm model portfolios, or in the Consilium Synergy portfolios.

Appendix 3: List of recommended funds as at 30 September 2021

Appendix 4: Important considerations when investing in ETFs Investing in ETFs involves different challenges than investing in managed funds. The first is the higher trading costs. All ETFs are listed on a stock exchange and must be traded through a broker. Brokerage fees usually have a minimum fee amount, so it is recommended that small orders are placed through the pooled orders functionality to help reach this minimum brokerage amount. For example, as of September 2021 the brokerage fee for trading a USD listed security on Consilium Wrap is 0.40% with a minimum fee of USD 50. This means an NZD 10,000 trade and at an exchange rate of 0.72 USD/NZD would not meet minimum brokerage. The USD 50 fee would represent 0.69% of the trade. In this case minimum brokerage would be achieved for trades of NZD 17,361 or higher. Most of the new ETFs are denominated in foreign currency and trades will likely incur FX fees. FX fees can be relatively high, for example, as at September 2021 the fee for the NZD/USD pair on Consilium Wrap is 50 PIPs. A PIP is a ‘percentage in point’ which is the smallest price change that a given exchange rate can make, in this case $0.0001. For example, to sell $10,000 NZD and purchase USD at an exchange rate of 0.72 USD/NZD, you will pay approximately $69 NZD in fees. ETFs generally cannot be traded in fractional units. This can be a problem for very small accounts as small trades will need to be rounded to the nearest unit. This may result in trades some distance from the intended trade value, especially if the ETF has a high unit price. The final point to consider in buying and selling an ETF is that the value of the ETF is decided by market participants rather than an administrator. This can mean that during periods of high volatility the valuation price used may deviate from the net asset value of the fund. This is predominantly due to timing differences in the valuation of the underlying companies (which happens at the end of each trading session for each individual nation), and the last trade that occurs on the ETF’s exchange. Over the long term these fluctuations tend to cancel out and the performance of the underlying companies drives the ETF’s returns. Most custodian platforms value an investors ETF holding using the market price, not the administrators NAV price.