Harbour Australasian Equity Focus Fund Monthly Report - July 2021

Fund Performance Fund Market Value $163,270,680 Portfolio performance was below benchmark for the month. The NZ market fell over the month as COVID-19 Since 1 month 3 months 1 year 3 years (pa) 5 years (pa) inception mobility restrictions hit travel & tourism stocks and as a2 (pa) continued to slide. Resource stock strength supported the Australian market. Strong returns from structural growth Fund -0.81% 2.57% 24.62% 13.64% 16.41% 15.96% stocks , Mineral Resources and IDP Education boosted portfolio returns. But weakness in Afterpay, Benchmark -0.18% 1.86% 17.49% 11.16% 11.46% 11.66% Kathmandu and Summerset detracted from portfolio Returns are gross of taxes and fees and include imputation credits. Inception: 10 April 2014. returns. Benchmark: 50% S&P/NZX 50 and a 50% S&P/ASX 200 Index (which is 50% hedged into NZ dollars) Market Environment Key Market Movements The equity market (S&P/NZX 50 Gross with 1 month 3 months 1 year 3 years (pa) imputation) finished the month down -0.5%, taking its 12- S&P NZX 50 Index month return to +8.04%. The Australian equity market (S&P -0.46% -0.96% 8.04% 13.07% ASX 200) rose 1.1% for the month (-0.9% in NZD), taking its 12- S&P ASX 200 Index (NZD) -0.90% 3.51% 25.77% 8.20% month return to be up 28.6% (+25.8% NZD). S&P ASX 200 Index (AUD) 1.10% 5.80% 28.56% 9.48% Source: S&P/NZX , Bloomberg.

Global markets were mixed as concerns about the delta COVID-19 variant and associated mobility restrictions contributed to forecasters reducing global growth expectations. Global bond yields fell as central banks remained dovish on falling inflationary expectations. A solid profit reporting season supported the US equity market. Chinese stocks were weak following regulatory changes. Commodity prices eased with iron ore and oil lower, but copper prices increased on supply constraints.

Forecasters accelerated RBNZ official cash rate (OCR) increase expectations. RBNZ hikes and Australian COVID-19 lockdowns led to the NZD/AUD increasing 1.8% to 0.9474. NZ 10-year Government yields fell -0.1% to 1.65 reflecting slowing global growth. The fall in bond yields supported defensive income and structural growth stocks, as did an increase in M&A activity. Locally, real estate, industrial and materials stocks outperformed, whilst banks, utilities and travel & tourism underperformed.

Top 10 Position % Mainfreight 13.1 The portfolio is positively biased to selected quality growth companies in the Summerset Group 8.2 healthcare, industrial and information technology sectors, where the potential rate CSL 6.6 and sustainability of growth may not be fully reflected in respective share prices. The National Australia Bank 6.3 portfolio also has selected growth investments in the more cyclical financial and materials sectors. The portfolio has a modest exposure to defensive growth stocks in Ebos Group 6.2 the utilities and real estate where valuations are full relative to their potential growth. Macquarie Group 6.1 The portfolio has no investment in the communication or energy sectors. Pacific Edge 4.5 Serko 4.5 3.8 Charter Hall Group 3.7 Fund Attribution

Contribution Contribution to Position % Stock return % Position % Stock return % Largest Contributors to Return Largest Detractors Return Mainfreight 13.1% 0.89 7.4% Afterpay 3.3% -0.74 -19.5% Mineral Resources 1.7% 0.22 14.8% Kathmandu Holdings 2.3% -0.41 -14.9% IDP Education 1.8% 0.20 12.5% Summerset Group 8.2% -0.32 -3.8% 3.5% 0.16 4.8% Ebos Group 6.2% -0.25 -4.0% Fortescue Metals 3.3% 0.16 4.8% National Australia Bank 6.3% -0.24 -3.1%

The portfolio underperformed in the month. Strong returns from structural growth stocks Mainfreight, Mineral Resources and IDP Education boosted portfolio returns. Investments in Afterpay, Kathmandu and Summerset were the key negatives to performance. Our research suggests all three of these growth stocks have the potential to positively surprise versus expectations. 1 | Harbour Australasian Equity Focus Fund Fund Highlights over the month

The NZ equity market continued its recent retracement despite a relatively uneventful domestic pre profit results “confession” season, strong leads from the US and European company profit reporting season and lower long term bond yields. While this weakness in part this may reflect expectations of increases in the OCR by the RBNZ, it mostly reflected the sectoral biases of the NZ equity market. Earnings upgrades, particularly for materials and finance stocks, continued to support the Australian market. Later in the month an acceleration of merger and acquisition (M&A) activity reinforced that parts of the public listed market have become mispriced relative to private capital markets due to the shorter- term impacts of COVID relative to longer-term earnings growth potential.

Stock Specific News over the month

Mainfreight’s share price (+7.4% over the month) responded to a positive Annual Shareholder Meeting (ASM) profit update. Mainfreight announced that it had grown profit before tax by +NZ$52m in the first 17 weeks, against financial year 2021, helped by global congestion, which is materially lifting forwarding margins and boosting the less-than-truckload (LTL) market. We had been expecting some upside but were stunned by how well Mainfreight is navigating ongoing disruptions to logistics chains for clients. While growth is likely to slow during the remainder of the year, stock broking analysts have had to scramble to upgrade earnings forecasts to reflect the better-than-expected start to the year. In our view, market consensus earnings expectations may be underestimating the base effect of the last 12 months on Mainfreight’s earnings going forwards - its ability to deliver exceptional service outcomes to clients through a challenging operating environment, reinforces Mainfreight’s ability to profitably grow share in the logistics markets it operates in.

Strong Australian office and industrial property transaction activity drove returns for real estate investment managers Goodman Group (+6.9% in AUD) and Charter Hall (+5% in AUD). Industrial occupancy remains high and demand for high quality, well located industrial property is increasing as businesses continue to enhance logistics structures to enhance profitability. Strong physical market transaction evidence during the month with quality industrial assets trading at low 4% to high 3% income yields also supported the Goodman and Charter Hall share prices.

Later in the month an acceleration of merger and acquisition (M&A) activity reinforced that parts of the public listed market have become mispriced relative to private capital markets due to the shorter-term impacts of COVID relative to longer-term earnings growth potential. While the closure of the trans-Tasman travel bubble hit returns for most travel and tourism exposed stocks during the month, the emergence of M&A activity with large sovereign wealth funds looking to take advantage of public market mispricing of COVID-19 related risk by launching a takeover offer for Sydney Airport (+34.9% in AUD), supported the (-0.4%) share price. A takeover offer for Spark Infrastructure (+20.4% in AUD) during the month also underscored the attractiveness of infrastructure assets with defensive growth.

Summerset (-3.8%) shares fell despite Summerset delivering a strong second quarter 2021 sales update, delivering its highest sales of occupation rights for units and apartments in a half year in its 23-year history. Some of the weakness in Summerset may reflect caution around COVID-19 risk but may also reflect switching to Ryman (+0.5%) after its positive ASM comments. Ryman announced a record first quarter and stronger cashflow than many had expected. Our research indicates the strong demand environment for retirement living is continuing, driven by aging demographics, the need for safety and security in a COVID-19 world and firm residential property markets. In our view, the market may be underestimating Summerset’s earnings potential and financial and operational strength. a2 Milk (-3.4%) shares continued to slide over the month. While there is an indication that a2’s management of inventory is contributing to a stabilisation in market pricing of its infant formula product, export volumes continue to fall below expectations with China’s June import data showing a -11% decline for total imports to China (by value). COVID-19 outbreaks may see a further decline in near term Chinese birth rates. We remain vigilant and active in a2 – the a2 brand continues to be well regarded by Chinese consumers, its share of market may have stabilised, and there are some early signs of a potential basing in activity in the ‘overseas purchase’ Daigou channel. But our research suggests it may be challenging for a2 to deliver the growth required to meet financial year 2022 market consensus earnings forecast. The portfolio reduced its investment in a2 during the month into price strength related to higher e-commerce infant formula pricing.

Mineral Resources (+17.3% in AUD) and Fortescue Metals (+6.7%) continued to benefit from strong iron ore and lithium prices. Lithium prices were particularly strong with demand for electric vehicles outstripping the supply of key battery components including lithium. It will take several years before lithium production can meet existing demand let alone potential demand. The portfolio reduced investment in Fortescue over the month given our research suggests iron ore prices may be peaking as Chinese steel demand peaks near term.

2 | Harbour Australasian Equity Focus Fund A contributor to portfolio underperformance over the month was weakness in the share price of global buy-now-pay-later (BNPL) business Afterpay (-18.2% over the month in AUD). Investors became concerned about increasing competition in the BNPL sector, particularly the point of sales credit part of BNPL. We focused on Afterpay’s sector leadership, particularly its strong millennial consumer ecosystem which generates high value/high sales conversion leads to retailers and service providers. Harbour’s deep industry research and company engagement gave us the confidence to add to the portfolio’s investment in what we believe to be an undervalued structural growth stock into the weakness during the month. Early in August, Afterpay received a takeover offer from US payments platform Square. The offer would see Afterpay shareholders receive 0.375 shares of Square common stock for each Afterpay share which, based on Square’s US share price at the time of proposal, is equivalent to A$126 per Afterpay share, which is 30% higher than the Afterpay share price of A$96.66 prior to the offer.

Outlook: Sprint within a marathon?

Equity markets often have periods of mixed returns within longer term return trends – a pause in sprints within marathons. Global economic growth indicators remain positive, but the rate of growth may be slowing as we lap the big recovery from COVID-19’s economic lows and production constraints limit activity. While the rate of economic growth may be slowing from peak to decent levels, this does not preclude equity market gains given lead economic indicators remain historically high.

The interplay between the rate of economic growth accelerating or decelerating, supply side inflation risks and the potential for gradual monetary policy tightening, with central banks removing ultra-supportive settings such as low official rates and quantitative easing, may contribute to equity market fluctuations and sector volatility as investors seek to position in advance of potential changes.

The risks to equity market returns remain the impact of COVID-19 variants on economic activity and on supply chain disruption leading to inflationary pressure. While the world may be ‘learning to live with COVID-19’ to some extent, the delta variant and other potential variants have the capacity to moderate the rate of economic recovery. The combination of both government-mandated and self-imposed restrictions in movements through periodic COVID-19 waves limits mobility and disrupts the economic recovery. The supply side of the economy is adjusting more slowly than the demand side to COVID-19. Labour shortages with migration limited by international border closures, and COVID-19 mobility constraints disrupting transportation and shipping, have contributed to inflation pressure.

With vaccination rates increasing, supply constraints normalising and demand acceleration potentially slowing, risks around inflation rates may reduce. This is important as a modest rate of inflation means central banks can gradually reduce monetary policy support rather than having to rapidly remove financial liquidity to counter a rapid increase in inflation which would disrupt capital markets.

Locally, the NZ equity market remains relatively fully priced at a 12-month forward weighted Price to Earnings (PE) multiple of around 30 times. To move higher the NZ equity market needs a solid result season with upbeat outlook statements. Alternatively, the NZ equity market with its bias to defensive and structural growth stocks may deliver better returns than other equity markets if global economic growth slows down.

From the 12th of August 33 NZ companies report profit results for the June period. Expectations are for an improvement in profits and falling debt levels as companies generate better cashflow than expected. Outlook statements will be key – whether companies are able to pass on increasing costs to customers, whether they have to confidence to put growth strategies in play or whether they hunker down and see how COVID and the economic recovery plays out.

Overall NZ equity growth expectations for financial year 2022 are for a relatively low mid-single digit increase over 2021. This may reflect difficulties forecasting for relative COVID-19 winner F&P Healthcare (has COVID pulled forward respiratory demand that may fade?) and relative COVID-19 loser a2 Milk (will Chinese infant formula demand re-emerge?). The range of earnings expectations for individual stocks is wider than normal suggesting we could see some higher-than-normal volatility around profit results. The NZ market has been weak in the lead up to results season so if we get a slightly better results season, some indications of productivity improvement or capital management, the NZ market may see some renewed investor support.

In contrast the outlook for the Australian earnings season is more optimistic, even with COVID-19 lockdowns. Positive earnings revision trends have continued providing the one of the most positive lead-ins to earnings in the last 20 years. Four-week rolling I/B/E/S Australian net earnings revisions remain positive, indicating more positive revisions than negative revisions. Full year 2021 earnings are expected to rebound by 49%, surpassing financial year 2019 levels. Consensus expectations are for Australian earnings to jump another 9% in financial year 2022. Resources stocks may continue to be a key source of earnings upgrades given the surge in commodity prices. Lockdowns could stall momentum for banks but they have entered a capital management phase with share buyback programs beginning. Capital management and buybacks could spread to other sectors given gearing levels remain low and consensus dividend forecasts look conservative relative to the strong earnings recovery.

3 | Harbour Australasian Equity Focus Fund Insights from the US equity market June quarter earnings season suggest investors are willing to look past cost inflation and reward real organic growth, supply chain snags are hitting companies unevenly and re-opening end markets are coming back stronger than expected. Strong sales acceleration (+20% quarter-on-quarter seasonally adjusted) and sales surprises (4%) have driven substantial margin expansion in the face of inflation worries. Upgrades to forward quarter/year estimates have been muted (4%) and thus stock returns after announcement have been flattish on average and mixed. Against the muted reaction to earnings US M&A activity is surging.

Markets have become increasingly noisy, with information everywhere all the time. Cutting through the noise and identifying enduring trends may be key to performance. We see upside to earnings for those companies that have used COVID-19 to reset their businesses for the next 5 years, particularly investment in research and development that enhances productivity and competitive positioning. In the near term, shares with more cyclical earnings growth may deliver better growth. However, over the medium term, shares that benefit from long-term structural tail winds including technology, demographics and environmental, social and governance (ESG) are expected to deliver stronger growth. ‘Technology everywhere’ is improving company profitability, with the falling cost of computing power and data analysis increasing speed to market, opening up new industry structures and disrupting traditional industry structures. Companies with better ESG practices may grow their customer base faster and attract more investment capital than those that do not.

While the outlook remains positive, it may not be a smooth ride and we may see periods of market volatility with macro conditions less supportive. Having a diversified portfolio in the period ahead and being alert to opportunities in equal measure as risks is likely to continue to be an appropriate strategy. A mix of patience and active investment may be the key to performance. A near-term lift in earnings may provide the fuel for the next equity market sprint, but a steady improvement in base business profitability driven by structural trends may be key to performing in the longer-term equity marathon that may include a few hills in the next 12 months.

Changes to the Fund holdings Change Security Name % Change over the Reason month

Mainfreight 1.35% Increased Covid related logistics disruption boosting near term & longer term returns

Aroa Biosurgery 0.51% Increased Participated in capital raise which provides funding product roll out & R&D

Macquarie Group 0.46% Increased Added to on positive ASM update - upside to infrastructure funds

Auckland International Airport0.32% Increased Near term upside to commercial property, medium term upside to passenger recovery

National Australia Bank -1.59% Reduced Took profit and switched in Macquarie Group

Pexa Group -0.42% Reduced Took profits into share price strength a2 Milk -0.26% Reduced Near term earnings risk

Summerset Group -0.21% Reduced Share price weakness

Country allocation Fund characteristics

50.79% NZD Portfolio % Equities

Return on Equity 13.4 AUD Equities PE Ratio Forward 12 Months 48.2 Gross Yield 2.5 48.58% Cash & Cash Expected Volatility 16.2 Equivalents Hedge on AUD exposure 25.3%

0.63% Total Carbon Emissions (tonnes CO2e) 1,829

Carbon Footprint (tonnes CO2e/$m invested) 13 Weighted Average Carbon Intensity (tonnes 43 CO2e/$m revenue)

4 | Harbour Australasian Equity Focus Fund Investment Mandate compliance for the month

Harbour Asset Management Limited certifies that, to the best of our knowledge, after having made reasonable enquiries and except as specified in this certificate, that the Fund has been managed in accordance with the investment mandate parameters defined in the Conditions of Establishment for the Fund.

A signed copy of the compliance certificate for the month end is included at the end of this report.

Important Notice and Disclaimer

The Australasian Equities Commentary is provided for general information purposes only. The information is given in good faith and has been prepared from published information and other sources believed to be reliable, accurate and complete at the time of preparation but its accuracy and completeness is not guaranteed. Information and any analysis, opinions or views contained herein reflect a judgement at the date of publication and are subject to change without notice. To the extent that any such information, analysis, opinions or views constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute financial advice under the Financial Markets Conduct Act 2013, nor do they constitute advice of a legal, tax, accounting or other nature to any persons. Harbour Asset Management Limited is the issuer and manager of the Harbour Investment Funds (Funds). Investors must receive and should read carefully the Product Disclosure Statement for the Harbour Investment Funds (Funds) before making a decision to invest in the Funds. The price, value and income derived from investments in the Funds may fluctuate in that values can go down as well as up and investors may get back less than originally invested. Where an investment is denominated in a foreign currency, changes in rates of exchange may have an adverse effect on the value, price or income of the investment. Reference to taxation or the impact of taxation does not constitute tax advice. The rules on and bases of taxation can change. The value of any tax reliefs will depend on your circumstances. You should consult your tax adviser in order to understand the impact of investment decisions on your tax position. No person guarantees repayment of any capital or payment of any returns on capital invested in the Funds. Actual performance will be affected by Fund charges. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. To the maximum extent permitted by law, no liability or responsibility is accepted for any loss or damage, direct or consequential, arising from or in connection with this presentation or its contents. S&P Dow Jones LLC Disclaimer The S&P NZX50 Index (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Harbour Asset Management. Copyright © 2015 S&P Dow Jones Indices LLC, a subsidiary of McGraw Hill Financial Inc., and/or its affiliates. All rights reserved. Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. Bloomberg Disclaimer The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and BLOOMBERG Order Management Systems (the 'Services') are owned and distributed locally by Bloomberg Finance L.P. ('BFLP') and its subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the 'BLP Countries'). BFLP is a wholly-owned subsidiary of Bloomberg L.P. ('BLP'). BLP provides BFLP with all global marketing and operational support and service for the Services and distributes the Services either directly or through a non-BFLP subsidiary in the BLP Countries. The Services include electronic trading and order-routing services, which are available only to sophisticated institutional investors and only where necessary legal clearances have been obtained. BFLP, BLP and their affiliates do not provide investment advice or guarantee the accuracy of prices or information in the Services. Nothing on the Services shall constitute an offering of financial instruments by BFLP, BLP or their affiliates. BLOOMBERG, BLOOMBERG PROFESSIONAL, BLOOMBERG MARKET, BLOOMBERG NEWS, BLOOMBERG ANYWHERE, BLOOMBERG TRADEBOOK, BLOOMBERG BONDTRADER, BLOOMBERG TELEVISION, BLOOMBERG RADIO, BLOOMBE RG PRESS and BLOOMBERG.COM are trademarks and service marks of BFLP, a Delaware limited partnership, or its subsidiaries.

5 | Harbour Australasian Equity Focus Fund