Harbor Capital burst onto the ETF issuance world in 2021 and now has USD1.1 billion in assets in ETFs. But the firm’s roots lie in something far from the world of finance as Harbor Capital was originally the pensions and investments department of glass manufacturer, Owens Illinois.
At the time, in the early 1980s, the firm was based in Toledo, Ohio on Lake Erie, with a significant pension plan which, in 1983, came out of the original firm to be a stand-alone entity offering portfolio construction.
As the pensions’ industry moved from Defined Benefits to Defined Contributions, the firm launched its first mutual funds in 1986, which ‘got us going in the modern era’, explains Kristof Gleich, Harbor’s President & CIO.
The firm remained firmly in mutual funds for the next 40 years, relocating to Chicago in 2005, and being bought by Orix Corporation, also owners of the Robeco Group, in 2013.
“We have changed owners a couple of times but stayed true to our roots,” Gleich says. The firm operates a manager of managers’ model. “We scour the world for best-in-class managers and our background also explains our longer-term nature of investing as our original clients were our blue-collar colleague workers. We have a very different origin story rather than coming out of a Wall Street bank.”
Mid-September sees the launch of the firm’s thirteenth ETF, on what is close to the second anniversary of the firm’s move into ETFs.
“We find interesting active money managers who can deliver strong returns,” Gleich says. “We are constantly looking for new ways of delivering investment solutions to our client base and it became clear to us that while we believe in mutual funds, but like any industry, the fund’s industry is evolving, and we wanted to be a part of that evolution.”
The ETF rule in 2019, 6c-11, levelled the playing field for issuers, Gleich says. “The regulators did a phenomenal job giving issuers the clear-cut guidebook and rules book which allowed a flood of new issuers into the market offering active solutions. We believe in an ETF vehicle for clients who prefer that, and we are pleased with our progress – scaling up and getting investor attention takes time. There is a seasoning that has to happen as investors like to see three years of track record before they will consider you – we are pleased to have good momentum.”
Gleich believes that the firm’s clients look to them to provide access to active external boutique managers: “The way to add alpha that you can only get through deep expertise and specialisation,” he says.
The firm’s latest ETF (MAPP) will, for the first time, be run by the internal multi asset team, following a distinctive proprietary multi asset philosophy that looks at the growth and inflation view of the market, taking a dynamic view.
“The original passive or 60/40 style portfolios have been challenged in this decade and we need to rethink and be more dynamic,” he says. The firm’s ETFs are all fully active, some index-based and some not. “We consider them all active as they are not offering market capitalised beta – even our index products are looking to produce active outcomes.”
Gleich gives the example of their Harbor Commodity All-Weather Strategy ETF (HGER) which seeks to provide investment results that closely correspond to the performance of the Quantix Commodity Index.
This ETF, 18 months old, has outperformed the Bloomberg Commodities Index by 800 basis points on an annualised basis or close to 14 per cent.
“One of the trends that is happening in asset management is that more broadly active and index management are converging bringing more dynamic index solutions to the marketplace,” Gleich says.
HGER is based on an all-weather commodities index created by Quantix, designed by Don Casturo, former Global Commodities COO and Head of EMEA Commodity Trading at Goldman Sachs.
“They were a hedge fund and evolved into a boutique solutions firm building long only business and we became their business partner. So, this is an example of how investors can get high quality returns in an ETFs that they couldn’t have accessed before,” he says, also noting that the fee on HGER is 68 basis points, while, back in the day, hedge fund fees were commonly 2 per cent management fee plus a 20 per cent performance fee. “It brings the fee and value conversation to the forefront,” he says.
“Even five years ago we would have been partnered in an actively run mutual fund,” he says. “But because the industry is shifting and client preferences are changing, tweaking how active is offered, means putting the active intellectual property inside the index that the ETF tracks.”
Harbor Capital has chosen not to go down the route of using semi-transparent ETF structures. “I think that model is dead,” Gleich says. “One of the benefits of ETFs is the transparency and often the semi-transparent ETFs are a solution in need of a problem –
they add a layer of complication to the end investor. We live in a world where transparency is preferred.
“The secret sauce in investing is discipline, longevity, time horizon and making sure you have a process when things aren’t working. I can’t count one instance where active managers have had a short-term timing edge – it’s the long run we are interested in.”