Accompanying the news regarding the launch of Harbor Capital Advisors’ first ETFs, the Harbor Scientific Alpha Income ETF (NYSE: SIFI) and the Harbor Scientific Alpha High-Yield ETF (NYSE: SIHY), ETF Trends was able to speak with the teams at Harbor and BlueCove about the funds, their potential, and more.
ETF Trends: With the Harbor Scientific Alpha High-Yield and Harbor Scientific Alpha Income funds, what makes it a good time to launch these funds?
Harbor/BlueCove: Fixed income investors have historically had two choices: traditional active discretionary investing or passive investing. We believe that scientific active fixed income investing provides a necessary third choice to investors looking to achieve superior investment returns, a particularly welcome choice in today’s low-yield environment.
Scientific active investing is arguably the first innovation in the fixed income investment process since passive investing was introduced in the 1980s. Today, science and technology are only in the early stages of disrupting the active fixed income asset management industry. Fixed income markets now boast the availability of data, the market structure, the breadth of securities, and the depth of research necessary to fully implement a scientific investment approach. That said, the barriers to entry remain high, and the medium-term alpha opportunity available to scientific fixed income managers in an uncrowded space should be meaningful as a result.
The great majority of active managers still operate a traditional, discretionary business model in which the exercise of subjective judgment dominates every phase of the (generally team-siloed and star manager-dominated) investment process. Passive investing, on the other hand, though lower-cost, does not offer the potential to capture additional returns in excess of a stated benchmark. In addition, passive investing may tilt portfolios to higher exposures in highly indebted issuers. By contrast, a scientific approach can objectively cover a broad investment universe, utilizing state-of-the-art technology to achieve active, process-driven investment decisions.
The Harbor Scientific Alpha High-Yield fund is designed to outperform a broad USD high-yield index. The Harbor Scientific Alpha Income fund is designed to provide income and total return to investors with lower volatility than investing solely in the high-yield market. Both are active strategies that generally have a place in investor and allocator portfolios in all market conditions. We believe investors will welcome the potential for diversifying these core allocations with new sources of high-quality returns versus similarly themed traditionally active or passively managed products.
ETF Trends: How will the SIFI and SIHY funds benefit investors and advisors looking to contend with the current trends in the market?
Harbor/BlueCove: Scientific investing seeks to generate alpha by decomposing a traditional discretionary investment process into its component parts, building an intellectual framework for each part, and reassembling the parts into a transparent, data-driven investment process that seeks to emphasize continuous improvement. The approach is evidence-based, driven by economic intuition, and grounded in the scientific method.
In BlueCove’s scientific investment process, people and technology are assigned the roles to which they are best suited. Human discretion undertaken by domain specialists remains central to the process but is focused on objective analysis by researchers (developing insights and processes), engineers (building the investment platform), and portfolio managers (oversight and execution, taking fixed income idiosyncrasies into account). Technology is tasked with processing vast quantities of diverse investment data and assessing risk, return, and liquidity trade-offs in portfolio construction.
Scientific investing is characterized by higher instrument liquidity, broad portfolio diversification, and a transparent portfolio construction framework taking into account transaction costs, risk, and liquidity considerations. Investors benefit from a firm-level investment process in which human discretion is steered away from areas in which is it is historically weak, such as subjective forecasting, and towards those in which it is stronger, such as objective analysis and process design.
In summary, the benefits of a scientific investment process for investors include:
- The potential to generate returns with a low correlation to those of traditional managers, making them complementary to, and competitive with, their traditional counterparts,
- An increased probability of repeatable outcomes given the redeployment of human discretion to minimize cognitive and emotional bias,
- A technology-enabled increase in investment breadth,
- Transparency in decision-making allowing for granular decision and performance attribution and continuous improvement of the investment process,
- A firm-level scientific investment process that minimizes key person risk, improving knowledge management at the firm level.
ETF Trends: What risks do these funds look to be going after and dealing with?
Harbor/BlueCove: Both funds will rely on research insights that are proprietary to BlueCove. The Harbor Scientific Alpha High-Yield fund will emphasize company and bond-specific risks across the broad USD high-yield investment universe while maintaining a similar market exposure to the fund’s benchmark. The Harbor Scientific Alpha Income fund will tilt the fund’s market exposure between high-quality versus lower-quality credit over time through exposure to market, company, and bond-specific risks, as well as directional interest rate duration risk.
BlueCove’s proprietary research insights may be broadly classified across fundamentals, sentiment, carry, and valuation. In addition to achieving a high level of diversification in the funds by investing across many positions, BlueCove also seeks breadth in the types and number of research insights that will be applied to the funds.
Market risk in both funds will be closely managed to ensure that unwanted exposures are minimized.
ETF Trends: What is the long-term goal for SIFI and SIHY?
Harbor/BlueCove: The long-term goal for both ETFs is to deliver strong investment performance for investors. Through these initial products, we seek to offer investors a differentiated return stream compared to traditionally managed active or passive strategies. We aim for the ETFs to achieve low correlations to the active returns of traditionally managed portfolios and higher returns than passive strategies.
We hope to bring more select scientific fixed income products to market to empower investors to make the best-informed decisions and construct optimal portfolios.
For more information, visit HarborFunds.com.
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This document is dated as of 14 September 2021.
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