Intangible assets have become increasingly important in the modern economy.
We believe valuations of businesses are now skewed to an increasing extent toward intangible versus tangible assets. Research and development investments and brand value are two well-known examples of intangibles that are now used to measure value. However, another intangible asset is emerging: human capital, which we believe now plays a larger role in delivering investment returns.
“Some business leaders say… the most important asset is our people. Yet if you think about how we account for people, we don’t capitalize people on a balance sheet as an asset,” Kristof Gleich, president and CIO of Harbor Capital Advisors, told VettaFi at Exchange: An ETF Experience. “I consider this really important because motivation, engagement, and happiness of employees really matters in delivering outcomes.”
Irrational Capital, cofounded by behavioral scientist Dan Ariely, is an investment research and development firm that applies workplace behavioral science and data science to capture the powerful connection between human capital and value creation. The firm is a pioneer in measuring the value of human capital efficiently.
“With our partnership with Dan Ariely and Irrational Capital, we’ve worked to correct an accounting anomaly, and accounting anomalies equal inefficiencies. What do really good active managers do? They exploit inefficiencies,” Gleich said.
Investors now have the ability to invest in the human capital factor, a nontraditional investment factor unavailable to investors until last year. The nontraditional factor first became publicly investable through the Harbor Corporate Culture Leaders ETF (HAPY), which launched last February, and serves as the foundation for the Harbor Corporate Culture ETF (HAPI), which launched last November.
While HAPI and HAPY use the same methodology to identify and score companies based on the human capital factor, each fund provides different exposures.
HAPI’s underlying index has a minimum market capitalization of $11 billion and a 5% individual stock limit (leading it to have smaller mega-cap exposure versus the S&P 500 Index). HAPY’s underlying index has a minimum market capitalization of $1 billion, leading it to have some mid-capitalization exposure, according to Harbor.
HAPI is generally sector neutral to the selection universe, with a maximum of 35% or a 10% band. On the other hand, HAPY’s underlying index is unconstrained and may have larger sector over/underweights.
HAPI’s underlying index takes a more diversified, lower beta approach: HAPI will typically hold approximately 150 securities, while HAPY will typically hold between 70 and 100 securities.
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Investors should carefully consider the investment objectives, risks, charges and expenses of a Harbor fund before investing. To obtain a summary prospectus or prospectus for this and other information, visit harborcapital.com or call 800-422-1050. Read it carefully before investing.
All investments involve risk including the possible loss of principal. Please refer to the Fund’s prospectus for additional risks associated with each Fund: HAPI, HAPY
The Fund relies on the Index provider’s methodology in assessing whether a company may be considered a corporate culture leader. There is no guarantee that the construction methodology will accurately assess a company to include or exclude it from the index which could have an adverse effect on the Fund’s returns.
The S&P 500 Index is an unmanaged index generally representative of the U.S. market for large capitalization equities. This unmanaged index does not reflect fees and expenses and is not available for direct investment.
Beta is a measure of systematic risk, or the sensitivity of a fund to movements in the benchmark. A beta of 1 implies that the expected movement of a fund’s return would match that of the benchmark used to measure beta.
Irrational Capital LLC is a third-party index provider to the Harbor Corporate Culture Leaders ETF. The Fund is managed by Harbor Capital Advisors, Inc.
CIBC is a third-party index provider to the Harbor Corporate Culture ETF. The Fund is managed by Harbor Capital Advisors, Inc.
This article was prepared as Harbor Funds paid sponsorship with VettaFI.
Foreside Fund Services, LLC is the Distributor of the Harbor ETFs.