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HomeMutual FundHarbor Worldwide Small Cap (HIISX / HNISX), September 2022

Harbor Worldwide Small Cap (HIISX / HNISX), September 2022

By David Snowball

Goal and technique

Harbor Worldwide Small Cap Fund pursues long-term development by investing in a diversified portfolio of worldwide small-cap shares. They’ve three specific preferences:

  1. show conventional worth metrics totally on a worth to ebook, worth to earnings, internet asset worth (NAV), and/or dividend yield foundation;
  2. well-capitalized and clear stability sheets and funding sources; and
  3. enterprise fashions that, via an entire enterprise cycle, generate returns on fairness or invested capital in extra of their value of capital.

As much as 15% of the fund’s complete belongings might be invested in rising markets, although direct EM publicity is at the moment minimal. The portfolio held 61 shares as of 6/30/2022.


Harbor Capital Advisors. Harbor is headquartered in Chicago. In 2013 its company guardian, Robeco Group NV, was acquired by ORIX Company, a Japanese monetary companies agency with a world presence. Harbor is now an entirely owned subsidiary of ORIX. In Could 2021, Harbor liquidated its 5 Harbor Robeco funds simply two years after launch. Collectively, the 20 Harbor funds, nearly all of that are externally managed, have $60 billion in belongings.

Cedar Avenue Asset Administration serves because the sub-advisor for Harbor Worldwide Small Cap Fund. It’s an unbiased value-oriented funding administration agency with ten staff and can also be headquartered in Chicago. The agency is unbiased, owned by its staff, and manages roughly $274 million (as of seven/31/2022).


Jonathan Brodsky and Waldemar Mozes. Mr. Brodsky based Cedar Avenue in 2016. Previous to that, he established the non-U.S. funding follow at Advisory Analysis. Mr. Brodsky started his funding profession in 2000. He labored for the U.S. Securities and Exchanges Fee’s Workplace of Worldwide Affairs, specializing in cross-border regulatory, company governance, and enforcement issues. Mr. Brodsky holds a B.A. in political science and an M.A. in worldwide relations from Syracuse College and an M.B.A. and J.D. from Northwestern College. He additionally studied at Fu Jen College in Taipei, Taiwan.

Mr. Mozes is a Associate and the Director of Investments for Cedar Avenue Asset Administration. Previous to becoming a member of Cedar Avenue, Mr. Mozes developed and applied the worldwide funding technique at TAMRO Capital Companions LLC and managed ASTON/TAMRO Worldwide Small Cap Fund (AROWX). It had a really promising launch, however the advisor pulled the plug after only one yr as a result of they’d over $2 million AUM. Mr. Mozes is a vivid man with expertise at Artisan and Capital Group. He jokingly described himself as “one of the best fund supervisor ever to return from Transylvania.”

Technique capability and closure

$2 billion. The equal non-US small cap worth technique that Mr. Brodsky managed at Advisory Analysis reached round $1.5 billion and there have been concerns on the time to maneuver towards a mushy shut as soon as they hit the $2 billion plateau.

Administration’s stake within the fund

Every of the PMs has between $10-$50K invested instantly within the mutual fund, and the senior funding staff has over $2 million invested in a restricted partnership on which the fund relies. Past that, the managers personal the sub-advisor and have type of devoted their lives, fortunes, and sacred honor to creating it work.

Opening date

Nominally, February 01, 2016. As a sensible matter, the fund was reborn on Could 23, 2019, when Cedar Avenue Asset Administration introduced a brand new staff and new self-discipline to the fund. They succeeded the Barings staff that had been in place at inception.

Minimal funding

$2,500 for the Investor class shares, and $50,000 for Institutional shares.

Expense ratio

1.32% for Investor class shares and 0.96% on Institutional class shares, on belongings of roughly $100 million. The fund has seen regular inflows over the previous yr or so, usually from traders who had labored with them on earlier funds.


Let’s begin with the half individuals care about: Harbor is one of the best worldwide small cap fund round.

The instantly significant metric right here is the fund’s three-year file, for the reason that present staff – which itself has a strong file for longer than three years – assumed duty for the fund.

Each Morningstar and Lipper classify the fund as worldwide small-mid worth. We begin there. Utilizing the screeners at MFO Premium, which draw on the Lipper World Information Feed, we examined the information of all worldwide small cap worth and core mutual funds and ETFs. In each absolute and risk-adjusted metrics, Harbor is the top-performing fund.

36-month file (via August 2022), worldwide small-to-mid worth

  Whole return Sharpe Martin Seize ratio Alpha
Harbor 7.9% – #1 0.35 – #1 0.72 – #1 1.2 – #1 4.0 – #1
ISCV peer ave. 3.2 0.12 0.25 1.0 -0.7

Whole return is a fund’s common annual return for the interval; Harbor had the best complete return. Sharpe and Martin ratios are commonplace and conservative measures of risk-adjusted efficiency; Harbor was once more first.

The 2 less-familiar measures. The seize ratio compares the quantity of a gaggle’s draw back that an funding captures relative to the quantity of upside it captures. A seize ratio over 1.0 implies that you’re seeing extra upside than common. Alpha tries to seize the identical phenomenon by how a lot an funding returns relative to what you’ll anticipate in a portfolio prefer it. Alpha is usually used as a measure of supervisor talent or, no less than, supervisor value-added.  It’s a type of “how a lot bang for the buck” calculation. Any rating above 1.0 implies that you’re successful. In each instances, nobody has accomplished higher.

Even after we prolong the comparability to the bigger set of worldwide small cap core funds, Harbor stays the best choice with the best complete return, Sharpe ratio, seize ratio, and Alpha.

Prolonged so far as doable to incorporate all worldwide small-to-midcap funds and ETFs -– worth, core, development – Harbor finishes within the high 5% by all of those measures. Given the market’s development bias, that’s a outstanding accomplishment.

We will say with confidence that the Cedar Avenue staff has been about one of the best at what they do. The portfolio displays three distinct preferences:

  1. it’s a real small cap portfolio. Its Morningstar friends within the worldwide small worth group have, on common, 25% of their portfolios in large- and mega-cap names. Harbor has zero. On the different finish of the size, Harbor has 40% invested in small- and micro-cap shares, about twice the peer common. That works out to a median market cap of $1.45 billion, in comparison with $3.5 billion for its friends.
  2. it’s a worth portfolio. A lot of its friends, even within the worth class, cheat towards development.
  3. it’s a high quality portfolio. The managers consciously pursue high quality firms, and high quality is among the strongest and constant predictors of funding efficiency. Particularly, they typically pursue companies with each high-quality administration and pristine stability sheets.

Essentially the most urgent remaining questions are, (1) do you have to take into account worldwide small caps (2) now?

Why worldwide small caps?

There are 4 arguments for contemplating an funding in worldwide small cap (ISC) shares and one further argument for contemplating it now.

  • The ISC universe is big. Cedar Avenue estimates that there are 5,000 non-US small caps. Compared, there are about 3,000 worldwide massive cap firms and fewer than 2,000 US small cap shares.
  • It’s the one space demonstrably ripe for lively managers so as to add worth. The common ISC inventory is roofed by fewer than 5 analysts, and it’s the one space the place the info exhibits nearly all of lively managers constantly outperforming passive merchandise. Primarily based on 3- and 5-year Sharpe ratios, 80% of the 25 funds and ETFs with the highest risk-adjusted returns have been actively managed.
  • Worldwide small is a extra enticing asset class than worldwide massive. The managers famous that “most US traders fail to acknowledge that small caps outperform massive caps outdoors the US. When individuals consider small caps, they consider excessive volatility, however that doesn’t maintain up within the small cap area outdoors the US. Small caps are inclined to have comparatively decrease volatility, higher risk-adjusted returns, and a decrease correlation to the US markets.” For the reason that World Monetary Disaster, worldwide small-mid worth has posted higher uncooked and risk-adjusted returns than worldwide massive worth; worldwide small-mid development has equally overwhelmed worldwide massive development.
  • Most traders are underexposed to it. Worldwide index funds (e.g., BlackRock Worldwide Index MDIIX, Schwab Worldwide Index SWISX, Rowe Value Worldwide Index PIEQX, or Vanguard Whole Worldwide Inventory Index VGTSX) sometimes commit someplace between none of their portfolio (BlackRock, Value, Schwab) to up a tiny slice (Vanguard) to small caps. Of the ten largest actively managed worldwide funds, just one has greater than 2% in small caps.

Why now?

Briefly put: imply reversion.

US shares have outperformed worldwide shares, the US foreign money has risen towards its EAFE friends, and US companies have posted file ranges of revenue. But it surely’s not possible to take care of file revenue ranges and file valuation ranges indefinitely.

Supervisor Waldemar Mozes notes,

The sturdy US greenback has been a big headwind to efficiency for many non-US funds. This offers a chance for non-US firms which have vital earnings publicity to US markets. As well as, the identical means that many Individuals are having fun with cheaper buying in Paris or accommodations and eating in Tokyo this summer season, so can also they get pleasure from extra shopping for energy in non-US funds.

Development shares have outperformed worth shares for the previous decade. That dominance was triggered by the (justifiably) panicked response of central banks to the worldwide monetary disaster, which plausibly threatened the collapse of the worldwide monetary system. Their resolution was free cash, then extra free cash delivered via typical and unconventional means. Nationwide governments joined the frenzy in 2020 with trillions of stimulus spending to offset the worldwide pandemic. That tidal wave of cash inspired, then underwrote, all types of economic tomfoolery, from utilizing high-yield debt to pay for inventory buybacks to convincing previously sober adults that digital photographs of bored apes have been an asset class. These days are ending.

Worth and development types are inclined to alternate lengthy intervals of relative outperformance. The chart beneath displays two lengthy intervals of dominance by worth and, for the reason that international monetary disaster, an extended interval of development dominance.

If worth resurges (hinted at within the 2022 transfer on this chart), it would dominate development via the tip of the last decade.

Messrs Mozes and Brodsky argue that each reversion and monetary uncertainty strengthen the argument for worldwide worth investing.

We additionally imagine that value-style equities are prone to outperform because of basic causes. The market has been paying much less for earnings streams from value-style equities than growth-style equities, each in absolute and relative phrases … when many “worth” firms attain an operational inflection level (e.g., top-line acceleration, margin enlargement, stability sheet rationalization, sale of an unprofitable phase, and so forth.) markets will react shortly to the development in fundamentals and even re-rate the enterprise with larger multiples. In different phrases, there are two alternatives to spice up returns from depressed, value-style equities.

The other phenomena of what’s at the moment going down with “development” companies that fail to satisfy lofty development expectations. 

Given the excessive ranges of uncertainty in all corners of economic markets mixed with a better worth for failure (rising rates of interest), we imagine it pays to pay much less for brand spanking new funding alternatives.

Backside Line

Harbor ISC has earned the MFO “Nice Owl” designation for posting high quintile risk-adjusted returns, it earned the Lipper Chief recognition for each Whole Return and Constant Returns over the three years since Cedar Avenue assumed command, it earned a spot on Schwab’s Choose Listing, and it has a five-star ranking from Morningstar for a similar interval. It’s an skilled staff and a wise technique with a rock-solid observe file, each right here and at their former Advisory Analysis and TAMRO funds. Fairness traders interested by placing a bit of sunshine between themselves and the high-priced US fairness market could be well-advised to place Harbor Worldwide Small Cap Fund on their due diligence listing.

Fund web site

Harbor Worldwide Small Cap Fund. The fellows’ Quarterly Report, below “Paperwork,” is evident and smart, although largely targeted on the here-and-now. Readers within the normal case for investing in worldwide small cap shares may discover curiosity in one in every of a number of latest white papers. These may embrace Artisan Associate’s “The Case for Worldwide Small Caps” (2021), Putnam’s “Why Now’s the time to contemplate worldwide small caps” (August 2022), and Steve Lipper’s “Why Allocate to Non-U.S. Small-Caps?” (2021).



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