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

By David Snowball

Goal and technique

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

  1. exhibit conventional worth metrics totally on a worth to e-book, 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, by means of a whole enterprise cycle, generate returns on fairness or invested capital in extra of their value of capital.

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


Harbor Capital Advisors. Harbor is headquartered in Chicago. In 2013 its company mum or dad, Robeco Group NV, was acquired by ORIX Company, a Japanese monetary companies agency with a worldwide presence. Harbor is now an entirely owned subsidiary of ORIX. In Might 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 impartial value-oriented funding administration agency with ten staff and can be headquartered in Chicago. The agency is impartial, 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 12 months as a result of that they had 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 issues on the time to maneuver towards a tender 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 straight within the mutual fund, and the senior funding crew has over $2 million invested in a restricted partnership on which the fund relies. Past that, the managers personal the sub-advisor and have form 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 Might 23, 2019, when Cedar Avenue Asset Administration introduced a brand new crew and new self-discipline to the fund. They succeeded the Barings crew 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 12 months or so, typically from buyers 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 report, for the reason that present crew – which itself has a strong report 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 International Knowledge Feed, we examined the data 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 report (by means of 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 very best whole 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 bunch’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’d anticipate in a portfolio prefer it. Alpha is commonly used as a measure of supervisor talent or, not less than, supervisor value-added.  It’s a form of “how a lot bang for the buck” calculation. Any rating above 1.0 implies that you’re successful. In each circumstances, nobody has achieved higher.

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

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

We will say with confidence that the Cedar Avenue crew 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 dimensions, 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. Lots of its friends, even within the worth class, cheat towards progress.
  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. Specifically, they typically pursue companies with each high-quality administration and pristine stability sheets.

Probably the most urgent remaining questions are, (1) must you contemplate 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 large. Cedar Avenue estimates that there are 5,000 non-US small caps. As compared, there are about 3,000 worldwide giant cap firms and fewer than 2,000 US small cap shares.
  • It’s the one space demonstrably ripe for energetic managers so as to add worth. The typical ISC inventory is roofed by fewer than 5 analysts, and it’s the one space the place the information exhibits nearly all of energetic managers constantly outperforming passive merchandise. Based mostly 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 engaging asset class than worldwide giant. The managers famous that “most US buyers fail to acknowledge that small caps outperform giant caps exterior the US. When individuals consider small caps, they consider excessive volatility, however that doesn’t maintain up within the small cap area exterior the US. Small caps are likely to have comparatively decrease volatility, higher risk-adjusted returns, and a decrease correlation to the US markets.” Because the International Monetary Disaster, worldwide small-mid worth has posted higher uncooked and risk-adjusted returns than worldwide giant worth; worldwide small-mid progress has equally overwhelmed worldwide giant progress.
  • Most buyers are underexposed to it. Worldwide index funds (e.g., BlackRock Worldwide Index MDIIX, Schwab Worldwide Index SWISX, Rowe Worth Worldwide Index PIEQX, or Vanguard Whole Worldwide Inventory Index VGTSX) sometimes commit someplace between none of their portfolio (BlackRock, Worth, 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 in opposition to its EAFE friends, and US firms have posted report ranges of revenue. Nevertheless it’s unimaginable to take care of report revenue ranges and report valuation ranges indefinitely.

Supervisor Waldemar Mozes notes,

The robust US greenback has been a big headwind to efficiency for many non-US funds. This supplies a possibility for non-US firms which have important earnings publicity to US markets. As well as, the identical method that many Individuals are having fun with cheaper purchasing 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.

Progress 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 by means of 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 kinds of monetary tomfoolery, from utilizing high-yield debt to pay for inventory buybacks to convincing previously sober adults that digital photos of bored apes have been an asset class. These days are ending.

Worth and progress types are likely to alternate lengthy intervals of relative outperformance. The chart beneath displays two lengthy intervals of dominance by worth and, for the reason that world monetary disaster, a protracted interval of progress dominance.

If worth resurges (hinted at within the 2022 transfer on this chart), it would dominate progress by means of 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 more likely to outperform as a result 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 growth, stability sheet rationalization, sale of an unprofitable phase, and so on.) markets will react rapidly to the advance 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 alternative phenomena of what’s at present happening with “progress” companies that fail to satisfy lofty progress expectations. 

Given the excessive ranges of uncertainty in all corners of monetary markets mixed with the next 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 Checklist, and it has a five-star score from Morningstar for a similar interval. It’s an skilled crew and a wise technique with a rock-solid observe report, each right here and at their former Advisory Analysis and TAMRO funds. Fairness buyers enthusiastic about placing a bit of sunshine between themselves and the high-priced US fairness market can be well-advised to place Harbor Worldwide Small Cap Fund on their due diligence record.

Fund web site

Harbor Worldwide Small Cap Fund. The blokes’ Quarterly Report, beneath “Paperwork,” is obvious and wise, although principally centered on the here-and-now. Readers within the basic case for investing in worldwide small cap shares would possibly discover curiosity in one in all a number of current white papers. These would possibly embody Artisan Associate’s “The Case for Worldwide Small Caps” (2021), Putnam’s “Why Now could be the time to contemplate worldwide small caps” (August 2022), and Steve Lipper’s “Why Allocate to Non-U.S. Small-Caps?” (2021).