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IR+M: Finding Value In Non-Traditional Market Segments

June 14, 2023

In selecting investment firms to manage our funds, Harbor seeks firms that demonstrate original thinking and a willingness to be different from the competition, whether that be in taking nonconsensus views or investing in less trafficked corners of the market.

We believe Income Research + Management is a case in point. IR+M strives to distinguish themselves by expanding their opportunity set beyond traditional sectors to less well-known areas of the bond market in its search for high quality, fundamentally sound issuers.

The IR+M team has long held expertise in asset-backed securities (ABS). Because of the knowledge base they have developed over the years, they have the capability to research unconventional segments of the ABS sector, such as franchise royalties, data centers, aircraft and railcar leases, and music royalties, to name a few.

As the chart below shows, these non-traditional subsectors have been a large contributor to the ABS sector’s growth.

Non-Traditional ABS Sectors sectors are a growing part of the ABS Market. Comparing Amount Outstanding for Auto, Credit Card, Student Loan, Equipment, and Non-Traditional Performance data shown represents past performance and is no guarantee of future results.
Source: IR+M, 2022.

Nevertheless, these nontraditional ABS securities are often not included in mainstream bond indexes. In fact, less than 15% of the ABS market is index-eligible due to index construction rules.

As a result, some bond managers’ research efforts are limited or nonexistent within this market segment. This lack of attention results in pricing inefficiencies that IR+M has been able to capitalize on by finding high quality issuers at attractive yields. We believe this has been a source of incremental value-add for their Core and Core Plus strategies over the years.

By including nontraditional ABS to its opportunity set, IR+M has a potential alpha source that some of its peers lack. In our view, this kind of thinking and specialization sets IR+M apart and illustrates the firm’s determination to deliver performance consistency to its clients.

Important Information

Past performance is no guarantee of future results.

The views expressed herein may not be reflective of current opinions, are subject to change without prior notice, and should not be considered investment advice or a recommendation to purchase or sell a particular security.

All investments involve risk including the possible loss of principal. Stock prices can fall because of weakness in the broad market, a particular industry, or specific holdings. Bonds may decline in response to rising interest rates, a credit rating downgrade or failure of the issue to make timely payments of interest or principal.

An asset-backed security (ABS) is a security whose income payments are derived from and collateralized by a specified pool of underlying assets.

Alpha is a measure of risk (beta)-adjusted return.

Investing entails risks and there can be no assurance that any investment will achieve profits or avoid incurring losses.

Income Research + Management is an independent subadvisor to the Harbor Core Bond Fund and Harbor Core Plus Fund.

Harbor Capital Advisors, Inc.



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