The Case for the Harbor Corporate Culture ETF (HAPI)
Introduction to the Human Capital Factor
“A company’s greatest asset is its people.” To us, this often repeated maxim makes intuitive sense – a company’s employees are responsible for serving customers, executing strategy, and delivering results. It stands to reason that a highly engaged and motivated staff gives a company an important competitive edge that may benefit financial results and ultimately equity performance.
Irrational Capital, a firm co-founded by renowned behavioral scientist Dan Ariely, has developed a method for systematically identifying companies with strong corporate culture. Built on Ariely’s extensive academic research, Irrational Capital has created what we believe to be a new distinctive investment factor—the Human Capital Factor (HCF). Irrational Capital utilizes a robust proprietary dataset and leverages data science to quantify employee sentiment for numerous previously qualitative measures, such as employee motivation. The HCF score is an aggregation of underlying signals which Irrational Capital’s research has shown to be linked to equity performance. Strong signals tend to be more personal, emotional elements such as levels of psychological safety, autonomy, and pride. The efficacy of these emotional signals have demonstrated to be consistent over time and across sectors (signals have shown to have a predictive signal capacity for employee motivation of 18-24 months and are re-cast annually). In contrast, elements that are easy to quantify, such as benefits and compensation, have not proven to be strong signals with respect to equity performance.
How People & Teams Function are the New “Fundamental”
Strong Signal: Intrinsic Motivation
- Leadership / Right Direction
- Psychological Safety
- Diversity of Perspective
- Career Growth / Development
- Trust / Transparency
- Effectiveness / Efficiency
- Compensation Fairness
Weak Signal: Extrinsic Motivation
- Compensation Level
- Special Recognition
- Physical Environment
- Expected Tenure
- Job Title
* Showed stronger signal during post COVID period (after June 2021)
For competitive protection purposes these lists only represent a sample of the universe of behavior factors within IC’s database and research.
What matters is emotional – personal – difficult to quantify & independent of size, geography and stage. While the HCF assesses highly qualitative experiences of an employee base, finding those signals within the noise is entirely data driven. There are two sources of data which combine to form Irrational Capital’s proprietary dataset: public data and private data. Some investment strategies scrape public websites such as Glassdoor to generate employee sentiment data. Irrational Capital goes a step beyond this public data through an exclusive partnership with a leading HR data collection firm who distributes surveys on behalf of corporations. The integration of the private survey data increases their depth and breadth of data coverage. Coverage spans over 90% of the S&P 500 and Russell 1000 indexes.
What Dimensions of Employee Satisfaction Does the Human Capital Factor Explore?
From a total universe of over 500M+ pieces of “alternative data”, a subset of data from private and public sources is collected and analyzed in an aim to identify companies that are consistently doing right by their employees.
Worthy of a Strategic Allocation
We believe that despite the clear benefits of a strong corporate culture, it is very hard for bottom-up fundamental investors to delineate between companies with a great corporate culture and those with a toxic or dysfunctional one. Company culture is not a line on the balance sheet; nevertheless, we find it can be an important intangible asset that is not widely recognized by the investment community, which provides new avenues for alpha creation.
Irrational Capital has discovered an investable correlation between behavioral factors and the market performance of public companies, notably via a rigorous method for identifying and quantifying aspects of corporate culture and their influence on long-term value creation. Back tests have shown a strong link between high HCF scores and equity performance.
Harbor Corporate Culture ETF (HAPI)
Harbor Capital has partnered with Irrational Capital to provide investors a way to gain exposure to companies with strong Human Capital Factor scores. HAPI:
- Provides an objective and systematic way to invest in companies with a history of strong corporate cultures.
- Offers exposure to large-cap companies with high Human Capital Factor scores, while constraining sectors in an effort to enhance overall diversification benefits.
- May make an effective diversifier because we believe it is uncorrelated to other factors and investment styles.
- Offers a compelling way to invest in the S* in ESG, which tends to be underrepresented in sustainable investing.
- Grounded in robust behavioral science research and backed by robust data sets.
- Designed to track the performance of the CIBC Human Capital Index.
*Invest in the S (social) in Environmental, social, and corporate governance (ESG) factors which may be incorporated into the investment process of the Fund which we believe tends to be underrepresented in sustainable investing. An ESG assessments represent only one of many considerations when making an investment decision. Investors should be aware ESG criteria, characteristics and/or assessments are often subjective in nature and may cause a portfolio to forgo other potentially attractive investment opportunities. Because of the subjective nature of ESG assessments, there can be no guarantee that ESG criteria, characteristics or factors used in any investment process will contribute to performance of the Fund. All investments, including ESG investing, are subject to risk and there is no guarantee that the investment objectives of the portfolio will be achieved, or the portfolio will be profitable. Please refer to each Funds prospectus, or summary prospectus if available, for further information on each Funds investment guidelines, and if applicable, ESG guidelines.
Correlation is a statistic that measures the degree to which two variables move in relation to each other.
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.
The Russell 1000® Index is an unmanaged index generally representative of the U.S. market for larger capitalization stocks. This unmanaged index does not reflect fees and expenses and is not available for direct investment. The Russell 1000® Index and Russell® are trademarks of Frank Russell Company.
Alpha is a measure of risk (beta)-adjusted return.
All investments involve risk including the possible loss of principal. There is no guarantee that the objective of the Fund will be achieved. Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. The Fund may not exactly track the performance of the Index with perfect accuracy at all times. Tracking error may occur because of pricing differences, timing and costs incurred by the fund or during times of heightened market volatility.
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 Fund's assets may be concentrated in a particular sector or industries to the extent the Index is concentrated and is subject to the risk that economic, political, or other market conditions that have a negative effect on that sector or industry will negatively impact the value of the Fund. Companies in the information technology sector can be significantly affected by short product cycles, obsolescence of existing technology, impairment or loss of intellectual property rights, falling prices and profits, competition from new market entrants, government regulation and other factors.
The CIBC Human Capital Index consists of a modified market-weighted portfolio of the equity securities of U.S. companies identified by Irrational Capital LLC (“Irrational Capital”) as those it believes to possess strong corporate culture based on its proprietary scoring methodology. The Index is developed by CIBC World Markets, Inc. (the “Index Provider”), Irrational Capital evaluates companies based on a proprietary, rules-based scoring methodology it developed by leveraging its research in behavioral science, data science and human capital. Constituents of the Solactive GBS United States 500 Index (the “index universe”) at the time of Index reconstitution are eligible for inclusion in the Index. Each company in the index universe that is also identified by Irrational Capital on its list of high-scoring companies (based on the most current scores as of each reconstitution) will be included in the Index. Index constituents in the same sector are weighted based on their float-adjusted market capitalizations. On reconstitution dates, the Index will target the same sector weights as the index universe. If after the Index’s weighting and capping rules are applied, a sector’s weight in the Index would be less than its weight in the index universe, the Index will hold exchange-traded funds that invest specifically in the stocks and securities of the corresponding sector (known as sector ETFs), or such other sector proxy as the Index Provider may determine, to fill the remaining weight and ensure sector neutrality as compared with the index universe. The index listed is unmanaged and does not reflect fees and expenses and is not available for direct investment.
Diversification does not assure a profit or protect against loss in a declining market.
The Harbor Corporate Culture ETF is not an ESG dedicated Fund.
Investing involves risk, principal loss is possible. Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. The ETF is new and has limited operating history to judge.
The views expressed herein are those of Harbor Capital Advisors, Inc. investment professionals. They may not be reflective of current opinions, are subject to change without prior notice, and should not be considered investment advice.
Irrational Capital LLC is a third-party index provider to the Harbor Corporate Culture ETF. The Fund is managed by Harbor Capital Advisors, Inc.