U.S. Large Cap Equities

• Although human capital is an asset, it is accounted for as an expense. This leads to human capital being systematically overlooked, mispriced, and ignored because it is difficult to quantify.
• The Human Capital Factor® (HCF®) seeks to quantify levels of motivation and engagement of a company’s workforce in an effort to capture the powerful connection between human capital and stock performance. These HCF® scores assist in addressing a market inefficiency and afford access to a new alpha factor with differentiated excess return potential.

• At the core of the HCF® is the distinct data ecosystem developed by Irrational Capital that is proprietary, expansive and provides wide coverage.

• Through in-depth research, Irrational Capital has identified the seven dimensions most important to employees.
• Notably, extrinsic factors such as compensation weigh less heavily than the intrinsic factors, those that are more personal to an employee's experience.

• Each company in the universe is scored on each of the seven dimensions.
• Scores across all seven dimensions are aggregated for each company.
• Raw HCF® values Z-Scored¹ across entire universe.

Case Study of Improving Human Capital

A Large Hardware and Software Company

• Previously had a since-described “know it all” culture. Recognizing the need for a culture change, the company replaced the existing CEO with a new CEO in 2014.
• Embraced an open-minded, “learn it all” culture emphasizing innovation which has produced an exceptional culture. As a result, this company was at the forefront of technology trends such as Cloud and artificial intelligence (AI).
• As the HCF® scores improved at this company, the business has performed well, and its stock has gone on to outperform the broad market by a wide margin.

Case Study of Declining Human Capital

A Food and Beverage Retailer

• Founder-centric culture with multiple terms as an on-and-off CEO of the business.
• During the COVID-19 period, a management vs. worker culture emerged. This produced a lack of emotional connection from front-line employees and ultimately less organizational alignment and effectiveness.
• As a result, per store revenue suffered and the company has underperformed the broad market (S&P 500) in recent years following the declining HCF® score.

Source: Morningstar Direct & Irrational Capital, December 2023. For illustrative purposes only. Security performance is for illustrative purposes only and does not represent actual performance of a security held by Harbor Capital. The Highest (most favorable) is 1, the lowest (least favorable) is 0.

Important Information

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.

Past performance is no guarantee of future results.

Investing entails risks and there can be no assurance that any investment will achieve profits or avoid incurring losses. Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions.

HCF Scoring: Each company in the universe is scored on each of the seven dimensions (organizational effectiveness, innovation, direct management, organizational alignment, engagement, emotional connection, and extrinsic rewards). In the examples provided, eligible constituents are chosen from Solactive GBS United States 500 Index (the “index universe”) at the time of Index reconstitution. The Solactive GBS United States 500 Index intends to track the performance of the largest 500 companies from the US stock market. The index listed is unmanaged and does not reflect fees and expenses and is not available for direct investment. HCF scores across all seven dimensions are aggregated for each company. The raw score reflects aggregate scores across the seven dimensions for every company in the universe. The Z-score then serves to normalize the distribution of raw scores across the universe. A Z-score is a statistical measurement that tells you how far away from the mean (or average) your datum lies in a normally distributed sample. The Highest (most favorable) raw HCF® value is 3, the lowest (least favorable) raw HCF® value is -3.

The S&P 500 Index is an unmanaged index generally representative of the U.S. market for large capitalization equities. The Russell 2000 Index measures the performance of the 2,000 smaller companies included in the Russell 3000 Index. The Russell 1000 Index represents the top 1000 companies by market capitalization in the United States. The Russell 2000® Index, Russell 1000 Index® and Russell® are trademarks of Frank Russell Company. These indices are unmanaged and do not reflect fees and expenses and are not available for direct investment.

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