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

By David Snowball

Objective and strategy

Harbor International Small Cap Fund pursues long-term growth by investing in a diversified portfolio of international small-cap stocks. They have three particular preferences:

  1. demonstrate traditional value metrics primarily on a price to book, price to earnings, net asset value (NAV), and/or dividend yield basis;
  2. well-capitalized and transparent balance sheets and funding sources; and
  3. business models that, through a complete business cycle, generate returns on equity or invested capital in excess of their cost of capital.

Up to 15% of the fund’s total assets may be invested in emerging markets, though direct EM exposure is currently minimal. The portfolio held 61 stocks as of 6/30/2022.


Harbor Capital Advisors. Harbor is headquartered in Chicago. In 2013 its corporate parent, Robeco Group NV, was acquired by ORIX Corporation, a Japanese financial services firm with a global presence. Harbor is now a wholly owned subsidiary of ORIX. In May 2021, Harbor liquidated its five Harbor Robeco funds just two years after launch. Collectively, the 20 Harbor funds, almost all of which are externally managed, have $60 billion in assets.

Cedar Street Asset Management serves as the sub-advisor for Harbor International Small Cap Fund. It is an independent value-oriented investment management firm with ten employees and is also headquartered in Chicago. The firm is independent, owned by its employees, and manages approximately $274 million (as of 7/31/2022).


Jonathan Brodsky and Waldemar Mozes. Mr. Brodsky founded Cedar Street in 2016. Prior to that, he established the non-U.S. investment practice at Advisory Research. Mr. Brodsky began his investment career in 2000. He worked for the U.S. Securities and Exchanges Commission’s Office of International Affairs, focusing on cross-border regulatory, corporate governance, and enforcement matters. Mr. Brodsky holds a B.A. in political science and an M.A. in international relations from Syracuse University and an M.B.A. and J.D. from Northwestern University. He also studied at Fu Jen University in Taipei, Taiwan.

Mr. Mozes is a Partner and the Director of Investments for Cedar Street Asset Management. Prior to joining Cedar Street, Mr. Mozes developed and implemented the international investment strategy at TAMRO Capital Partners LLC and managed ASTON/TAMRO International Small Cap Fund (AROWX). It had a very promising launch, but the advisor pulled the plug after just one year because they had over $2 million AUM. Mr. Mozes is a bright guy with experience at Artisan and Capital Group. He jokingly described himself as “the best fund manager ever to come from Transylvania.”

Strategy capacity and closure

$2 billion. The equivalent non-US small cap value strategy that Mr. Brodsky managed at Advisory Research reached around $1.5 billion and there were considerations at the time to move toward a soft close once they hit the $2 billion plateau.

Management’s stake in the fund

Each of the PMs has between $10-$50K invested directly in the mutual fund, and the senior investment team has over $2 million invested in a limited partnership on which the fund is based. Beyond that, the managers own the sub-advisor and have sort of dedicated their lives, fortunes, and sacred honor to making it work.

Opening date

Nominally, February 01, 2016. As a practical matter, the fund was reborn on May 23, 2019, when Cedar Street Asset Management brought a new team and new discipline to the fund. They succeeded the Barings team that had been in place at inception.

Minimum investment

$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 assets of approximately $100 million. The fund has seen steady inflows over the past year or so, often from investors who had worked with them on earlier funds.


Let’s start with the part people care about: Harbor is the best international small cap fund around.

The immediately meaningful metric here is the fund’s three-year record, since the current team – which itself has a solid record for longer than three years – assumed responsibility for the fund.

Both Morningstar and Lipper classify the fund as international small-mid value. We start there. Using the screeners at MFO Premium, which draw on the Lipper Global Data Feed, we examined the records of all international small cap value and core mutual funds and ETFs. In both absolute and risk-adjusted metrics, Harbor is the top-performing fund.

36-month record (through August 2022), international small-to-mid value

  Total return Sharpe Martin Capture 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

Total return is a fund’s average annual return for the period; Harbor had the highest total return. Sharpe and Martin ratios are standard and conservative measures of risk-adjusted performance; Harbor was again first.

The two less-familiar measures. The capture ratio compares the amount of a group’s downside that an investment captures relative to the amount of upside it captures. A capture ratio over 1.0 means that you’re seeing more upside than average. Alpha tries to capture the same phenomenon by looking at how much an investment returns relative to what you would expect in a portfolio like it. Alpha is often used as a measure of manager skill or, at least, manager value-added.  It is a sort of “how much bang for the buck” calculation. Any score above 1.0 means that you’re winning. In both cases, no one has done better.

Even when we extend the comparison to the larger set of international small cap core funds, Harbor remains the top choice with the highest total return, Sharpe ratio, capture ratio, and Alpha.

Extended as far as possible to include all international small-to-midcap funds and ETFs -– value, core, growth – Harbor finishes in the top 5% by all of these measures. Given the market’s growth bias, that’s a remarkable accomplishment.

We can say with confidence that the Cedar Street team has been about the best at what they do. The portfolio reflects three distinct preferences:

  1. it’s a true small cap portfolio. Its Morningstar peers in the international small value group have, on average, 25% of their portfolios in large- and mega-cap names. Harbor has zero. At the other end of the scale, Harbor has 40% invested in small- and micro-cap stocks, about twice the peer average. That works out to a median market cap of $1.45 billion, compared to $3.5 billion for its peers.
  2. it’s a value portfolio. Many of its peers, even in the value category, cheat toward growth.
  3. it’s a quality portfolio. The managers consciously pursue quality companies, and quality is one of the most powerful and consistent predictors of investment performance. In particular, they generally pursue firms with both high-quality management and pristine balance sheets.

The most pressing remaining questions are, (1) should you consider international small caps (2) now?

Why international small caps?

There are four arguments for considering an investment in international small cap (ISC) stocks and one additional argument for considering it now.

  • The ISC universe is huge. Cedar Street estimates that there are 5,000 non-US small caps. In comparison, there are about 3,000 international large cap companies and fewer than 2,000 US small cap stocks.
  • It is the one area demonstrably ripe for active managers to add value. The average ISC stock is covered by fewer than five analysts, and it’s the only area where the data shows the majority of active managers consistently outperforming passive products. Based on 3- and 5-year Sharpe ratios, 80% of the 25 funds and ETFs with the top risk-adjusted returns were actively managed.
  • International small is a more attractive asset class than international large. The managers noted that “most US investors fail to recognize that small caps outperform large caps outside the US. When people think of small caps, they think of extreme volatility, but that doesn’t hold up in the small cap space outside the US. Small caps tend to have comparatively lower volatility, better risk-adjusted returns, and a lower correlation to the US markets.” Since the Global Financial Crisis, international small-mid value has posted better raw and risk-adjusted returns than international large value; international small-mid growth has similarly beaten international large growth.
  • Most investors are underexposed to it. International index funds (e.g., BlackRock International Index MDIIX, Schwab International Index SWISX, Rowe Price International Index PIEQX, or Vanguard Total International Stock Index VGTSX) typically commit somewhere between none of their portfolio (BlackRock, Price, Schwab) to up a tiny slice (Vanguard) to small caps. Of the ten largest actively managed international funds, only one has more than 2% in small caps.

Why now?

Briefly put: mean reversion.

US stocks have outperformed international stocks, the US currency has risen against its EAFE peers, and US corporations have posted record levels of profit. But it’s impossible to maintain record profit levels and record valuation levels indefinitely.

Manager Waldemar Mozes notes,

The strong US dollar has been a significant headwind to performance for most non-US funds. This provides an opportunity for non-US companies that have significant earnings exposure to US markets. In addition, the same way that many Americans are enjoying cheaper shopping in Paris or hotels and dining in Tokyo this summer, so too can they enjoy more buying power in non-US funds.

Growth stocks have outperformed value stocks for the past decade. That dominance was triggered by the (justifiably) panicked reaction of central banks to the global financial crisis, which plausibly threatened the collapse of the global financial system. Their solution was free money, then more free money delivered through conventional and unconventional means. National governments joined the frenzy in 2020 with trillions of stimulus spending to offset the global pandemic. That tidal wave of money encouraged, then underwrote, all sorts of financial tomfoolery, from using high-yield debt to pay for stock buybacks to convincing formerly sober adults that electronic images of bored apes were an asset class. Those days are ending.

Value and growth styles tend to alternate long periods of relative outperformance. The chart below reflects two long periods of dominance by value and, since the global financial crisis, a long period of growth dominance.

If value resurges (hinted at in the 2022 move on this chart), it might dominate growth through the end of the decade.

Messrs Mozes and Brodsky argue that both reversion and financial uncertainty strengthen the argument for international value investing.

We also believe that value-style equities are likely to outperform due to fundamental reasons. The market has been paying less for earnings streams from value-style equities than growth-style equities, both in absolute and relative terms … when many “value” companies reach an operational inflection point (e.g., top-line acceleration, margin expansion, balance sheet rationalization, sale of an unprofitable segment, etc.) markets will react quickly to the improvement in fundamentals and even re-rate the business with higher multiples. In other words, there are two opportunities to boost returns from depressed, value-style equities.

The opposite phenomena of what is currently taking place with “growth” businesses that fail to meet lofty growth expectations. 

Given the high levels of uncertainty in all corners of financial markets combined with a higher price for failure (rising interest rates), we believe it pays to pay less for new investment opportunities.

Bottom Line

Harbor ISC has earned the MFO “Great Owl” designation for posting top quintile risk-adjusted returns, it earned the Lipper Leader recognition for both Total Return and Consistent Returns over the three years since Cedar Street assumed command, it earned a spot on Schwab’s Select List, and it has a five-star rating from Morningstar for the same period. It’s an experienced team and a sensible strategy with a rock-solid track record, both here and at their former Advisory Research and TAMRO funds. Equity investors interested in putting a bit of light between themselves and the high-priced US equity market would be well-advised to put Harbor International Small Cap Fund on their due diligence list.

Fund website

Harbor International Small Cap Fund. The guys’ Quarterly Report, under “Documents,” is clear and sensible, though mostly focused on the here-and-now. Readers interested in the general case for investing in international small cap stocks might find interest in one of several recent white papers. Those might include Artisan Partner’s “The Case for International Small Caps” (2021), Putnam’s “Why Now is the time to consider international small caps” (August 2022), and Steve Lipper’s “Why Allocate to Non-U.S. Small-Caps?” (2021).

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