On February 24, 2022, Harbor Capital, in partnership with Irrational Capital, launched the Harbor Corporate Culture ETF (HAPY). The fund invests in companies with the strongest employee-employer relationships. As the ticker implies, in firms where the employees are happy. It is a passive fund whose investment universe is primarily US large-cap stocks, tracking an index that “quantitatively and systematically capture(s) the lift that strong corporate culture has on a company’s future stock price.”
The investment case for Harbor Corporate Culture starts with your immediate reaction to the statement above: “invest in ‘happy employees’? What a bunch of lame, snowflake drivel!” That very bias is enshrined in corporate accounting rules: investments in human capital – in hiring, strengthening, and supporting employees – are not counted as investments at all; it is in the same corporate overhead category as purchases of toilet paper for the staff lavatory. As a result, it weighs on the standard financial metrics that drive many investment decisions. And any such miscategorization drives potential mispricing.
Irrational Capital is led by Dan Ariely. Dr. Ariely is a professor of psychology and behavioral economics at Duke University, co-founder of several companies exploiting investors’ behavioral anomalies, former professor of behavioral economics at MIT, and author of Predictably Irrational: The Hidden Forces that Shape Our Decisions (2010). As a side note, I’ve had at least two fund managers tell me that they’ve required their entire investment team to read and dissect Predictably Irrational; in one case, it’s an annual exercise.
Mr. Ariely has been managing the Irrational Capital hedge fund. While hedge fund records are hard for the public to track, at least one report speaks to its outperformance:
Dan Ariely hasn’t looked at a profit and loss statement or a balance sheet in the past five years. And yet his hedge fund, Irrational Capital, has smashed the S&P 500 even during one of the longest bull markets in history. (“Meet Dan Ariely, the hedge fund star who never looks at financials,” Australian Financial Review, 11/18/2018)
More recently, JP Morgan published an extensive research report on the impact of human capital factor investing. Institutional Investor reports,
J.P. Morgan analyzed HCF’s performance across a wide range of indices, including the Nasdaq, Russell 1000, and MSCI USA. By back-testing stock performance data from 2015, JPM found that the Nasdaq HCF Long portfolio delivered an excess return of 3.1 percent, while the Nasdaq HCF Long-Short portfolio generated a significantly higher annual return of 13.3 percent. The report concluded that “within the tech-heavy Nasdaq, the HCF is highly proficient at identifying underperformers.” For the Russell 1000 and MSCI USA indices, the HCF Long portfolios delivered excess returns of 3.7 percent and 6.2 percent, respectively. (“Looking for a good investment? Find a company that understands its employees,” Institutional Investor, 1/28/2022)
Morgan concludes that no other investment factor is nearly as powerful: “the Human Capital Factor “dominates all [other investment] styles across all metrics” and yielded the highest returns, lowest volatility, highest Sharpe ratio, highest hit rate, and lowest maximum drawdowns when compared to Value, Growth, Momentum, Quality and Risk investment styles.” (JP Morgan research report precis at Irrational Capital, with a link for the complete study)
The fund charges 0.5% and, as of April 29, 2022, has $6.6 million in AUM. The Irrational Capital website is pretty rich and visually striking. The fund’s own homepage reflects, I suspect, a marketer’s guess about the sort of investor most immediately drawn to supporting worker-centered firms.
Along with HAPY, Harbor’s recently launched ETFs include two fixed-income ETFs (Scientific Alpha Income SIFI and Scientific Alpha High-Yield SIHY) that were launched in the fall of 2021, the Disruptive Innovation ETF (INNO) launched in December 2021, and the All-Weather Inflation Focus ETF (HGER) and Long-Term Growers ETF (WINN) launched in February 2022.