Managing Director, Head of ETFs
Steve Cook, managing director and head of ETFs at Harbor Capital, explains scientific fixed income investing, how it may help investors achieve their income investing goals, and ways to access the approach with Harbor Scientific Alpha ETFs.
Tell us about scientific fixed income investing. What are the potential benefits to investors?
The scientific method has been the primary means of solving hard problems for over 400 years. In a scientific light, investing is data- driven decision-making in the face of uncertainty. We believe that this challenge can be robustly met with the application of a scientific investment process.
At its essence, scientific fixed income investing stipulates that its investment process is grounded in the scientific method and subject to continual refinement.
What does this mean? It means that the investment process engages in each aspect of the scientific method—systematic observation, gathering of information, formulation of hypotheses, experimentation, drawing conclusions, and the continual modification of hypotheses.
We recently launched our first two ETFs at Harbor. Each is managed by BlueCove, who are seasoned professionals in scientific fixed income portfolio management.
Using this scientific process is obviously a distinctly different approach than what many investors would consider traditional discretionary active, or index investing in fixed income, and has exhibited multiple outcome benefits for investors, including:
- Has the potential to offer low correlations to traditional discretionary strategies while removing unwanted market exposures
- Can potentially improve returns by mitigating cognitive and behavioral biases that can compromise traditional discretionary investment strategies via the application of tested market insights across a large set of instruments and markets
- Harnesses large datasets to help create innovative sources of alpha
- Applies modern portfolio construction techniques by targeting consistent risk-adjusted returns while mitigating transactions costs
- Adapts to changes in market behavior by transparently attributing performance
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You mentioned BlueCove is the investment manager of your Scientific Fixed Income ETFs. Why was BlueCove the right fit?
It’s important to share that sourcing specialized investment talent is at Harbor’s core. BlueCove stands out as a firm that is solely dedicated to scientific fixed income investment management.
The firm was founded in 2018, and brings together leading fixed income industry investment and engineering professionals with expertise and a collective passion for scientific investment management.
BlueCove is focused on researching and developing state-of-the-art scientific investment processes applicable to fixed income investment management. Their mission is to create market-leading scientific fixed income investment solutions designed to give investors both an alternative and a complement to the index-based and traditional active discretionary fixed income strategies that dominate the industry today.
More specifically, their approach to the management of fixed income aims to strip the traditional investment process of its weaknesses. It is thus reduced to its component parts—universe definition, data sourcing, alpha sourcing, portfolio construction, trade execution and process review—which are then reassembled, with people and technology assigned the roles to which BlueCove feels they are best suited.
BlueCove uses a firm-level investment process in which human discretion is principally focused on process design and improvement and directed away from areas in which it is relatively weak, such as subjective forecasting.
When BlueCove’s capabilities are coupled with its scientific investment process, the firm is able to create innovative and powerful active investment solutions. It is this combination, joined with the added potential benefits of the ETF structure, that we feel makes our new ETFs so compelling.
Tell us more about your new ETF offerings, SIFI and SIHY. Why these strategies, and why was now the right time to launch these ETFs?
Historically, fixed income investors have had two choices: traditional active discretionary investing or index investing. We believe that scientific active fixed income investing provides a compelling third choice to investors looking to achieve alpha potential plus income, a particularly welcome choice in today’s low yield environment.
The Harbor Scientific Alpha Income ETF (SIFI) seeks to provide income and total return to investors with a lower volatility than investing solely in the high yield market. The Harbor Scientific Alpha High-Yield ETF (SIHY) seeks to outperform a broad USD high yield index while also delivering high-yielding income to investors.
Both are active strategies that we believe have a place in investor and allocator portfolios in all market conditions. We believe investors will welcome the potential for diversifying their core allocations with new sources of high quality returns versus similarly themed traditionally active or index products.
Ultimately, SIFI and SIHY offer cost-efficient solutions to gaining access to differentiated, actively managed and scientifically driven fixed income exposure in the U.S. multisector and high yield bond categories.
This is a challenging market environment for income-seeking investors. How may scientific fixed income and your ETFs benefit investors?
Scientific investing is characterized by higher instrument liquidity, broad portfolio diversification, and a transparent portfolio construction framework that takes into account transaction costs, risk and liquidity considerations.
In the current environment, many income-seeking investors are looking to diversify their exposures through differentiated strategies.
BlueCove’s proprietary investment process is designed to deliver multiple potential outcome benefits to a portfolio, such as enhanced alpha, increased diversification, reduced risk potential, plus income generation. Because of this, both SIFI and SIHY may be impactful solutions for many investors in the current environment.
Harbor offers a diverse family of cost-aware investment solutions managed by institutional-caliber firms. We source talented investment teams to manage portfolios and apply a rigorous fiduciary oversight program to monitor their performance and investment decisions. Harbor had combined assets under management of approximately $63 billion as of September 30, 2021. For more information, visit harborcapital.com.
BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER A FUND’S INVESTMENT OBJECTIVES, RISKS, CHARGES, AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FOR PROSPECTUS OR SUMMARY PROSPECTUS WITH THIS AND OTHER INFORMATION ABOUT THE FUND, PLEASE VISIT OUR WEBSITE AT WWW.HARBORCAPITAL.COM.
All investments involve risk including the possible loss of principal. Fixed income securities fluctuate in price in response to various factors, including changes in interest rates, changes in market conditions and issuer-specific events, and the value of your investment in the Fund may go down. There is a greater risk that the Funds will lose money because they invest in below investment-grade fixed income securities and unrated securities of similar credit quality (commonly referred to as “high-yield securities” or “junk bonds”). These securities are considered speculative because they have a higher risk of issuer default, are subject to greater price volatility, and may be illiquid. Because the Funds may invest in securities of foreign issuers, an investment in the Funds is subject to special risks in addition to those of U.S. securities. These risks include heightened political and economic risks, greater volatility, currency fluctuations, higher transaction costs, delayed settlement, possible foreign controls on investment, possible sanctions by government bodies of other countries and less stringent investor protection and disclosure standards of foreign markets.
Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. The ETFs are new and have limited operating history to judge.
Foreside Fund Services, LLC is the Distributor of the Harbor Scientific Alpha High-Yield ETF and the Harbor Scientific Alpha Income ETF.
BlueCove Limited is a third-party subadviser to the Harbor Scientific Alpha Income ETF and the Harbor Scientific Alpha High-Yield ETF.
Harbor Funds Distributors, Inc.