Harbor Capital Advisors has launched a new US equity ETF that seeks to harvest returns from the underexplored human capital factor.
The fund invests in companies with supportive corporate cultures.
The Harbor Corporate Culture Leaders ETF (HAPY US) has been listed on NYSE Arca with an expense ratio of 0.50%.
The ETF was developed in partnership with Irrational Capital, an investment research firm employing advanced data science to investigate the relationship between corporate culture and stock price returns.
According to Irrational Capital, companies that foster supportive corporate cultures exhibit high levels of employee engagement and motivation, a rich diversity of ideas, and greater innovation, thereby generating superior outcomes for investors.
This hypothesis has been backed up by independent analysis from JP Morgan’s Quantitative Research Team which found that a sector-neutral index based on the human capital factor generated “the highest returns and lowest volatility among all US investment styles with very low correlation to other factors.”
Dan Ariely, co-Founder of Irrational Capital, said: “Of all the investments companies make, creating a strong culture is one of the best ways to create value. This is why employee behavior and motivation are such important predictors of stock market performance.”
Methodology
The ETF is linked to the Human Capital Factor Unconstrained Index which begins with an initial universe of US-listed stocks, including American Depository Receipts, of companies with market capitalizations above $1 billion.
The index aims to quantitatively and systematically capture risk premia associated with the human capital factor. It does this by harnessing the data analysis capabilities of Irrational Capital to aggregate millions of employee responses about deeply emotive characteristics such as trust, purpose, pride, psychological safety, point of view diversity, motivation, and transparency, among others.
The methodology selects the companies with the highest human capital scores, targeting a portfolio of 70 to 100 stocks which are equally weighted at each quarterly reconstitution and rebalance.
Dan Ariely added: “We believe we have discovered a way to quantitatively capture the powerful connection between human capital and financial outcomes in an investable way. By uncovering the capital in human capital, we help create investment options that prove that doing the right thing pays.”
Kristof Gleich, President and CIO, Harbor Capital Advisors, said: “There has never been a more important time to focus on the well-being of the relationship between companies and their most important asset, their people. With Irrational Capital’s unique insights into the space, we’re confident we have a compelling solution for clients interested in this new field of investing. We believe human capital remains misrepresented by outdated accounting rules that could lead to market inefficiencies over the longer term. Thoughtful active approaches can exploit those inefficiencies.”