Power by the People in 2024 and Beyond: A Q&A on the Human Capital Factor®

According to Harbor’s partner Irrational Capital, human capital should be viewed as an asset. That said, human capital is systematically overlooked, mispriced, and ignored because it has been difficult to define and quantify – until the development of the Human Capital Factor®.

We talked to Irrational Capital’s Chief Investment Officer Scott Colson ahead of the new year to discuss this new, uncorrelated alpha factor, and the opportunities it may present for investors in 2024 and beyond.

What is the Human Capital Factor®?

The Human Capital Factor® (HCF®) is an investment factor that looks to quantify levels of motivation and engagement of a company’s workforce and capture the powerful connection between human capital and future stock performance. HCF® utilizes a proprietary scoring system to assist in addressing a market inefficiency and help afford access to this new alpha factor with differentiated and uncorrelated excess return potential.

What makes the HCF® unique?

Irrational Capital’s proprietary, distinct, and longstanding data spans more than 17 years and covers over 7,500 companies for a total of more than 750 million data points assessed.

The composition of portfolios based on the HCF® is based 100% on behavioral data – there is no financial information used in the selection of stocks. No financial metrics and therefore no possibility of over-fitting. Our research is technically and financially sophisticated and has been independently validated by industry leaders. For these reasons, we believe the alpha generating signal derived from these behavioral insights – the Human Capital Factor® – makes it unique relative to other investment factors.

What do you believe gives the HCF® an edge entering 2024?

Investors are always looking to identify new factors to gain an edge in the market. While “extrinsic” motivating considerations such as compensation, benefits, and training hours have historically been available research factors, their impact on future equity performance is quite muted, in our view. We have found that people have unfortunately ignored the “intrinsic” motivational aspects of the workplace when they evaluate companies for security price purposes because they are challenging to measure. What we have done is find reliable and longstanding data sources and, through our work, make this overlooked source of alpha potential and market inefficiency accessible for investors. By uncovering the HCF®, we have enabled investors access to what we believe is a robust, consistent, key driver of performance, and source of differentiated, orthogonal return potential.

Where does the HCF® fit into my portfolio as I plan for 2024?

We think that the potentially distinct excess return pattern produced by the HCF® provides flexibility in implementation into a well-balanced portfolio. For example, an investment in the Harbor Human Capital US Large Cap ETF (HAPI) and the HCF® could be used to help complement an existing core exposure in an effort to help lower volatility while aiming to retain a correlation of about 1 to the S&P 500. On the other hand, HAPI and the HCF® could also be used as a core equity replacement with the goal of achieving alpha and lower levels of volatility than the S&P 500 alone.

How can I invest in the HCF®?

As more data becomes available, Harbor finds it especially important to align with investment managers that are ahead of the curve with what we deem to be established investment intelligence moats. The Harbor Human Capital Factor Unconstrained ETF (HAPY), the Harbor Human Capital US Large Cap ETF (HAPI), and the Harbor Human Capital Factor US Small Cap ETF (HAPS) present three such examples and methods to invest utilizing the HCF®. Learn more on our website.

Important Information

Investing involves risk, principal loss is possible. Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. Shares are bought and sold at market price not net asset value (NAV). Market price returns are based upon the closing composite market price and do not represent the returns you would receive if you traded shares at other times.

HAPS, HAPY and HAPI seek to provide investment results that correspond, before fees and expenses, to the performance of their prospectus named index. The indices are designed to deliver security exposure to companies that have high human capital scores, based on Irrational Capitals Human Capital Factor. For more information regarding , please refer to each Funds prospectus.

HAPI: There is no guarantee that the investment objective of the Fund will be achieved. Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. The Fund may not exactly track the performance of the Index with perfect accuracy at all times. Tracking error may occur because of pricing differences, timing and costs incurred by the fund or during times of heightened market volatility. The Fund relies on the Index provider's methodology in assessing whether a company may be considered a corporate culture leader. There is no guarantee that the construction methodology will accurately assess a company to include or exclude it from the index which could have an adverse effect on the Fund's returns. The Fund's assets may be concentrated in a particular sector or industries to the extent the Index is concentrated and is subject to the risk that economic, political, or other market conditions that have a negative effect on that sector or industry will negatively impact the value of the Fund.

Companies in the information technology sector can be significantly affected by short product cycles, obsolescence of existing technology, impairment or loss of intellectual property rights, falling prices and profits, competition from new market entrants, government regulation and other factors.

HAPY: There is no guarantee that the investment objective of the Fund will be achieved. Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. The Fund may not exactly track the performance of the Index with perfect accuracy at all times. Tracking error may occur because of pricing differences, timing and costs incurred by the fund or during times of heightened market volatility.

The Fund relies on the Index provider's proprietary scoring methodology in assessing whether a company may be considered a to have a strong corporate culture. There is no guarantee that the construction methodology will accurately assess a company to include or exclude it from the index which could have an adverse effect on the Fund's returns. The Fund's assets may be concentrated in a particular sector or industries to the extent the Index is concentrated and is subject to the risk that economic, political, or other market conditions that have a negative effect on that sector or industry will negatively impact the value of the Fund.

HAPS: There is no guarantee that the investment objective of the Fund will be achieved. Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. Stocks of small cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies. The Fund may not exactly track the performance of the Index with perfect accuracy at all times. Tracking error may occur because of pricing differences, timing and costs incurred by the fund or during times of heightened market volatility. The Fund relies on the Index provider's methodology in assessing whether a company may be considered a corporate culture leader. There is no guarantee that the construction methodology will accurately assess a company to include or exclude it from the index which could have an adverse effect on the Fund's returns. The Fund's assets may be concentrated in a particular sector or industries to the extent the Index is concentrated and is subject to the risk that economic, political, or other market conditions that have a negative effect on that sector or industry will negatively impact the value of the Fund. The Fund’s assets may be concentrated in a particular sector, industry or group of industries to the extent the Index is so concentrated and could subject the Fund to the risk that economic, political or other conditions that have a negative effect on the Fund. There can be no assurance that the Fund will grow to or maintain an economically viable size, in which case the Board of Trustees may determine to liquidate the Fund.

Diversification does not assure a profit or protect against loss in a declining market.

Alpha refers to excess returns earned on an investment above the benchmark return when adjusted for risk.

Idiosyncratic alpha is the portion of a strategy’s return not explained by the market and risk factors.

A moat is a distinct advantage a company has over its competitors that allows it to protect its market share and profitability.

An orthogonal return is one that is statistically independent.

The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.

The views expressed herein are those of Irrational Capital at the time the comments were made. These views are subject to change at any time based upon market or other conditions, and the author/s disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions are based on many factors, may not be relied upon as an indication of trading intent. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

Foreside Fund Services, LLC is the Distributor of the Harbor ETFs.

3274054