Sub-advised fund specialist Harbor Capital Advisors is on a mission to transform its business in order to secure a future in the rapidly evolving distribution landscape. The blueprint involves doubling the size of its salesforce and pushing into a host of new fund structures.
Speaking to Fund Intelligence in Chicago this week, president Kristof Gleich, chief investment officer Brian Collins and head of distribution John Halaby ran through why, after having offered only single manager subadvised funds over its 34-year history, now is the time for change.
- Scroll to the end for a breakdown of how Harbor is tackling the coronavirus epidemic
Gleich, who joined the firm in 2018 from JPMorgan Wealth Management, where he was head of manager selection, explained the ultimate goal is to become vehicle agnostic.
“One of our strategic priorities is our vehicle expansion effort … if we only offer ‘40 Act mutual funds, we’re only offering part of the solution, and we want to be in the business of holistic solutions for our clients,” he said.
Last month, Harbor took its first step outside of the mutual fund wrapper in its history, with the launch of a CIT version of its flagship $29bn Harbor Capital Appreciation Fund (HACAX), subadvised by Jennison Associates.
In its mutual fund form, the strategy has experienced significant net outflows in recent years, including $3bn in 2019, $1.9bn in 2018 and $3.1bn in 2017, but strong performance plus market appreciation — until recently — kept its AUM total on the rise.
Speaking at the time of the launch, Gleich told Fund Intelligence that had the strategy been offered in different structures previously those outflows might have been prevented.
I don’t think we’ll be ready to come to market with a nontransparent ETF until, at the earliest, late 2020 or early 2021 … I would expect we come to market with fully transparent ETFs [first] and I wouldn’t be surprised if we ultimately have both
More CITs are planned, depending on the outcome of discussions with existing and new managers to determine which will have most appeal in the retirement channel.
“CITs are becoming the preferred investment vehicle within the retirement channels, and we could see an equivalent happening in the wealth management channel, where an active ETF becomes the favored vehicle of how to consume active management,” Gleich said.
To that end, the firm is currently exploring the launch of both fully transparent active ETFs and nontransparent ETFs, with transparent products likely to hit the market quicker.
Gleich pointed to diversified fixed income strategies with low portfolio turnover as potential candidates to sit in an active wrapper.
“In addition to that, there may be strategies that will run in a nontransparent way, and we’re working through that at the moment. I don’t think we’ll be ready to come to market with a nontransparent ETF until, at the earliest, late 2020 or early 2021 … I would expect we come to market with fully transparent ETFs [first] and I wouldn’t be surprised if we ultimately have both,” he said.
He described the current battle between the different nontransparent structures as a “Betamax versus VHS moment,” and that once there is more clarity around the best structure “we will move quickly into the market.”
“There are some formidable competitors that have filed to launch recently with Precidian, with very good alpha that’s going to be offered in a more tax efficient vehicle for the wealth space,” he said.
Model delivery is the other area Harbor is exploring, with the potential to combine its manager selection capabilities into an asset allocation framework; other potential structures are “on the whiteboard.”
The push into a wide variety of structures isn’t just to enable the firm to adopt the kind of consultative sales approach that has been spreading across the industry. It is also eyeing up the opportunity to become a more attractive distribution partner to subadvisers, particularly those Harbor is sourcing overseas and bringing to the US market on an exclusive basis.
“It will help us attract different subadvisers. If we’re able to offer a more comprehensive vehicle chassis, we’re able to take that subadviser to the entire market across multiple channels that we wouldn’t be able to do if we just had ‘40 Act funds,” Gleich explained, adding that he wants to ensure partnerships are more strategic to better leverage managers’ intellectual capital.
Harbor doubling the size of its distribution team
In order to change course, Harbor is having to make substantial changes to its distribution team, marketing efforts, how its manager research component functions, and how all of those pieces integrate with each other.
Last year, Halaby joined the company as head of distribution, moving over from a position as head of financial institutions at T. Rowe Price.
Under Halaby, Harbor is doubling the size of its distribution team by the end of next year, filling in coverage gaps in the defined contribution and independent adviser channels, and adding “strategy directors” to sit between sales and manager research to fill a consultative role for clients.
The firms that will be lasting winners are those who are much more deliberate about how they spend their time, their resources, and who they partner with
Halaby said the new distribution unit will be “marketing led” and will be structured with generalist salespeople supported by vehicle or product specialists.
“Strategy directors are a skill we are developing internally, and then also looking to hire folks who are insatiable in their desire of extracting information and data from clients,” he said. “If they aren’t obsessing over looking to extract another nugget of information, then we’ll lose. We don’t expect to lose.”
A new head of national accounts has been hired in recent weeks to fill in knowledge on distribution CITs to the DC channel, and a marketer is currently being sought with specific experience in ETFs.
In the adviser sphere, the focus is going to be on independent advisers who “aren’t linked too tightly to a large mothership.”
“I think the wirehouses present a tremendous opportunity, but you have to be ready. You have to have the resources from a human capital perspective to effectively win in those networks, that is something that’s in a future plan for us but not there today,” Halaby said. “[In the past] the approach was hire great salespeople and they’ll figure it out. I firmly believe those days are over. The firms that will be lasting winners are those who are much more deliberate about how they spend their time, their resources, and who they partner with.”
As well as building out a larger distribution organization, Harbor has also changed the structure of its manager research team, and how that team integrates with the wider firm.
Collins explained that in the past it was a team of generalists with the straightforward goal of finding great managers, then answering the question of how Harbor could work with them in a mutual fund structure.
“We turned over a lot of rocks. We’ll still be turning over rocks, but we’re going to do it in a more structured way,” he said.
The manager team has now been divided into four clusters, with a managing director in charge of each who is not only responsible for research on managers, but also research on the asset class in order to better identify themes the firm should be exploring strategy launches in.
There is a growth and innovation cluster, a value and alternative cluster, a fixed income cluster and an international/multi-asset cluster.
Collins said while mutual funds are “an incredible utility” they are also “a bit of a blunt instrument.” The goal now will be to isolate the specific attributes of managers that are “truly differentiated” and incorporate them into solutions not constrained by the ‘40 Act wrapper, with the enhanced distribution capabilities intended to generate enough demand to encourage managers to work on custom solutions that are not off-the-shelf.
“From when we last spoke [in June] to now there is a much more significant integration across product, distribution and research, working very collaboratively,” he said. “In fact we have one project underway where all three are sitting down regularly and working on designing the blueprint for a new type of investment strategy.”
Gleich added that Collins’ team is now “much more focused on disruption,” and that where managers are found with something distinctive “we need to back them and create strategic relationships … I think managers would love to find a single distribution partner.”
How Harbor is handling the coronavirus epidemic
On Monday, Harbor will be conducting a firm-wide work from home day to test its off-site facilities. It also turned its distribution off-site day this week into a virtual event using Microsoft Teams.
“Any decisions that we make are around putting safety first and foremost, and anything economic and commercial is secondary to that,” Gleich said. “So we have been ratcheting up our business disaster recovery … and we’ve taken necessary precautions around travel restrictions.”
Halaby added that so far there has been minimal pushback from clients on visiting in person, but that the situation could rapidly change.
“Even just last Thursday feels materially different than today … I think the larger prospects and clients that have more of a global footprint have put their own restrictions in place, and obviously we’re abiding by those,” he said.
What’s concerning is ultimately nobody has the exact playbook … you have to make sure you’re getting good information
In terms of oversight of how all of the firm’s subadvisers are coping, Collins said that as the firm specializes in finding long-term managers, most are not undertaking any trading activity, and that the expectations regulation wise from the SEC and Finra mean continuing to operate in these conditions is a standard part of their planning.
All of Harbor’s subadvisers are subject to legal and compliance assessments annually, in addition to investment due diligence, with regular follow-ups to check on improvements requested.
“It seems that most people are still trying to digest the news and not necessarily trying to draw conclusions just yet. We’ve been in continuous contact with our subadvisers,” he said, adding that his team has been pulling together information on how strategies have performed versus expectations in this environment, which is being fed to the distribution team to assist in client conversations.
Halaby added that there has not been an unusual volume of client inquiries about Harbor’s strategies.
“The half-life of useful information is incredibly short. We don’t see a quick resolution. We expect heightened volatility in the markets for probably the next three, maybe even six months,” Gleich said. “What’s concerning is ultimately nobody has the exact playbook … you have to make sure you’re getting good information.”