Harbor takes first ever step outside mutual funds with CIT version of $33bn sub-advised fund

Firm is also considering nontransparent ETFs in bid to become vehicle agnostic, following years of outflows from its flagship strategy

Harbor Funds has announced it is stepping outside of the mutual fund realm for the first time with the launch of a CIT version of its flagship equity strategy, as the firm bids to become vehicle-agnostic following years of outflows.

The fund firm has established the Harbor Trust Company in order to offer CIT structures for various existing strategies. A CIT version of its flagship $33.6bn Harbor Capital Appreciation Fund (HACAX), sub-advised by Jennison Associates, is the first strategy to be ported to the CIT format.

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. Strong performance has kept its AUM total on the rise however, and the fund still manages $10bn more than it did in 2013.

Kristof Gleich, who became president of Harbor Capital Advisors in late 2018 after moving from JPMorgan, told Fund Intelligence that had the strategy been offered in different structures previously those outflows might have been prevented.

CITs are a natural extension of the current client base that we cover. We are historically strong in the retirement and 401(k) space, and we’ve seen tremendous growth in that market around CITs

“To compete in an environment like we are in, you need to skew the odds, which means having as many different vehicles as you can … having just one access point to the strategy has been unfortunate. We’re addressing that today,” he said. “Outflows would have been captured potentially by a CIT offering.”

He said that becoming vehicle agnostic is a strategic priority for Harbor, to be implemented over many years, as clients now want to deal with firms on a strategy basis then take their pick of structure.

“This is very significant for us as a firm … this is our first new vehicle offering since we introduced our first mutual fund to the market back in 1986,” Gleich added.

CITs specifically have been an area of significant product development in recent years. In September last year Federated Investors partnered with M&T Bank to launch its own CITs, and Wilmington Trust and Nasdaq combined to launch the first ever CIT tickers — helping to overcome the standardization and transparency drawbacks of the structure.

Speaking at the 2019 Spark Forum, Wilmington’s head of retirement distribution Rob Barnett argued that the CIT industry will rival the mutual fund industry in terms of scale within the next five years.

“CITs are a natural extension of the current client base that we cover. We are historically strong in the retirement and 401(k) space, and we’ve seen tremendous growth in that market around CITs. [Industry-wide] assets tripled from roughly $1trn to $3trn in the US over a 10-year period,” Gleich said.

He added that CITs have become the vehicle of choice in the retirement channel, and managers without a CIT offering are at a material disadvantage, or being shut out of searches altogether.

Harbor is currently in discussions with all of its sub-advisers to determine which strategies might hold the most appeal in the retirement space, and how to prioritize which to launch a CIT structure for next.

The US growth equity Capital Appreciation strategy was chosen to be ported first, given its flagship status and because Harbor expects the combination of a mainstream asset class and strong track record to resonate well in the retirement channel.

Morningstar has given the mutual fund version a Silver rating, and its investor share class has beaten both its category average and benchmark index over three years, plus its category over five and 10.

Pricing wise for the CIT, there will be different price points depending on AUM, with the most expensive in line with the 58 basis point expense ratio the mutual fund’s retirement share class charges.

“This is step one in a multi-year, and I would say multi-decade, journey of becoming vehicle agnostic. CITs make sense first,” Gleich said.

He added that nontransparent ETFs are the other structure that Harbor is giving serious consideration to, as he sees potential for the vehicles to become “a vehicle of choice for taxable clients.

Harbor is in talks with multiple companies at present regarding different NT ETF structures, but is yet to settle on one.

This is not the first step away from its roots that Harbor has made in recent months under the leadership of Gleich, CEO Charles McCain, CIO Brian Collins and new head of distribution John Halaby.

In September last year, Harbor announced the launch of a new suite of low volatility equity funds, managed for the first time in its history by an affiliated company.