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All-Star Managers Make This Firm a Beacon

Harbor Funds charge a fair price for solid strategies.

Courtney Goethals Dobrow, 11/11/2010

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Harbor Capital Advisors is known in the mutual fund industry for hiring best-in-class subadvisors to run its mutual funds. The firm has a long history of selecting money managers since it began as the in-house pension manager for Owens-Illinois Inc. OI. Starting in 1969, Harbor began managing O-I employees' assets as a benefit offered by the company. In 1983 it was spun out of Owens-Illinois, and in 1987 the firm started running public mutual funds while continuing to manage corporate pension money. Dutch asset manager Robeco Groep N.V. purchased Harbor from Owens-Illinois in 2001. (Robeco Groep is in turn owned by the Netherlands-based bank, Rabobank.)

Under Robeco's ownership, Harbor autonomously manages more than $55 billion in assets (as of Sept. 30, 2010) across its funds and corporate pension plans. While Harbor's CEO and board chairman Dave Van Hooser reports to Robeco's CFO, the parent company's approach is hands-off, and the communication between the two is limited. Robeco will regularly send management board members to sit in on Harbor board meetings, but Harbor says Robeco's attendance is primarily for sharing ideas and best practices. It's also worth noting that Harbor, whose entire lineup is subadvised, doesn't use Robeco to manage any of its funds and says it's never felt any pressure to do so.

Harbor's use of subadvisors is its defining characteristic. Rather than building a staff of investment personnel to manage funds in-house, Harbor's approach is institutional in nature, hiring topnotch managers to run funds for both institutions and individual investors. The firm says the subadvisory approach is an inherently arms-length one--managers are external partners as opposed to colleagues, making it easier to rigorously assess them on an ongoing basis (and fire them if needed). Unlike some firms, Harbor uses one manager or team of managers from the same firm to run each fund. Harbor maintains that this model gives it a better possibility of outperforming because the approach doesn't dilute managers' best ideas. Relying on a single team makes it doubly important to get the right money manager in place at the beginning, especially because Harbor says that a manager change is almost always followed by significant outflows.PAGEBREAK

Harbor has a thorough, repeatable process in place for evaluating and selecting managers. It starts with the six-person investment- and portfolio-management team. They look for managers with consistently good risk-adjusted performance over the long term and clearly articulated and repeatable strategies. The next phase is having managers make presentations to the investment review committee (composed of the investment- and portfolio-management team, the CEO, the chief compliance officer, and others). If the subadvisor passes that test, the fund board renders a final decision.

Once a manager is brought into the fold, the monitoring process is ongoing and similarly rigorous. Harbor does its own regular attribution studies, quarterly manager interviews, and qualitative research. It also evaluates personnel and looks for incentive plan changes. However, Harbor doesn't tend to make a lot of changes to its lineup, and it says the changes it does make are never solely performance-based. In 2007, for example, Cohen & Steers replaced Armstrong Shaw on Harbor Large Cap Value HAVLX based on Harbor's concerns about changes to the underlying team. And Harbor says its confidence in Pzena Investment Management's (which has run Harbor Global Value HAGVX since its 2006 inception) strategy remains intact, despite that fund's poor track record.

Harbor's process isn't too different from that used at other fund firms that utilize a subadvisory model, but Harbor has proved it's able to employ the model reliably over time and regularly give investors access to topnotch managers at cheaper prices than they're available elsewhere. For example, Morningstar Fund Analyst Pick Harbor Real Return HARRX charges a 0.60% expense ratio. The comparable share class (both have $1,000 investment minimums) of the fund it's modeled on, PIMCO Real Return PRRDX, has a price tag of 0.85%.

Harbor encourages its investors to share its long-term focus. The firm discourages market-timing and excessive trading across its fund lineup. Further, Harbor charges 2% redemption fees on its international equity fund lineup and a 1% redemption fee on Harbor High-Yield Bond HYFAX to discourage market-timing.

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