Harbor Scientific Alpha High-Yield ETF’s model-based approach distinguishes it from fundamentally focused peers but remains unproven over a full credit cycle, supporting a Morningstar Medalist Rating of Neutral.
This strategy is still fairly new. Subadvised by BlueCove Capital, this exchange-traded fund was launched in 2021 but had a small asset base until it absorbed about $100 million in assets from Harbor High Yield Bond in 2023. Most of BlueCove’s portfolio managers lacked public track records prior to joining during the firm’s 2018 founding. Head of portfolio management Mike Harper is the exception; he previously spent 19 years as a senior fixed-income portfolio manager at BlackRock, during which he demonstrated skill managing UK corporate bonds across multiple offerings. The other three comanagers also joined from BlackRock and form a seasoned cohort, averaging over two decades of experience, but didn’t have publicly available track records managing assets prior to taking over here.
BlueCove’s model-driven approach to high-yield bond investing still needs to be tested over a longer period. The firm considers sentiment-based metrics (in addition to those derived from fundamental- and valuation-based factors) to produce proprietary signals that drive the strategy’s allocation models; this separates its process from most high-yield bond Morningstar Category peers that stick to traditional fundamental analysis. This strategy eschews investment-grade bonds and bank loans and seeks to generate competitive returns through bottom-up selection within its universe of below-investment-grade cash bonds. The comanagers avoid significant interest-rate positioning bets, maintaining a tight duration band of plus or minus 0.2 years around their high-yield index.
SIHY has impressed so far, albeit with a limited history. Its 2.6% drawdown from its first full month in October 2021 through May 2023 was less severe than its ICE BofA U.S. High Yield Index benchmark’s 4.5% setback as well as its median high-yield bond category peer’s 4.2% loss. Still, more time is needed to determine whether this differentiated approach can establish a durable edge versus more traditional rivals.

Analyst Rating

Distinct, But Unproven.

Associate Analyst

Max Curtin

This unique, model-driven approach stands out from peers that use more traditional fundamental credit analysis. It has yet to be tested over a full credit cycle, supporting an Average Process rating.
BlueCove seeks differentiated outcomes to traditional asset managers by extending beyond the scope of fundamental credit analysis. The comanagers leverage the firm’s proprietary technology to maintain pace with the ever-expanding breadth of global liquid credit markets. From an opportunity set consisting of below-investment-grade cash bonds, the team models nontraditional factors, like equity earnings momentum, to incorporate related market sentiment into relative valuation assessments. Adjacent models dealing with risk, transaction costs, and liquidity are layered in with the joint signal outcomes to inform optimal portfolio construction. Concentration guardrails, like 1.25% maximum single-issue positions and 2% maximum issuer exposures, are standard relative to peers. This results in a strategy that looks to security selection to outperform its ICE BofA U.S. High Yield Index as well as its high-yield bond Morningstar Category peers.
While this approach has endured its fair share of macro-induced headwinds during its first two years, the efficacy of this quantitatively driven process will remain unclear until it proves resilient through credit-driven market events. Before then, it will be challenging for this process to establish a clear competitive edge over its larger, traditional peers.

Average

Process

Subadvisor BlueCove is still in its formative stages despite the guidance of an experienced manager cohort, underpinning an Average People rating.
BlueCove has amassed ample investment and quantitative talent since its 2018 founding, but most of these professionals lack established public track records. All of this strategy’s four portfolio managers joined BlueCove by way of BlackRock, but only head of portfolio management Mike Harper has a publicly available record managing assets; this came during Harper’s 19 years as a senior fixed-income portfolio manager at BlackRock, during which he predominantly managed UK corporate bonds. CIO Benjamin Brodsky, head of credit Benoy Thomas, and head of asset allocation Garth Flannery round out an experienced management group guiding this team-based approach (despite the absence of public track records, these managers each have 23 years of industry experience). While this experience stood out during Harbor’s vetting process of BlueCove, the London-based fixed-income boutique needs more time to establish a durable competitive edge.
Among BlueCove’s 65 employees as of April 1, 2022, about 40 support this strategy. This includes contributors to research and development, systems building, model construction and refinement, and trade monitoring. These functions are all central to BlueCove’s quantitatively driven approach, which is predicated upon the continuous reevaluation and improvement of these various processes.

People

A history of thoughtful manager selection and continued investment in its research team underpin Harbor Capital Advisors' Above Average Parent rating.

Harbor is an independent subsidiary of Orix Corporation Europe N.V., itself a subsidiary of Japanese financial-services firm Orix, which bought Harbor's previous parent Robeco in 2013. Today Robeco, Harbor, and other asset managers operate autonomously under Orix, which takes a hands-off approach toward its subsidiaries.

Harbor has long been known for hiring best-in-class subadvisors to manage its roughly $64 billion held almost exclusively in actively managed mutual funds. Yet the firm has expanded its vehicle lineup in recent years: from February 2020 through March 2022, the firm introduced a collective investment trust version of an existing open-end strategy as well as six transparent, active exchange-traded funds. The firm has also shaken up its subadvisor lineup, removing Pimco from Harbor Core Plus HABDX in February 2022 and hiring smaller and less established asset managers like BlueCove and Quantix Commodities to manage its newer ETF offerings. These moves break new ground for Harbor, but the firm has invested in new data and analytics tools to help its capable manager research team oversee the expanding subadvisor roster and has retained long-standing subadvisor relationships where they continue to add value.

Above Average

Parent

Harbor Scientific Alpha High-Yield ETF

SIHY is an actively managed fund of high-yield, USD-denominated corporate bonds selected based on a proprietary scientific method.

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