The Exchanges

Q Which two people have had the biggest impact on your professional life?

A I've been lucky to have many, but there are two, both of them from JP Morgan, Jamie Kramer and Ted Dimmick. Jamie hired me at JP Morgan, and she gave me A shot at leadership before I was probably ready for it because she saw potential and I'll be forever thankful to her for doing that. And she taught me how to build a business within JP Morgan as well. She's awesome. A force of nature. One of the smartest people I've ever worked with and ever met, frankly, and I owe her a lot. And Ted Dimmick was one of my bosses at JP Morgan as well. He taught me that you can be a ruthless competitor, but also not take yourself too seriously, have humility at the same time, and have a sense of humor, and I took that from him, and he's one of my best friends as well, so those two without doubt.

AI assessment note: “there are two, both of them from JP Morgan, Jamie Kramer and Ted Dimmick.”

Q So when you then came to Harbor, how did you think about the most important takeaways you had from each that you wanted to bring into what you were doing?

A One of the things that I learned at JP Morgan was this notion of the competition is outside the four walls of where you're working. So yes, there's some internal competition, but the real competition lives outside. And if you are doing something successful in a business, if you're earning a decent return doing a business, whatever business it is, credit cards, asset management, wealth management, You should be behaving as if competition outside of the four walls are trying to eat your lunch and compete whatever it is that you're doing, and they're gonna be figuring out how to do what you're doing Better, faster, cheaper, and so we were always encouraged to try and improve at whatever it was that we were doing, and so there was always a culture of continuous improvement at JP Morgan that I took for granted there, and it really stuck with me. Harbour had been in existence for 40 years, and when I joined Harbour, We were a mutual fund company. We refer to ourselves as the Harbor Funds Group, and we offered a select offering of mutual funds that were run and sub-advised by outside boutique money managers, and that's what we did, and that's what we had done since 1986, and we did it well. It felt a little bit like that was what we were always going to do. So The culture I've learned from JP Morgan to bring here was you should continually be pushing and challenging yourself, thinking…

AI assessment note: “The culture I've learned from JP Morgan to bring here was you should continually be pushing”

Q What have you found effective in building awareness so that you get adoption on these strategies in the space?

A That's a good question. So this is a big change. 10 years ago, the playbook would be hire a good salesperson that has good industry contacts, and then they go out and they distribute and they raise capital for you. I think now we use much more of a tailored data approach. And so we try and look at specific cohorts of advisors and investors Do they hold ETFs? Yes or no. Do they run their own investment practice? Do they use active or do they use index products? And with the use of data, you can be a lot more targeted than you used to be able to be, which is good because I think more targeted approach is more efficient. It's more efficient for us. We're not wasting people's time that don't want to hear from us. And then dripping on those potential clients, the stories that we have about our managers, Why we're convicted in them, keeping them regularly updated with performance, acknowledging that often investors rightly want to see two, three years of the track record build before they're willing to really kick the tires on us, and bringing them something special. I'll give you an example. We work with an awesome firm out of Copenhagen in Denmark called Sea Worldwide. They came out of Carnegie Asset Management, But they do international stock picking for us, and they are a discretionary, concentrated, long-term, thematic stock picker, and they run an international ETF for us. The …

AI assessment note: “now we use much more of a tailored data approach.”

Q What does that portfolio of your relationships look like today in terms of number and coverage?

A So we have about sixty two billion of assets under management. We have about 20 managers across the world that we have strategic relationships with, that we work with actively. Now, some of those we've had for over 50 years. We were one of the first investors in a firm called Jennison Associates, who are a boutique firm Based out of New York and they specialize in growth investing and specifically large growth investing. And when that firm was established back in the 19 seventies, we invested with them. So we've had that partnership for a long, long time. And then we have some newer partnerships where we're sort of growing them, where we've had a relationship for a year or two. So it's a combination of different relationships by duration. It's a combination of relationships by different styles. And then we have different relationships with some quant managers as well. So we have, I'd say a pretty broad range of investment approaches. We don't go and only look for value managers or only look for growth managers or only look for small cap managers. We try and find managers that are masters of their own craft that do what they do, but do it exceptionally well and build our offering that way.

AI assessment note: “We have about 20 managers across the world that we have strategic relationships with”

Q As you're looking out to say the next manager you might partner with, what are the characteristics that you're looking for that seem to have worked to both fit into your portfolio and help a manager get to the next level?

A A few things that we look for in managers. Relevant experience, and this doesn't mean a track record that must have three years, five years, seven years, or whatever it is, but there's got to be obviously some form of relevant experience. We do a lot of work on looking at past performance. We break past performance apart, and we are Looking for alpha. We're trying to strip out all of the factor noise, the sector noise, and we're trying to really isolate skill. So if you think you have skill and we think we can demonstrate that by isolating the alpha, that's a great place to start. We are looking for skill or an edge, and we spend a lot of time internalizing what is that skill or what is that edge. And generally, I think there's two different camps that skill or edge fall into. You either, number one, have an interpretational edge, which is where you're privy to the same information as everybody else, but you interpret it in a different way and are on average more right than wrong. And then there are managers that have an informational edge. Now I have to be careful when I say informational edge, because obviously Reg FD, when did Reg FD come in the early 2002 1002 1001, something like that, which essentially meant all investors needed to get access to the same information at the same time. And you certainly can't trade or invest on any material non-public information, but in th…

AI assessment note: “A few things that we look for in managers. Relevant experience... Looking for alpha.”

Q Why don't you take me back to the path that got you into the investment business in the first place?

A Sure. So I'm originally from the UK as born and raised there and studied there. I actually studied physics at university and made the transition from science to finance. I got my first job in the business at Goldman Sachs. So I joined the Goldman Sachs graduate program, 23, 24 years ago now, whenever it was, and worked there for seven or eight years. Couple of different roles at Goldman, but finished up the last five years in asset management in a group called the global manager strategies group, which is where I began to cut my teeth in effectively what I've been doing my entire career since, which is the business or the craft of investing in money managers and allocating to money managers on behalf of clients. So I began that journey at Goldman Sachs in London within GSAM. I then also spent the best part of a decade at JP Morgan, that small boutique finance firm. The JP Morgan, rather than the asset management side, it was on the wealth management side, but I ran the group there globally by the end that was responsible for research, sourcing, selection, monitoring, and firing of money managers on behalf of wealth management clients globally. So that was a big Research team of 60 people, five hundred billion dollars of assets under management, and I began that journey in London, and JP Morgan moved me to New York. So I moved to the US 10 years ago, and then about six years ago…

AI assessment note: “I actually studied physics at university and made the transition from science to finance.”

Q So as you're conducting this assessment of the internal team, the external manager relationships that will be the right ones going forward, which takes time to do all that, what was happening in the external environment to the assets of Harbor as you were trying to figure out how you were going to move forward?

A This is not unique to us, but our asset base was shrinking. The year I joined, I think we had outflows of about twenty two billion dollars in that calendar year. That was our knock on wood, our worst year in our history and will never be repeated again. And it's because we were in the wrong parts of the business with the wrong type of vehicles. So generally in the industry, there was a movement away from active investing, and there still is to a certain degree, and there was a movement away from mutual funds, and that was all we had. So it was really hard for us to play defense, let alone offense. And so I wanted to quickly establish New relationships, new managers, new offerings that would allow us to play offense as well. Ultimately, what we were trying to do is get to the point where, if you like, our More mature business that is in outflows begins to be offset by a newer business that you're building, which is in areas of the markets or is in vehicles that people want, and at some point those two offset each other. That's when you go through a period of stabilization, but then ultimately you get to a positive tipping point where the new has displaced the old, and again, knock on wood, but I think 2024 is that year for us. And so we've gone from that first year of losing twenty-two billion of assets Which is a big number. And now we are about four billion of net inflows this…

AI assessment note: “our asset base was shrinking. The year I joined, I think we had outflows”

Q What's an example of a differentiated manager that you came across from being open-minded?

A I'll share one that I think will make you smile. So we have three ETFs with a firm called Irrational Capital and Irrational Capital as co-founder is a gentleman called Dan Ariely. Dan is a leading behavioral economist in the world. He's a professor at Duke University. He's a multi-time bestselling author. He and his research firm have created something called the human capital factor. The human capital factor is trying to measure the value of employees, the value of engagement. The twist with this story, Ted, is I first heard about Dan's research into the human capital factor when he was a guest on your show. Which was, I think, about four years ago, something like that. I do a lot of running. I was out for a run four years ago, whenever it was, listening to Dan talk about the value of people, and I was listening to Dan talk about the fact that This isn't measured correctly in investing. And then I was reminded of what I've heard and what I'm sure all of your listeners have heard many, many times before. Any successful business in any industry in any region in the world says some version of the following. Our most important asset are what? Our people. And they say it because it's true. People are what makes a company special. People are what makes a company tick. People are what makes a company Creative and innovative. And yet when you look economically how people are accounted…

AI assessment note: “we have three ETFs with a firm called Irrational Capital and Irrational Capital as co-founder”

Q When you identify a manager like OC or Irrational Capital and you get excited about what they're doing, what's your pitch to them of why they should work with Harbor?

A I've had to make that pitch a few times. So, The pitch is, if you're a specialized boutique firm, it's going to be very difficult on your own to build the relationships with a network and a region as big as the US. And so if you're based in Copenhagen or in London or wherever really, It takes decades to build the network of connections, to have the right platform placements, to have enough people getting out there and getting your story out for you. And I don't want to say you need an army, because you don't, because with data, you can be a bit more focused. But you know, we have a marketing and distribution effort of about 75 to 80 people. Obviously, it's expensive. It's hard to replicate, and so we want to let our managers do what they do very, very well, which is alpha generation, and then we want to give those managers access to the largest marketplace in the world, which is the U.S., and at the same time, we want to do this in a highly curated fashion, and so I think one of the things that resonates with the managers as well is We will never Put our name on anything or launch an ETF or a mutual fund or a collective investment trust if we don't have strong investment conviction in that manager. So for us, everything always starts with the investment thesis. There has to be an investment thesis. There has to be an investment conviction of why we think we've found a manager t…

AI assessment note: “The pitch is, if you're a specialized boutique firm, it's going to be very difficult”

Q How did you do that in a forty-year-old organization that was accustomed to doing the same thing?

A It was really difficult. It was really challenging, because on one hand, you have to respect What made this company in the first place, the cast of characters that made it successful, but at the same time, try and balance that with heading in a new direction. And so I listened an awful lot at the beginning and tried to tease out elements of what we were good at and how we could retain those elements But point them in a new direction in a positive way. I'm definitely a glass half full person. I really enjoy leading people and I try and do it very positively and in an inclusive way. So I'm much more of a carrot than a stick person when it comes to that. But ultimately the truth is you have to do a little bit of both. And so I had to spend a lot of time looking at our lineup of managers and Really just be honest with what business we're in. The classic know your product, and our product is delivering strong investor returns and helping advisors, clients build stronger portfolios. Having that North Star that you stay true to, but delivering it in ways that you haven't been able to deliver it before. For example, embracing new vehicles. When I joined, we only had mutual funds, and now we have Almost a third of our business in new vehicles and new strategies that didn't exist five or six years ago. I quickly began to realize that there were different types of people and where they we…

AI assessment note: “I looked at this on a two by two matrix of willingness and ability”

Q So joining a mutual fund company six years ago when ETFs were on the rise seems like that would be an important inflection point in thinking about the future strategic direction of Harbor. So what happened in those early years when you came in?

A When I joined Harbor, obviously everything was new for me. It was a new culture. So I needed to sort of get up to speed with what the culture was, what our business was, really understand what markets we operated in, try and understand what we did well, and then make a pretty quick assessment of what we could do, which new markets that we could ultimately compete in. Because when I joined, we were an actively managed mutual fund company with a bias towards domestic equity. And one of the interesting trends obviously at the moment is mutual funds are rapidly being displaced as the preferred vehicle by other vehicles, depending on the channel, whether it's retirement as collective investment trusts or what everybody talks about within wealth. Clearly, ETFs are a better vehicle and a better mousetrap, so we had to embrace the way the world was going, not the way it was, and so that was a big change that we had to make.

AI assessment note: “we had to embrace the way the world was going, not the way it was”

Q So when you have this substantial increase in the supply of active ETFs because of the regulatory change and people's ability to go put these products out, how as a provider do you go about gathering assets in a distribution channel that might be different from an institutional distribution channel?

A There's a lot of competition in active management and investing in public markets in the U S it's probably one of the most competitive marketplaces that exist. And so what we try and do is we try and differentiate by product so that we have something of value to our investor base. And so when it comes to sourcing new ideas, we are very open-minded, very intellectually curious. You have to be creative. You also have to be cynical and skeptical and equal measures. So we like to think of our offering as different from the competition, and that's really, really important. In an era where so much money has gone into index investing, into Vanguard, into State Street, into iShares, There's definitely a marketplace for people that want a different experience. And so the way that we think of ourselves is as a marketplace of boutiques. So we go all around the world and we try and cherry pick the best of the best that have a distinct edge in what they do. And the managers that we look for are typically independent. They typically found the lead and A lot of the financial advisors that we work with are what we refer to as free-thinking advisors. They haven't outsourced their investment practice to some generic third-party model provider. They actually think having an investment practice is really important, and they want to be close to the markets, and that they want to be involved in the …

AI assessment note: “independence resonates with independence, and so we deliberately target free-thinking wealth advisors.”