Harbor Capital Advisors and C WorldWide Asset Management last year launched the Harbor International Compounders ETF (OSEA).
In its one year since its inception, OSEA has shown continued signs of outpacing its peers. The active ETF focuses on companies that are believed to be able to sustain growth levels well into the future.
In a two-part interview with VettaFi, C WorldWide portfolio manager Peter O’Reilly discusses the firm’s distinct investment process, trend-based stock picking, and active management.
C WorldWide’s Role in the Global Investment Landscape
Elle Caruso, staff writer, VettaFi: C WorldWide has been in the active investment space since 1986. What are the firm’s strengths and specialties?
Peter O’Reilly, portfolio manager, C WorldWide: I would say the strengths and specialties are that first, we’re focused. We’re a boutique asset manager. The word boutique, I think, is often misused in an asset management context. However, what I believe we’re trying to say is that all we do is asset management. So, we’re not an insurance company with an asset manager stuck beside it, or a bank with an asset manager. Our core focus and our core business is asset management.
We don’t try and manage everything and be all things to all people. We only try and work with what we think we have an edge at. So, in this case, the largest part of our assets, which are about $20 billion are in global equities. So it’s about 70% of our assets are in global equities, which includes the Harbor International Compounders ETF (OSEA). We also then have an emerging markets franchise, and we have a Nordic and a healthcare franchise.
If you’re speaking to Bo (Knudsen), who’s the CEO in the firm and is also a co-manager with me on [OSEA]. He would say that we put people over systems. What that means is we don’t go out and say we need a Japanese fund or an AI fund, let’s get an AI guy or a Japanese guy and just be prolific product launchers. We’re reasonably thoughtful in what we do. When we do something, we tend to do it for a long time – hence the 30 year-plus track record we have.
International Headquarters Offers Compelling Perspective
I would say the second thing that is different, we believe, is that we are based in Denmark. That may sound like the middle of nowhere Europe from an asset management context. But what it does is: Denmark, a bit like Ireland, is a very small market in the bigger global scheme of things. So if you have a $35 billion market cap company, it’s a big company in Denmark or Ireland. Still, it’s not a very big company in a global context where you have companies that have surpassed $2 trillion plus. So it means that we’re not I believe bogged down by a local bias. We must look outwards.
Caruso: That’s great. I’d love to expand a bit more on C WorldWide’s base in Denmark. Can you expand more on how that shapes the firm’s view of global equities and investment opportunities, and how that might compare to a firm based in a larger country?
O’Reilly: Due to Copenhagen having a small financial sector, I would say it helps us have a different perspective on the world. Having worked in London, which would be a big financial sector, I would say that you’re less exposed to the noise and more able to define the signal.
Harbor Capital and C WorldWide Join Forces to Launch OSEA
Caruso: That’s interesting. So why did Harbor Capital and C WorldWide partner to launch OSEA? How do the two firms work together?
O’Reilly: The inspiration for getting together with Harbor has been a long-term relationship between our CEO Bo Knudsen and Harbor’s CIO and President, Kristof Gleich. I believe they’ve known each other for about over two decades. There was a firm relationship there beforehand.
But I think what excited us about what Harbor was doing is as we’re relatively new to the U.S. So, with that in mind, we don’t necessarily have a backlog of mutual funds charging fees, etc. A partnership with Harbor provided us with the ability to enter the market and offer the end consumer the most competitive product in terms of investment returns, but also in terms of tax efficiency and fees, which in our view, is the ETF strategy. This was pretty compelling. The fact that Harbor had really embraced this and was really running with ETFs was something that was very, very appealing to us.
Secondly, [Harbor’s distribution capabilities]. We’re a small Danish investment boutique. It would be very hard for us just to land in New York and start knocking on doors. We need to have a strong partner, and Harbor fit the bill.
C WorldWide’s Distinct Approach to Stock Picking
Caruso: That’s great background. Pivoting to investment strategy, can you explain to our readers the firm’s distinct trend-based stock picking approach?
O’Reilly: C WorldWide has been around for over 30 years, and I’ve been in the investment business for over 30 years albeit maybe not with C WorldWide.
I suppose the journey I have had, and I’ve seen through my time in global investing has been we all started off as practitioners, first of all, looking at the world through the prism of geography. Then, we got more sophisticated as the years went by and started looking at sectors because sectors tend to be less correlated and so you can be more precise. But sectors tend to be defined by people like MSCI and S&P and some of them can be very heterogeneous in terms of the mix.
I suppose, where the market is going now is focusing a little bit more on thematics. C WorldWide, since the formation of the firm, has very much been of the belief that themes are a much more efficient way of investing for portfolio construction and diversification than looking through the guise of geography or sectors.
A good example of that is one of the companies in our portfolio. Atlas Copco is a Swedish company; the sector classification would be industrial, so one might think that it has a lot in common with a German or a French industrial being in the EU and then also being exposed to the industrial sector. But one would be pretty mistaken if that was one’s thought because although Atlas Copco was one of the leaders in industrial compression.
If you walk out to lunch and you see a guy with a kango hammer bouncing on the road and he’s stuck to a little trailer, that trailer is a compression, it’s providing all the power, and it’s also done at the industrial level. The reverse of compression is vacuum, and vacuum is critical in the construction of clean rooms for semiconductor manufacturing. As a result, it’s the semiconductor cycle that has very much been more of the driver for Atlas Copco. So, in reality Atlas Copco has more in common with a Taiwanese semiconductor manufacturer than it does with a German industrial.
It’s just that way of looking at the world, and, understanding the companies you own, and then understand the trends and themes that are driving it that’s more important.
We look to find themes and trends that we believe will help us find attractive addressable markets. Within those addressable markets, if we can find the right market structure, we then go shopping for the right companies. Then, assuming those companies are well managed, and they can recycle capital and have strong business models, they become potential candidates.
Stock Picking: The Healthcare Dilemma
An example of that would be… something that we call the healthcare dilemma. I would say the healthcare dilemma – or health care of the future – is very much just a function and if I use [the U.S.]as an example, whereby most western economies and developing economies are facing this demographically driven healthcare crisis.
The U.S. is the most extreme. I think 20% of GDP is currently being spent on healthcare, and that’s being consumed by the over 60s who were the fastest growing cohort. Now you could look at Japan, you could look at Germany, look at China. It’s a similar phenomenon. But the U.S. probably has the best statistics as well. We see this as being untenable going forward. When we first started looking at this, it was about 16% of GDP.
To solve this dilemma, we think companies that do two things will be beneficiaries. The first is companies that can potentially create a better outcome for the customer or the patient, and then secondly, a better outcome for the payer. Companies that we’ve identified are companies that are involved in things like testing, or in preventative medicine.
Novo Nordisk is the largest provider of diabetes therapy in the world. It’s also now the largest provider of obesity therapy. Novo Nordisk started its history as being a pure insulin company in Denmark. It then graduated to going into treating type 2 diabetes, lifestyle driven diseases, and it is moving on to become an obesity company whereby their latest drugs have been proven to reduce weight by 20 to 25%.
Solving the Healthcare Dilemma
If you look at diabetes and obesity, nobody tends to die from diabetes or obesity. But diabetes and obesity cause organ failure. So, if you can treat people early and reduce the impact of both diabetes and obesity, you can also reduce things like cardiovascular risk. There’s a recent report that says that [Novo Nordisk’s] latest drug seeks to reduce the risk of cardiovascular problems by 20%. You can a) have a better outcome for the patient and b) have a better outcome for the payer.
That’s the sort of investment thesis driven by a trend, which helps us identify an attractive addressable market. The addressable market needs to have a very strong structure. So we generally look for oligopolies, and in the case of obesity and diabetes, it’s two and three player markets. There’s only two players in the obesity market at the moment, which is Novo Nordisk and Eli Lilly. In diabetes, there’s only three players: Novo Nordisk, Eli Lilly, and a French company called Sanofi.
Then we look for a strong business model. So, we’re also looking for companies that can recycle their capital and Novo Nordisk is the poster boy for this. It’s been able to move from being a pure insulin company, to a GLP diabetes company, to an obesity company. What that does is it allows the company to continue to compound its earnings at a more sustainable and faster rate than both the market and market expectations. So this gives you a look as to how we use thematics.
Stock Picking in a Concentrated Portfolio
It’s important to recognize we only own 30 companies in the portfolio, and that’s been the way since inception. It creates a competition for capital which is ‘one in, one out’ to put it very simply. If you are on our global decision team and you can come up with a great idea for a new investment, you have to tell us why it’s better than one of the investments that’s in the portfolio at the time. That creates a competition of capital, but it also means that you must have a generalist mindset. You cannot just be a pure sector specialist. You need to be able to understand different companies in different industries, to decide whether that competition for capital is there or not.
It’s important to note that because we only own 30 companies, we live or die by the companies that we own. So we are pure stock pickers. As I said, the brands and themes create a north star guiding light for us, but we will never invest in a weak company, even if we think it’s supported by a strong trend.
When Stock Picking, Avoid Strong Trends With Weak Companies
In terms of a theme and a trend. I think we can all agree there’s an energy transition going on. We believe we will be moving towards a more electrified world. That electrified world will need to be generated in some part by more renewable energy. As it stands today, some of the most credible renewable energy sources come from solar and from wind power. With wind power, that means we will need more wind turbines and so the wind turbine market is growing at about 15% to 20% per annum. It’s an attractive addressable market, and so far, it’s a fast-growing market. There are only three players in the wind turbine market: Siemens Gamesa, Vestas, and GE.
But the problem with the wind turbine market is it’s not a very good business model. Companies like Vestas and Siemens Gamesa are losing money even though they’re growing at a fast rate. That strikes them out as being investable companies straight away, even though it’s an attractive addressable market. We’ll never invest in a strong theme with a weak company.
The other thing I think themes and trends help us to do is they help us to not only find tailwinds and find markets that are growing faster and more sustainably in the overall economy, but they also help us avoid headwinds. One of the best ways to underperform, we feel, is not necessarily not having the winners, but having losers. It helps us avoid structurally challenged companies, even though they may look exciting from a valuation perspective.
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Investors should carefully consider the investment objectives, risks, charges and expenses of a Harbor fund before investing. To obtain a summary prospectus or prospectus for this and other information, visit harborcapital.com or call 800-422-1050. Read it carefully before investing.
All investments involve risk including the possible loss of principal. Please refer to the Fund’s prospectus for additional risks associated with the Fund. For the Fund’s prospectus, holdings, and most current standardized performance, please click: OSEA
Performance data shown represents past performance and is no guarantee of future results.
OSEA Risks: There is no guarantee that the investment objective of the Fund will be achieved. Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. Investing in international and emerging markets poses special risks, including potentially greater price volatility due to social, political and economic factors, as well as currency exchange rate fluctuations. These risks are more severe for securities of issuers in emerging market regions. A non-diversified Fund may invest a greater percentage of its assets in securities of a single issuer, and/or invest in a relatively small number of issuers, it is more susceptible to risks associated with a single economic, political or regulatory occurrence than a more diversified portfolio.
The Subadvisor considers certain ESG factors in evaluating company quality which may result in the selection or exclusion of securities for reasons other than performance and the Fund may underperform relative to other funds that do not consider ESG factors.
The S&P 500 Index is an unmanaged index generally representative of the U.S. market for large capitalization equities. This unmanaged index does not reflect fees and expenses and is not available for direct investment.
The MSCI All Country World Ex. US (ND) Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance in the global developed and emerging markets, excluding the U.S. This unmanaged index does not reflect fees and expenses and is not available for direct investment.
As of 8/31/23, Atlas Copco comprised 2.60 % and Novo Nordisk comprised 7.90% of the Harbor International Compounders ETF.
This information should not be considered as a recommendation to purchase or sell a particular security. The weightings, holdings, industry, sector and/or countries mentioned may change at any time and may not represent current or future investments.
Diversification does not assure a profit or protect against loss in a declining market. Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. The ETF is new and has limited operating history to judge.
The views expressed herein are those of the investment professionals at the time the comments were made. They may not be reflective of their current opinions, are subject to change without prior notice, and should not be considered investment advice.
ETFs are subject to capital gains tax and taxation of dividend income. However, ETFs are structured in such a manner that taxes are generally minimized for the holder of the ETF. An ETF manager accommodates investment inflows and outflows by creating or redeeming “creation units,” which are baskets of assets. As a result, the investor usually is not exposed to capital gains on any individual security in the underlying portfolio. However, capital gains tax may be incurred by the investor after the ETF is sold.
C Worldwide is a third-party subadvisor to the Harbor International Compounders ETF
This article was prepared as Harbor Funds paid sponsorship with VettaFI.
Foreside Fund Services, LLC is the Distributor of the Harbor ETFs.
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