The Analysis of Human Capital
The “Human Capital Factor” analysis considers the economic value created by people working towards their companies’ goals. It identifies six “intrinsic” dimensions and one “extrinsic” element. These dimensions include:
- Direct management: measuring the level of respect employees feel from their managers.
- Emotional connection: assessing how much employees feel appreciated and whether they find meaning in their work.
- Engagement and leadership: evaluating employees’ level of pride, loyalty, motivation, and belief in the company’s vision.
- Organizational alignment: determining whether employees feel the company’s goals align with their own.
- Organizational effectiveness: gauging how employees perceive the quality of the company’s output and the level of respect for the company’s brand.
- Compensation: considering the extrinsic factors such as compensation, working hours, training, and career progress.
Only the components of the “human capital factor” are used for selecting stocks in the index.
The Harbor Human Capital Factor U.S. Large Cap ETF, also known as HAPI, tracks the CIBC Human Capital Index, developed by the Canadian Imperial Bank of Commerce. This index typically includes 150 stocks identified by Irrational Capital during the annual reconstitution of the index.
The 150 stocks are selected from the components of the Solactive GBS United States 500 Index, which consists of stocks from the largest 500 U.S.-listed companies by market capitalization. While similar to the S&P 500, the Solactive index lacks additional qualitative factors that could exclude certain companies.
The CIBC Human Capital Index follows a modified cap-weighting strategy, with individual stocks weighted by market capitalization during the annual reconstitution but subject to caps of 5% or five times their weighting in the Solactive GBS United States 500 Index. The index also seeks to match the sector weighting of the Solactive index and utilizes exchange-traded funds to achieve these weights if necessary.
The Harbor Human Capital Factor U.S. Large Cap ETF was launched on October 12, 2022. While it holds 151 holdings, it is relatively concentrated, with the top 10 positions making up 42% of the portfolio and the top 15 positions accounting for over 50%.
Environmental, social, and corporate-governance (ESG) strategies have faced some criticism. These strategies aim to allow investors to concentrate their portfolios on companies perceived as making a positive impact on the world. ESG monitoring often emphasizes environmental responsibility and companies’ sustainability efforts. Additionally, companies highlight diversity, equity, and inclusion policies to address the social aspect of ESG. Some fund managers emphasize reporting their participation in shareholder votes to demonstrate strong governance.
Although HAPI tracks an index that scores companies based solely on the “human capital factor” and employee satisfaction levels, it cannot be considered an ESG fund. It does not exclude companies based on compliance with environmental standards or the nature of their products. For example, it holds shares of tobacco companies.
ESG remains subjective to individual investors’ preferences. Harbor launched HAPI and two associated funds based on their belief in their potential for better returns. Within the ESG investment landscape, there are typically more offerings with environmental or governance pillars, while the social aspect is less represented. HAPI aims to address the social aspect of ESG.
Harbor also offers two other funds utilizing Irrational Capital’s analysis: the Harbor Human Capital Factor U.S. Small Cap ETF and the Harbor Human Capital Factor Unconstrained ETF. These funds take an equal-weighted approach, holding stocks of large-cap and midcap companies with the highest Human Capital Factor scores, ranging from 70 to 100 stocks.