Harbor International Compounders ETF Q1 2025 Commentary

The Harbor International Compounders ETF (HAIL) underperformed its benchmark, the MSCI All Country World ex-US Index, in Q1, returning 1.47% versus the benchmark's 5.23%. Detracting from relative performance was stock selection within Financials, Health Care, and Industrials, while Materials, Consumer Discretionary, and Information Technology contributed positively. The fund emphasizes investment in companies with defensible competitive advantages amid policy uncertainty.

Analysis

The Harbor International Compounders ETF (OSEA) delivered a 1.47% return at NAV in the first quarter, substantially underperforming its benchmark, the MSCI All Country World ex-US Index (ACWX), which recorded a 5.23% return during the same period. This significant underperformance of 3.76 percentage points stemmed primarily from adverse stock selection within the Financials, Health Care, and Industrials sectors. In contrast, stock selection within Materials, Consumer Discretionary, and Information Technology positively impacted relative performance. Harbor Capital, the fund's manager, emphasizes a strategy of investing in companies deemed difficult to replicate or replace, seeking a 'margin of safety' especially within the current 'uncertain policy regime.' The Q1 performance suggests that this 'compounder'-focused investment philosophy, or the specific securities chosen under it, did not keep pace with the broader ex-US market trends during this particular quarter.

Key Decisions for Investors

• Investors should acknowledge OSEA's notable Q1 underperformance against its benchmark and evaluate whether the fund's 'compounder' strategy, with its focus on companies with strong moats in an 'uncertain policy regime', aligns with their individual investment objectives and market expectations.
• Prudent risk management suggests closely monitoring OSEA's subsequent quarterly reports to determine if the stock selection difficulties in Financials, Health Care, and Industrials are indicative of a persistent issue or a temporary setback.
• A review of current or potential allocations to OSEA may be warranted, considering how its recent sector-specific performance and overall underperformance impact its stated goal of delivering compelling, risk-adjusted returns within an investor's diversified portfolio.