Harbor International Small Cap Fund Institutional Class (HAISX)

Investment Strategy


Cedar Street recognizes the inherent pricing inefficiencies that occur in foreign equity markets from a variety of fundamental, corporate governance, and macroeconomic factors, and that a well-defined, value-oriented process, applied consistently over time can yield attractive results. Their process utilizes the best value investing practices that the firm's PMs have been refining throughout their careers. The core foundational elements of this process have been in place since 2004, and every aspect of the firm's structure, from the clients they serve to the people they hire, are designed to optimize their focus on value investing in non-U.S. markets.

The process has an unwavering focus on buying businesses only when discounted valuations present themselves and maintains a longer-term holding period than most market participants. As such, their process incorporates significant bottom-up fundamental analysis, strategic analysis, operational due diligence, and financial analysis to develop thorough valuation support. Additionally, they engage with management teams of potential portfolio holdings to gain a high degree of insight into corporate governance, behavioral finance, macro-economic influences, and other external factors. They feel their ability to analyze corporate governance is a feature of their strategies that is not easily replicated by other passive or active strategies. Because of varied laws around corporate governance and knowledge of the local players in the markets and their views on minority investors, Cedar Street feels that a detailed review of corporate governance practices is key to success in this space.

Research Process:

Cedar Street's investment process utilizes a range of screening and idea sourcing methodologies to shrink the universe of securities to a manageable level. They then apply a range of bottom-up research techniques, financial analyses, and top-down considerations to select securities and compile what they believe is an optimal portfolio from a risk/reward standpoint.


Step 1. Establish Investment Universe:
Equities that trade on international exchanges or equities that trade on U.S. exchanges that conduct most of their business in international markets.
Step 2. Inject Macro Economic Overlay:
Exclude markets with political, social, fiscal turmoil, or a lack of regard for the rule or law (including securities law).
Step 3. Use Databases to Screen for New Ideas:

A broad-based screening methodology is used to shrink the investible universe to stocks that:

  • Demonstrate traditional value metrics primarily on a price to book, price to earnings and dividend yield basis
  • Have well-capitalized and understandable balance sheets
Step 4. Engage Outside Sources to Generate New Ideas:
New idea generation derived externally to our screens from industry specific reports, academic literature, newspapers, sell-side research and travel.
Step 5. Conduct "Tear Sheet" Review:

A preliminary review of a potential new investment is conducted via a "Tear Sheet" analysis, which focuses on:

  • A brief company and industry review, historical valuation metrics, and relevant comparables analysis
  • A review of ownership, board structure and business plan
  • A description on why the stock is trading with a value profile
Step 6. Downside Review:

If the tear sheet review yields an attractive investment candidate, a thorough "downside" review is conducted. This is generally a more quantitatively oriented exercise:

  • Full financial statement review
  • Footnote analysis with focus on off-balance sheet assets/liabilities
  • Margin analysis
  • Review of cyclical or structural reasons behind low valuation
  • Absolute and peer value analysis
  • Background checks on company and management
  • Corporate governance score
  • Culminating in an estimated downside price relative to the current stocks price
Step 7. Upside Analysis:

If the downside review yields a stock trading near or below Cedar Street's downside estimate, we will conduct an "upside" analysis, which will result in our upside case for the stock. This is generally a more qualitatively oriented exercise:

  • Interviews with management to discuss current valuation and ways to unlock value
  • Porter Five Forces analysis
  • Internal and external catalyst review
  • Board and ownership structure
  • Management incentive structure
  • Improvements in corporate governance or disclosure regime
  • Historical transaction comparables and role of activism in the local market
  • Culminating in an estimated upside price relative to the current stocks price

Upon completion of these research steps, upside/downside price targets are compared, and a decision to buy or "put on watch" is put into motion.


Bottom-up Portfolio Construction

Portfolio construction is primarily a bottom-up, stock selection exercise, but sector, country, currency, and other weightings are taken into consideration to minimize unintended bets. Investable securities are generally within the market cap range of their respective benchmarks. Individual position sizes vary by level of conviction but will typically range 1.75% to 2% and can reach a maximum of 5%. Portfolios are generally constructed with between 50-70 names. Country weights tend to be stock-specific, but they will place less than 30% of assets in a single country. Likewise, sector exposure that exceeds the benchmark by more than 25% requires additional review. They manage portfolios for high active share and modest tracking error and seek to minimize turnover, typically 30-40%. They monitor portfolio risks on an absolute and relative basis through attribution analyses and factor-based exposures on a regular basis using Bloomberg.

Cedar Street not only manages risk at the security level but also at the portfolio level. This risk can be broken down into several factors, including: valuation risk, risk of financial distress, business or competitive risk, corporate governance risk, and macro risk.


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. Stocks of small cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.