An active fund holding a whopping 800 stocks is beating major indexes. Here's how.

By Philip van Doorn

For diversification in the stock market, there are actively managed alternatives to index funds

After several years of leadership by the largest U.S. technology companies, 2026 has been a year of sharing the wealth, with equal-weighted and international stock indexes outperforming the S&P 500.

You can make good money in the stock market even if you are not holding the hottest individual stocks.

After several years during which the largest U.S. technology stocks have driven investors' gains, performance and opportunities have been broadening this year. And there are different ways to take advantage of this trend.

One way is to select index funds with a broader view. If you want actively managed exposure, you might lean toward funds that hold a relatively small number of stocks for concentrated exposure to names favored by fund managers.

The S&P 500 SPX is weighted by market capitalization, which means its largest 10 stocks make up about 40% of the index. The index has returned 13.7% this year, but the equal-weighted S&P 500 index XX:SP500EW has returned 16.3%, according to FactSet. And the number of individual stocks within the S&P 500 beating the index's performance this year is at a four-year high.

Another aspect of the broadening market performance has been that stocks outside the U.S. have outperformed. The MSCI EAFE Index, which tracks 21 developed markets, excluding the U.S. and Canada, has returned 15.5% this year, also beating the S&P 500. And stocks outside the U.S. as a group are still relatively inexpensive. The iShares Core MSCI EAFE ETF IEFA has a forward price/earnings ratio of 15.6, as calculated by LSEG, compared with a forward P/E of 20 for the State Street SPDR S&P 500 ETF Trust SPY.

A different way to ride the trend is to broaden your investing horizon. An example is the Harbor International Core Fund HAOSX, which has been a consistent and strong performer with a very active strategy and an eye-popping 847 stocks in its portfolio as of June 30. Its management team follows a daily process of scoring more than 30,000 stocks by myriad factors to cover quality, value and momentum.

While the fund can be aggressive in making changes when called upon to do so, it's also disciplined in following its quantitative process to select stocks, buy and sell them, and allocate its portfolio weighting. And it has incorporated artificial-intelligence technology to expand the daily analysis to "peer groups" of competitors and suppliers.

A quantitative active approach holding more than 800 stocks outside the U.S.

According to Morningstar's analysis of almost 3,000 mutual funds that hold U.S. and international stocks, "the median foreign large-blend fund had 109 holdings, compared to 67 holdings for the median large-blend fund in the United States." For funds holding small-cap stocks, the median for funds holding non-U.S. stocks was 98 stocks, with 67 for U.S. funds.

So the Harbor International Core Fund stands out, as it holds nearly eight times the average number of stocks in its portfolio at the end of June. And its annual turnover - the percentage rate of the portfolio's change over a one-year period - has been 123%, compared with a majority of the nearly 3,000 funds having turnover below 40%, according to Morningstar's study.

The median turnover for global large-cap funds was 28%. "Even the 75th percentile for turnover was in the 50%-range for some categories," according to the Morningstar analysts, who concluded that the data indicated that "a buy-and-hold approach is closer to the standard than the exception."

The $2.5 billion Harbor International Core Fund is rated five stars (the highest rating) within Morningstar's Large Foreign Blend fund category. Its performance benchmark is the MSCI EAFE Index. However, unlike the index, it can be as much as 15% allocated to stocks in emerging markets.

Gabriel McNerney, a managing director with Harbor Capital Advisors, which is based in Chicago, told MarketWatch how the fund's subadviser, Acadian Asset Management, uses a systematic process to manage the fund. Harbor partnered with Acadian to design and launch the fund in March 2019.

Using its quantitative model, the Acadian team analyzes companies' fundamentals, as well as stocks' price momentum patterns, analyst coverage, valuations and other technical factors. The daily analysis has evolved over the years to encompass "common suppliers, common customers," and even "which stocks are grouped together in passive vehicles," McNerney said.

"Everything is driven to look forward," he said, adding that Acadian was on its "41st model," as its quantitative analysis has expanded as markets have changed.

When asked how Acadian was incorporating artificial intelligence into its analysis, McNerney said one example was using natural-language processing as part of its analysis of peer groups. A stock's performance will depend on "how related companies (customers, or those in the supply chain, for example) perform," he said, adding that "machine learning helps identify those related companies. "

The analysis is also designed to incorporate macroeconomic events and even industry differences within countries. "Comparing an Indian and a Chinese bank - they are totally different," he said.

When asked why the Acadian team was holding so many stocks in the fund, McNerney stressed the importance of limiting downside risk. The daily quantitative process is designed to "come up with an alpha forecast for all 30,000 stocks, while limiting beta," he said. Alpha refers to how well a stock performs (or is expected to perform) relative to an index. Beta is a measure of volatility when compared with an index. A beta of 1 means the stock's volatility has matched the index's price volatility.

"We are not trying to increase returns at the expense of risk," McNerney said.

The fund was 23% concentrated to its largest 10 holdings as of June 30. McNerney said the 10 represented "our highest-conviction names," with that group concentrated in the pharmaceuticals and banking industries. This concentration at the top is offset by "a lot of little bets in the portfolio, which increases the chance of outperforming," he said.

Among the fund's largest holdings, McNerney cited Novartis (NVS) (CH:NOVN) as an example of a company scoring high among all the main drivers of the Acadian team's scoring. He said the pharmaceutical industry was benefiting from demographic factors and large international players "selling into the United States."

He also named ING Groep (ING) (NL:INGA) as an example that "you can get cheaper than Wells Fargo and cheaper than JPMorgan Chase, but it is growing faster than those banks."

Top holdings

Here are the largest 10 holdings of the Harbor International Core Fund as of June 30. Keep in mind that in the case of this particular fund, it is only a snapshot. The fund's top-10 holdings list may have changed significantly since it last disclosed its holdings. The fund tends to hold stocks as listed locally, although in some cases it holds an American depositary receipt traded in the U.S. So there are two columns of tickers - the fund's ticker and the U.S. ticker, which might be the same.

  Company                                 Fund ticker  U.S. ticker  Country       % of Harbor International Core Fund as of June 30  Novartis                                CH:NOVN      NVS          Switzerland                         3.6%  Roche Holding                           CH:ROP       RHHBY        Switzerland                         3.5%  ASML Holding                            ASML         ASML         Netherlands                         2.8%  Abb                                     CH:ABBN      ABBNY        Switzerland                         2.4%  ING Groep                               NL:INGA      ING          Netherlands                         2.3%  Siemens Energy                          XE:ENR       SMERY        Germany                             1.8%  Tokyo Electron                          JP:8035      TOELY        Japan                               1.7%  BP                                      BP           BP           U.K.                                1.7%  CaixaBank                               ES:CABK      CAIXY        Spain                               1.7%  ABN Amro Bank                           NL:ABN       AAVMY        Netherlands                         1.6%                                                                                              Sources: Harbor Capital Advisors, LSEG 

Performance against competing funds

For peer comparisons, LSEG calculates one-year total returns and average annual total returns for three-, five- and 10-year periods through the most recent month-end. The data provider lists 101 mutual funds as peers to the Harbor International Core Fund Fund that are also benchmarked to the MSCI EAFE Index, in U.S. dollars.

The Harbor International Core Fund Fund was established in 2019. After expenses, the fund's institutional share class has ranked eighth for one-year total return among the full group of peer funds. It has ranked second among the 102 funds for average three-year return and 13th for average five-year return.

The Harbor International Core Fund Fund's institutional shares have annual expenses totaling 0.85% of assets under management, which means $85 in annual fees for a $10,000 investment. So the fund's net expense ratio is 0.85%, but its full expense ratio is 0.94%. There is a temporary reimbursement of 0.09% of expenses until at least Feb. 28, 2027. There are other funds on the list below with temporary waivers of portions of their expenses. Before you make any investment, make sure you understand exactly how the expenses work and when any waivers might be lifted.

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