His investing career began in 1960, the year that John F. Kennedy was elected president of the U.S.
Despite that longevity, Spiros Segalas, nicknamed “Sig,” continues to be one of America’s investing legends with 10-year returns that beat the Standard & Poor's 500 benchmark.
The results stem from a commitment to a philosophy of investing, one that involves a search for strong companies with sustainable moats that are priced reasonably in light of their potential.
Who is Sig Segalas?
Segalas graduated from Princeton University with a bachelor's degree, then served as a U.S. Navy officer and worked in the shipping and construction industries.
His investment career began with a research analyst position at Bankers Trust Co. in 1960, where he was responsible for technology, aerospace and conglomerates.
In 1969, Segalas and six colleagues got together to form Jennison Associates, and he began advising Harbor Fund’s flagship fund, the Harbor Capital Appreciation Fund (Investor Class), 21 years later.
He took second place in the Wall Street Journal Winners’ Circle competition of 2015, a competition among stock funds. Institutional Investor magazine named him Money Manager of the Year for 2016.
The guru is now 83 years old but continues to hold the positions of president and chief investment officer at Jennison (biographical information from the Jennison Web site unless otherwise noted).
What is Jennison Associates?
It was established as a growth equity manager of institutional assets; the firm began managing its first corporate pension account in the year it was founded, 1969.
Jennison was bought by Prudential Financial (PRU, Financial) (Prudential Insurance Co. of America at that time) in 1985.
1990 saw it providing investment management services to individuals for the first time. A decade later, it integrated Prudential's actively managed public equity strategies into Jennison. And in 2011 it brought in a dedicated global equity investment team and assets.
The firm manages more than two dozen Harbor funds, grouped under five categories:
- Domestic equity.
- International and global.
- Strategic markets.
- Fixed income.
- Target retirement.
At the end of the first quarter, Jennison managed $164.3 billion (Jennison information from the firm's Web site).
A relatively small investment advisory firm that has the backing of a financial giant and manages a diverse group of funds for Harbor.
Segalas’ investing philosophy and strategy
Segalas was interviewed for a Wall Street Journal article searching for wisdom from fund managers in their 70s and 80s, managers who have seen just about everything the markets can throw at investors.
The guru emphasized that, although he had more than 50 years in the industry, he is not able to rest on his experience because the world keeps evolving. He said investors who want to succeed must keep evolving with it. At the same time, they must choose an investment philosophy and follow it through good times and bad. The Journal quotes him as saying, “Sometimes stocks ride out of favor, and the Street says that’s time to do this or do that, but you [have] got to stick with your investment philosophy and the characteristics in companies you believe work.”
Turning to strategy, the Capital Appreciation Fund’s Prospectus says the fund has one objective: long-term growth capital.
To achieve that objective, Segalas and the fund invest in equities, mainly common and preferred stocks of American companies with market caps of at least $1 billion when purchased and that are believed to have above average growth prospects.
They do bottom-up research and evaluations, which includes visits to companies and meetings with management. Candidate companies are screened for (in their words):
- Superior absolute and relative earnings growth.
- Superior sales growth, improving sales momentum and high levels of unit growth.
- High or improving profitability.
- Strong balance sheets.
Segalas also looks for candidates that have achieved or exceeded their expected earnings results and are valued in relation to their growth potential. They also look for the following attributes (in their words):
- Strong market position with a defensible franchise.
- Unique marketing competence.
- Strong research and development leading to superior new product flow.
- Capable and disciplined management.
And while Segalas puts most of the fund’s money into domestic stocks, the prospectus notes that up to 20% of its assets may be made up of foreign securities including those in emerging markets.
In the Managers’ Commentary section of the Harbor Capital Appreciation Fund’s Annual Report for 2016, Segalas and co-manager Kathleen A. McCarragher discussed both the overall market and some specific stocks:
- Overall: Risk aversion is shaping the global market environment with investors favoring “safety” stocks including those that are low volatility and high dividend paying. On the other hand, higher-growth companies generally underperformed.
- Health care: These stocks are not reflecting their intrinsic value because of drug-pricing concerns. But they believe the long-term fundamentals of the biotech names they own remain intact and that current valuations also underestimate the potential of pipeline drugs.
- Consumer stocks: Nike (NKE, Financial) took a hit because of inventory issues, lower average selling prices and more competition. Amazon.com (AMZN, Financial) continued to do well, thanks to strong execution, margin growth and development of its cloud business. Kroger (KR, Financial), the supermarket chain, was weak because of deflation effects on grocery prices.
- Information Technology: The fund did well with Facebook (FB, Financial) delivering strong, positive results on key measures, and its growth potential is heightened through Instagram, WhatsApp and Messenger. Chinese service portal Tencent Holdings Ltd. (HKSE:00700, Financial) is delivering good results because of its dominant position in that country. The fund continues to have faith in another major Chinese player, Alibaba Group Holdings (BABA, Financial), which aspires to be the Asian version of Amazon.com.
- On the financials front, the managers still like S&P Global Inc. (SPGI, Financial), a ratings agency with a strong moat. And, in real estate, they continued to hold American Tower Corp. (AMT, Financial), a real estate investment trust that pays out most of its pretax profits to shareholders.
One final piece of wisdom from Sig Segalas: In an interview published on Sept. 23, 2008 (near the bottom of the financial crisis), Steven Goldberg of Kiplinger wrote, "'The lesson of those past disturbances,' Segalas says, is that 'we have an unbelievably resilient economic system.' Consequently, during times of panic, 'You're best off doing nothing.'"
Segalas is a value investor looking for stocks that are attractively valued in relation to their growth potential, but it seems growth matters more than bargain prices. Another word that is a must in describing Segalas' investing is "strength" in one form or another.
Current holdings
As this GuruFocus chart illustrates, Segalas leans heavily to technology and consumer cyclical stocks in the Harbor Capital Appreciation Fund:
GuruFocus reports that these were the top 10 holdings at the end of the first quarter:
- Amazon.com 5.75%.
- Apple Inc. (AAPL, Financial) 4.78%.
- Facebook 3.77%.
- Microsoft Corp. (MSFT) 3.52%.
- Alibaba Group Holdings 3.26%.
- MasterCard Inc. (MA) 3.24%.
- Visa Inc. (V) 3.03%.
- Alphabet Inc. (GOOG) 2.85%.
- Alphabet Inc. (GOOGL) 2.83%.
- Tencent Holdings 2.75%.
Eight of the top 10 holdings are technology stocks, and the group includes several large caps that are responsible for the current high valuation of the S&P 500. Segalas is the first guru I’ve seen with holdings in both GOOG (Class C, no voting rights) and GOOGL (Class A, regular voting rights).
Performance
Short-term investors have taken a beating on the Harbor Capital Appreciation Fund, but this GuruFocus table shows results have been good for long-term investors:
This chart, from the Annual Report, shows how the Fund (blue line) compares with its selected benchmark, the Russell 1000 (gray), and the S&P 500 (black):
Segalas has lagged the three- and five-year cumulatives by significant margins while beating the S&P 500 by an average 0.7% per year over 10 years. There is essentially no difference between the performances of the Capital Appreciation Fund and the Russell 1000.
Conclusion
Segalas is somewhat unique among gurus because he’s seen so many market cycles come and go. He’s survived them all and turned in solid results.
As he has noted, investors must evolve with the times but not so much as to go beyond the boundaries of the investing philosophy in which they believe. Today, the portfolio Segalas runs has a heavy bias toward technologies that did not exist, or only existed in somewhat primitive form, when he began his investing career.
While the names and the sectors may change, Segalas has continued his bottom-up research, looking for names that have a sustainable moat, growth potential, and a reasonable valuation in terms of that future growth.
Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the next 72 hours.
