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Sydnee Gatewood
Sydnee Gatewood
Articles (2960) 

Spiros Segalas' Harbor Capital Appreciation Fund 3rd-Quarter Commentary

Discussion of markets and holdings


As of 09/30/2020

"The U.S. economy continues to recover from the worst effects of the pandemic, but the pace of the rebound appears to be moderating." Jennison Associates LLC

Market in Review

Equities markets continued their vigorous, post-March rally in the third quarter, as the realities of COVID-19 continued to dictate daily conduct for individuals, businesses, and governments around the world. Behaviors, which seemed disorienting and disruptive in the spring, became routine throughout the summer and early fall. Work-from-home remained the standard, while countries and enterprises experimented tentatively with reopenings. Global infection rates reflected varying policy and social behaviors. Developing a vaccine remained an overwhelming focus, with both human and capital resources deployed to a number of promising approaches. Equities advanced solidly in July and August, bringing major indices back to levels achieved earlier in the year. New highs were recorded in the sectors and companies that appear best positioned to benefit from the realities created by the pandemic. Many of these companies already benefited from secular trends in place that have now accelerated—work-from-home for the consumer and digital transformation for the enterprise. The speedy adoption of communication mediums such as video conferencing proved effective at replacing formerly in-person interactions, thus driving faster revenue recovery for many companies. Growth companies, which led equities markets through the end of August, surrendered a portion of their advances during September, reflecting concerns about the valuation of future growth potential in the short term. At the same time, businesses most negatively affected by the pandemic, including leisure and travel, stabilized as the downturn moderated, although the overall depressed levels persisted. The effects of fiscal stimulus—trillions of dollars disbursed through the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Payroll Protection Plan—blunted the pandemic's effect on employment and spending. Comprehensive monetary policy initiatives to bolster liquidity and stabilize asset prices contributed to record-low interest rates.

Portfolio Performance

In the third quarter of 2020, the Russell 1000® Growth Index returned 13.22%. The benchmark's two biggest sectors, Information Technology and Consumer Discretionary, once again outperformed the overall index. Other large sectors, Health Care and Communication Services, underperformed. Utilities and Energy (with a near-negligible weighting) lost ground.

The Harbor Capital Appreciation Fund (Institutional Class, "the Fund") outperformed the benchmark during the quarter. As in the first and second quarters, positions in the Fund's largest areas—Information Technology and Consumer Discretionary—contributed meaningfully to absolute and relative returns. Communication Services holdings advanced but lagged the benchmark sector. Health-care positions detracted from relative performance.

The COVID-19-driven acceleration in the digital transformation of the global economy continued, as e-commerce, digitally enabled-payment, and cloud-computing models extended their advances. Consumer businesses with digital, direct-to-consumer business models once again performed well, as did digital-payment processors and cloud-based software companies.

Contributors & Detractors

Tesla (NASDAQ:TSLA) and Apple (NASDAQ:AAPL) were among the Fund's top contributors during the third quarter. Tesla continues to surge on a host of impressive financial results made possible by solid production, increased capacity, and strong execution. We believe the company's technology, scale, and low-cost advantage make it not only the breakaway leader in the electric-vehicle market but also position it to disrupt the overall automotive industry. With its huge installed base, Apple has benefited from the rapid growth in service-business subscriptions, a key source of recurring revenue. The upcoming product cycle should provide robust revenue and profit growth when it ultimately commences.

Stocks that detracted from the Fund's performance included BioMarin Pharmaceutical (NASDAQ:BMRN) and Illumina (NASDAQ:ILMN). BioMarin Pharmaceutical, which develops pharmaceuticals for rare, often genetic, diseases, fell after an unexpected U.S. Food and Drug Administration (FDA) determination delayed the approval timeline for the company's hemophilia gene therapy, which we considered a key, near-term growth driver. Illumina, which makes genotyping, next-generation sequencing, and gene-expression tools, declined on news that it plans to buy a company that is developing an early cancer detection test. Although the transaction could strengthen Illumina's long-term position, it will likely be highly dilutive to earnings, as the acquired company is expected to contribute minimally to revenue until 2025.

Buys & Sells

We added Match Group (NASDAQ:MTCH) to the Fund in the third quarter. With popular brands, including Tinder, Match.com, Meetic, OurTime, PlentyofFish, Pairs, OKCupid, and Hinge, Match Group is the global leader in online dating. Some estimates suggest that globally, approximately 25% of the 600-700 million single adults use online dating services—suggesting a massive and largely untapped market. We believe Tinder, the most-downloaded and top-grossing dating app in the world, has significant room for further paid-subscriber penetration. We view the company as largely, structurally immune from Big Tech competition and well-positioned in a post-COVID world, as growth is set to accelerate with the company's monetization strategy, which includes tiered products.

We sold Illumina during the quarter. Illumina declined on news that it plans to buy a company that is developing an early cancer-detection test. Although the transaction could strengthen Illumina's long term position, it will likely be highly dilutive to earnings, as the acquired company is expected to contribute minimally to revenue until 2025.


The U.S. economy continues to recover from the worst effects of the pandemic, but the pace of the rebound appears to be moderating. Congress has so far failed to agree on additional stimulus measures to take up the slack from the massive, but now-largely-exhausted, programs approved in March. Further job reductions at large companies, particularly where the effects of COVID-19 have created the most disruption, are an additional headwind. The uneven pace of reopening heightens the need for further government action into year end and beyond. Corporate profit-recovery is set to continue, aided by reduced labor and travel costs that further expand profit-margin opportunities. However, the overall outlook remains uncertain—not least because of next month's U.S. presidential election and the pandemic's ongoing impact. COVID-19 continues to disrupt activity around the globe. We are optimistic that promising results from a number of clinical trials will result in an effective vaccine in the coming months. But it may be another 12-18 months before a finished product—the likely prerequisite for a broad-based recovery in confidence and activity—is globally available. Sectors whose share prices and operating fundamentals have been disproportionately hit by the disease will likely experience a relief rally once distribution of a vaccine begins, but a return to pre-COVID-19 operating rates will probably not transpire for some time thereafter. Investors have demonstrated their preference for businesses that were thriving before Covid-19 and that have benefited from pandemic-related tailwinds and enhanced competitive positions. The Fund holds many companies across the technology, consumer, and communications services industries in these categories. Prospects for their continued growth at above-average rates remain strong.

Performance data shown represents past performance and is no guarantee of future results. Past performance is net of management fees and expenses and reflects reinvested dividends and distributions. Past performance reflects the beneficial effect of any expense waivers or reimbursements, without which returns would have been lower. Investment returns and principal value will fluctuate and when redeemed may be worth more or less than their original cost. Returns for periods less than one year are not annualized. Current performance may be higher or lower and is available through the most recent month end at harborfunds.com or by calling 800-422-1050.

Views expressed herein are drawn from commentary provided to Harbor by the subadvisor and may not be reflective of their current opinions or future actions, are subject to change without prior notice, and should not be considered investment advice.

This information should not be considered as a recommendation to purchase or sell a particular security. The weightings, holdings, industries, sectors, countries, and returns mentioned may change at any time and may not represent current or future investments.

As a result of changing market conditions, total net asset levels, expenses and other statistics may change at any time and may differ from those shown.

The total amount shown for sector, industries, or country holdings may be greater than 100% because of the inclusion of derivatives and the collateral securities supporting those instruments.

Sector allocations are determined using the Global Industry Classification Standard (GICS), which is a service of Morgan Stanley Capital International (MSCI) and Standard & Poor's (S&P).

About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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