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Sydnee Gatewood
Sydnee Gatewood
Articles (3619) 

Spiros Segalas' Harbor Capital Appreciation Fund 4th-Quarter Commentary

Discussion of markets and holdings

"In our view, monetary and fiscal stimulus will gradually support a return to endogenous, positive, nominal economic growth."

Jennison Associates LLC

Market in Review

Events in the fourth quarter of 2020 capped off a remarkable year for markets. News in November of the successful clinical trials of two vaccines that use the body's messenger RNA to inoculate against COVID-19, and their subsequent approval for use by the U.S. Food and Drug Administration and other global health regulators, marked a watershed in the fight against the pandemic. The development sparked a further, broader rally in equities, notably benefiting shares of companies most exposed to the negative economic effects of the virus.

The economy continued to recover, but the pace of improvement in consumer spending, confidence, and employment moderated, as extended negotiations over the size and scope of further fiscal stimulus measures remained unresolved. The Federal Reserve continued to signal sustained policy accommodation. However, investors pushed yields on longer-dated Treasury securities modestly higher, in anticipation of broader economic recovery ahead. Housing activity built on its gains, aided by low interest rates and demand for suburban accommodation in response to COVID-19.

Brexit negotiations between the U.K. and European Union (EU) were largely concluded by the end of December, laying the foundation for new flexibility but also uncertainty about future cooperation and trade between the parties. China announced measures to counter what regulators assert is the anticompetitive behavior of large domestic internet platforms and canceled the scheduled initial public offering of Ant Group. Ant's close relationship with outspoken founder Jack Ma and its increasingly pervasive reach in China's personal financial services market led to the IPO cancellation. Uncertainty created by the new decrees drove share prices of Chinese internet/technology platform providers lower over the final weeks of the year.

Portfolio Performance

The Harbor Capital Appreciation Fund (Institutional Class, the "Fund") returned 12.60% during the fourth quarter of 2020, outperforming its benchmark, the Russell 1000® Growth Index, which returned 11.39%, and the S&P 500 Index, which rose 12.15%.

Among the growth benchmark's major sectors, Communication Services, Consumer Discretionary, and Information Technology outperformed the overall index, while Health Care lagged. Industrials and Consumer Staples also underperformed.

The Fund's positions in Consumer Discretionary and Industrials contributed positively to absolute and relative return. Information Technology holdings advanced but lagged the benchmark sector. Health Care and Financials positions detracted from absolute and relative return.

Contributors & Detractors

Tesla (NASDAQ:TSLA) was a top contributor to the Fund's performance during the quarter. Tesla posted a host of impressive financial results made possible by solid production, increased capacity, and strong execution. We believe Tesla'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.

Twilio (NYSE:TWLO) also made a positive contribution to returns. Their cloud communications platform enables software developers to build, scale, and operate communications functions such as phone calls, text messages, video, and e-mail within their mobile applications through Twilio's web-service application programming interfaces. We believe Twilio's cloud capabilities in messaging, voice, and video position the company to benefit significantly, as businesses across industries scramble to retool their communications for an environment of social distancing and restricted mobility. The acquisition of private data-platform company Segment during the quarter broadens Twilio's total addressable market from omnichannel communications to a more holistic customer-engagement suite.

Alibaba (NYSE:BABA) detracted from the Fund's relative performance. The stock fell on news that Chinese market regulators opened an investigation into whether the company, one of the world's largest e-commerce companies, had engaged in monopolistic practices, such as restricting vendors from selling merchandise on other platforms. Separately, four Chinese financial regulatory agencies, including the central bank, announced moves to supervise Ant Group, Alibaba's financial-business affiliate.

Zoom Video Communications (NASDAQ:ZM) gave back a portion of its impressive 2020 advance in the quarter and detracted from relative performance. It provides video telephony and online chat services through a cloud-based, peer-to-peer software platform. "Zoom" became a verb in 2020, and the magnitude of the company's customer growth in 2020's work-and-learn-from-home environment has been remarkable. We believe Zoom is in the nascent stages of a multiyear growth opportunity.

Buys & Sells

During the quarter we purchased Square and TJX and sold Alibaba and Eli Lilly.

Square (NYSE:SQ) provides hardware and software that allow merchants and other service providers to accept credit card payments. As small businesses have become increasingly dependent on e-commerce, Square has helped them adapt quickly. As a result, Square has added a significant number of new customers, increased average revenue per user, and improved gross processing volume—the total dollar amount of card payments processed by merchants using Square's system.

Off-price retailer TJX (NYSE:TJX) buys merchandise opportunistically and then sells it to consumers at a substantial discount from list price. A market leader with solid operational execution and a track record of market share gains, the company, we believe, is well-positioned over the near to intermediate term based on its merchandise category mix, comparatively higher-end customer demographic, and ability to navigate the COVID-19 environment (through sound management and scale).

We eliminated the position in Alibaba because of the heightened risk when it fell on news that Chinese market regulators opened an investigation into whether the company, one of the world's largest e-commerce companies, had engaged in monopolistic practices, such as restricting vendors from selling merchandise on other platforms.

We closed the position in Eli Lilly (NYSE:LLY) based on disappointing earnings per share and revenue, and the company's reduced operating margin guidance.


The prospects for continued economic recovery in 2021 look promising. However, the pandemic continues to pose significant headwinds. Democrats now control both chambers of Congress by slim margins, which bodes well for additional fiscal stimulus in the near term. We expect that corporate profits in 2020 will end up being better than feared earlier in the year, when the ramifications of the pandemic were first becoming evident. Earnings for the S&P 500 could recover significantly from 2020's decline and possibly eclipse the level achieved in 2019, if vaccines are distributed broadly and rapidly. A recovery in global gross domestic product (GDP) depends on the same conditions. Many of the companies in the Fund benefited from trends that were in place before the pandemic and that received a further boost once the realities of lockdowns, social-distancing requirements, and work-from-home protocols began to take shape. Productivity-enhancing products and services, such as e-commerce, cloud computing, streaming entertainment, and electronic payments, were increasingly in demand. The valuations of many companies in the Fund expanded meaningfully in 2020, given the distinction of their fundamentals in a time of scarce growth. While the market may take time to digest their gains, we believe that the above-average rates of revenue and earnings growth of these companies, over our investment time horizon, will support continued, long term outperformance. In our view, monetary and fiscal stimulus will gradually support a return to endogenous, positive, nominal economic growth. The broadening of equity market gains suggests that investors expect a widening range of companies to begin to recover. As social and economic activity return to pre-pandemic levels, U.S. GDP growth is likely to revert to its prior, low-single-digit growth trend.

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.

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