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Holly LaFon
Holly LaFon
Articles (9284)  | Author's Website |

Spiros Segalas' Harbor Capital Appreciation Fund 2nd Quarter Commentary

Discussion of markets and holdings

August 07, 2018 | About:

"We believe the recent strength of growth stocks reflects solid execution and the sustainability of attractive growth opportunities." -Jennison Associates LLC

U.S. equity markets gained in the second quarter despite uncertainty

U.S. equity markets gained in the second quarter of 2018, despite a degree of uncertainty about trade and international relations not seen since the end of the Cold War. Trade related tensions gathered steam during the quarter, as threats from Washington sparked retaliatory measures from China, Canada, Europe and Latin America. An initial round of tariffs took effect in July.

During the quarter, the S&P 500 Index returned 3.43%. The Harbor Capital Appreciation Fund returned 6.35% for the quarter, outperforming its benchmark, the Russell 1000® Growth Index, a measure of larger, growth-oriented U.S. companies, which returned 5.76%. Consumer Discretionary contributed to relative performance, due to stock selection. In contrast, security selection in Financials detracted from relative performance.

Jennison Associates’ comments were made in a July 2018 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2018, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2018.


The U.S. Unemployment Rate Fell to Historically Low Levels

Strong corporate earnings gains and healthy consumer and business sentiment drove U.S. equities higher in the second quarter of 2018. U.S. Gross Domestic Product continued to expand in the 2%–3% range, while the strong labor market pushed the unemployment rate to historically low levels. The Federal Reserve proceeded with its well-telegraphed intentions to increase the federal funds target rate slowly and steadily, citing broad economic strength and low unemployment as justification for incremental monetary policy tightening.

We Examine Company and Industry Prospects Over the Near and Long Term

As fundamental, bottom-up investors, we examine company and industry prospects over the near and long term. Numerous factors, including company fundamentals, macroeconomic conditions and market risk tolerance, cause variability in the way equity markets price securities in the short-term. We constantly assess if and how these factors affect our investment thesis and company long-term value. Macroeconomic-level events during the quarter did not materially affect the underlying fundamentals of companies held in the Fund. Most portfolio holdings have met or exceeded financial estimates thus far this year, and we believe they can post above-average revenue, earnings and cash flow growth through the rest of this year and into 2019.

The Market’s Focus on Fundamentals Favored Our Investment Approach

We believe the market’s focus on company fundamentals favored our investment approach during the quarter. By identifying fundamentally strong companies through our disciplined, research-intensive approach, we believe we have constructed a portfolio that is positioned to potentially generate above-average returns over the longer term. We believe the market, as it has historically, will value such companies appropriately over the long-term.

Recent Equity Market Volatility Reflects Conflicting Expectations

We believe recent equity market volatility reflects conflicting expectations. Some investors are optimistic about the second half of the year, citing projections of strong earnings gains and continued reasonable stock price valuations. Others see the dramatic outperformance of growth companies and the resulting narrowness of the market as omens of trouble ahead.

Threats of Trade Retaliation Create Uncertainty

From our perspective, confidence is likely to be one of the greatest variables going forward. The ongoing rhetoric and threats of trade retaliation create uncertainty. The damage to markets has been limited so far, and it is possible that the principals in the current war of words are skillful in the art of brinkmanship. With the implementation of threats now underway and no signs of conciliatory dialogue, however, we believe the prospects of a full-blown trade conflict and heightened market uncertainty are increasing. Business and consumer confidence can be ephemeral; if trade wars curtail or stall economic expansion, we believe sentiment is likely to deteriorate.

Tax Cuts Could Continue to Buoy Profits and Temper Valuations

On the earnings front, we see reason for optimism. In our view, the impact of tax cuts alone could continue to buoy profits and temper valuations. We believe the recent strength of growth stocks reflects solid execution and the sustainability of attractive growth opportunities. Many large growth companies have continued to grow revenue at double-digit rates, with profits in many cases projected to grow 20% or more this year and next.

Sectors: As of 06/30/2018, the Harbor Capital Appreciation Fund had invested the following percentages of its assets in the sectors listed: Information Technology, 50.65%; Consumer Discretionary, 21.85%; Health Care, 7.87%; Industrials, 6.24%; Consumer Staples, 4.71%; Financials, 4.09%; Energy, 1.13%; Materials, 0.89%;

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.

Performance figures discussed in any of the Manager Commentaries reflect that of the Institutional Class shares.

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

Expense ratio information is as of the Fund's current prospectus, as supplemented. Gross expenses are the Fund’s total annual operating expenses. The net expense ratios for this fund are subject to a contractual management fee waiver through 02/28/2019.

About the author:

Holly LaFon
I'm a financial journalist with a master of science in journalism from Medill at Northwestern University.

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