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Capital Appreciation Fund —
Most sectors advance as large cap growth stocks gain ground in Q4
4th Quarter, 2014
"Lower oil prices should be a net positive rather than a negative. Some companies will get hurt, but it's a huge tax cut to the entire system and that usually plays out very positively over time. "
– Jennison Associates LLC

U.S. equities turned in a solid performance in the fourth quarter of 2014 and posted a double-digit gain for the full year. The broad U.S. stock market, as measured by the Russell 3000® Index, returned 5.24% for the quarter and 12.56% for the 12 months ended December 31, 2014. The Russell 1000® Growth Index, a measure of larger, growth-oriented U.S. companies, recorded returns of 4.78% for the fourth quarter and 13.05% for the year. Most sectors in the index gained ground, while the Energy sector lost 19% and Telecommunication Services declined 5%.
The Harbor Capital Appreciation Fund returned 3.26% for the quarter and 9.93% for the year, trailing the Russell 1000® Growth benchmark. Stock selection in the Consumer Discretionary sector hurt Fund performance relative to the index in the fourth quarter, as did a below-benchmark exposure to the Industrials sector. These negatives were partially offset by above-index allocations to the Consumer Discretionary and Health Care sectors. Sector weights are primarily a reflection of the Fund's bottom-up stock selection process rather than a major element of investment strategy.
Portfolio Manager Sig Segalas reports that Information Technology stocks were among the top individual contributors to Fund performance in the fourth quarter, including Apple, MasterCard, and Visa, as well as biotechnology company Celgene and drug maker Bristol-Myers Squibb. Among the biggest detractors from performance were Energy companies Schlumberger and Concho Resources, social media provider Twitter, online video streaming company Netflix, and Danish insulin maker Novo Nordisk.
Sig Segalas’s comments were made in a January 14, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2014.

Interview Highlights

Market uncertainty
With the precipitous decline in oil prices, the market became very risk-averse because of the uncertainty it created. Lower oil prices should be a net positive rather than a negative. Some companies will get hurt, but it’s a huge tax cut to the entire system and that usually plays out very positively over time. However, when you get a precipitous decline in such an important commodity, along with a very sharp increase in the Dollar, another strong factor, it does create uncertainty.
Increased volatility
When I look at this year, I think the U.S. stock market is going to be okay. We probably will have greater volatility than we’ve had in the recent past and the market could be somewhat vulnerable to profit taking. Our Fund, the Russell 1000® Growth, and the S&P 500 have all had gains over the past two years. Some profit taking in a nervous environment could happen. I don't think people should get too negative, though, because I still think we could have a positive return this year.
Strong Dollar
Traditionally, I don’t worry too much about currency. It may hurt some of our holdings a little bit, but these are very strong companies and I’d rather ride that out because currencies are always fluctuating to some extent. I think a strong Dollar is more of a positive than a negative. It’s a positive in the sense that it encourages foreigners to invest in the United States if they believe the currency will stay reasonably strong. It also dampens inflation, which is not an issue right now but historically is something we’ve worried about.
U.S. economic growth
Europe is having its difficulties. China is still growing but it’s probably slowing more than the numbers would suggest. The U.S. economy is doing much better. Lower oil prices should be a positive and I also was encouraged to see surveys showing optimism by small business in the United States, which I think is very important. I think employment gains are likely to accelerate. Average wages have been disappointing, but there's a lag there. I think they’ll be coming on.

Performance data shown represents past performance, which is no guarantee of future results. Current performance may be higher or lower than the past performance data shown. Investment returns and the value of an investment will fluctuate, and an investor's shares, when sold, may be worth more or less than their original cost. You can obtain performance data current to the most recent month-end (available within seven business days after the most recent month-end) by calling 800-422-1050 or visiting

Performance figures discussed reflect that of the institutional class shares.

The views expressed herein are those of the portfolio manager at the time of the interview and may not be reflective of their current opinions or future actions.  These views are not necessarily those of the fund company and should not be construed as such.

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