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Capital Appreciation Fund —
Stock selection drives Fund's outperformance as large cap growth shares advance
1st Quarter, 2015
"The market has done well. It's not as cheap as it was once but I'm cautiously optimistic. "
– Jennison Associates LLC

U.S. equities opened the new year with a gain, as the Russell 3000® Index, a measure of the broad domestic stock market, returned 1.80% for the first quarter of 2015. Shares of larger, growth-oriented U.S. companies, as measured by the Russell 1000® Growth Index, recorded a return of 3.84% for the quarter. The Utilities sector was the only area of the large cap growth index to lose ground.
The Harbor Capital Appreciation Fund returned 5.55% for the quarter, outperforming its Russell 1000® Growth Index benchmark. Stock selection, especially in the Information Technology and Health Care segments, was the primary driver of Fund performance relative to the index. A larger-than-index position in Health Care stocks and a below-benchmark exposure to the Industrials sector also helped relative performance. 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 Apple and Twitter were among the top individual contributors to absolute performance for the Fund. Others included biotech company Biogen, online retailer Amazon, and insulin maker Novo Nordisk. Holdings that detracted from performance included Chinese e-commerce company Alibaba, luxury goods merchandiser Tiffany, industrial components maker Precision Castparts, electric car maker Tesla Motors, and media company Twenty-First Century Fox.
Sig Segalas’s comments were made in an April 14, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2015.

Interview Highlights

Stronger economy
The U.S. economy has been in kind of a slow patch but I agree with the argument that, with the weather getting better and the West Coast port strike behind us, things should start picking up. There are some early signs that the economy is picking up a bit of steam. My guess is that the second quarter should be much stronger than the first and I think we should see continued strength over the year. We should start getting support from consumer spending as a result of lower gasoline prices. It's like a big tax cut.
Improved earnings
Many of the stocks that we owned that got hurt in the fourth quarter benefited from solid earnings gains and were among the best performers in the first quarter. Amazon, Twitter, and Netflix, for example: all three were hurt in the fourth quarter but apparently they were doing well fundamentally because the earnings reports they came out with were very good. That was true in general. Many of the companies in our portfolio reported better-than-expected results, and I think that was probably the main contributor to performance.
Global outlook
The market has done well. It’s not as cheap as it was once but I'm cautiously optimistic. I think the U.S. economy should respond to the lower oil prices and consumer confidence is up. Europe is doing a little better and China, while it’s slowing, still is going to show very good growth. We are seeing monetary easing by central banks around the world, and it’s happening at a time when inflation is still pretty dormant. I think that's a positive.
Fed tightening
With regard to the Fed increasing interest rates, I see it as more of a positive than a negative. I think they're going to be careful when they do it; it could happen this year or early next year. The stock market could correct when it first happens but I think it would be a positive development. Usually when the Fed starts to increase rates there's a good reason; it means the economy is in pretty good shape.
Sluggish growth
One reason I'm a bit cautious is that we keep expecting the economy to pick up a little steam but the numbers so far have been somewhat sluggish. I'm using the excuse of weather, which I think has been an issue. But we'd better start seeing some acceleration in the next several quarters. If we don’t I think the market could be vulnerable.

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.