News & Commentary

View all Commentary headlines

Large Cap Value Fund —
Fund advances as stock market rally continues
3rd Quarter, 2018
"At Aristotle Capital, rather than worrying about the short-term impact of day-to-day news, we work to identify companies with what we believe are the quality characteristics to succeed over full market cycles. "
– Aristotle Capital Management, LLC

The U.S. equity market continued its rally in the third quarter of 2018, supported by strong economic data and corporate earnings growth. Gross Domestic Product (GDP) data released over the summer showed that the U.S. economy accelerated 4.2% on an annualized basis during the second quarter, its fastest pace in nearly four years. Consumer spending, buoyed by lower taxes, job growth and rising wages, was the key driver behind the pickup in growth. A jump in exports ahead of the scheduled implementation of new tariffs also helped. The S&P 500 Index advanced 7.71%, its best quarter since 2013, as approximately 80% of S&P 500 companies reported earnings per share above mean estimates, according to FactSet.
During the third quarter of 2018, the Harbor Large Cap Value Fund advanced 3.61%, underperforming the Fund’s benchmark, the Russell 1000® Value Index, which advanced 5.70%. Stock selection drove relative underperformance during the quarter. Stock choices in Health Care, Information Technology and Materials detracted from relative performance. In contrast, stock selection in Consumer Staples, contributed to relative returns. Sector allocation was an overall relative contributor. The Fund’s sector weightings are purely a residual outcome of the bottom-up stock selection process, but favorable underweights and stock selection in Real Estate and Utilities bolstered relative performance. A favorable overweight to Information Technology also helped mitigate underperformance.
Aristotle Capital’s comments were made in an October, 2018 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2018, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2018.

Interview Highlights


A Difficult Environment for the Short-Term
We focus our intellectual capital on understanding long-term business values, independent of market conditions. With that said, from time to time, particularly over short periods of time, market conditions can create a headwind to short-term performance. The realization of investment catalysts is not a linear process, and stock selection proved to have a negative impact during the third quarter of 2018.
How We Choose a New Investment
During the quarter, we initiated positions in three stocks. In each case, our process starts by identifying companies with high-quality characteristics, such as high barriers to entry and predictable revenues. Once we are comfortable that a company meets our quality criteria, we analyze the company’s valuation, identifying what we believe is a “valuation gap” between intrinsic value and the market’s view of the company. That may reach beyond traditional valuation metrics, and can focus on finding a risk/reward tradeoff that’s attractive to us. Next, we look for catalysts, identifying the keys that we believe have the potential to close the companies’ valuation gap over our three- to five-year time horizon. Those may include favorable demographic trends, potentially increasing pricing power, monetization opportunities or other improvements and enhancements. Only then, with a complete understanding of the long-term fundamentals, do we invest.
Tuning Out the Noise to Focus on Long-Term Performance
From the escalating U.S./China trade conflict to what some are calling the end of an era of “accommodative” monetary policy, there has been plenty of news to digest. These events make for interesting talking points, but for long-term investors, it is important to consider whether the news is anything more than that. Are these events and trends truly analyzable, differentiated and meaningful from a long-term perspective? We do not spend much time on how the market may react, nor do we attempt to reposition our portfolio based on those assumptions. At Aristotle Capital, rather than worrying about the short-term impact of day-to-day news, we work to identify companies with what we believe are the quality characteristics to succeed over full market cycles. We believe that long-term thinking distinguishes us from our competitors, helping us to identify companies that possess sustainable competitive advantages and appear poised to outperform their peers.

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 harborfunds.com.

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.