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Global Leaders Fund —
Fourth Quarter Manager Commentary
2nd Quarter, 2019
"We continue to remain focused on the fundamental strengths and long-term growth prospects of our portfolio businesses, which are typically independent of macro events and/or conditions. "

Market in Review
The global equity landscape remains volatile, with U.S. trade policy, economic growth concerns, and global monetary policy direction continuing to influence investor sentiment. However, we believe the headlines obscure important secular shifts that are changing how people bank, communicate, and shop.
Change can be worrisome, but it can also lead to opportunity. Growth investing is all about identifying and profiting from change, and we believe that the pace of change is accelerating globally. We seek to invest in businesses driving or benefiting from change, and often these businesses can be classified as dominators, disruptors, and/or scale leaders. Sustainable growth, in our view, derives from the combination of leadership and competitive advantage, and we believe these types of businesses are best positioned for the future. We don’t know what the next quarter or year will bring. We do know, however, that we remain comfortable with volatility and maintaining our approach. Guided by our six criteria, we remain confident that the businesses we own will continue to deliver above-average earnings growth.
Portfolio Performance
In the second quarter of 2019, the Harbor Global Leaders Fund (Institutional Class) returned 6.55%, outperforming its benchmark, the MSCI All Country World (ND) Index, which returned 3.61%.
The U.S./Canada and Western Europe were the top regional contributors to relative investment results. Eastern Europe and Latin America—both zero percent weights—were the largest relative detractors. From a sector perspective, Industrials and Health Care contributed the most to relative results, while the sole two detractors were Communication Services and Materials. The Harbor Global Leaders Fund’s ("Fund") relative return for the period was largely attributable to selection effect. The Fund's sector weightings are a residual outcome of the bottom-up stock selection process.
Contributors and Detractors
The top relative contributors were Recruit, Temenos, HDFC Bank, Visa, and Zoetis. Recruit remains committed to its vision of transforming the recruiting process through digitalization, and continues to track our investment case. We’ve learned of two significant developments through our recent research. First, a team at the Indeed business has begun to focus on digitizing and transforming the placement and temporary portions of the industry, which together represent a potential $130 billion addressable market. Second, Recruit is less likely in the future to make acquisitions to grow its staffing business. We view this positively, given the cyclicality and low margins associated with this segment of the recruiting industry. We believe these developments are additional proof of Recruit’s commitment to its mission to transform the hiring process. We continue to believe the company is well positioned to improve this largely outdated industry, which represents a significant opportunity—together, job advertising, temp/placement, and staffing represent a $150 billion annual market. The company’s fiscal 2018 results further validated our views, with 25 percent year-over-year earnings growth, and improving profitability across all three business units. Over our investment horizon, we believe Recruit will significantly grow its market share, from six percent today.
The top relative detractors were Microsoft, Alibaba, Nike, Alphabet, and Salesforce. Salesforce shares traded lower after the company announced its acquisition of Tableau, a leading data-visualization software business. The $15.7 billion acquisition will be the largest in Salesforce’s history, accounting for roughly 13 percent of its enterprise value. We view Tableau as a high-quality asset, and believe this is a good strategic fit. Data analytics is an obvious area of focus for Salesforce, and Tableau could integrate nicely with MuleSoft (with Tableau serving as the visualization tool sitting on top of the data synthesized by MuleSoft). Assuming that Salesforce successfully integrates Tableau’s technology, we believe the acquisition will drive further wallet-share gains and increase the strategic nature of Salesforce’s enterprise relationships. Aside from this announcement, which spooked investors, the business continues to generate strong results. First quarter fiscal 2020 results and commentary pointed to a generally healthy spending environment, which was positive considering investors were concerned about slowing growth, given the record bookings in fiscal 2019. Revenue, operating margins, cash flow, and earnings all were ahead of expectations. Backlog showed healthy growth, and full-year guidance was raised. Management emphasized Salesforce’s unique ability to help its customers’ digital transformation initiatives, and enterprise appetite remains high for its services.
Buys and Sells
Roper Technologies is a diversified industrial technology company that operates over 40 businesses in more than 40 niche markets. Roper’s businesses sell software and engineered products and solutions across four segments: application software, network software and systems, measurement and analytical solutions, and process technologies. The corporate strategy prioritizes cash flow growth, which Roper then seeks to deploy into acquiring new businesses. Roper maintains strict investment criteria when evaluating acquisition targets, and its rigorous standards are based on its proprietary "cash return on investment" metric. The company is indiscriminate in the types of businesses it seeks to own; rather, it focuses exclusively on free cash generation and management quality. Each business is decentralized and operates autonomously, with a mandate to grow and generate cash. Our research suggests that Roper is an acquirer of choice for engaged management teams that desire to continue independent operations. Over our investment horizon, we expect steady cash flow growth as Roper executes on its disciplined acquisition and growth strategy.
We sold Starbucks in May. Our thesis for owning Starbucks was based on continued U.S. same-store-sales growth—driven in part by digital-marketing initiatives—and a long store-growth runway in China, where the opportunity is largely untapped. We believe the company has made significant progress on both fronts, and believe that Starbucks may benefit from rising coffee consumption in China over the long-term. Looking ahead, however, we expect the company’s growth to slow, and Starbucks could also be more susceptible to cyclical factors than other businesses in the Fund’s portfolio. In the U.S., Starbucks will need to increasingly rely on selling non-coffee items outside of the morning hours to bolster growth. In China, recent competitive threats are likely transitory, but could affect the marginal coffee buyer. Ultimately, we decided to sell Starbucks and reinvest into businesses with what we view as better earnings visibility and stability.
We continue to remain focused on the fundamental strengths and long-term growth prospects of our portfolio businesses, which are typically independent of macro events and/or conditions. We believe our businesses can deliver strong business results and earnings growth over our five-year investment horizon.

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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.