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Strategic Growth Fund —
Equity returns were more muted amid greater volatility
1st Quarter, 2018
"Although behavioral biases may influence near-term stock performance, we believe that business economics matter more over time. "
– Mar Vista Investment Partners, LLC

Although economic fundamentals and global growth remain solid in the first quarter of 2018, factors such as inflation uncertainty, social media regulations, a more hawkish Fed, and global trade concerns fueled a surge in market volatility. Fundamentally, tax reform continued to be a positive tailwind for corporate earnings.
The Harbor Strategic Growth Fund returned 1.68% for the first quarter, outperforming its benchmark, the Russell 1000® Growth Index, which returned 1.42%. Stock selection in Industrials made that sector the largest contributor to relative returns, while stock selection in Materials was also beneficial. Consumer Discretionary was the greatest detractor, due to both stock selection and an underweight. The Fund’s sector weightings, however, are purely a residual outcome of the bottom-up stock selection process.
Mar Vista’s comments were made in an April, 2018 report. Highlights adapted from the report appear below. All comments relate to the quarter ended March 31, 2018, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2018.

Interview Highlights

Risk Factors and Volatility Prompted Adjustments
Concerns over possible government-imposed regulation within social media, rising interest rates, and the "tariff tantrum" caused us to revise and add scenario possibilities for companies that have social media, high debt, or potential tariff-impacted revenue exposure. In some cases, these adjustments had a small impact on our range of intrinsic values. The volatility in the market allowed us to identify opportunities, improving the portfolio average discount to intrinsic value to 10% this past quarter. Although this is slightly higher than at the end of the fourth quarter of 2017 (7%) or the beginning of the first quarter of 2018 (2%), this is lower than the typical discount we receive when investing in new companies. As a result, we believe that future returns will closely correlate with our companies’ abilities to compound their intrinsic value.
Search for Reasonable Value Drove a Market Rotation
A rotation by investors away from the faster-growing, higher-valued concentrated holdings of the market, experienced in the latter half of the first quarter, was beneficial for the Fund as investors searched for growing companies with more reasonable valuations. The traditional growth sectors of Information Technology, Consumer Discretionary, and Health Care together make up a much smaller percentage of the Fund than of its benchmark index. Our portfolio construction process focuses on bottom-up factors independent of benchmark weights. The resulting Fund’s sector exposures represent the areas in which we are finding skewed risk-reward opportunities in serial compounders, and are not an expressed opinion on the sectors from a macro level.
Optimistic Yet Cautious
We remain optimistic about the compounded intrinsic value growth of the Fund’s holdings. In our view, the recent volatility of the market improved the Fund’s discount to intrinsic value. Nevertheless, this discount continues to be at the low end and well below the 20-35% historical range. We cautiously remind our investors that downside risks have a way of sneaking up on markets during periods of increasing optimism. Although behavioral biases may influence near-term stock performance, we believe that business economics matter more over time. Investment bargains are elusive, but we believe that companies that compound owners’ earnings become increasingly attractive with the passage of time. We will continue to identify these unique franchises and wait patiently for markets to offer them at discounts.

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.