Harbor Focused International Fund Institutional Class (HNFSX)

Investment Strategy

Comgest employs a quality growth approach to investing. They focus their investments on a select number of companies that they believe are high-quality and can sustain double-digit EPS growth for an extended period of time. Characteristics of quality they seek include an advantageous competitive position that allows for pricing power, capable management, above average visibility to sustainable growth, steady and substantial free cash flow, and solid balance sheets.

 

They target double-digit EPS growth, but other measures are just as critical, including free cash flow generation and stable or growing margins. While the objective is to find double-digit compounders, the consistency and visibility of growth is equally important to the level of growth.

Valuation is a secondary component of the process. They believe their valuation standards instill discipline and keep them from falling in love with a stock. Valuation is never a starting point and would not be the key linchpin of an investment thesis, but will factor into sell decisions.

The portfolio managers (PMs) are relatively long-term investors, with an investment horizon of 3-5 years and turnover typically in the 20-30% range.

 

Investment Process

Comgest's process is conducted in two stages. It begins with the regional teams who perform detailed fundamental analysis and identify compelling regional investment options. The combined lists of stocks from all regions then represent the possible investment universe for the Fund's portfolio. The global team does its own research, over and above the regional team's analysis, to select what it believes are the best ideas across the firm.

Regional Team Process
After a company passes an initial quality screen, the covering portfolio manager conducts research to make a more thorough assessment of quality. This research includes detailed analysis of company financials as well as meeting with management, competitors, suppliers, customers, and industry experts. Multiple meetings with corporate management are usually required to gain conviction in a management team, and that conviction must also be supported by tangible financial results.

After the quality assessment is complete, the covering portfolio manager presents the company to the regional team. There must be unanimous agreement for the company to be added to the investible universe.

Once a name is added to the investible universe, the regional team then assesses a stock's valuation. Valuation analysis is not about getting to a precise value; rather, the objective of valuation analysis is to better understand the degree of price risk in a stock.

The lead PMs of each regional team oversee the management of regional strategies. The holdings of these regional strategies represent the investment universe for the Global ex-U.S. strategy.

Global Portfolio Manager Team Process
Each member of the global PM team sits in on regional team research meetings which are the ultimate source of idea generation for the Fund. The decision to include ideas from the regional team in the Fund is entirely that of the global PMs and disagreement is not uncommon. This healthy dynamic fosters debate and guards against groupthink.

After a stock is selected by a regional team, the global team decides whether it is worthy of inclusion on the global watch list, which is a higher hurdle since it should reflect the firm's very best ideas. Unanimous agreement must be reached by the global PMs to include stocks on their watch list. If added, the company is then assigned a global portfolio manager to review and expand on the research, this time from a global perspective.

 

From this list, the portfolio managers craft a portfolio of stocks that have the most compelling risk/reward characteristics.

Once a stock is purchased, the portfolio management team documents the investment thesis and key metrics to monitor. Each quarterly earnings report prompts a review to make sure their thesis is still intact and to make sure there are no red flags. If growth slows and they still believe that the overall thesis is intact, they will be patient and give the company time to get growth back on track. If there is not demonstrated improvement within a reasonable time frame, they are inclined to move on to a better idea.

Risk

There is no guarantee that the investment objective of the Fund will be achieved. Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. Investing in foreign and emerging markets poses special risks, including potentially greater price volatility due to regulatory, social, political and economic factors, as well as currency exchange rate fluctuations. These risks are more severe for securities of issuers in emerging markets.

The Fund may invest in a limited number of companies and from time to time, the Fund may be more heavily invested in particular countries, geographic regions or sectors. As a result, the Fund's performance may be more volatile, and you may experience greater losses.

Comgest Asset Management International Limited ("CAMIL") serves as the Fund's subadviser. In providing services to the Fund, CAMIL uses designated persons of its affiliates, including Comgest S.A., based in Paris, France, and Comgest Singapore Ptd Ltd., based in Singapore. CAMIL and such affiliates are referred to collectively as "Comgest."