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Since the market's short slide at the end of February, big-capitalization domestic stocks have staged a dramatic rally, rising more than 7% in two months.
"Interest is shifting to the growth stocks," says Spiros "Sig" Segalas, the manager of Harbor Capital Appreciation Institutional (HACAX). Here's why: Many investors think the economy is slowing, meaning growth is becoming scarce, making those companies that do grow even more valuable.
It's a big switch. Large, growing companies were the engine of the stock market's startling climb in the 1990s. But they've been so out of favor this decade that the average ratio of stock price to earnings in the S&P 500 Index ($INX), a big-cap index, is 16.1, compared with 26.4 at the end of the 1990s.
Big growth is a fundamental portfolio building block, but new investors, in particular, may be missing it because it has performed so poorly of late. If you are low on big growth, now is the time to buy. And Harbor Capital Appreciation is a great fund to consider.
A safe harbor
Since mid-February, stocks have been highly volatile, and big caps are a traditional refuge at such times because their earnings tend to be steadier. As of May 10, iShares Russell 2000 Index (IWM, news, msgs), an exchange-traded fund (ETF) that tracks an index of small-company stocks, had edged up 1.8% over three months. iShares S&P 500 Index (IVV, news, msgs), which tracks a large-company index, had spurted 4.3%.Big companies also derive a greater proportion of revenue from exports. A weakening dollar helps buoy their overseas sales, which come in the form of those appreciating foreign currencies.
Morgan Stanley advised its clients in April that hedge funds, under constant competitive pressure to find the market's hottest group, had begun flocking into big caps, in the process dumping their smaller, more-speculative holdings.
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Harbor Capital Appreciation is well-positioned to take advantage of these trends. Segalas is an unwavering devotee of big-company growth stocks and hasn't abandoned his style simply because they've been out of favor.
The fund's five largest holdings are Google (GOOG, news, msgs), Gilead Sciences (GILD, news, msgs), Adobe Systems (ADBE, news, msgs), Qualcomm (QCOM, news, msgs) and Walt Disney (DIS, news, msgs). Apple (AAPL, news, msgs) and Cisco Systems (CSCO, news, msgs) are other major bets.
"Apple has been almost a 10-bagger for us, and in a month or so we expect to begin seeing the impact of their new invention, the iPhone," Segalas says. "But the sleeper here is the Macintosh. This is a very high-margin product, and they're upgrading the (operating) system in the September quarter. I think earnings estimates will be moving up."
Google has disappointed Segalas, he says, but he blames the market, not the company. "The market is pricing this as a 30% grower, and I think it will be growing faster than that. Google has the courage to invest in the future. This is a $460 stock, and I think it goes to $600," he says.
Segalas owns about 60 names, with the heaviest concentration in technology, media, health-care and consumer companies. The portfolio is largely domestic companies, but it does own a few foreign names.
Segalas cites UBS AG (UBS, news, msgs), a Swiss banking giant. "There are two parts to this story," he says. "The tough part, where they're struggling a little, is the investment-banking side. But their absolute gold mine is the high-net-worth business they have. That is the crown jewel. The stock sells for 10 or 11 times earnings, and I think the high-net-worth business is worth what the stock costs, alone."
UBS' high-net-worth arm manages the wealth of investors with more than $10 million.
Segalas' willingness to stick to his guns when his stocks get in trouble can test shareholders' patience. In the 12 months that ended May 10, Harbor Capital Appreciation's 5.7% return lagged the market by more than 9 percentage points. Even over the past 10 years, the fund's annualized average return of 7.4% trails the market by 0.7 percentage point.
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Despite this, Segalas has remained true to his mandate, which is to invest in large, high-growth companies. In addition to rating this fund an Analyst Pick, Morningstar offers it to its employees in their 401(k) plan.
"Great managers aren't necessarily those that lead the pack year in and year out," Morningstar analyst Kerry O'Boyle wrote in a commentary on Harbor Capital Appreciation last month. "Instead, investors are better off looking for strong research efforts from firms with established long-term strategies that have weathered the test of time."
Harbor funds, which were launched by former pension managers at Owens-Illinois, are subadvised by leading independent firms. Segalas works for Jennison Associates, a long-established leader in growth-stock investing. He has managed the fund for 17 years.
Segalas is 73, and every time I speak with him I ask if he's thinking about retirement. He always says no. When I spoke to him last week, he added, "You'd understand if you saw my golf game."
Another of this fund's advantages is its low costs, just 0.67% on the institutional share class. If you can't afford that class's $50,000 minimum, a low-minimum version, Harbor Capital Appreciation Investor (HCAIX), charges 1.07%.
Most mutual fund investors have a core portfolio of funds they hold for the long haul, and Harbor Capital Appreciation is an excellent candidate for this role. Seasoned superior management combined with low costs is a knockout combination in investing.
At the time of publication, Tim Middleton didn't own any securities mentioned in this article.
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