When examining the main holdings of the Harbor Capital Appreciation fund, one might assume that its managers favor momentum stocks, given the presence of well-known names like Microsoft and Nvidia.
According to Morningstar, however, historical data shows that these investments were made years ago — Microsoft in 2015 and Nvidia in 2016, Notably, the fund’s position in Apple traces back to 2004.
Established in 1987, the Harbor fund has been under the sub-advisory of Jennison Associates since 1990.
Blair Boyer, a managing director and co-head of large-cap growth equity at Jennison, stressed that to ensure long-term success, his team seeks out companies with a consistent ability to identify and finance new avenues for growth.
When pinpointing these companies, Boyer’s team focuses on secular growth narratives and above-average growth rates in revenue, operating margins, and net income.
Boyer elaborated, “The self-reinforcing nature of these characteristics is such that it tends to mean that companies have the ability to use the free cash flow that they generate to reinvest in their business.”
Performance Metrics
The institutional share class of the Harbor Fund (HACAX) maintains a three-star rating from Morningstar, having surpassed both its category and index performance over the past decade.
In 2023, the fund delivered a return of 53.7%, surpassing both the Nasdaq Composite and the S&P 500. This marked the fourth instance in the last decade that HACAX ranked in the top 10% of large growth funds, according to Morningstar’s data.
Although Boyer, who has spent thirty years at Jennison, officially assumed the role of manager for the fund in 2019, he stressed the consistency of the fund’s strategy over the years.
However, the fund underwent a transition when long-time manager Sig Segalas, Jennison’s co-founder, passed away in January 2023 at the age of 89.
Boyer commented, “We have a very strong belief that there’s a repeatability in the process.”
As of 2024, the fund has started the year on a positive note, delivering a return of nearly 12% through March 15. Its assets now total approximately $28.5 billion, with an expense ratio of 0.68%.
Portfolio Composition
The Harbor fund displays a significant level of concentration, with the top 10 holdings representing nearly half of the portfolio’s value. Primarily, these holdings consist of tech stocks, with some exceptions such as Eli Lilly.
Boyer remarked, “If you looked over the very long history of the fund, I’d describe consumer, technology, broadly defined, and healthcare as kind of the areas where we’ve had the most exposure.”
The roster of holdings also underscores companies demonstrating “self-reinforcing” growth, including tech behemoths like Amazon, which have evolved substantially as the internet landscape matured.
Moreover, Boyer highlighted Visa and Mastercard as holdings that have adeptly adjusted to the digitalization of payments, demonstrating enduring growth prospects.
Portfolio Strategy
Alongside Boyer and the fund managers, Jennison boasts a team of analysts, with each responsible for covering 30-40 stocks to identify potential investments.
Boyer attributed the addition of Advanced Micro Devices in the previous year to one analyst’s insights into semiconductor market opportunities during Nvidia’s surge.
In terms of portfolio management, Boyer’s team aims to maintain full investment, necessitating adjustments when adding new stocks by trimming or liquidating existing positions.
They introduce new holdings with small allocations, typically starting at 30 or 40 basis points and adjusting over time based on business performance.
Moreover, the Jennison team employs a diversified growth strategy within the portfolio to mitigate risk, classifying stocks into three growth buckets based on their growth rates.
This approach ensures a balanced exposure to various types of growth opportunities, encompassing high-growth names and those with recurring revenue characteristics such as credit card companies.
“The structure of the portfolio is not just about trying to own high-growth names,” Boyer concluded.
