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Spiros Segalas' Harbor Capital Appreciation Fund 4th Quarter Commentary

- By Holly LaFon

"Although we expect heightened volatility in the near-term, long-term investing in companies with well above average growth rates and unique, market-leading products and services remains our focus." -Jennison Associates LLC

Global equities continue to rally after election surprise

The unexpected victory of U.S. President elect Donald J. Trump produced a momentary spasm for global equities, but markets quickly resumed their rally, and major indexes closed out the fourth quarter of 2016 and the year with gains. In late November, after more than two tumultuous years over which the price of oil declined from more than $110 to about $25 per barrel, the Organization of the Petroleum Exporting Countries (OPEC) agreed to cut production quotas. In the agreement's wake, oil prices settled in above $50 through year end. In December, strong employment, wage and housing gauges prompted the U.S. Federal Reserve to make its second hike in short-term interest rates in as many years. The Manager expects further rate increases in 2017. U.S. economic growth was positive if uneven in 2016, with GDP expanding 1.1% in the first quarter, 1.4% in the second and 3.5% in the third.

Against that backdrop, the Harbor Capital Appreciation Fund returned -1.94% for the fourth quarter, underperforming the benchmark, the Russell 1000(R) Growth Index, a measure of larger, growth-oriented U.S. companies, which gained 1.01%, as well as the S&P 500, which closed the period up 3.82%. For full year 2016, the Fund returned -1.07%, compared to a 7.08% advance for the benchmark, and an 11.96% advance for the S&P 500. The primary driver of the Fund's relative underperformance during the fourth quarter was security selection in the Information Technology sector, which also detracted from absolute performance, more than offsetting relative contribution from the Financials sector.

Jennison Associates' comments were made in a January, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended December 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through December 31, 2016.


Staying the Course as Market Environment Worked Against Fund

After the U.S. election, speculation about potential policy initiatives of the new administration favored cyclical industries, including many exhibiting little secular growth. This rotation negatively impacted the portfolio's performance. Although we expect heightened volatility in the near-term, long-term investing in companies with well above average growth rates and unique, market-leading products and services remains our focus.

Valuation and Growth Promising

The Fund's aggregate earnings per share (EPS) growth in 2016 was approximately 15%, handily surpassing that of the S&P 500, which was approximately -3%. We believe the Fund's aggregate EPS growth will approximate 15% again in 2017, while EPS growth for the S&P 500 Index is forecast at approximately 10%. With a modest price-to-earnings ratio premium, the Fund is currently at the low end of its historical valuation range relative to the S&P 500 and Russell 1000(R) Growth indexes. In the past, the Fund has performed well when its relative valuation has been low and its above-average earnings growth has been clear.

Impact of New U.S. Administration Remains Uncertain

The vigorous rally in the U.S. equities since the November election has included industries and companies that could benefit from potential policy events, including the repeal and rollback of regulations, a reduction in corporate tax rates, the repeal of the Affordable Care Act and increased defense spending. With such an expansive list of prospective beneficiaries, it is hardly surprising that the stock market moved in anticipation of these possibilities before the new president has been sworn into office. However, the nature, timing, scope and ease of policy change are uncertain. With U.S. economic expansion now entering its eighth year and the economy essentially at full employment, it remains to be seen how the new administration's policies will achieve what the market is already discounting: an economy pushed to accelerate.

This information should not be considered as a recommendation to purchase or sell a particular security. The holdings or sectors mentioned may change at any time and may not represent current or future investments.

This article first appeared on GuruFocus.