Harbor Capital Appreciation Fund’s Triumphs in the Face of Inflation
Since the S&P 500 Index’s profitability peak at the end of 2021, elevated inflation has pressured the operating margins of its underlying companies. In fact, operating margins for a number of U.S. indices spanning a range of investment styles declined for the period covering the end of 2021 through the first half of 2023 as exhibited below:
Source: FactSet Research Systems, June 2023
However, amidst this period of elevated inflation and deteriorating economic conditions, the Harbor Capital Appreciation Fund demonstrated fundamental resiliency, actually delivering an over 22% positive change in operating margins growth, compared to a more than 2% operating margin weakening for its benchmark, the Russell 1000 Growth. Notably, the S&P 500 Index (-4.2%), the Russell 1000 Value Index (-6.2%) and the Rusell 2000 Growth (-17.4%) also experienced operating margin declines for the reporting period outlined previously. In our view, the Harbor Capital Appreciation Fund’s aggregate operating margin expansion highlights the Fund’s mix shift towards companies with enhanced pricing power and profitability profiles throughout 2022 and 2023.
All things considered, we find it important to recognize the benefits of active management during periods of challenging macro phenomenon, such as long stretches of heightened interest rates, during which passive investments may be unable to adjust as quickly as active managers. To be sure, we cannot predict what the future holds. However, we point to Jennison Associate’s tenured management team and steadfast process as value additive for investors during periods of uncertainty and adjustment.
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. At times, a growth investing style may be out of favor with investors which could cause growth securities to underperform value or other equity securities.
Since the Fund may hold foreign securities, it may be subject to greater risks than funds invested only in the U.S. These risks are more severe for securities of issuers in emerging market regions.
The Standard & Poor’s (S&P) 500 Index is an unmanaged index generally representative of the U.S stock market. The Russell 1000® Growth Index is an unmanaged index generally representative of the U.S market for larger capitalization growth stocks. The Russell 1000® Growth Index and Russell® are trademarks of Frank Russell Company. The Russell Midcap Growth Index is a market capitalization-weighted index comprised of 800 publicly traded U.S. companies with market caps of between $2 and $10 billion. The Russell 2000 Growth Index is a market capitalization weighted index that measure the performance of small-cap growth companies. The Russell 1000 Value Index is a stock market index that measures the performance of the large-cap value segment of the U.S. equity universe. The Russell Midcap Value Index is a market capitalization weighted index that measures the performance of midcap value segment of the U.S. equity market. The Russell 2000 Value Index is a stock market index that measures the performance of the small-cap value segment of the U.S. equity universe. These unmanaged indices do not reflect fees and expenses and are not available for direct investment.
The views expressed herein are those of Harbor Capital Advisors, Inc. investment professionals at the time the comments were made. They may not be reflective of their current opinions, are subject to change without prior notice, and should not be considered investment advice.
Operating margins measure how much profit a company makes on a dollar of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax.
Jennison Associates is an independent subadvisor to the Harbor Capital Appreciation Fund.