How Active Management May Enhance Growth Investing
A long-term allocation to growth may be a critical component in client portfolios.
U.S. large growth equity is one of the largest single areas in capital markets in the world. As of today, there's just over $2 trillion of capital deployed to public large U.S. growth, Kristof Gleich, president and CIO at Harbor Capital Advisors, said during a LiveCast on May 18, 2023.
Many advisors have been content with getting growth exposure from passive ETFs during the past decade. However, the landscape is shifting, and several factors may make active management positioned to outperform in the coming years.
The Complexities of Growth Investing
Over the long run, Harbor Capital believes equity prices either anticipate or follow earnings – and sometimes a combination of both. Looking at the S&P 500 over the past 30 years, ultimately markets and company share prices have followed those fundamentals, Gleich said.
“These winning companies that are exposed to longer-term secular growth themes that drive earnings and therefore share prices over the long term,” Gleich said. “It's a very simple concept, but like all good investing, it may sound simple but it's very hard to do well.”
“It takes rigorous research experience and really a deep appreciation today of network effects, scaling effects, compounding, and just generally sort of nonlinear thinking to identify these winning companies ahead of time,” Gleich added.
The Harbor Long-Term Growers ETF (WINN) seeks to exploit market inefficiencies by investing in companies with under-appreciated multi-year structural growth opportunities.
Lack of Persistence in Growth Leaders Has the Potential to Support Active Management
Notably, there has been very little persistence in growth leaders. The low market leadership persistence may require active management to capture the evolving opportunity set.
Gleich highlighted the top 20 companies in the Russell 1000® Growth Index by decade, looking at December 1999, December 2009, and February 2023. There is only one name in the index that has maintained its position in the top 20 throughout this period: Microsoft.
“Think about [how] Microsoft has had to continually invest, innovate, and reinvent itself to just stay in that top 20,” Gleich said. “So if you want to capture the future leaders, then you have to invest differently from a benchmark, which really reflect past winners, and take an active approach.”
Additionally, active management may be poised to outperform as concentration in indexes, which has reached historical levels, begins to normalize. Harbor Capital thinks concentration should normalize over the coming decade.
“As concentration normalizes, it's generally a worse time for index investing and a better time for active investing,” Gleich said. “I have nothing against concentration in investing. In fact, we lean into concentration as active investors. But concentration should be a deliberate action… rather than just a consequence of history or a passive decision as it is with index concentration.”
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All investments involve risk including the possible loss of principal. Please refer to the Fund’s prospectus for additional risks associated with each Fund. For the most current standardized performance, holdings and current yields: WINN
All investments involve risk including the possible loss of principal. 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. A non-diversified Fund may invest a greater percentage of its assets in securities of a single issuer, and/or invest in a relatively small number of issuers, it is more susceptible to risks associated with a single economic, political or regulatory occurrence than a more diversified portfolio.
This information should not be considered as a recommendation to purchase or sell a particular security.
The S&P 500 Index is an unmanaged index generally representative of the U.S. market for large capitalization equities. This unmanaged index does not reflect fees and expenses and is not available for direct investment.
The Russell 1000® Growth Index is an unmanaged index generally representative of the U.S. market for larger capitalization growth stocks.
Jennison Associates LLC is an independent subadvisor to the Harbor Long-Term Growers ETF. The Fund is managed by Harbor Capital Advisors, Inc.
This article was prepared as Harbor Funds paid sponsorship with VettaFI.