Sponsored by Sponsored By Harbor Capital Advisors, Inc.
Harbor Capital Advisors, Inc., Brian Collins, Chief Investment Officer
Harbor has employed a manager-of-managers approach going back to the inception of the first Harbor mutual fund in 1986. All of our funds are single manager subadvised and employ either a traditional, fundamental, research-driven investment approach or a quantitative, model-driven approach.
Through our dedicated manager research team, we identify compelling investment firms that have a defined investment process - either fundamental, quantitative, or a blend - that we believe will lead to long-term outperformance over passive options. Harbor puts potential subadvisers through a comprehensive due diligence process so that when we decide to partner with a subadviser and bring a new fund to the market, investors can have high conviction that this manager has strong potential to deliver excess returns above passive over a market cycle.
We package that into an investment vehicle that is available to a wide range of investors at a relatively low price point. We offer products across different investment styles and asset classes that we believe investors will want exposure to over a long period of time, so we tend to avoid short-term, trendy opportunities. We do this on a consistent basis by working with talented managers, whether they're U.S.-based or international. Increasingly we're working with firms outside the U.S. that are trying to access the largest investment market – the U.S. — through pooled investment vehicles, such as mutual funds. We establish partnerships with our subadvisers that are beneficial to both parties and, most importantly, to our investors.
Why is investing in international markets attractive?
We believe it's always been an attractive place for investors to allocate a portion of their investment dollars, given the diversification benefits achieved from broadening away from a U.S.-centric portfolio. In the current environment, we believe it's even more attractive given the different market environments that have existed over the last few years between the U.S. and non-U.S. investment markets.
When you look at the returns that have been generated in U.S. equity markets versus foreign equity markets over the last couple years, for example, the S&P 500 vs MSCI EAFE, the spread has been pretty significant. On a trailing 3-year basis, the S&P 500 has had annualized returns more than 5% higher than the MSCI EAFE. That can create some attractive opportunities for investors in the international space at current valuation levels. When we look at long-term valuation levels versus the current metrics, the foreign markets appear to be undervalued relative to U.S. markets which creates opportunities for active managers to identify companies with very attractive attributes. Yet, for more macro reasons in some cases, the valuations that are tied to those companies are at depressed levels. If you look at the MSCI EAFE versus the S&P 500, much of the data that's out there supports the case for investing overseas.
We believe our managers will be able to deliver attractive excess returns above passive options over a market cycle and to do so in a way that rewards investors. One of the things we look for and we're seeing right now in the international equity space, particularly, is that active managers have a broad opportunity set across countries, sectors, regions, and the thousands of companies that are available to invest in. When we assess the results of active management in the international equity space relative to domestic equity, we're seeing that it's been easier for managers to deliver positive excess returns in foreign markets over the last three, five, ten years relative to passive options. For instance, the Russell 1000® Growth Index ranks well above median within the peer group of U.S. large-cap growth mutual funds over extended time periods. On a 10-year trailing basis, the Russell 1000® Growth Index ranks in the 20th percentile of the peer group. That has been a difficult benchmark to beat. Whereas the MSCI EAFE, over that same time period, ranks near the median.
Do active managers have more of an advantage in international markets?
As we talked about, there's greater breadth in the opportunity set. There are more levers to pull in terms of countries and currencies. Different sectors are more prominent outside the U.S. than they are in the U.S. As an example, the U.S. is widely recognized as being the leader in developing technology companies. Outside the U.S., tech companies are less prominent, but there are larger companies in other sectors which create opportunity. We also see lower correlations between stock price movements, which creates an attractive environment for active managers.
How are Harbor’s international funds positioned in the current market environment?
What is attractive about the Harbor platform is that we have a broad range of investment approaches. Our Harbor Diversified International All Cap Fund, subadvised by Marathon-London, is managed against an MSCI ACWI ex USA benchmark which includes emerging markets across the market capitalization range. It is a highly diversified portfolio where the manager takes a very active approach at the stock selection level but doesn't take large active bets at the broad regional level.
Our Harbor International Growth Fund, subadvised by Baillie Gifford, is also diversified, but not as broadly diversified of a portfolio. It comprises 70 to 80 stocks with a pronounced growth bias with a long-term growth orientation and relatively low turnover. The manager finds opportunities where companies have long runways of secular growth due to their business model and their competitive advantages.
In the middle, we have an actively-managed, quantitatively-run portfolio that we recently launched - the Harbor Overseas Fund - which has exposure to value, momentum, and quality all as part of the factor model that is employed by Acadian, the subadviser.
We see each manager exploiting what they see as the most attractive opportunities across the investment universe that they have exposure to. What's interesting in our approach is certain managers may be favoring specific regions or specific sectors. In the case of our International Growth Fund, it has been favoring e-commerce-based business models both in the direct-to-retail, as well as business-to-business space that are dislocating, long-held positions by other established companies in their markets. Whether it's having newer technology or a different approach, they are causing dislocation in their spaces, and that's a theme that we see being employed repeatedly.
We do see managers across our lineup being concerned about the direction of Europe and the UK/Europe Brexit issue, but most managers have taken a view that opportunities will arise from either outcome. There is uncertainty right now, but it's actually creating opportunities, particularly from a valuation perspective, which they are layering into their overall investment approach. Our diverse array of investment styles and types of products that we offer will always have a range of biases and tilts towards different themes, different countries and different sectors that the individual subadvisers find most attractive in the current environment.
What opportunities are subadvisers finding more attractive / less attractive?
One theme that we're seeing across a few of the managers is that they are a bit defensive in their outlook on Europe. This doesn't mean that they're completely avoiding Europe, but their exposure in Europe is being driven by individual company selection rather than taking a broad view on a sector or a country. We are seeing some interesting new investments across different funds where our subadvisers feel the company has an enduring competitive advantage, but hasn’t had an opportunity to continue to grow and gain share in its respective market because of this cloud about Brexit or the cloud overhanging Europe from a macro growth perspective. The valuation of the company is not fully reflecting that company's growth opportunities, so it's creating some attractive entry points to invest or to add to positions during this period.
On the emerging side, we're finding our managers are looking for opportunities in local markets where the company’s potential for continued growth and expansion is not being fully reflected in the share price of the stock. Whether that's because of concerns about trade policy in China, not only with the U.S. but with more regional trading partners, or it's a concern about geopolitics and the impact it may have on a particular country's economy, there still are attractive companies that are being sought out by our subadvisers and identified as attractively-valued opportunities that they want to have in their portfolio for the long term.
What are your thoughts on global investing versus U.S. / international allocations?
There does continue to be the appearance of a home country bias here in the U.S. and it's certainly understandable why people would favor their local market. For example, if you are a pension plan or investor with local market liabilities, you may be anticipating the need to cover those liabilities with your investments in the future. However, what we've been focusing on recently, is that the distinction between a domestic versus foreign company is increasingly being blurred. When you have multinational companies and smaller companies that still have a sizable revenue source outside their local market, it's increasingly difficult to think of those companies as purely domestic or purely international. And so that supports taking a global approach, and we have our Global Leaders Fund, subadvised by Sands Capital, that takes a purely global approach and invests across the entire equity universe developed market or emerging market exposure. They're looking for the most attractive growth companies that are leaders in their particular segment. It doesn't necessarily mean that you need to be a global business; they can be a regional business that has a strong competitive advantage and a dominant market share and a long runway ahead of them. But that opportunity is compared with other opportunities from around the globe. Even though the U.S. has been the stronger performing market in recent years, we believe it's a very attractive time for investors to look outside the U.S. This allows them to position themselves to build on exposure in the international space, where, particularly for those of us that believe in active management, there's greater opportunities, and we believe managers can add excess returns over passive options. There's more diverse investment opportunities, and whether that leads you to maintain a U.S. and non-U.S. allocation or eventually move towards global, we still think all of those attractive aspects of the international markets can lead to opportunities in a global portfolio as well.
DISCLOSURES
Investors should carefully consider the investment objectives, risks, charges and expenses of a Harbor fund before investing. To obtain a summary prospectus or prospectus for this and other information, visit harborfunds.com or call 800-422-1050. Read it carefully before investing.
There is no guarantee that the investment objective of a 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. Investing in international and emerging markets poses special risks, including potentially greater price volatility due to social, political and economic factors, as well as currency exchange rate fluctuations. These risks are more severe for securities of issuers in emerging market regions. Stocks of small and mid cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies. Harbor Diversified International All Cap Fund: Marathon-London's assessment of the capital cycle for a particular industry or company may be incorrect. Investing in companies at inopportune phases of the capital cycle can result in the Fund purchasing company stock at pricing levels that are higher than the market dynamics would support and therefore subject the Fund to greater risk that the stock price would decline rather than increase over time. Harbor Overseas Fund: The value of securities selected using quantitative analysis can react differently to issuer, political, market, and economic developments than the market as a whole or securities selected using only fundamental analysis. The factors used in quantitative analysis and the weight placed on those factors may not be predictive of a security's value. In addition, any model may contain flaws or the model may not perform as anticipated. Harbor Focused International Fund: The Fund may invest in a limited number of companies and from time to time, the Fund may be more heavily invested in particular countries, geographic regions or sectors. As a result, the Fund’s performance may be more volatile, and you may experience greater losses. Harbor Global Leaders Fund: Since the Fund typically invests in a limited number of companies, an adverse event affecting a particular company may hurt the Fund's performance more than if it had invested in a larger number of companies.
Harbor Funds are distributed by Harbor Funds Distributors, Inc.
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 MSCI EAFE (ND) Index is an unmanaged index generally representative of major overseas stock markets. 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. This unmanaged index does not reflect fees and expenses and is not available for direct investment. The Russell 1000® Growth Index and Russell® are trademarks of Frank Russell Company. The MSCI All Country World Ex. US (ND) Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance in the global developed and emerging markets, excluding the
U.S. This unmanaged index does not reflect fees and expenses and is not available for direct investment.
Alpha is a measure of risk (beta)-adjusted return.
