Which of HCAIX’s Holdings Hurt Its 1Q16 Performance?

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Performance evaluation of the Harbor Capital Appreciation Fund

The Harbor Capital Appreciation Fund Investor Class (HCAIX) fell 5.6% in 1Q16, placing it among the bottom three funds out of 12 funds in this review. HCAIX fell 1.1% for the one-year period ended March 2016. It was placed fifth among its peer group.

Meanwhile, from December’s end 2015 until April 20, 2016, the fund rose 1.6%. We’ve graphed its performance against two ETFs: the iShares S&P 500 Growth ETF (IVW) and the iShares Russell 1000 Growth ETF (IWF). Let’s look at what contributed to the fund’s poor showing in 1Q16.

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Portfolio composition and contribution to returns

Healthcare stock picks were a bane to the fund’s returns in 1Q16. Regeneron Pharmaceuticals (REGN), Alexion Pharmaceuticals (ALXN), and Celgene (CELG) hammered down the contribution from the sector. There were no positive contributors.

Information technology stocks, which form ~40% of the fund’s assets, emerged as the second-largest negative contributors to the fund in 1Q16. LinkedIn (LNKD) was responsible for nearly all of the sector’s negative contributions.

Other negative contributors included Splunk (SPLK), Red Hat (RHT), and Salesforce.com (CRM). The information technology sector could have been in for a disaster had it not been for the sizable positive contributions from Facebook (FB) and Apple (AAPL).

Consumer discretionary stocks, which form over 30% of the fund’s assets, were sizable negative contributors to the fund as well. They were led downward by Amazon (AMZN).

Energy was the only sector to contribute positively to the fund. Both the fund’s stocks from the sector (CXO) (SLB) contributed positively to its returns.

Comparison with IVW

The HCAIX was thoroughly beaten by IVW in terms of total returns for 1Q16. The only sector in which the active fund did better was energy.

While IVW’s compositions from the consumer staples, financials, industrials, information technology, and materials sectors were positive, HCAIX’s stock picks from these sectors contributed negatively to its returns.

Investor takeaway

HCAIX has a small portfolio and is focused on the information technology and consumer discretionary sectors, both of which do well in a favorable economic environment. If consumer spending picks up in 2016, the fund will easily outdo its peers.

However, if the global economy faces further headwinds, the fund may be in for a poor showing for the year. Due to its composition, investors who believe in the consumption story will like HCAIX.

Let’s move on to the next fund in this series: the MFS Growth Fund Class A (MFEGX).

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