How a $43B Fund Finds Stocks Like Tesla Before Everybody Else

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Kathleen McCarragher, left, and Natasha Culkin co-manage the Harbor Capital Appreciation Fund.

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Photo by Evelyn Freeze

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Many portfolio managers credit their research teams with helping them find winning stocks. It goes a step further for Kathleen McCarragher and Natasha Culkin: The collaboration of analysts is critical to the success of the $43 billion fund, say co-managers at Harbor Capital Appreciation.

He and his team of analysts focus on structural development companies with a long-lasting competitive advantage, research industry trends and companies independently, and then discuss their findings in detail as a group. This process determines the risks and opportunities of potential portfolio holdings and builds long-term confidence in their selection. Jenison Associates, subadvisor at Harbor Capital Appreciation, has had this process for more than 50 years.

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“Our culture is critical to our long-term success,” says McCarragher, who has been with Jenison since 1998 and heads the firm’s growth equity. “Research is rewarded. [This] There is a qualification.”

Morningstar Capital Appreciation (ticker: HCAIX) has a . rates as Silver Medalist Fund, outperforming its benchmark, the Russell 1000 Growth Index, and its big-growth peers over the past three and five years. On a five-year annualized basis, the fund delivered a return of 26.9%, putting it in the top 12% of its peers. Its expense ratio is above the 1.03% average, and its investor share class is weighted at 0.25%.

McCarragher was named Portfolio Manager on Harbor Capital Appreciation in 2013. Prior to joining Jenison, she was a portfolio manager at Weiss, Peck & Greer, based in New York.

Kuhlkin started as an analyst on the large-cap growth team at Jenison in 2004, and joined the fund in 2019. Prior to that, she was an analyst at Evergreen Investments in Boston and Palisades Capital in Fort Lee, the other two designated portfolio managers at NJ Capital Appreciation. Spiros Segalas and Blair Boyer.

The fund’s biggest source of return is twofold: owning market-leading companies with internal demand drivers that don’t necessarily depend on a strong economy for growth, and holding those companies for many years to profit from compounding. Happened, Kuhlkin says. His goal is to hold the companies for three to five years, but for at least a decade to name several.

1 holding of (AMZN), first purchased in 2007, is a good example of the type of company co-managers want: innovative firms that, over time, many addressable businesses with high reinvestment opportunities. Markets can be leveraged across geographies. Amazon started with its core retail concept, and management created other revenue streams—areas the team hadn’t predicted at the time, such as Amazon Web Services, its cloud-computing business.

Managers see opportunities like this in both the technology and consumer cyclicals, and have allocated more to those sectors than the fund’s benchmark.

Companies in secular growth with strong management teams and strong brands are also on the team’s radar, especially founder-led companies.

Number 3 Holding Tesla (TSLA) represents much of their philosophy and process. Capital Appreciation bought the electric-vehicle maker in 2013, when EVs weren’t really a product category and Tesla only had one product available to buy.

“Tesla is a great example of a name where it would be so easy to get lost in the daily news flow. But we have continued to focus on longer-term trends that are not reflected in the stock price today,” McCarragher says. highlights the potential development of cheaper entry-level models and full self-driving as a potential stock catalyst down the line.

“Operationally and financially, it has a lower risk profile than it was when we first bought it,” she adds.

LVMH shows a passion for capital appreciation for strong brands at Moët Hennessy Louis Vuitton (MC.France), which the fund bought in 2020. The luxury-goods retailer has top brands like Dior and Bulgari, and has a deep competitive advantage with luxury-goods consumers, Kuhlkin says. She acknowledges that the broader market is concerned with actions by Chinese authorities regarding luxury goods, and the Asian nation is a large consumer of LVMH brands.

While there is some risk, the fund’s research shows that demand for high-end goods remains strong in China and globally. She says recent earnings reports in the luxury space and meetings with such companies have also shown evidence of this.

Co-managers value teamwork as the core of the fund’s success.

Photo by Evelyn Freeze

In 2019, the fund now raised-no. 7 Holding Shopify (SHOP), draws from the way the e-commerce platform provides small and medium-sized merchants with sophisticated tools to sell online. Shopify initially offered website management, but now manages other important systems for customers, such as online security, shipping, financing, and cross-border activity. Shopify benefits from several trends, says McCarragher: new-business formation, e-commerce penetration, and the need for new businesses to establish an online presence.

Managers are eyeing inflation, which is now at its hottest in three decades, as rising prices and interest rates could hurt a long-term equity strategy like theirs. As a result they are evaluating the business fundamentals and stock valuations of their holdings. They state that many holdings have modest direct exposure to current inflationary pressures, but these firms also have pricing power to adjust to rising costs. Management teams have told the fund that inflation has not affected demand so far, but “it is a potential concern,” says McCarragher.

The fund has been lagging the index and competitors this year, but the fourth quarter is allowing it to make up for some poor performance. For the most part, the companies in the portfolio are strong, Culkin and McCarragher say, and they expect that strength to continue through 2022.

“If these companies meet our expectations for them, I feel very confident about the potential of this portfolio,” says McCarragher.

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