Objective and strategy
Harbor Global Leaders targets firms, worldwide, that are capable of generating sustainable, above-average, and relatively stable rates of earnings per share growth and strong free cash flows. The manager looks for companies that are leaders in their country, industry, or globally in terms of products, services, or execution.
Their ideal business has six characteristics:
- Sustainable above-average earnings growth;
- Leadership position in a promising business space;
- Significant competitive advantages;
- Clear mission and value-added focus;
- Financial strength; and
- Rational valuation relative to the market and business prospects.
In general, the discipline leads them to large-cap companies, though about 10% of the portfolio is currently invested in mid-caps.
Their investment discipline uses both qualitative and quantitative research and integrates environmental, social, and governance factors into its investment process. They will generally hold 30-50 companies and aspire to hold them for five years or more. The managers have the authority to invest 30-35% of the portfolio in emerging markets stocks, though currently, they’re closer to 5%.
Harbor Capital Advisors is responsible for all of the 27 Harbor Funds. Collectively, they have $56 billion in assets. Harbors’ business model centers on hiring sub-advisors, frequently institutional investors who are otherwise inaccessible to average people, to manage their funds.
Sands Capital Management, LLC, is responsible for the day-to-day management of the Global Leaders fund. Sands was founded in 1992 by Frank Sands, is headquartered in Arlington, Virginia, and manages $51 billion for clients worldwide. They are staff-owned and do long-only growth equity investing. They exist to add value and enhance the wealth of their clients with prudence over time. Sands Capital’s investment strategies (and those of their affiliates) employ a fundamental, bottom-up research approach that aims to identify high-quality public and private growth businesses globally.
Sunil H. Thakor and Michael Raab.
Mr. Thakor joined Sands Capital as a research intern, became a full-time Research Analyst in 2006, co-manager of the Global Growth strategy in 2007, and manager of the Global Leaders strategy when it launched in 2017. Before joining Sands Capital, he was an analyst and as an Associate at Charles River Associates, a strategic consulting firm.
Mr. Raab, CFA joined Sands Capital in 2007 as a research analyst and became Associate Director of Research in 2009. He was promoted to Portfolio Manager in 2019.
Strategy capacity and closure
Well above $15 billion. In general, managers avoid owning more than 5% of the outstanding shares of any company. We estimate the lowest possible cap by assuming the improbable: if the managers moved the entire portfolio into mid-cap stocks, now about 10% of the portfolio and the smallest type of stocks they own, and chose to own only 30 names, they could easily manage $15 billion without violating the 5% rule. As a practical matter, the capacity is unlimited.
Management’s stake in the fund
Mr. Thakor has invested over $1 million in the fund, and Mr. Raab has been $100,000 and $500,000 invested. Two of the fund’s eight independent trustees have also invested in it.
March 31, 2010. In March 2017, responsibility for the fund moved from Marsico Capital and Sands Capital. Investors assessing the fund should limit themselves to its last three years.
1.23% on assets of $131 million.
A singular odd profile in Business Insider assures us that “Sunil Thakor’s Harbor Global Leaders Fund is blowing away its benchmark in 2020 and has returned 516% to investors since March 2009” (9/25/2020). That sentence is wrong in two important ways:
- The fund is not “blowing away” its competition though it is handily outperforming its index over the first nine months of 2020. The fund’s 12.8% is in the top 20% of Morningstar’s category, which is great but is also below the fund’s longer-term record.
- All data prior to March 2017 is utterly irrelevant. The article is celebrating a record that is almost entirely the product of a now-departed team from Marsico Capital. Disregard it.
Mr. Thakor’s record is fine and requires neither hyperbole nor misrepresentation to celebrate it.
On March 1, 2017, Marsico-led Harbor Global Growth became Sands-led Harbor Global Leaders “to reflect Sands Capital’s investment strategy for the Fund.”
Three things to know about Sands Capital:
- They mostly target rich people. The investment minimums for Sands Capital Global Growth are $100,000 in the US and 500,000 USD/GBP/EUR in Europe.
- They are not primarily a mutual fund company. When we talk about the “global leaders strategy,” we’re not referring to an individual fund. Instead, the strategy manifests itself in a US fund, funds designed for European investors, separate accounts for high net worth investors, and so on. US funds are about one-fifth of the firm’s assets.
- They are really quite good. Morningstar rates both their funds for European investors and the ones for domestic investors as either four- or five-stars. The quantitative version of the Morningstar analyst rating makes the funds some version of bronze, silver, and gold.
And this fund is really quite good. By Morningstar’s assessment, its 17.7% annualized returns over the past three years put it in the top 7% of global large-cap funds. Both its peer group and benchmark trail Harbor by about 1000 bps annually, which is huge but not quite the full story. Global Leaders is a five-star / Gold-rated fund.
Morningstar places Harbor Global Leaders in a peer group that includes all large-cap global funds, including value-oriented funds whose style has been deeply out-of-favor. That makes the comparison automatically positive for any growth-oriented fund. Lipper offers a better peer group in this case: global large-cap growth. Harbor also leads that peer group but by a more-modest 390 bps.
It is, based on either raw returns or risk-adjusted returns, one of the top 10 funds in its Lipper peer group. It has much in common with the other top-tier global large-cap growth funds.
It is relatively concentrated, typically investing in between 30-50 names, currently 37. Only two of the top ten funds fall dramatically outside that range.
It has a relatively low turnover ratio, between 26-47% depending on the time period you look at. Again only two of the top ten funds are dramatically different.
It invests in companies with an above-average sustainability profile. On a scale of zero to fifty, where zero is best, Morningstar gives the portfolio a score of 19.95. Lipper gives the portfolio a B- ESG score, with all of the top-ten funds falling somewhere in the “B” range.
The manager’s distinction comes in two forms.
He focuses on global leaders, firms with best-in-class products, services, or execution. He describes them as “dominators, disruptors, and scale leaders.”
He focuses on two types of firms, those which thrive on innovation and disruption, and those which cater to needs over wants.
Mr. Thakor’s argument strikes me as fundamentally sound: growth might be hard to come by, the gap between winner and also-rans is likely to widen, but even stagnant markets will have some outstanding opportunities. The key to success to having a portfolio which is very selective by design, so that you’ve minimized the risk of incorporating also-rans, and which focuses on firms that can “make their own weather.” That is, consistently dominate across markets.
Executed well, such a portfolio should be relatively low-turnover, should have some of the stability characteristics of blue-chips with the return characteristics of growth stocks, and should hold up well in rocky markets.
Those are high and admirable expectations. Over his three-plus-year tenure, Mr. Thakor has largely but not wholly met them. Returns have been top tier. Volatility has been neither noticeably higher nor noticeably lower, than either his Lipper peer group or the composite to the 10 top-performing Lipper peers. During the three-month COVID bear market at the start of 2020, HGGIX had a maximum drawdown of 18.8%, worse than his peer group’s 17.6% drop. Turnover has signaled a holding period of two to four years, a bit short of the five years he aspires to.
There’s much to like with Harbor Global Leaders. The fund has earned top tier returns every year since Mr. Thakor assumed management of it, which is a welcome contrast to the somewhat erratic performance in its final years under the previous team. He’s generated those high returns with no more than average volatility. Mr. Thakor believes that he should be judged on his fund’s performance across an entire market cycle; historically, such cycles have averaged 5-7 years in duration. Performance at about the halfway point has been exceptional, and investors should have the patience to ride out any short-term disruptions.
With a low investment minimum, small asset base, uniformly successful sub-advisor, and reasonable expenses, investors looking for a long-term growth strategy should have it on their due-diligence list.