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A Great Fund for This Market

Steven Goldberg

With 48 years of experience, the manager of Harbor Capital Appreciation knows how to produce good results -- with stocks of large, sturdy companies that can weather the current storm.



At 75, Spiros "Sig" Segalas has seen just about every kind of market. His long experience has helped him weather the occasional crisis with equanimity -- and without rushing to sell stocks at inopportune moments.

Segalas has been investing for a living since 1960 and has run Harbor Capital Appreciation (symbol HACAX) -- a terrific fund for this market -- since 1990. Today's upheaval, while terrifying, isn't any more frightening than some previous calamities. For example, during the 1973-74 bear market, when stocks sank nearly 50%, "there was every bit as much uncertainty," says Segalas, president and chief investment officer of Jennison Associates, a New York City money-management firm.

The current financial meltdown reminds him even more of 1987. The stock market plunged 23% on October 19 of that year -- the biggest one-day decline in history. "Everything was going down, and every pundit was saying things were similar to the Great Depression," Segalas recalls. And like the current crisis, the 1987 crash was sparked by a highly leveraged product -- at that time, portfolio insurance. "We learned that leverage works both ways," he says of Black Monday.

The lesson of those past disturbances, Segalas says, is that "we have an unbelievably resilient economic system." Consequently, during times of panic, "You're best off doing nothing."

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Although Segalas is optimistic about the future, he certainly doesn't underestimate the importance of recent developments: "If I had gone on vacation on a desert island and come back to find that American International Group, Lehman Brothers, Freddie Mac, Fannie Mae and Merrill Lynch were all essentially out of business, I would have assumed the worst." And he's been worried about derivatives for years. "It has been one big Ponzi scheme."

Segalas doesn't like financial stocks and says the financial system is undergoing fundamental change. "Investment bankers will have to be boring bankers again," instead of being able to use leverage to goose profits and then paying the consequences when things go wrong. Segalas says consumers are overleveraged, too, which is why he is wary about consumer-related stocks.

Since its launch, Capital Appreciation has produced good, if not great, returns. Over the past 15 years through September 22, the fund's Institutional share class, which requires an initial minimum investment of $50,000 returned an annualized 7%, putting it in the top 22% among funds that specialize in large-company growth stocks, according to Morningstar. Over the past five years, it returned 4.8% annualized, putting the fund in the top 34% of its peer group.

The fund has become streaky of late. It was remarkably consistent in the 1990s, finishing ahead of its competitors every year. But it performed horribly during the 2000-02 bear market, with a 62.5% loss -- dropping 15 percentages points more than Standard & Poor's 500-stock index. (The fund's Investor share class (HCAIX), which came into existence in 2002, charges slightly higher annual fees than the Institutional class but requires only $2,500 to start.)

However, the current market environment, which I believe favors sturdy, large-company growth stocks, should be ideal for Capital Appreciation. Over the past 12 months, it has lost 16%, placing it in the top 28% among its peers and beating the S&P 500 by three percentage points.

About 27% of the fund is in the stocks of large technology companies, which I think are cheap (see Ten Tech Giants to Buy Now). Another 25% is in health companies, traditional bulwarks against recession. Less than 3% is in cash.

Segalas and his team are stressing quality even more than usual. He says: "We want to own strong companies with strong balance sheets with defensible franchises that can weather the storm -- even if it's worse than we think it will be."

Among his top holdings is Google (GOOG). At a September 22 closing price of $430.14, Google's stock sells at 18 times the $23.88 per share that analysts on average expect the company to earn in 2009. The stock is off its 52-week high by 42% because of concerns about a weakening economy and declines in advertising spending, but the company "generates tons of cash" and has a huge amount of it in reserve, says Segalas.

Although Segalas isn't wildly bullish on energy, he likes Schlumberger (SLB), the leading energy-services company. At $89.94, it trades at 15 times estimated 2009 earnings of $6.08 per share.

Segalas is also a fan of Amazon.com (AMZN), which he considers a great long-term holding. "In many cases, Amazon is the low-cost guy, and it's killed eBay," he says. The stock, at $74.93, trades at a lofty 35 times forecasted '09 profits of $2.12 per share.

Another stock he thinks makes a great long-term holding is Visa (V), which makes money every time someone uses one of its credit or debit cards. In hard times, Segalas says, debit-card usage picks up while credit-card usage falls. With the stock at $65.18, Visa trades at 24 times estimated profits of $2.77 per share for the year that ends September 30, 2009.

Segalas doesn't consider just a company's growth prospects. He pays attention to its price-earnings ratio and other measures of valuation. But occasionally, he goes out on a limb. That's the case with First Solar (FSLR), which has developed a low-cost method for producing solar panels. At $222.65, the stock sells for 32 times analysts' estimated earnings for 2009 of $6.98 per share.

Capital Appreciation has assets of $7.8 billion, but altogether Segalas supervises $33 billion in large-growth stock money at Jennison. He's assisted by four portfolio managers and 14 analysts.

Steven T. Goldberg (bio) is an investment adviser and freelance writer.




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