Disciplined buying, selling strategy is key to Harbor Capital's impressive record

THE BALTIMORE SUN

Having sold stock in Capital Cities/ABC long before last week's run-up is the kind of bad luck that resonates with investors.

But shareholders in the Harbor Capital Appreciation Fund will probably forgive that decision by Spiros Segalas, the fund's manager. Afterall, they have gained 35 percent so far this year.

Such a return puts Harbor Capital in the top 4 percent of all growth funds, with an impressive long-term record as well.

Mr. Segalas, ever frank about his errors, expressed only a tinge of regret about Capital Cities, whose stock rose nearly 21 percent last Monday on the news it was being acquired by the Walt Disney Co. "We thought the valuation was too high," he said, even though Capital Cities had been one of his top-performing stocks. "We sold a couple of years ago."

The fundamental strength of Capital Cities was never a doubt, he said, and that's a good thing. With a significant stake in Disney, Harbor Capital will regain a position in Capital Cities once those companies combine their operations.

Mr. Segalas' choice of Disney over Cap Cities goes to the core of his investment strategy. He picked up Disney more than a year ago because it met key criteria: its growth was approaching 20 percent a year, three times the market average, and its stock was trading at little or no premium to the overall market.

When Capital Cities' valuation rose, he stuck to his equally disciplined approach to selling, which forces him to shed a stock before adding one to his portfolio. He's not a momentum player, jumping into stocks on the rise, nor does he troll for companies likely to be acquired.

The number of names in his portfolio holds steady at 60 -- no matter what -- making for a concentrated portfolio, much of it currently in the high-flying technology sector.

With five-year total returns that average 18.2 percent annually, the fund has topped the Standard & Poor's 500 by more than 5.5 percentage points a year, earning Five Stars, the highest designation, from Morningstar Inc., the fund researchers in Chicago.

High returns imply high risk, though, and Harbor Capital is riskier than 76 percent of growth funds for the three years that ended in June, and 83 percent riskier for the last five years, according to Morningstar.

Sheldon Jacobs, editor of the No-Load Fund Investor, a newsletter published in Irvington, N.Y., recommends the fund despite its risk profile. "It has delivered even greater rewards than the risks it took," he said.

In fact, Mr. Segalas, 62, has transformed the fund from an underachiever to a leader. In 1969, he helped found the Jennison Associates Capital Corp., which has managed the fund for Harbor Capital Advisors Inc. of New York since 1990. Before that, the fund had trailed the broader market.

Now, technology stocks account for 42 percent of the fund's $758 million in assets. The fund's top three holdings -- Intel, Hewlett Packard and Motorola -- represent nearly 12 percent.

Mr. Segalas is enamored of technology for much the same reason everybody else is -- American industry dominates a field exploding along with burgeoning global markets. Despite soaring stocks this year, the prices remain cheap, he contends.

"Back in the late 1960s, we used to pay two times or better the market's price-earnings multiple for the technology stocks of the time, such as Xerox and Polaroid," Mr. Segalas said. "They would sell for as much as 50 times earnings. Now you have Hewlett Packard selling for 16.8 times our estimate of this year's earnings, and the S&P; is 15.5 times. That ain't bad for a company that's clearly growing faster than the market."

Intel, he said, is trading at 16 times his estimate of 1995 earnings, and Motorola at 24.4 times. Over all, he estimates his portfolio's average price-to-earnings ratio is 19.8 times this year's earnings. "The only high P.E. in the portfolio is Microsoft, which is selling at 35 times our estimate for this year," he said. "But that's such a unique company. I think I've cut back that holding three times over the last 12 months." The stock would probably be 5 percent of the portfolio instead of 3 percent without those sales, he said.

Much of the portfolio's turnover, about 70 percent a year, can be attributed to the trimming of stakes in stocks that have surged. "I've cut back technology several times in the last six months," Mr. Segalas said. It was a technology stock that Mr. Segalas culled last year to make way for Disney.

Though mindful of the wall of worry surrounding high-tech stocks, Mr. Segalas suggests the media scrutiny is keeping managers vigilant. "The only rap I can see against technology is that the group has done incredibly well," he said. "I think the valuations are still incredibly attractive."

Technology is really a subset of Mr. Segalas' favorite group, the best-run corporations in categories that will meet the burgeoning worldwide demand for goods and services. At least 70 percent of the portfolio, he said, is devoted to stocks of such companies.

The group includes foreign multinationals, like Ericsson, Nokia, Reuters and SmithKline-Beecham, which account for 14 percent of assets. It also embraces domestic companies like Disney, Boeing, Coca-Cola and McDonald's that are selling products around the world.

"My feeling is that we're getting into the sweet spot of performance for growth managers," Mr. Segalas said.

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