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Capital Appreciation Fund —
Despite Brexit, U.S. equities advance
2nd Quarter, 2016
"We constantly assess how the factors we consider important affect our investment thesis and companies for the long-term, regardless of how the market is pricing securities in the short-term. "
– Jennison Associates LLC

The second quarter of 2016 came to a tumultuous close as the U.K.’s June vote to exit the European Union briefly halted the gradual, sustained recovery of equity markets from their sharp declines at the beginning of the year. Nonetheless, U.S. equities advanced for the quarter after posting steady gains for much of the period. The price of oil futures continued to rebound, from $27 per barrel in early February to just below $50 at the end of June. The U.S. Federal Reserve kept monetary policy on hold while bond prices rallied, pushing U.S. interest rates to near-record lows for the current cycle. Most measures of U.S. economic activity showed steady progress, notwithstanding conflicting signals from May’s employment report.
Against that backdrop, the broad market S&P 500 Index advanced 2.46% for the period, while the Harbor Capital Appreciation Fund’s benchmark, the Russell 1000® Growth Index, a measure of larger, growth-oriented U.S. companies, finished up 0.61%.
The Fund lagged the benchmark, posting a return of -1.31% for the quarter. Stock selection, particularly in the Health Care sector but also in Consumer Discretionary, drove relative underperformance. Stock selection in Financials and Materials benefited absolute and relative returns. Sector allocation overall was negative as well. An overweight to Information Technology, the benchmark’s weakest sector for the quarter, outweighed the positive effect of stock selection in that sector. An overweight to the Energy sector, the benchmark’s strongest, benefited absolute and relative returns.
Apple, whose shares fell on a lull in major product cycles, was a major detractor from relative returns, along with Nike and Alexion Pharmaceuticals., the Fund’s largest holding as of June 30, 2016, was the top contributor to relative returns. Other notable contributors included Bristol-Myers Squibb, China-based internet service portal Tencent Holdings and Monster Beverage.
Jennison Associates’ comments were made in a July, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2016.

Interview Highlights

Brexit Effect
The Brexit could cause prolonged uncertainty surrounding equity valuations, consumer confidence, and corporate confidence and investment; dampen global gross domestic product (GDP) in what has been a slowing economic environment; and increase uncertainty about an array of social and geopolitical issues and initiatives. Because slowing GDP growth and currency swings will affect earnings, and valuations will affect stock prices, we believe that risk-averse assets will outperform in the short-term. These factors present short-term headwinds for the Fund. However, the Fund’s limited U.K. and Europe domiciled holdings derive most of their revenues from elsewhere.
Sticking With Health Care
Many Health Care stocks that have been strong positive contributors to return over past quarters continued to face concerns about drug pricing. Biotechnology companies that sell innovative, high priced drugs lost ground, including Alexion Pharmaceuticals. We believe that the long-term fundamentals of the Fund’s biotechnology holdings remain intact, and that current valuations underestimate the potential of pipeline drugs.
Adding Adidas
Adidas, the world’s third-largest sporting goods manufacturer – behind Nike and Under Armour – was added to the Fund during the quarter. After several years of suboptimal performance, we believe Adidas is poised to generate accelerated growth as new management repositions the brand in North America, leverages its Boost technology, and restructures certain product lines, such as golf. We believe the company could post attractive revenue growth and stable profit margins as higher raw material costs and negative currency effects are offset by better channel and product mix and more favorable pricing trends.
Amazon Rebounds
Amazon continues to invest to drive unit growth in its core retail business and through the proliferation of digital commerce via the mobile market. The stock has benefited as investors have shown an increased appreciation for Amazon’s strong execution, long-term revenue growth, margin-expansion potential, and development of a second meaningfully important business opportunity in cloud infrastructure. Earnings and revenue in the most recently reported quarter exceeded expectations, as did company estimates for future quarters.

Performance data shown represents past performance, which is no guarantee of future results. Current performance may be higher or lower than the past performance data shown. Investment returns and the value of an investment will fluctuate, and an investor's shares, when sold, may be worth more or less than their original cost. You can obtain performance data current to the most recent month-end (available within seven business days after the most recent month-end) by calling 800-422-1050 or visiting

Performance figures discussed reflect that of the institutional class shares.

The views expressed herein are those of the portfolio manager at the time of the interview and may not be reflective of their current opinions or future actions.  These views are not necessarily those of the fund company and should not be construed as such.

This information should not be considered as a recommendation to purchase or sell a particular security and the holdings or sectors mentioned may change at any time and may not represent current or future investments.