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Capital Appreciation Fund —
Fund outperforms as market rally rolls on
1st Quarter, 2017
"We believe the market's increased focus on company fundamentals favored the Fund's investment approach. "
– Jennison Associates LLC

Global equity markets advanced broadly in the first quarter of 2017. Solid economic fundamentals in the U.S., including robust employment and accelerating corporate profit growth, bolstered the market. A series of executive orders from President Donald J. Trump relaxed or eliminated prohibitions across many industries, in some cases accelerating specific infrastructure projects, such as the Keystone XL and Dakota Access pipelines. The Manager believes the Republican party's failure to repeal and replace the Affordable Care Act showed major legislative accomplishments could be more elusive, while action on trade, immigration, and national security also fell short of campaign rhetoric. The U.S. Dollar declined slightly against major world currencies, oil prices fell, and gold and other major metal prices rose. The Federal Reserve raised the U.S. federal funds target rate 25 basis points with further tightening promised, reflecting increased inflationary expectations.
Elsewhere, U.K. Prime Minister Theresa May formally invoked the legal mechanism that will end Britain’s membership in the European Union, though the sequence of negotiations remained in dispute. Incumbents defeated right-wing populists in German and Dutch elections, but votes in France and Italy were still to come, and could indicate growing appeal for more inwardly focused, less globally inclusive political agendas.
The Harbor Capital Appreciation Fund advanced 10.64% for the quarter, outperforming the benchmark, the Russell 1000® Growth Index, a measure of larger, growth-oriented U.S. companies, which gained 8.91%, as well as the S&P 500, which closed the period up 6.07%. An overweight in the Information Technology sector, the best performing sector in the benchmark, was the key driver of relative performance, while stock selection there was also beneficial. Stock selection in Consumer Discretionary also drove relative performance. Overall, both stock selection and sector allocation added value during the quarter. However, an overweight to Energy reduced relative gains, while Health Care positions advanced but lagged the benchmark.
Jennison Associates’ comments were made in an April, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended March 31, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2017.

Interview Highlights

Market Focus on Company Fundamentals a Boon to Fund
As fundamental, bottom-up investors, we examine company and industry prospects over the intermediate and long-term. Numerous factors, including company fundamentals, macroeconomic conditions, and market risk tolerance, cause variability in the way equity markets price securities in the short-term. We constantly assess whether and how these factors affect our investment thesis and company long-term value. While macroeconomic events during the quarter did not materially impact the underlying fundamentals of companies held in the Fund, we believe the market’s increased focus on company fundamentals favored the Fund’s investment approach.
Portfolio Growth and Valuation on Target
We believe the Fund has the potential to once again exceed the profits growth of both the S&P 500 and the Russell 1000® Growth Index in 2017. At the same time, the Fund’s price-to-earnings ratio premium relative to the indexes remains modest by historical standards. In the past, attractive relative valuation and visible above-average earnings growth have often translated into strong Fund performance.
Sentiment Moderates Surrounding Trump Rally
Equity market gains in early 2017 were spurred by signs that U.S. economic expansion may be gathering strength and that earnings growth and margin expansion continue across many industries. The market’s initial favorable response to President Trump’s election reflected anticipation of lower corporate tax rates, a less onerous regulatory environment, and increased fiscal spending on infrastructure. We believe that with elusive legislative accomplishments and factionalism impeding cooperation, market optimism has moderated.

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.