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Capital Appreciation Fund —
Fund outperformed benchmark for Q4, ending year in positive territory
4th Quarter, 2015
"We had a very good year, and it was largely driven by better than expected fundamentals of some of our largest holdings. "
– Jennison Associates LLC

Equity markets reported solid gains during the three-month period ended December 31, 2015, rebounding from the negative territory of the previous quarter. The first month of the fourth quarter was especially strong, but was followed by volatility as geopolitical instability roused investor fears once again. The broad market S&P 500 Index recorded a return of 7.04% for the period. The Russell 1000® Growth Index, a measure of larger, growth-oriented U.S. companies, was up 7.32% for the quarter. Within the Russell index, all sectors reported positive returns except for the Energy sector, which continued its negative trend to end the quarter at -17.19%.
The Harbor Capital Appreciation Fund outperformed the Russell index, with a quarterly return of 8.09%. For the full year, the Fund was up 10.99%, outpacing the Russell index’s return of 5.67%. The Fund’s stock selection in the Information Technology sector was the greatest contributor to relative performance for the quarter. An overweight position in Consumer Discretionary coupled with negative stock selection detracted from relative returns during the period.
Portfolio Manager Sig Segalas noted that several of the Fund’s largest holdings performed very well. The top contributors to relative return were Amazon, Facebook, Alphabet, and Visa, all of which posted double-digit positive returns for the quarter. Apple, one of the Fund’s largest positions, did not fare as well; with a negative return, it detracted from relative performance for the quarter, as did Under Armour and Chipotle.
Sig Segalas’s comments were made in a January 14, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2015, unless otherwise indicated. All references to the year-to-date are for the period January 1, 2015 through December 31, 2015.

Interview Highlights

Confidence in Our Technology Holdings
In terms of overall exposure, Information Technology was 39% of the Fund’s portfolio at quarter end. It is very encouraging to see that the biggest relative gains during the quarter were largely driven by better than expected fundamentals in our growth stocks. Amazon was up over 100%, as was Netflix. Netflix is very disruptive in the media area and is being very aggressive internationally, where their profitability is inherently higher than in the U.S., since they can spread their costs over a larger base than they can domestically. This was an unusually strong year and I believe we are invested in the right stocks.
Fear Has Been a Factor in Market Volatility
I am surprised by the magnitude of the correction in the market that we just observed, but the market has been through this before, and I believe that we are in a position to weather this just fine. Last year was very difficult for many investors, with fears rising over the slowing of China’s economy, and uncertainty over whether there will be a hard or soft landing there. I believe it is possible that there is going to be additional volatility going forward due to worries about terrorism, Iran, and, of course, the upcoming U.S. election in 2016.
Headwinds Are Eroding
The U.S. consumer seems to be in good shape, relatively speaking. Unemployment is hovering around 5%, and gasoline prices are still very low. Though the Federal Reserve has begun moving interest rates higher, rates are still very low and we do not have inflation. I believe we could start seeing the tailwinds of lower oil prices and, likewise, lower commodities prices, which would help U.S. consumers.
Tech Companies Are Investing in the Future
We continue to invest in what we consider to be high quality companies; particularly those that we believe have strong balance sheets. We are long-term investors, and this strategy has paid off for us over time. Companies such as Amazon and Facebook are focusing on investing in their futures. I would not be surprised if they come out with expansion budgets that exceed what people are comfortable with. Although it might hurt their bottom lines in the near-term, I believe they are making productive investments that will pay off in the longer term.
No Inflation, For Now
I believe people have been too preoccupied with the Federal Reserve’s rate increase. In actuality, the Fed raised rates a quarter of a percent. While some fear that the Fed could continue to raise interest rates by a quarter of a percent every quarter, I’ll give the Fed the benefit of the doubt when they say that the rate changes will be “data-dependent.” I believe we are unlikely to see much inflation (though the Europeans would like to see some), because the Fed will likely take into account fears regarding slowing economic growth both in China and globally. And while wages are creeping up a bit, there is still a lot of slack in the system.

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.