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Capital Appreciation Fund —
Fund in line with benchmark for Q3, but remains up for the year
3rd Quarter, 2015
"We've got to go through this earnings period, which could be a little tricky. But I believe most of our companies are very well positioned, and I anticipate some good news. "
– Jennison Associates LLC

Equity markets declined in the third quarter of 2015, bogged down by concerns over a slowdown in China’s economy and uncertainty about a potential Federal Reserve rate hike that didn’t materialize. The broad market S&P 500 Index fell -6.44% for the quarter, its worst quarterly decline since 2011. Growth stocks, as measured by the Russell 1000® Growth Index, posted a return of -5.29% for the quarter. Within the Russell Index, the Consumer Staples and Consumer Discretionary sectors were the best performers, returning approximately 1% and -2%, respectively.
The Harbor Capital Appreciation Fund performed in line with the Russell index, with a quarterly return of -5.44%. For the year-to-date period, the Fund was up 2.68%, outpacing the Russell index’s return of -1.54%. The Fund’s overweight allocation to Consumer Discretionary and strong stock performance in that sector made it the greatest contributor to relative performance for the quarter. Stock selection in the Information Technology sector, the largest allocation in the portfolio, detracted from relative return for the quarter.
Portfolio Manager Sig Segalas noted that several of the Fund’s largest holdings performed well in the difficult market environment. The top contributors to relative return were Amazon, Nike, Google, and Netflix, all of which posted double-digit positive returns for the quarter. Apple, the Fund’s largest position, did not fare as well; with a negative return, it detracted from relative performance for the quarter, as did several Health Care stocks.
Sig Segalas’s comments were made in an October 12, 2015 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1, 2015, through September 30, 2015.

Interview Highlights

Technology Positioning
I believe the outlook for Facebook is very strong, with products like Instagram and Messages that are likely to be monetized in the near future. I also believe the outlook for Google is quite strong. Another stock that has been around forever, Adobe, is moving more to the cloud and gaining a lot of traction with its creative marketing solutions.
Slowing in Biotechnology
The group has done exceptionally well for some time, and it was ripe for a little profit taking. Bristol-Myers is the leader in some of the developments in the cancer area. I believe it will do quite well as we look ahead. We also have Biogen, which has disappointed with one of their drugs. However, the company has the potential to reach a huge market with its Alzheimer's drug, which we will be getting more information on next year.
Economic Outlook
I am cautiously positive, as there are some signs of world slowdown but also some reasons for optimism. U.S. exports have been very weak, due not just to demand but also the strong Dollar. On the other hand, a positive is that our employment is quite strong here. In the fourth quarter, we may start seeing the benefits of lower oil prices, which would help consumers.
Earnings Season
I feel pretty good about the portfolio. We’ve got to go through this earnings period, which I think could be a little tricky, but I believe most of our companies are very well positioned and I anticipate some good news.
Impact of Expected Fed Activity
The Fed has indicated that it may raise rates as early as October. My expectation is that it’s more likely to occur in December or possibly next year. The anticipation for a rate hike adds to the volatility in the markets, but I expect that any initial rate increase is going to be pretty modest. I don’t believe it will have an impact on end demand.

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.