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Capital Appreciation Fund —
Large cap growth stocks manage modest advance for Q3
3rd Quarter, 2014
"I think the environment is quite a bit better. We're the strongest economy around and valuations, I think, are quite attractive. They're not as cheap as they were at the beginning of the bull market we've had, but I think they are still very reasonable on a historical basis. "
– Jennison Associates LLC

Shares of larger, growth-oriented U.S. companies recorded modest gains in the third quarter of 2014, with the Russell 1000® Growth Index posting a return of 1.49%. Health Care and Information Technology were the strongest performing sectors in the index, while the Energy sector, down 10%, was the weakest.
The Harbor Capital Appreciation Fund returned 1.91% for the quarter, slightly outperforming its Russell 1000® Growth benchmark. Longer term, the Fund outperformed the index for the 10 years ended September 30, 2014, and since its inception in 1987.
A larger-than-index weighting in Health Care stocks boosted Fund returns relative to the index in the third quarter, as did favorable stock selection in the Industrials sector. These advantages were offset in part by unfavorable selection in the Health Care sector. Sector weights are primarily a reflection of the Fund's bottom-up stock selection process rather than a major element of investment strategy.
Portfolio Manager Sig Segalas reports that several Information Technology stocks were among the top contributors to Fund performance in the third quarter, including Facebook, Apple, LinkedIn, and Twitter. Drug maker Gilead Sciences and athletic apparel maker Nike also were major contributors. Among the biggest detractors from performance were Schlumberger, EOG Resources, and Concho Resources, all in the Energy sector.
Sig Segalas's comments were made in an October 14, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through September 30, 2014.

Interview Highlights

Quiet quarter
The third quarter was remarkably tame; we were up 1.91%, the Russell 1000® Growth was up 1.49%, and the S&P 500 was up 1.13%. It was a relatively quiet quarter, while behind the scenes a lot of things were going on that the market seemed to disregard. It's only now, in early October, that we have started seeing the effects of some of the turmoil that really started festering in the third quarter.
Improving economy
On the positive side, the U.S. economy is clearly doing better. Employment is improving, inflation is muted. And lower energy prices, while they may hurt the energy stocks, are a positive in the sense that they are like a tax cut for the consumer as we enter the holiday shopping season. I think the environment is quite a bit better. We're the strongest economy around and valuations, I think, are quite attractive. They're not as cheap as they were at the beginning of the bull market we've had, but I think they are still very reasonable on a historical basis.
Interest rate outlook
The day the Fed raises rates the market may not like it, but I think it is going to be good news, because I don't believe they're going to do it unless they're absolutely convinced that the U.S. economy is in good shape. Moreover, in my view, rates are so low, they're artificially low. I think they could go much higher before they would begin to affect the economy in a negative sense.
Above-average growth
I think one reason the portfolio has worked the last few years is that in a slow-growing world economy, growth is a scarcity and we tend to gravitate towards companies that we think are going to grow at above-average rates. I believe growth is the way to go; I think it's the most productive way to manage money. The key, as always, is that we have to be pretty good on the execution on the growth rates for our companies. If they come through with the numbers we're expecting, the portfolio should do just fine.
Fundamental advantages
I think the benchmark is beatable over time. It's not going to be beatable every single quarter, but it should be beatable if you do your job as a growth stock manager. I think we do a pretty good job identifying the companies that have strong fundamental advantages that will allow them to grow above average. The other part of the equation is valuation: what do you pay for those favorable characteristics? My bias has always been on making sure we're right on the fundamentals. Because even if we over pay, which we try not to, if we're right on fundamentals, we believe we'll get bailed out eventually because they'll catch up to the price.

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.