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Capital Appreciation Fund —
Large cap growth stocks up in Q2; all sectors gained
2nd Quarter, 2014
"I think the trends are positive and I believe this could be a good year for us. "
– Jennison Associates LLC

Stocks of large U.S. companies posted solid results for the second quarter of 2014. Large cap growth stocks, as measured by the Russell 1000® Growth Index, returned 5.13% for the three months ended June 30, 2014, with all 10 economic sectors gaining ground.
The Harbor Capital Appreciation Fund returned 4.59% for the quarter, trailing the index. Longer-term, the Fund outperformed its Russell 1000® Growth benchmark for the 10 years ended June 30, 2014, and since its inception in 1987.
In the second quarter, stock selection in the Health Care sector was the biggest contributor to Fund performance both on an absolute basis and relative to the index. Stock selection in the Information Technology sector was the biggest detractor from relative returns.
Portfolio Manager Sig Segalas reports that top performers for the Fund included Apple, oil-services company Schlumberger, and Health Care holdings Allergan, Vertex Pharmaceuticals, Illumina, and Celgene. All had share price gains of 20% or more, led by Allergan, up 36%. Allergan shares rose after a takeover bid by Valeant Pharmaceuticals International. Among the portfolio holdings that detracted from performance were Whole Foods Market, Splunk, and VMware.
Sig Segalas’s comments were made in a July 15, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2014.

Interview Highlights

Reasonable valuations
The economy is slowly getting better. Inflation is still behaving. The Federal Reserve is scheduled to complete its quantitative easing later this year. Even though we had big gains in the stock market last year and a good market so far this year, I think stocks continue to be reasonably priced. They are not as cheap as they were a year ago, but I think a market selling around 16 times earnings is still a very reasonable price.
Reducing risk
After last year's monster rally I think the market has become somewhat risk averse. When you see Utilities being one of the best performing groups, you know it's probably not going to go well for small cap or high-beta growth stocks in general. I think the test will come when the Federal Reserve tries to get back to normal and stops its quantitative easing, to see what effect this has on the economy. If the Fed has done this correctly and inflation continues to behave, I could see some of the higher-beta names doing a little better.
Q2 laggards
Whole Foods is a great company and I'm sure they'll do fine over the long-term. But clearly they're seeing more competition and I think the stock could be a laggard in the short-term. I think some of the tech names, such as Splunk and VMware, just got ahead of themselves. Their fundamentals are strong and we believe they should do well.
Healthy environment
Based on this year's estimated earnings, our portfolio is now 25 times earnings versus 16.5 times for the S&P 500. For next year, it's about 20 times earnings versus 14.5 times for the S&P. So it's important that our companies come through. I think the environment is healthy and we should get more evidence as earnings numbers are reported over the next couple of weeks. I think the trends are positive and I believe this could be a good year for us.
Fundamental strengths
We never play M&A. If it's going to happen, it happens, but we never try to anticipate who may buy someone else. That's pretty risky. There has been a lot of M&A activity lately, and I view that as a negative longer-term because I think we're getting too much consolidation. If we happen to be invested in a company that benefits from it, fine, but we don't try to play M&A. We try to buy companies that are fundamentally strong in their own right.

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.