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Capital Appreciation Fund —
Growth stocks post modest gains in Q1
1st Quarter, 2014
"I feel that this is going to be a pretty good year for us. The economy is doing better. Inflation is behaving. I think the market will broaden out. "
– Jennison Associates LLC

U.S. growth stocks posted small but positive returns for the first quarter of 2014 as investors showed a preference for value-oriented equities. Large cap growth stocks, as measured by the Russell 1000® Growth Index, returned 1.12% for the three months ended March 31, 2014, while its counterpart, the Russell 1000® Value Index, returned 3.02%.
The Harbor Capital Appreciation Fund posted a negative return of -0.12% for the first quarter, trailing its Russell 1000® Growth benchmark. From a longer-term perspective, the Fund outperformed the index for the 10 years ended March 31, 2014, and since its inception in 1987. Stock selection in the Health Care sector proved to be the most favorable factor in Fund performance in the first quarter, while Information Technology holdings weighed most heavily on both absolute and relative returns.
Portfolio Manager Sig Segalas reports that Health Care holdings Illumina, Novo Nordisk, and Alexion were among the biggest contributors to absolute returns for the portfolio, as were Consumer Discretionary stocks Tesla Motors and Under Armour. Profit-taking among some of the Fund's leading performers in 2013, including Amazon, MasterCard, and LinkedIn, weighed on results in the first quarter of 2014, Segalas notes.
Sig Segalas’s comments were made in an April 10, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2014.

Interview Highlights

Economic recovery
The bottom line is that our economy seems to be slowly coming back. The first quarter economic numbers are going to be somewhat distorted by weather but I think GDP growth should start picking up.
Sharp correction
Even though we had a correction in a number of our big names, in no case did we have to cut the earnings estimates. I think it was driven strictly by sentiment; P/Es had gotten a little ahead of themselves. We expected some consolidation and we did cut back on some of these names. But the downside from their phenomenal returns of last year was more severe than we would have thought.
Positive outlook
I feel that this is going to be a pretty good year for us. The economy is doing better. Inflation is behaving. I think the market will broaden out. Last year we had some extreme moves in some of the growth stocks. This year I think more companies will start doing a little better.
Growth in biotech
I feel good about our exposure in biotechnology. I think most of these stocks have reasonable P/E ratios and I see it as an area of strength for us. We did cut back a little bit on some of the high fliers earlier in the year but I don't expect a major change there. The bulk of our Health Care exposure is likely to be in biotech because that's where the growth prospects are.
Buying on weakness
There haven't been any major changes in the portfolio. We're looking to buy on weakness in some of our favorite names. I think this may shape up to be a nice year after the volatility we saw in the first quarter. We were slightly behind our benchmark but we've seen this before. It's early.

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.