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Capital Appreciation Fund —
Stocks bounce back from difficult start in first quarter
1st Quarter, 2016
"We've been through some tough periods in the past, but I believe in our methodology. I expect the portfolio to look very similar six months from now. We own what we believe to be very good companies here. "
– Jennison Associates LLC

In a volatile first quarter of 2016, equities fell sharply before rebounding to end the period with a slight advance. Stocks generally declined through early February on concerns about low oil prices, growth in China, a potential interest rate increase by the U.S. Federal Reserve, and a strong Dollar. The Fed’s decision not to raise rates, along with potential signs of stabilization in China and with oil prices, helped turn equities around in the latter half of the quarter.
The broad market S&P 500 Index recorded a return of 1.35% for the period. The benchmark Russell 1000® Growth Index, a measure of larger, growth-oriented U.S. companies, finished up 0.74% for the quarter. Within the benchmark, all sectors except Energy and Health Care reported positive returns. Telecommunications and Utilities posted double-digit advances.
The Harbor Capital Appreciation Fund lagged its Russell benchmark, posting a return of -5.49% for the quarter. Stock selection drove relative underperformance, particularly in Information Technology, Health Care and Consumer Discretionary. Sector allocation was negative overall as well, with underweights to Industrials and Consumer Staples and lack of exposure to Telecommunication Services proving especially problematic for the quarter. The Fund’s stock selection in Energy aided relative returns, as did overweights to Consumer Discretionary and Information Technology.
Facebook, one of the Fund’s largest holdings, was the top contributor to relative returns, along with O'Reilly Automotive, Apple and TJX Companies. But a number of positions that posted sizable gains in 2015 lost ground in the first quarter of 2016. LinkedIn, hurt by concerns about some new products, recent acquisitions and a cautious forecast, was among the top detractors and was sold during the period., the largest holding in the portfolio as of March 31, 2016, also hindered performance. Several Health Care names, including Regeneron Pharmaceuticals, Alexion Pharmaceuticals and Celgene, were substantial detractors.
Portfolio Manager Sig Segalas’ comments were made in an April 14, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2016.

Interview Highlights

Encouraging Earnings
Even with the performance that we had in the first quarter, it was somewhat encouraging to see our companies deliver on fourth quarter earnings reported in the first quarter. The only real disappointment was LinkedIn, which we sold. Apart from that, we had to cut a few estimates here and there, largely due to currency, but for most part, our companies came through. I always come back my old saying, “As long as we come through with our earnings numbers, we'll be fine.” And so far, these companies are coming through.
On Staying the Course
I expect volatility is the name of the game, particularly in an election year. But I really believe in the companies that we own. We think they are well positioned, and they're handling this difficult period very nicely. They are multinationals, and they've all been hurt by currency. The Dollar seems to be becoming less negative for us. We’ve been through some tough periods in the past, but I believe in our methodology. I expect the portfolio to look very similar six months from now. We own what we believe to be very good companies here.
Pursuing Faster Growth in Consumer Stocks
From a macro point of view, the consumer seems to be doing better. Employment is pretty good. We're starting to see some wage increases. We're going to continue to gravitate towards the faster growing companies. By far, our largest holding in Consumer Discretionary is, and nothing's changed there. The company spends a lot of money, but it's one of the most unique companies in the world. The stock was up 100% last year, so it gave some back. We believe Amazon is well-positioned, and we like it a lot.
An “Emerging Market” Play in the United States
As tough as retail has been, our retailers have done pretty well. TJX has done very well in a very difficult environment, as has Inditex, which is a Spain-based, global company. It's not cheap, but we believe it's probably the finest managed retail company in the world. Zara, their brand in the United States, still has very small penetration, with only about 10% of their sales here. We think this is a great market for them. You could call it an emerging market play, with the United States being their emerging market.

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.