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Capital Appreciation Fund —
Solid Q4 performance caps strong year for Capital Appreciation Fund
4th Quarter, 2013
"Despite the rally, which has been almost historic, I would say stocks are still reasonably priced. "
– Sig Segalas

Harbor Capital Appreciation Fund capped a strong performance in 2013 with a return of 11.94% in the fourth quarter. For the full year, the Fund returned 37.66%. The Fund surpassed its benchmark, the Russell 1000® Growth Index, which returned 10.44% for the latest quarter and 33.48% for the year. Stock selection was a key driver of Fund performance relative to the benchmark for both the fourth quarter and the calendar year.
Portfolio Manager Sig Segalas reports that Google, Amazon, MasterCard, and Priceline.com were among the biggest contributors to absolute returns for the Fund in both the fourth quarter and year. The biggest detractor in both periods was Rackspace, which was eliminated from the portfolio.
Segalas observes that 2013 proved to be an exceptional year for the Fund, as 22 stocks in the portfolio posted gains of more than 50%. Despite the unusually strong performance by equities in 2013, he believes share prices could continue to advance in the year ahead, although likely at a more moderate pace.
Sig Segalas's comments were made in a January 10, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2013, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2013.

Interview Highlights


Focus on companies
I believe that our outperformance versus the benchmark was largely because some of our companies had outstanding results. It was encouraging to see the market responding to positive results by individual companies and not just reacting to macroeconomic and political concerns.
Capital spending
An area that has lagged a bit, and one where I think we could see some strength going forward, is capital spending. Most of the capital spending so far has been to reduce costs but we may be at a point where we see companies actually adding to capacity. I think that would be very positive.
Reasonable valuations
Despite the rally, which has been almost historic, I would say stocks are still reasonably priced. We entered last year with the market being cheap. Now I think it's fairly priced. Price/earnings ratios are still within a reasonable range, in my view, and I could see them expanding from here.
Signs of recovery
I don't want to overstate the case but it looks like we're getting a synchronized recovery, albeit at a very moderate rate. There are signs that Europe is coming out of recession. Japan seems to be doing a little better. China is growing. We also are benefiting from very low levels of inflation.
Top-line growth
I think the key right now is revenue growth. Margins are pretty strong; industries have done a phenomenal job on the cost side. But I think we're going to need a little more revenue growth, which, if the economy is doing a little better, we should get. That's going to be the key.

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.