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Capital Appreciation Fund —
Equities off to a solid start in 2013 despite uncertainties
1st Quarter, 2013
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"Corporate balance sheets are very robust and I think this should be a good year for equities. "
– Sig Segalas

Domestic equities opened the new year with a solid advance. The Russell 1000® Growth Index, a measure of large cap growth stocks in the U.S., returned 9.54% for the first quarter of 2013, as all 10 economic sectors registered positive results.
Sig Segalas, Portfolio Manager of the Harbor Capital Appreciation Fund, believes that the strong performance of stock markets was aided by continued monetary easing around the world as well as the relative attractiveness of equities in comparison with low-yielding bonds. In his view, these factors helped overcome lingering concerns over global macroeconomic issues.
The Harbor Capital Appreciation Fund registered a return of 6.91% for the quarter, trailing the Russell 1000® Growth benchmark. From a longer term perspective, the Fund outperformed the index for the 10 years ended March 31. Among the portfolio's leading contributors in the first quarter were LinkedIn and MasterCard in the Information Technology sector, along with Health Care holdings Biogen, Vertex Pharmaceuticals, and Allergan, Segalas reports. Technology names Apple, Rackspace, and VMware were among the biggest detractors from results.
Sig Segalas's comments were made in an April 10, 2013, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2013, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2013.

Interview Highlights

Sluggish fundamentals
While the market has hit an all-time high I think there is still a lot of cautiousness out there. To put it in perspective, we're just back to where we were in 2007. We've had a big rally, probably sooner than most would expect because fundamentals around the world are still sluggish at best. The U.S. is getting better and I think it has to lead the way.
Defensive names
What performed the best in the first quarter were the relatively defensive stocks. The best performing groups in the S&P 500 were Health Care (particularly the more mature Health Care companies), Consumer Staples, and Utilities; the worst performing stocks were Technology and Materials. I'm hopeful that as confidence comes back you'll see some shift towards higher-beta names and some of the more cyclically sensitive issues.
Favorable valuations
Stocks are still relatively cheap, in our view, which is part of the reason for this rally. Corporate balance sheets are very robust and I think this should be a good year for equities.
Global outlook
Confidence is getting a little better but it's still pretty shaky. Europe is still in a recession. China is growing although not as fast as some people would hope. But overall, I don't see any real excesses in the market.
Biotech additions
We added to our exposure in biotech. These are product-driven companies and they're obviously higher beta. But I feel more comfortable in some of these names than in the tech names. There is always risk in biotech but the companies we've invested in seem to have very strong momentum.

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.