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Large Cap Value Fund —
Fund holds up better than index during broad Q3 sell-off
3rd Quarter, 2015
"Volatility like we've seen over the past couple of months, for bottom-up, fundamental firms like ours, creates opportunity. "
– Aristotle Capital Management, LLC

Large value stocks were swept up in a broad sell-off in the third quarter of 2015. The Russell 1000® Value Index fell -8.39% over the period.
While the Harbor Large Cap Value Fund managed to outperform the index, it wasn’t immune from the selling pressure, registering a loss of -7.65% for the quarter. Jim Henderson, Principal and Portfolio Manager with Aristotle Capital Management, the Fund’s subadviser, noted that amid the spike in volatility, investors rotated to more defensive sectors like Consumer Staples and Utilities, while shunning areas perceived as risker, such as Energy and Materials. The Fund’s below-benchmark allocation to Energy helped it outperform the index over the quarter. Moreover, Henderson noted that one of the Fund’s three Energy holdings, Philips 66, is primarily a refiner and chemical company and not as directly influenced by falling oil prices as many other stocks in the sector. The Fund also was helped by strong stock selection in the Materials sector. Specifically, cement company Martin Marietta enjoyed a strong quarter thanks to a pickup in homebuilding and construction activity in the U.S.
On the negative side, the Fund was hurt by stock selection in the Utilities sector. The Manager typically steers clear of regulated utilities, preferring higher quality companies that it believes will earn higher returns on invested capital. Two of those holdings - AES and National Fuel Gas - underperformed. National Fuel Gas declined on concerns about its exposure to the Energy sector, while investors sold AES in reaction to a poor quarterly report, which was mainly due to non-operational issues that the Portfolio Manager believes are temporary in nature.
Financials was another weak area for the Fund in the third quarter. Many banks lost ground over the period due to concerns that low interest rates may continue to put pressure on earnings. The Fund was also hurt by Financials holdings with exposure to emerging market countries.
Jim Henderson’s comments were made in an October 12, 2015 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2015, unless otherwise indicated. All references to the year-to-date are for the period January 1, 2015 through September 30, 2015.

Interview Highlights

Tuning Out Short-Term Noise on Financials
We recognize that some Financials holdings in the portfolio may see some short-term volatility when investors worry about the path of interest rates, but we view that as short-term noise. Our long-term thesis on the banks we hold is that interest rates, at some point in the future, are going to be higher than they are today. When is that going to happen? We don’t know. But when the banks that we own start to get their net interest margins back to more normal levels, we believe the cash flows these businesses are going to throw off could be substantial.
Two other Financials were weak this quarter because of their exposure to emerging markets: Banco Santander, and to a lesser degree Mitsubishi. Emerging markets over the last quarter got clobbered. Our investment thesis on those is the exact opposite of the market’s reaction. Exposure and expansion into those markets is a long-term positive catalyst for us.
Activity over the Quarter
The volatility over the quarter gave us the opportunity to add Archer Daniels Midland to the portfolio. This is a company that we have owned in the past, so we know it quite well. The previous CEO Patricia Woertz had an energy background and she implemented a number of energy- based acquisitions to transition the business from what we believed was an improving, commodity-based, agricultural company to more of an energy-driven business. Earlier this year, Woertz was replaced by a new CEO Juan Luciano, who has begun to undo some of that exposure to Energy. We started looking at it and saying, “Gosh! We always liked the business. We like the new CEO who is coming in. We like the new focus on return on invested capital.”
Volatility Creates Opportunity
There are other companies on our shopping list. Volatility like we’ve seen over the past couple of months, for bottom-up, fundamental firms like ours, creates opportunity. There’s no question about that. The most boring times we ever have around here are when the market is doing nothing but going straight up. When we see some volatility like this, that’s when we get real excited. There are a number of companies that we either know or have worked on in the past that we would like to see in the portfolio. We happen to have 40 other companies that are in the portfolio right now that we like better. Now that may change tomorrow, depending upon what happens; but we believe that we have a lot of interesting things on our plate right now.

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.