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Large Cap Value Fund —
At quarter end, a dramatic fall and rebound for stocks
2nd Quarter, 2016
"The end of the second quarter felt much like the start of the first quarter for global financial markets. "
– Aristotle Capital Management, LLC

As many investors have tried to forget, stocks sold off dramatically at the beginning of the year on concerns over slowing Chinese economic growth and weak oil prices as well as uncertainty regarding global monetary policy. A week before the conclusion of the second quarter, the United Kingdom’s vote to withdraw from the European Union sent stock markets reeling around the world once again. However, the final few trading days saw some investors rethinking their likely overreaction to the so-called “Brexit” vote, while others bargain hunted, causing a sharp rebound and enabling the S&P 500 Index to generate a 2.46% total return for the quarter.
Against this backdrop, the Harbor Large Cap Value Fund advanced in the second quarter of 2016. The Fund posted a total return of 4.95%, outperforming both its Russell 1000® Value Index benchmark, which rose 4.58%, and the broad S&P 500 Index.
The Financials sector made the largest contribution to the Fund’s outperformance, resulting from both security selection and an underweight allocation, which proved beneficial as the sector lagged amid Brexit worries and continued concerns over the timing of future interest rate increases. Stock selection was also positive in Industrials, where construction supplier Martin Marietta Materials added value.
Meanwhile, a sizable underweight in Energy – the benchmark’s top performing sector – coupled with weak security selection in the sector made it the largest detractor from relative returns. However, Energy holding Halliburton was one of the top relative contributors during the quarter. The portfolio’s meaningful overweight in the worst performing sector in the benchmark, Consumer Discretionary, also subtracted value, although the negative impact was largely offset by favorable stock selection in the sector.
Aristotle Capital Management’s comments were made in a July, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2016.

Interview Highlights

Impressive Performance for Martin Marietta Materials
For the third time in the past four quarters, aggregates and construction materials producer Martin Marietta Materials was a top contributor to relative returns. Shares of Martin Marietta climbed on first quarter earnings that more than doubled consensus estimates, despite the slow pace and early stages of the construction recovery. The company's aggregates business saw improvements in both volume and pricing. Given its ability to raise prices consistently in a poor construction market (which we view as a hallmark of a high quality business), we continue to see the potential for Martin Marietta to further enhance its profitability as infrastructure spending normalizes in the coming years.
Additions to the Portfolio
During the second quarter, we added Microchip Technology, a company that develops, manufactures and sells microcontrollers and analog semiconductors for a variety of applications.We believe that the company’s recently announced acquisition of the semiconductor firm Atmel could provide another “leg up” in overall microcontroller market share.
We also added Danaher Corporation, which designs, manufactures and markets professional, medical, industrial, and commercial products and services. Danaher is in the final stages of transforming itself by splitting into two entities. One, Fortive, will contain more cyclical businesses, while the remaining “new” Danaher will encompass several divisions that tend to be less cyclical and more consumable. Danaher has a long-term track record of creating shareholder value, and we believe this separation may allow both pieces to further accelerate the process.
Focus on Finding Value, Despite Bumps in the Road
In periods of uncertainty, we are reminded that while the news of the day can sway markets in the short-term, business values change much more slowly. As markets are currently digesting the impacts of the Brexit and the U.S. presidential election, we believe that any changes that may flow to business valuations will take years if not decades to fully understand. We believe that current interest rates may be artificially and unsustainably low across the yield curve. We do not claim to be able – nor do we attempt – to predict precisely when rates will normalize. Indeed, it may be that the normal order for interest rates for the coming decade is lower than in prior decades. As such, we continue to focus on areas where we believe we can add value: in-depth, fundamental company research and bottom-up security selection.

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.