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Large Cap Value Fund —
Macroeconomic woes could weigh on earnings growth rates
4th Quarter, 2011
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"Cash flows and dividends are rising and high volatility could provide buying opportunities. "
– Rick Helm

Global economic weakness, especially in Europe, could prove to be a drag on the pace of corporate earnings growth in the year ahead, in the view of Rick Helm, Portfolio Manager of the Harbor Large Cap Value Fund. In such an environment, he notes, U.S. companies with characteristics such as limited reliance on overseas sales and an ability to raise dividends could enjoy favor with equity investors.
Helm expects financial markets to continue to experience high volatility in the year ahead. Market swings could translate into opportunities to initiate or add to portfolio positions, he says, noting that domestic equity valuations began 2012 at modest levels.
In 2011, a strong finish lifted large cap value stocks into barely-positive territory for the full year, Helm observes. Large cap value names, as measured by the Russell 1000® Value Index, registered returns of 13.11% for the quarter ended December 31, 2011, and 0.39% for the full year. By comparison, the Harbor Large Cap Value Fund returned 10.84% for the quarter and 0.09% for the year.
In the fourth quarter, stock selection in the Information Technology and Financials sectors hurt Fund performance relative to the index. Stock selection in Consumer Staples was the biggest contributor to relative return, Helm reports.
Rick Helm's comments were made in a January 11, 2012, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2011, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2011.

Interview Highlights

Rising cash flows
As we enter the year, U.S. equities appear modestly priced by historical standards. Cash flows and dividends are rising and high volatility could provide buying opportunities.
Volatile markets
We believe volatility will again continue to be extreme as most asset classes and markets face increasing pressure from a world hungry for attractive risk-adjusted returns. Our early view is that 2012 will be a volatile year but will end with the markets gaining modestly.
Slower earnings growth
Given sluggish economic growth in the U.S., weakness in Europe, and slowing growth in emerging markets, the rate of earnings growth also could slow in 2012. In that kind of environment, I think companies that are raising dividends will probably be more sought after than those that are not. In addition, you could see investors favoring companies that emphasize domestic sales versus revenues from overseas, and particularly from Europe.
Pent-up demand for growth
We think there is a lot of pent-up demand for “growth-ier” names; so if the market makes a big move investors may pay less attention to dividends. If it proves to be a difficult market, however, that could favor higher-yielding stocks.
Investing in Apple
We initiated a small position in Apple in the fourth quarter. We have been watching the company for some time and our biggest issue had always been whether under Steve Jobs it would ever pay a dividend. Under this management, I think Apple could begin paying a dividend. The company clearly has more capital to deploy than it can use right now and it typically has not made large acquisitions.

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.