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Large Cap Value Fund —
Large cap value shares post small decline in Q3
3rd Quarter, 2014
"There was a clear divergence between domestic and international equity markets in the third quarter, as international markets significantly underperformed the U.S. "
– Aristotle Capital Management, LLC

After moving higher in the first half of 2014, many segments of the U.S. equity market gave back some of their gains in the third quarter. Large cap value stocks finished just below the break-even level with a return of -0.19% for the three months ended September 30, 2014, as measured by the Russell 1000® Value Index. For the first nine months of 2014, the index returned 8.07%. Energy stocks, down 8%, were the weakest performing area of the index in the third quarter, as 5 of the 10 economic sectors in the index posted negative returns.
The Harbor Large Cap Value Fund recorded a return of -2.12% for the third quarter, lagging the index. The Fund is managed by Aristotle Capital Management, LLC. Exposure to a few foreign-based companies hurt Fund performance relative to the index, as U.S. equities generally outperformed international shares in the third quarter, reports Jim Henderson, a Principal and Portfolio Manager with Aristotle Capital Management. Favorable selection among Consumer Discretionary and Materials stocks helped relative returns, as did a below-benchmark exposure to the weak-performing Energy sector. Sector weights typically are a reflection of individual stock selection decisions rather than an active element of the Fund's investment strategy.
The Fund's best performers in the third quarter included home improvement retailer Home Depot, online retailer eBay, software maker Microsoft, Bank of America, and data storage provider EMC, all of which had double-digit share price gains. Among the portfolio holdings that detracted most from performance were pharmacy chain Walgreen, defense and safety equipment maker Oshkosh, electronic components maker TE Connectivity, and Energy sector holdings Pioneer Natural Resources and Halliburton.
Jim Henderson's comments were made in an October 14, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through September 30, 2014.

Interview Highlights

Energy underweight
With oil prices declining, the Energy sector didn't do very well in the quarter. Our underweight in Energy stocks was a net positive. The benchmark had about 13% in Energy and we were at about 9%, so that was a net positive. We also outperformed in Materials. Materials in the benchmark were off for the quarter; ours were not.
International exposure
There was a clear divergence between domestic and international equity markets in the third quarter, as international markets significantly underperformed the U.S. I mention that because, as part of our philosophy, we feel strongly that having an international component helps build an optimal portfolio from a risk/return basis. Although it should be helpful in the long run, in the third quarter it proved to be a drag on performance, and we think it accounted for the vast majority of the Fund's underperformance.
Investment thesis
Our opinion has not changed on Oshkosh. Our investment thesis may have been drawn out a year or so more than we anticipated when we first got involved with the business, but in our eyes nothing has changed in terms of the market shares and the quality of the business. It's just going to take some time for their end markets to recover.
Upgrading the grid
One area we've looked at is the aging of the U.S. electricity grid. The federal government has encouraged consolidation among companies in the grid by allowing a higher total return on equity in the businesses when they're combined. ITC Holdings has been a major consolidator in that regard. It has acquired several regional players and spent time and money in upgrading the grid. We see it as a very high quality business that has been able to earn its statutory rate of return and then use those returns to consolidate the industry and improve the electricity grid, which benefits us all.

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.