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Large Cap Value Fund —
Fund moves higher, outpaces benchmark in weak quarter for large cap value stocks
1st Quarter, 2015
"Many of the headwinds that we experienced last year turned into tailwinds in the first quarter. "
– Aristotle Capital Management, LLC

Large cap value stocks ended the first quarter of 2015 in negative territory, with the Russell 1000® Value Index posting a return of -0.72%. Information Technology, down 7%, was the weakest performing area of the index; in all, seven of the 10 sectors had negative returns.
The Harbor Large Cap Value Fund posted a positive return of 3.27%, outpacing its Russell 1000® Value benchmark. The Fund is managed by Aristotle Capital Management, LLC. Jim Henderson, a Principal and Portfolio Manager with Aristotle Capital Management, reports that the Fund's outperformance relative to the index was driven by stock selection, as portfolio returns outpaced those of the index in seven of the nine sectors in which the Fund had investments. This more than offset an above-benchmark exposure to the weak-performing Information Technology sector and an underweight to Health Care, which proved to be the strongest-performing area of the index. Sector weights typically are a reflection of individual stock selection decisions rather than an active element of the Fund's investment strategy.
Leading individual stocks in the portfolio included specialty drug maker Hospira, construction industry supplier Martin Marietta Materials, electronic products maker TE Connectivity, home builder Lennar, and pharmacy chain Walgreen Boots Alliance, all of which had double-digit share price gains. Holdings that detracted from absolute returns included Information Technology stocks EMC and Microsoft, Bank of America, drug maker AbbVie, and National Fuel Gas in the Utilities sector.
Jim Henderson’s comments were made in an April 15, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2015.

Interview Highlights

Improved environment
Many of the headwinds that we experienced last year turned into tailwinds in the first quarter. In 2014 we experienced below-average volatility and above-average correlations among companies – conditions that are almost always a headwind for a bottom-up fundamental approach like ours. That all seemed to change in the first quarter, as volatility returned and correlations dropped. Also, our small exposure to international stocks, which was a drag on performance last year, was a positive in the first quarter as international equity markets outperformed the U.S.
Oil price impacts
As oil prices dropped last year, shares of most energy-related companies suffered right along with them. Companies that we own that are somewhat leveraged to oil prices, Halliburton and Pioneer, saw their share prices get hit. However, the decline was so broad that it also impacted companies in the portfolio that we feel would actually benefit from lower oil prices, such as Philips 66, Dow Chemical, and Martin Marietta Materials. Their share prices all declined last year and then rebounded in the first quarter as the market became more selective.
Buyout offer
Hospira, one of our Health Care holdings, was the subject of an unsolicited buyout offer from Pfizer at about $17 billion, which incidentally was reflective of our calculation of its intrinsic business value when we originally bought the company. The stock was up 42% in the first quarter. Given that it approached and then exceeded our estimate of fair value, we sold that position.
Growth concerns
Two of our holdings in the Information Technology sector, Microsoft and EMC, were weak in the quarter. With an expectation of slowing GDP growth in the U.S., combined with what was already slower growth in Europe, I think there was an expectation that enterprise growth in software, and in hardware to some extent, would slow. Microsoft and EMC were both a little soft, apparently because of that. There was really nothing to speak of from a fundamental standpoint. In addition, we bought National Fuel Gas in the fourth quarter after much of the decline in oil prices had taken place. But we were a bit early on it and the share price continued to suffer in the first quarter of 2015.
M&A activity
The potential of M&A activity is never a catalyst for us. We’re not going to buy a company because we think it will either be an acquirer or be acquired. Of course we have benefited from acquisitions over the years. Hospira is one of many that we have experienced. From a larger perspective, there has been a lot of M&A activity going on in general. The combination of an improving economy and interest rates being at very low levels, along with the specter of those conditions going away at some point in time, may have given greater urgency to deals that could have taken place over the next several quarters. And I don’t think it’s going to go away any time soon.

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.