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Large Cap Value Fund —
Large cap value stocks advanced in Q2, led by by Tech and Energy names
2nd Quarter, 2014
"Our process is based on an investment horizon over the next three to five years, not a quarter or two. "
– Aristotle Capital Management, LLC

Stocks of larger U.S. companies recorded a solid advance in the second quarter of 2014. Large cap value shares returned 5.10%, as measured by the Russell 1000® Value Index. Every sector of the index moved higher, led by Information Technology and Energy.
The Harbor Large Cap Value Fund returned 4.82% for the second quarter, lagging the index. On a year-to-date basis, the Fund outperformed the index, posting a return of 9.08% for the six months ended June 30, 2014, versus 8.28% for the Russell 1000® Value benchmark. The Fund is managed by Aristotle Capital Management, LLC.
Among the Fund's top performers in the second quarter were medical device maker Covidien, as well as Energy names Halliburton and Pioneer Natural Resources, reports Jim Henderson, a Principal and Portfolio Manager with Aristotle Capital Management. Stocks that hurt Fund performance in the latest quarter included Bank of America, eBay, and Information Technology names EMC and Oracle, Henderson notes.
Covidien's share price rose after it received an acquisition offer from medical device rival Medtronic, also a portfolio holding. The investment team liquidated the Fund's stake in Covidien and increased its position in Medtronic, Henderson reports. In other transactions, the team added Hospira, a provider of injectable drugs and infusion technologies, to the portfolio and increased its position in Industrials sector holding Illinois Tool Works. SunTrust Bank was sold from the portfolio during the quarter.
Jim Henderson’s comments were made in a July 16, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2014.

Interview Highlights


Favorable acquisition
One of our longtime holdings, Covidien, was the subject of an acquisition offer by a shorter-term holding in the portfolio, Medtronic. We think this combination of firms makes sense from a variety of standpoints. Both companies are in the medical device business but they don't compete directly in very much of that market. We think the combination should provide an expanded portfolio of products and a dramatically expanded geographic footprint. As Covidien's stock price approached the level of the buyout offer, we liquidated that position and added to our position in Medtronic.
Energy holdings
Halliburton and Pioneer Natural Resources on the Energy side were very strong in the second quarter. Halliburton continues to benefit from the growth of more technically-oriented drilling activities, mainly in the United States. Pioneer continued to add to proven reserves and expand production as more of its West Texas holdings have come on line.
Financial crisis aftermath
Bank of America was off about 10% in the quarter. It has continued to struggle, mainly because of fines imposed in the aftermath of the financial crisis. In fact, it had a $4 billion litigation charge in the second quarter. We think this eventually will play itself out and meantime it has drawn attention away from progress that the company has made since the financial crisis. We feel very strongly that B of A, as it comes out of the shadow of these litigation costs, could do quite well.
Short-term issues
EBay has been dealing with a number of issues and was relatively weak in the quarter. Our view is that some of these near-term problems have masked what has been a quite successful and growing business, not just on the PayPal side, but also on the enterprise side where eBay is now an attractive platform that other online retailers are using to launch their retail sites. All in all, we think they are doing quite well.
Capital spending recovery
Oracle and EMC are driven by similar factors. Both rely on capital expenditures of other businesses, which have not yet returned to levels that we would expect to see at this stage of the economic cycle. In the long-run, these companies have such strong positions in the products and services where they have expertise that when those markets recover we think they are going to be fine. Our process is based on an investment horizon over the next three to five years, not a quarter or two. We are confident that those companies eventually are going to do well.

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.