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Large Cap Value Fund —
Stocks bounce back from slow start to first quarter
1st Quarter, 2016
"There was some uncertainty in the marketplace during the first half of the quarter, but then almost everything turned on a dime. The Dollar started to decline, oil prices started to rise, and equity markets rebounded. "
– Aristotle Capital Management, LLC

Large value stocks struggled through the first half of the first quarter of 2016 before rallying to advance for the period. Key concerns, such as falling oil prices, a strengthening Dollar, weakness in China and a potential U.S. interest rate increase became less worrisome or reversed course, and stocks rallied. The Russell 1000® Value Index gained 1.64% during the quarter. Within the index, the majority of sectors were positive, led by Utilities and Telecommunication Services. Only Financials and Health Care declined.
The Harbor Large Cap Value Fund underperformed for the first quarter, rising 0.89%. Sector allocation contributed overall, particularly an underweight to the Financials sector and an overweight to the Consumer Staples sector. However, much of the Fund’s underperformance came from stock selection in those two sectors. Global food company Mondelez International was impacted by the strong Dollar and flat fourth quarter volumes. Several banks, including Bank of America, Mitsubishi UFJ Financial and JPMorgan Chase, were among the top detractors for the quarter.
Overall, stock selection was negative for the quarter, though notably positive in Information Technology and Energy. Top contributors to relative returns included Martin Marietta Materials and two utilities, AES and National Fuel Gas Company. AES has liquidated a number of problematic subsidiaries around the world, helping the parent company increase dividends.
Portfolio Manager Jim Henderson’s comments were made in an April 18, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2016.

Interview Highlights

Amgen Added to the Portfolio
We bought Amgen during the quarter. It's a high quality business, a pioneer in the biotech industry, with a long-term record of producing biologics. It’s typically a very expensive stock, but shares have traded down, largely because a number of their products are going off patent in the next couple of years. We see it differently, because the revenues that are associated with biologics are protected for longer. We think that's underappreciated by the marketplace. They also have a strong pipeline of new products, and we think that’s underappreciated. And third, because of the increase in DNA technology, the future of medicine is moving to DNA-based, person-specific treatments for cancer and other maladies. These are treatments that can be more effective without some of the side effects, and Amgen is spearheading that. We believe it is really the future of biologics and the future of cancer fighting therapies.
Explicable Decline for Mondelez International
Mondelez is a global food and beverage company, producers of Oreos and Cadbury chocolate, and the stock has been very strong for us. Shares fell in the quarter, because 75% of their revenues come from outside the U.S., and the strength of the Dollar was a major headwind. Their organic revenues were up almost 5% in the fourth quarter, but their volume was flat. However, a significant portion of their earnings shortfall was due to currency.
Material Contribution from Martin Marietta
Martin Marietta Materials was very strong for us. The company issued a very positive earnings report during the quarter, and also issued very positive expectations for 2016. The highway bill has passed. We expect that there's going to be greater emphasis on infrastructure work here in the U.S. Construction has continued to improve. Volumes at Martin Marietta have picked up, and we believe that stock has done very, very well.

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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.