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Large Cap Value Fund —
Fund surpasses market gains
2nd Quarter, 2017
"From time-to-time, market conditions can create a tailwind to short-term performance. The second quarter was one such period. "
– Aristotle Capital Management, LLC

U.S. stocks climbed higher in the second quarter in an environment of rising interest rates, falling oil prices, and political uncertainty as corporate earnings exceeded expectations. There was a significant rotation in sector dominance, as Energy stocks declined and Health Care companies led the pack. Value stocks lagged growth across all market-cap ranges for the second consecutive quarter, following a strong 2016 for value stocks.
The Harbor Large Cap Value Fund advanced 3.91% during the second quarter of 2017, outperforming its benchmark, the Russell 1000® Value Index, which rose 1.34%. Overall, both stock selection—which was positive in seven of the nine sectors in which the Fund invested—and sector allocations boosted relative performance during the quarter.
Stock selection in Information Technology was a primary driver of the Fund’s outperformance. Positions in Paypal, which now has more than 200 million active users of its payment platform, and engineering software firm Ansys were significant individual contributors within the sector. The Manager believes Ansys has sustainable competitive advantages in a business where demand could rise, due to the importance of the cost-effective design of smart products.
An overweight and stock selection in Health Care, the benchmark’s strongest sector for the period, also aided relative performance. Hospital supplier Baxter International and drugmaker AbbVie were among the top overall contributors. The Fund’s underweight in Energy and lack of exposure to Telecommunication Services, the two weakest sectors in the benchmark by a significant margin, also bolstered relative results.
In contrast, stock selection in the Consumer Staples and Utilities sectors weighed on relative performance. Food retailer Kroger, a Consumer Staples holding, was a key detractor. Share prices declined sharply after the company reported weak quarterly results, followed by news that will purchase Whole Foods. The Manager believes that the company’s depressed results will reverse over time, and that while Kroger’s competition with Whole Foods is limited, the situation bears careful monitoring.
Aristotle Capital Management’s comments were made in a July, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2017.

Interview Highlights

Market Conditions Produce Tailwinds
Our process is not dependent on specific market conditions. We focus our intellectual capital on understanding long-term business values, independent of market conditions. That said, from time-to-time, market conditions can create a tailwind to short-term performance. The second quarter was one such period. Our underweight in Energy and overweight in Health Care proved to be substantial tailwinds.
An Opportunity in Product Development
During the quarter, we added shares of engineering software company Ansys to the portfolio. The company creates platforms where manufacturers can develop and test new products virtually, greatly reducing research and development costs and increasing product effectiveness. Given the notoriety and highly publicized failures some consumer electronics firms have faced recently, many of them could have benefitted from using the technology platform offered by Ansys.
Locating Value in an Index World
The impact of the popularity of passive index funds has skewed valuations, particularly for very large businesses. As funds flow into market-cap-weighted indexes, investment flows into larger businesses to a greater extent, driving their prices higher. We have been able to find greater values away from those top few companies by focusing our attention on businesses not caught up in the “index rally."

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.