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Large Cap Value Fund —
Fund delivers heady performance during Q4 rally
4th Quarter, 2015
"All in all, it was a pretty decent quarter, not just for the U.S., but for international markets as well. "
– Aristotle Capital Management, LLC

Large value stocks participated in a robust rally in 2015’s fourth quarter. The Russell 1000® Value Index gained 5.64% during the year’s final three months.
The Harbor Large Cap Value Fund kept pace with the index, rising 5.66% during the same period. Jim Henderson, Principal and Portfolio Manager with Aristotle Capital Management, the Fund’s subadviser, noted that in part, the outperformance came from sector allocation. The largest contributor was the Fund’s underweight position in the lagging Energy sector. The Fund devoted roughly 6% on average to Energy stocks while the index’s average allocation was approximately 13%. The sector’s performance for the quarter was roughly flat, while as noted the index overall gained 5.64%. On the other hand, the Fund was helpfully overweight in Information Technology stocks, which gained 9.6% in the quarter. The Fund put more than 17% of assets in Technology on average, versus the index’s 11.5% average weight.
All in, stock selection was negative for the quarter, though there are contributors to highlight, too. Among detractors, multinational bank Banco Bilbao Viscaya (BBVA) stood out. The shares of BBVA, a new addition to the Fund during the quarter, declined by 19.4% in the quarter. The company reported a larger than anticipated quarterly net loss due to greater costs and inflation in some countries in which it operates. The stock price of agriculture processor Archer Daniels Midland also skidded, in its case by 10.9%, as declining gas prices weighed on its ethanol business. On the plus side, longtime holding General Electric’s stock price climbed 24.4%, as the market cheered its corporate reorganization efforts. Creative software maker Adobe Systems’ shares rose 14.3% thanks to new subscribers to its cloud-based platform.
Jim Henderson’s comments were made in a January 13, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2015, unless otherwise indicated. All references to the year-to-date are for the period January 1, 2015 through December 31, 2015.

Interview Highlights

Adding Insurance
We bought insurer ACE Ltd. during the quarter, and it’s the Fund’s only Financials holding that is not a bank. We’ve followed ACE since its inception and we’re excited and interested in it for at least a couple of reasons. ACE has acquired Chubb, which specializes in multi-line insurance for high net worth individuals and businesses, which is a very high quality business in our view. ACE has also changed its business mix to include more reinsurance, which although it is less profitable, builds in greater stability into the company’s risk management posture.
Improving Industrials
General Electric has been in the news because of the well-understood and highly-publicized asset sales on the financial side of its business. But one of the reasons why we’re so excited about it is because they’ve really changed the way they’re managing their industrial base. The walls are being broken between divisions and industrial businesses are going to be on a platform of shared technologies, which can be expected to improve operating performance. The exact same thing is going on at another Industrials sector holding, Illinois Tool Works.
Portfolio Activity
As mentioned, ACE Limited and BBVA were added during the quarter. Two sales took place to make room for these new additions. Electronics maker TE Connectivity, which had been a holding for many years, had performed very well for the Fund, due in large part to strong sales in the auto industry. The Manager sold the Fund’s shares as the valuation appeared less compelling as a result. To free up space for BBVA, Banco Santander was sold. Another longtime holding, Banco Santander has significant exposure to Brazil, which has weighed on the stock’s performance as the Brazilian economy and political situation have continued to deteriorate. BBVA, which like Banco Santander is based in Spain, has strong businesses in the U.S. and Mexico, and no exposure to Brazil.

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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.

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