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Large Cap Value Fund —
U.S. large caps post 13% return for 2014
4th Quarter, 2014
"Over the long-term, the price of a company's stock is going to be reflective of the business fundamentals of that company. Are they successful? Have they created a business that has a competitive advantage that is sustainable? That will be rewarded in the stock market in the long run. "
– Aristotle Capital Management, LLC

Shares of larger U.S. companies overcame weakness in the Energy sector to move higher in the fourth quarter and post double-digit gains for the 12 months ended December 31, 2014. The Russell 1000® Index, a large-company benchmark, recorded returns of 4.88% for the fourth quarter and 13.24% for the full year.
Value-oriented large caps, as measured by the Russell 1000® Value Index, did slightly better, posting returns of 4.98% for the quarter and 13.45% for the year. Seven of the index's 10 economic sectors gained ground, with the Consumer Discretionary, Consumer Staples, and Utilities sectors all posting double-digit returns. Energy, down 9%, was the weakest performing sector.
The Harbor Large Cap Value Fund registered returns of 3.67% for the quarter and 10.69% for the year, lagging the index. The Fund is managed by Aristotle Capital Management LLC. Jim Henderson, a Principal and Portfolio Manager with Aristotle Capital Management, reports that overseas investments, representing about 10% of the portfolio, hurt performance relative to the index for both the quarter and the full year, as U.S. equities advanced while international shares lost ground.
From an economic sector perspective, stock selection in the Health Care and Industrials sectors boosted Fund returns relative to the index in the fourth quarter, as did a below-benchmark exposure to Energy names and an above-index weighting in Consumer Staples stocks. Offsetting these positive factors were below-benchmark returns in the Energy, Financials, and Materials sectors. Sector weights typically are a reflection of individual stock selection decisions rather than an active element of the Fund's investment strategy.
Top performers in the portfolio for the fourth quarter included pharmacy chain Walgreen Boots Alliance, medical supply company Medtronic, media company Time Warner, homebuilder Lennar, and electronic component maker TE Connectivity. Among the biggest detractors from absolute returns were Energy sector names Halliburton, Pioneer Natural Resources, and Phillips 66, in addition to Materials holdings Dow Chemical and Martin Marietta Materials.
Jim Henderson’s comments were made in a January 14, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2014.

Interview Highlights


International exposure
The vast majority of the businesses we own are based in the U.S., but when we find foreign-based companies that we believe have a competitive advantage we have the opportunity to go up to 20% percent of the portfolio in non-U.S. businesses. Right now we are at about 10%. Over the long-term we believe this allows us to build a better investment portfolio, not only from a return standpoint but from a risk standpoint. In periods like the fourth quarter, however, where the international markets dramatically underperformed the U.S. market, it can become a major headwind.
Business fundamentals
Over the long-term, the price of a company's stock is going to be reflective of the business fundamentals of that company. Are they successful? Have they created a business that has a competitive advantage that is sustainable? That will be rewarded in the stock market in the long run. Over shorter periods of time, 2014 being one of them, macroeconomic factors like the precipitous drop in oil prices and the strength of the U.S. Dollar, may have a bigger and wider-reaching effect on stock prices than do fundamental differences between individual companies. That kind of environment generally is a challenging one for active managers.
Focus on businesses
Oil prices always have been volatile. We look at it this way: if the CEO of Exxon Mobil doesn’t know what the price of oil is going to do over the next six months, why would we even try? We think it’s more important to try to understand the businesses that we own and how they will react during difficult periods than it is to spend any intellectual capital trying to understand what oil prices are going to do.
Active management
Ten years ago the advantage that active managers had was access to information. Now, it is the ability to assimilate and understand information. Some would say we are overloaded with information now – some of it is helpful and some of it isn’t. So I think the advantage that a fundamental bottom-up firm like ours has today is not the gathering of information but the assimilation.

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 www.harborfunds.com.

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.