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Mid Cap Growth Fund —
Mid cap growth stocks gain ground in Q1 despite March pullback
1st Quarter, 2014
"After a sharp correction, with some of the strongest revenue growth stories in the market down 20% to 30%, we are seeing more opportunities in our style. "
– Wellington Management Company, LLP

U.S. equities opened the new year with a modest advance. Mid cap growth stocks recorded a return of 2.04% for the three months ended March 31, 2014, as measured by the Russell Midcap® Growth Index. Nine of the 10 economic sectors in the index finished in positive territory, led by Utilities and Health Care.
Harbor Mid Cap Growth Fund returned 2.13% for the quarter, slightly outperforming the Russell Midcap® Growth benchmark. Growth stocks performed well in the first two months of the quarter but lost ground in March, Portfolio Manager Michael Carmen reports. Although the pullback reduced first quarter returns, it could create opportunities to expand the portfolio's exposure to rapidly-growing companies at more attractive share prices, Carmen notes.
Stock selection within the Health Care and Consumer Staples sectors was a primary driver of performance relative to the benchmark, Carmen says, while detractors included stock selection in the Consumer Discretionary and Industrials sectors. Forest Laboratories and NXP Semiconductors were among the leading individual contributors to absolute returns, Carmen notes, while a correction in DigtalGlobe, one of the Fund's top performers in calendar 2013, hurt performance in the first quarter of 2014.
Michael Carmen’s comments were made in an April 14, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2014.

Interview Highlights

Correction in growth stocks
The quarter was a tale of two markets. Growth-oriented stocks performed well through the beginning of March and then underperformed amid a sharp correction characterized by a move from growth to more value-oriented names, which had lagged the broader market in recent periods. We had been paring back some of the faster-growing stocks in our portfolio where we felt valuation was most stretched. Although performance deteriorated in late March, we ended the quarter slightly ahead of the benchmark.
Leading contributor
NXP Semiconductors was among our top contributors. We believe the company is one of the best positioned semiconductor manufacturers given its exposure to four strong end markets – security, mobility, connectivity, and energy efficiency. We continue to hold the stock, which we believe has solid upside potential even after posting strong gains this past quarter.
Emerging opportunities
After a sharp correction, with some of the strongest revenue-growth stories in the market down 20% to 30%, we are seeing more opportunities in our style. We are carefully taking on added risk in the portfolio, given our view that the upside/downside ratio has become more compelling. Recognizing that the market could be choppy, we are being judicious with our purchases.
Food preferences
We rely on upside/downside analysis to construct the portfolio, and fundamental analysis has led us to invest in groups of companies exposed to specific themes. For example, we hold positions in WhiteWave Foods as well as Sprouts Farmers Markets and Whole Foods Market, all Consumer Staples companies leveraged to the growing consumer preference for healthy foods.
Energy sector picks
Among the names we added to the portfolio during the first quarter was Energen, which in our view is one of the better plays in the Permian Basin. We purchased the stock after a correction in the group. Energen along with Pioneer Natural Resources and Diamondback Energy remain our favorite stocks in the Energy sector.

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.