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Mid Cap Growth Fund —
Mid Cap Growth Fund up over 30% for 2013
4th Quarter, 2013
"Our focus on identifying companies with accelerating tangible operating momentum led to strong performance... "
– Michael Carmen

U.S. equities continued their strong 2013 performance with a solid advance in the fourth quarter. Mid cap growth stocks posted a return of 8.23% for the three months ended December 31, 2013, as measured by the Russell Midcap® Growth Index. Harbor Mid Cap Growth Fund slightly outperformed the index with a return of 8.60% for the quarter. For the calendar year, the Fund returned 36.01%, ahead of the Russell Midcap® Growth benchmark return of 35.74%.
Portfolio Manager Michael Carmen reports that the Fund's top contributing sectors during the fourth quarter included Health Care, led by Forest Laboratories and ONO Pharmaceutical; Financials, led by Platform Acquisition and Assured Guaranty; and Industrials, with strong performance from DigitalGlobe and Nielsen. Weakness in some areas of the portfolio detracted from results, including the Information Technology sector, with Angie's List and Trulia losing ground; Consumer Staples, with poor returns from Coty and Whole Foods Market; and Consumer Discretionary, with lower performance by Lululemon and Life Time Fitness.
Last year's strong U.S. stock market rally was driven in part by expanding price/earnings multiples, making equity valuations less attractive entering 2014, Carmen notes. Within the portfolio he has sold stocks with reduced upside potential while adding names that he believes have better risk/reward dynamics.
Michael Carmen's comments were made in a January 14, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2013, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2013.

Interview Highlights

Operating momentum
U.S. mid cap equity markets posted record gains in 2013 as a combination of reasonable valuations and investor enthusiasm regarding potential improvement in many, but not all, economies drove stocks higher. Our focus on identifying companies with accelerating tangible operating momentum led to strong performance as we invested in companies that we believed would either benefit from a better macroeconomic backdrop or offered strong secular growth in attractive industries.
Growth potential
Lululemon stock was under pressure due to management turnover, product quality issues, and public relations challenges. These temporary difficulties provided opportunities for us to establish a position in a company that we believe has a strong brand with accelerating growth potential.
Health Care exposure
When we see opportunities that we think fit the guidelines of the portfolio, we will own those companies without regard to where they may be headquartered. ONO Pharmaceutical is a perfect example. We don't own ONO because it is a Japanese company. We own it because in the mid cap space it is one of the few ways we can gain exposure to what I think is an exciting therapeutic area in Health Care, which is cancer immunotherapy.
Construction recovery
Throughout the year we have been investing in stocks with exposure to U.S. housing and non-residential construction. These are areas that we expect to experience outsized growth as a result of pent-up demand. Owens Corning, Armstrong World Industries, Lennar, Pulte, Whirlpool, and Autodesk are all companies that have shown some weakness due to concerns about a rapid rise in interest rates. Downward pressure on housing stocks allowed us to establish positions at attractive prices in companies that we believe will continue to participate in the ongoing housing and non-residential construction recovery.
Potential winners
We've been trying to buy stocks that may not have participated quite as well as the broad market in 2013 but that we think that have the potential to be winners over the next year. Panera Bread experienced some issues last year but we think this is a stock that may be positioned to do better over the next year or so. It's a newer position that we brought into the portfolio in the second half of the year.

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.