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Mid Cap Growth Fund —
Fund outperforms as growth beats value in continued market rally
1st Quarter, 2017
"The macro environment during the first quarter of 2017 was conducive to our style of investing, and was a tailwind for the approach. "
– Wellington Management Company LLP

U.S. equities rallied during the first quarter of 2017. The S&P 500 Index rose 6.07%, advancing for the sixth consecutive quarter. The Trump rally rolled on with continued confidence in the "big three" of President Donald Trump’s administration: tax reform, deregulation, and infrastructure spending. Despite many investors voicing concerns about stretched valuations and overly optimistic policy expectations, the market hit a series of record highs during the quarter. The Fed hiked rates for the third time in a decade, but the market did not flinch. The move was well telegraphed and many market participants noted that the policy statement's tone was less hawkish than market expectations. Risk on sentiment ground to a halt in March, after the Republican party's failure to repeal and replace the Affordable Care Act cast a cloud over the administration's pro-growth agenda. The bullish camp's spin on the defeat was that the administration could now pivot to tax reform, which many investors view as the more important victory to maintain the rally.
Growth stocks generally outperformed value stocks during the quarter across all market caps, a shift from the trend of the previous quarter as well as the full year of 2016. The Harbor Mid Cap Growth Fund advanced 9.64%, outperforming its benchmark. The Fund’s benchmark, the Russell Midcap® Growth Index, advanced 6.89% during the quarter, also a sixth straight quarterly advance. That compared to a 3.76% return for the Russell Midcap® Value Index. Positive security selection, primarily in the Information Technology sector, drove outperformance. Stock selection in the Consumer Discretionary sector also added value. That combination more than offset negative selection in Financials and Health Care. The impact of sector allocation, a residual of the Manager’s fundamental research, was essentially negligible, though an overweight to Energy weighed on relative returns.
Wellington Management Company’s comments were made in an April, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended March 31, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2017.

Interview Highlights


Investor Sentiment Pivots Toward Pro-growth
The macro environment during the first quarter of 2017 was conducive to our style of investing, and was a tailwind for the approach. High growth stocks outperformed low growth names in what was a reversal of the environment towards the end of 2016. We are seeing a broadening opportunity set of strong growth companies that fit our investment criteria. We continue to be diversified across sectors and have been finding opportunities in certain areas of the market where we have not in several years.
Increasing Opportunities in Tech Names
During the quarter, we significantly increased our exposure to the Information Technology sector, our largest sector overweight at the end of 2016. We initiated several new investments in the sector, with an emphasis on the semiconductor industry. We believe the market is underappreciating the potential of a better growth environment within a more consolidated semiconductor industry.
Outlook Remains Positive
We are fairly constructive on the prospects for U.S. growth in 2017. We believe that increased fiscal stimulus, reduced regulatory restrictions, and lower corporate taxes are all likely scenarios in the new U.S. political landscape. We view these changes as tailwinds for many areas of the market and have increased our exposure to various sectors accordingly.

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.