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Mid Cap Growth Fund —
Mid cap growth stocks gain ground in Q4 as most sectors advance
4th Quarter, 2014
"While we may be uncertain about the macroeconomic environment, we have great optimism that these uncertainties create valuable opportunities for active managers. "
– Wellington Management Company LLP

Despite weakness in the Energy sector, U.S. equities posted positive returns for the fourth quarter of 2014. Mid cap growth stocks returned 5.84% for the three months ended December 31, 2014, and 11.90% for the full year, as measured by the Russell Midcap® Growth Index. Eight of the index's 10 economic sectors moved higher in the fourth quarter, led by Health Care, up 12%, and Consumer Staples, up 10%. The Energy sector lost 22% while Telecommunication Services declined by 1%.
The Harbor Mid Cap Growth Fund returned 3.80% for the quarter and 6.59% for the year, trailing the Russell Midcap® Growth benchmark. Portfolio Manager Michael Carmen reports that a smaller-than-index exposure to the Energy sector helped Fund performance relative to the benchmark in the fourth quarter, while portfolio returns in the Industrials, Information Technology, and Materials sectors trailed those in the index. Sector weights are generally a result of bottom-up stock selection rather than a major element of the Fund's investment strategy.
Top individual performers in the portfolio included Consumer Discretionary holdings Whirlpool, Advance Auto Parts, and Diamond Resorts International, as well as medical device makers DexCom and Insulet. Among the larger detractors from absolute returns were online retailer Zulily, online video provider Netflix, drug maker Salix Pharmaceuticals, oil producer Pioneer Natural Resources, and cement and concrete maker Eagle Materials.
Michael Carmen’s comments were made in a January 16, 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

Top performers
DexCom and Whirlpool were among our top contributors for the quarter. DexCom develops and manufactures continuous glucose monitoring systems for diabetes management. DexCom’s pediatrics launch is proceeding better than management had expected and the company's recently approved DexCom SHARE system is designed to leverage Bluetooth technology to allow for glucose monitoring on smartphones. We believe that this advance will lead to accelerated adoption of the technology. Whirlpool had a strong quarter with meaningful growth acceleration from recent European and Chinese acquisitions. We retain a favorable outlook for Whirlpool based on these acquisitions, the recovery of the U.S. housing market, and increased penetration within emerging markets.
Economic uncertainties
As we enter 2015 the market is full of uncertainties. While falling energy prices will have the most immediate effect within the Energy sector itself, it remains to be seen how widely the impact will be felt. The termination of quantitative easing programs will ultimately lead to higher interest rates, but the timing and pace of these increases are yet to be determined. Europe continues to be weak and the outlook for China is mixed. This type of environment leads us to focus on companies with strong underlying growth fundamentals and with limited exposure to these economic uncertainties. While we may be uncertain about the macroeconomic environment, we have great optimism that these uncertainties create valuable opportunities for active managers.
Risk/reward analysis
We sold Keurig Green Mountain late last year, at higher prices than it is right now, because it had reached our price target. We like the concept and we still like the company very much. But on the basis of our risk/reward, upside/downside analysis it was no longer attractive to us.
Customer communications
Within the Consumer Discretionary sector, Zulily was a primary detractor. The company had lower third quarter revenue growth as well as challenges with its email delivery system, which resulted in many customers not receiving daily emails. This negatively impacted orders and revenue per customer. These email issues have been resolved and we retain a positive outlook on the stock.
Tech contributors
While stock selection in Information Technology detracted over the quarter, there were a couple of notable contributors including Tyler Technologies. Tyler is a software provider focused on the government sector. We believe it is well positioned to benefit as municipalities transition toward cloud-based platforms. NXP Semiconductors continued to be a strong performer in the Fund. 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.

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

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.