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Mid Cap Growth Fund —
Post-election inflows drive U.S. equities to fifth straight quarterly gain
4th Quarter, 2016
"We believe that increased fiscal stimulus, reduced regulatory restrictions and lower corporate taxes are all likely scenarios under the new U.S. political landscape. We view these changes as tailwinds for many areas of the market. "
– Wellington Management Company LLP

U.S. equities continued to rally in the fourth quarter of 2016 and closed out a strong year, soaring after the Presidential election of Donald J. Trump. The S&P 500 Index rose 3.82% for the fourth quarter, and closed 2016 year with a 12-month advance of 11.96%. During the fourth quarter, stocks recovered from a volatile September, as uncertainty surrounding the U.S. election gave way to hopes for supportive policies under the new administration and a renewed “risk-on” market environment, with outperformance by riskier assets. The U.S. Federal Reserve (Fed) gave the economy a vote of confidence, increasing short-term interest rates for the second time in 10 years and the first since December, 2015. While the rate hike was expected, many investors viewed the Fed’s post-meeting comments as more hawkish than expected. Economic data during the quarter was generally encouraging, with an upward revision of third quarter GDP and continuing healthy trends in the U.S. housing market.
Value stocks generally outperformed growth stocks for the quarter and the year, and small-cap stocks generally outperformed both mid- and large-cap stocks. The Fund’s benchmark, the Russell Midcap® Growth Index, advanced 0.46% during the quarter compared to a 5.52% quarterly return for the Russell Midcap® Value Index. During the quarter, Harbor Mid Cap Growth Fund returned -3.33%, underperforming its benchmark. The Fund’s 0.69% advance for calendar year 2016 also trailed the benchmark, which advanced 7.33%. During the fourth quarter, the Fund’s relative performance was largely driven by stock selection in the Information Technology sector, which more than offset more modest relative contribution from holdings in Energy and Real Estate.
Wellington Management Company’s comments were made in a January, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended December 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through December 31, 2016.

Interview Highlights

Portfolio Changes
Our portfolio is a collection of best ideas we believe can contribute to relative performance in various market environments, as well as potential cyclical winners. Many of our additions during the fourth quarter fall into the latter category, positions in companies we believe will benefit from accelerating growth going forward, including names in Materials and Industrials. We also added to select stocks in the Information Technology and Financials sectors. Conversely, we reduced exposure to the Health Care sector. We believe drug pricing will continue to be a hot topic in 2017, and that this will be a serious headwind for many sector stocks.
An Opportunity Within Financials
We believe higher interest rates, lower regulatory intervention, and an improving economic environment could prove to be substantial tailwinds for credit card companies. We added exposure to select names in the industry, including Capital One Financial and Synchrony Financial. We also added to select banks and insurance companies that we believe will benefit from improving conditions in the Financials sector.
Positive Outlook, With a Caveat
After the November election, we saw sizeable equity inflows and the largest exodus from bonds since the "taper tantrum" in 2013. We believe a Republican majority in Congress may result in tax reform, less business regulation, repatriation of cash from U.S. multinational companies and more short-term fiscal stimulus, which could support near-term growth. We are constructive on the prospects for U.S. growth in 2017. However, we believe the election of Donald Trump has created more uncertainty than the market currently reflects.

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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.