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Mid Cap Growth Fund —
Mid cap growth stocks post Q2 advance with all sectors moving higher
2nd Quarter, 2014
"Cash levels in the portfolio are currently very low, approaching 1%, and we're having no problem finding good ideas. "
– Wellington Management Company, LLP

U.S. equities continued to gain ground in the second quarter of 2014. Following a 2.04% advance in the first quarter, mid cap growth stocks posted a return of 4.37% for the three months ended June 30, 2014, as measured by the Russell Midcap® Growth Index. All 10 economic sectors in the index advanced in the second quarter, led by Telecommunication Services and Energy.
The Harbor Mid Cap Growth Fund returned 3.81% for the second quarter, trailing the Russell Midcap® Growth benchmark. Portfolio Manager Michael Carmen reports that stock selection in the Materials and Energy sectors helped Fund performance relative to the index, while selection in Health Care and Consumer Discretionary names hurt relative performance.
Carmen notes that, after peaking in early March, mid cap growth stocks corrected sharply in April, then rallied in May and June. The investment team took advantage of the correction to increase existing positions as well as to add new names to the portfolio, he reports.
Top individual performers in the portfolio included Platform Specialty Products in the Materials sector, Netflix in the Consumer Discretionary sector, Energy names Pioneer Natural Resources and Diamondback Energy, and Information Technology holdings SanDisk and Palo Alto Networks. All recorded share price gains of more than 20%. Lululemon Athletica and Panera Bread Company in the Consumer Discretionary sector, Whole Foods Market in the Consumer Staples sector, and Insulet in the Health Care sector detracted from returns in the second quarter. Lululemon was eliminated from the portfolio.
Michael Carmen’s comments were made in a July 14, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2014.

Interview Highlights


Mobile computing
With the number of smartphones expected to grow over the next three to four years, from less than 2 billion to upwards of 5 billion, we think many businesses will be transformed by all those computers in consumers’ pockets. While the market transformation will be broad-based, not all companies are positioned to benefit simultaneously. We look for companies that we think are doing a good job on the mobile side or can crack the code in terms of monetization. Netflix, SanDisk, Akamai, and TripAdvisor are current holdings that we think will benefit from this theme.
Global outlook
We think the global macro environment is as good as it has been in a number of years. Our biggest present-day macro concern is the continuing conflict in the Middle East. We think the market may be too complacent about the potential contagion effects of an escalation of the current conflict in Iraq. We will watch the situation closely.
International opportunity
There are a lot of Consumer Discretionary companies that you could argue whether they're Technology companies or they're really Consumer companies, such as our biggest holding, Netflix, which is taking advantage of technology to provide a very user-friendly experience at an attractive price. We think people very much under-appreciate how large its international opportunity can be. In fact, we believe that over the next several years Netflix could accrue more value from its international opportunity than from the current U.S. opportunity, which is still growing very quickly also.
Investment ideas
I'm generally comfortable with where we stand and I feel very good about the portfolio. Cash levels in the portfolio are currently very low, approaching 1%, and we’re having no problem finding good ideas.
Medical technology
Medical device maker Insulet was weak during the second quarter due to valuation issues. We think there is a large and growing opportunity in the diabetes market with the firm’s unique patch-style insulin pump. We also believe that the opportunity to expand this drug-delivery technology to areas outside diabetes could be transformative for the company longer-term.

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.