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Mid Cap Growth Fund —
U.S. equity markets climbed for the third consecutive quarter
2nd Quarter, 2016
"Market conditions were much improved from what we saw in the first quarter. "
– Wellington Management Company LLP

A better than feared U.S. corporate earnings season and an encouraging economic backdrop helped sustain the U.S. equity market rally in the second quarter of 2016, and U.S. equity markets climbed for the third consecutive quarter. After plunging in the days following the Brexit vote, U.S. stocks staged an impressive comeback in the final three days of the quarter, further evidence that the seven-year-old bull market remained intact. During the quarter, the Fund's benchmark, the Russell Midcap® Growth Index returned 1.56%. The Harbor Mid Cap Growth Fund outperformed its benchmark with a return of 3.94%.
During the quarter, both sector allocation and security selection drove the Fund’s relative outperformance. Security selection in the Information Technology and Consumer Discretionary sectors contributed to relative returns. The Fund’s overweight allocation to Energy also aided results. Conversely, an underweight allocation to the Materials sector detracted from relative performance.
One of the largest contributors to the Fund’s relative performance was Zillow Group. The online real estate company’s stock price climbed after the company reported better than expected earnings and guidance for the first quarter, driven by accelerating revenue growth and synergies associated with its Trulia acquisition. In contrast, Harman International Industries was a notable detractor from relative performance. The company, a manufacturer of connected car and audio systems and services, reported weaker than expected earnings in the first quarter. The Manager believes the issues causing the first quarter weakness were transitory, and thus has maintained the position in the portfolio.
On average during the second quarter, the two sectors in which the Fund had the largest overweight allocations relative to its benchmark were Health Care and Information Technology. The Manager believes these sectors offer the most innovative and investable growth trends, and has a differentiated outlook for the sectors relative to the market. At the end of the period, the Fund’s largest underweights were to the Financials and Materials sectors.
Wellington Management Company’s comments were made in a July, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2016.

Interview Highlights

Purchases Included Wayfair and Under Armour
During the quarter, we initiated positions in industry leading retail businesses, such as Wayfair and Under Armour. Wayfair is a disruptive operator of an online home furnishing store, which is rapidly growing its online presence and market share. Under Armour is a manufacturer and distributor of branded performance apparel, footwear and accessories. The stock pulled back during the quarter after management reduced guidance based on the short-term market impact of the Sports Authority liquidation. This pullback provided a great opportunity to invest in a powerful global brand that we believe has significant long-term growth potential.
Liquidations Included Diamond Resorts International and Intuitive Surgical
During the quarter, we eliminated our positions in Diamond Resorts International and Intuitive Surgical. Diamond Resorts is a hospitality and resort management business that we eliminated on strength, after the company agreed to be acquired by private equity firm Apollo. Intuitive Surgical is a health care company that develops and manufactures surgical systems used in minimally invasive surgeries. The business benefited from increased demand and exposure to strong industry growth, and we eliminated our position on strength.
Brexit Vote Caused a Short-Term Disruption
Market conditions were much improved from what we saw in the first quarter. There was better differentiation among companies, particularly in the sharp risk-off phase when it seemed individual company fundamentals were not relevant. The Brexit vote caused a short-term disruption in the momentum gathered earlier in the quarter, but it has dissipated, reflected in the market making new highs.
We Expect Market Volatility to Persist
We expect the market volatility experienced during the first half of the year to persist into the third quarter. Concerns over the implications of Brexit, negative interest rates, muted global growth and the uncertainty surrounding the U.S. elections have all contributed to the turbulent macro environment. We believe a recession in the U.K. is likely to occur, but we do not expect it to have significant consequences for the U.S. or global economy.

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.