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Mid Cap Growth Fund —
Mid cap growth shares edge lower in Q3
3rd Quarter, 2014
"Our view is that the U.S. economy is in good shape, although the geopolitical landscape remains challenging. We are perhaps a bit overweight U.S.-centric stocks as opposed to more global-oriented businesses. "
– Wellington Management Company LLP

The third quarter of 2014 saw mixed results from U.S. equities, as shares of large companies managed modest gains while mid cap and small cap stocks ended the period in negative territory. Mid cap growth stocks recorded a negative return of -0.73%, as measured by the Russell Midcap® Growth Index. The Health Care sector was the leading contributor to index returns, while Energy was the weakest sector.
The Harbor Mid Cap Growth Fund returned -3.14% for the quarter, trailing the Russell Midcap® Growth benchmark. Portfolio Manager Michael Carmen reports that stock selection in the Consumer Discretionary, Industrials, and Information Technology sectors weighed on Fund performance relative to the index. A smaller-than-benchmark exposure to the weak-performing Energy sector helped relative returns, as did overweighted positions in Health Care and Information Technology. Sector weights are typically a result of bottom-up stock selection rather than a major element of the Fund's investment strategy.
Top individual performers included expense management software maker Concur Technologies, which agreed to be acquired by German software company SAP; drug makers Salix Pharmaceuticals, Regeneron Pharmaceuticals, and Actavis. Leading detractors included handbag and fashion company Kate Spade, casual dining restaurant operator Bloomin' Brands, Energy sector holdings Energen and Pioneer Natural Resources, and temporary staffing company ManpowerGroup.
Michael Carmen's comments were made in an October 13, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through September 30, 2014.

Interview Highlights

Challenging environment
The market environment during the third quarter was challenging and presented an almost perfect storm of headwinds, with growth out of favor, an overhang from last year's strong rally, and a preference for safety. The portfolio lagged in July and September with a minor reprieve in August. Market-wide volatility impacted holdings throughout the quarter.
Energy investments
Several of the positions detracting most from relative results were Energy stocks. Although we are underweight the Energy sector, we hold select positions that we believe are attractive with respect to their longer term risk/reward dynamics but are a higher risk in the short-term. Our investment thesis for these companies remains unchanged and we continue to hold these stocks. Overall, Energy did not detract from performance because our below-benchmark sector allocation offset the negative stock selection effect.
Sector shifts
Our sector positioning has not changed radically with the exception of an increased exposure to Consumer Discretionary and decreased exposure to Consumer Staples. We initiated positions in Harley Davidson, Chipotle, and Advance Auto Parts in the Consumer Discretionary area. We believe Harley Davidson is a great brand experiencing accelerating trends. We also believe the company is well managed. Chipotle is an example of a stock for which we have a strong differentiated view. Because the company was able to raise prices without a corresponding dip in traffic, we estimate same-store sales will be higher for longer than current investor expectations.
New opportunities
As we enter the fourth quarter, our low cash balance is evidence of our ability to find investment ideas. The headwinds we have experienced for our style are not surprising following the performance of 2013, and we believe fundamentals remain strong. Our view is that the U.S. economy is in good shape, although the geopolitical landscape remains challenging. We are perhaps a bit overweight U.S.-centric stocks as opposed to more global-oriented businesses. We are finding ideas across a range of sectors.
Buying on weakness
My job is to try to position us in the best companies and use the market declines that we've seen to buy and add to companies that we think are well positioned for the longer term. So I'm willing to take under performance in the short-term in order to get outperformance over the long-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

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.