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Mid Cap Growth Fund —
Mid cap growth stocks move higher in Q1 with most sectors gaining ground
1st Quarter, 2015
"We believe equity markets will continue to reward quality, growth-oriented companies that are attractively valued and we are confident that the Fund is well positioned, with major holdings in undervalued stocks trading at attractive multiples. "
– Wellington Management Company LLP

U.S. equities posted mostly positive returns for the first quarter of 2015, with growth stocks generally outpacing their value counterparts. Among mid-sized companies, growth stocks returned 5.38%, as measured by the Russell Midcap® Growth Index, while the Russell Midcap® Value Index returned 2.42%. Health Care, with a return of 13%, was the best performing area of the mid cap growth index, while Utilities, off 4%, was the only sector to lose ground.
The Harbor Mid Cap Growth Fund returned 5.48% for the quarter, slightly outperforming the Russell Midcap® Growth benchmark. Portfolio Manager Steve Mortimer reports that stock selection in the Materials, Energy, and Consumer Staples sectors helped Fund performance relative to the index, while holdings in the Health Care sector underperformed those in the benchmark. An above-benchmark exposure to the strong-performing Health Care sector was a plus for relative performance, as was an underweight in Energy, one of the weaker areas of the index. Sector weights are generally a result of bottom-up stock selection rather than a major element of the Fund's investment strategy.
Mortimer notes that construction-industry supplier Martin Marietta Materials and Japanese drug maker Ono Pharmaceutical were among the leading individual performers in the portfolio. Others included online video provider Netflix, NXP Semiconductors, and vacation property manager Diamond Resorts International. Portfolio holdings that detracted from absolute returns included medical device maker Insulet, camera maker GoPro, online retailer Zulily, industrial supplier Fastenal, and railroad operator Kansas City Southern.
Steve Mortimer’s comments were made in an April 13, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2015.

Interview Highlights

Energy sector winners
While maintaining our underweight to the embattled Energy sector was additive, we were also able to add value through stock picking. Diamondback Energy and Pioneer Natural Resources outperformed and we continue to hold those positions. We believe these low-cost producers will be able to weather the near-term pricing pressures better than most of their peers in the exploration and production industry.
Sharp rebound
Martin Marietta Materials was the portfolio's top relative contributor in the Materials sector. Shares of the aggregates and cement company had sold off on concerns about its exposure to the Texas economy, which has been hit hard by the crash in oil prices. The stock rebounded sharply in the first quarter after the firm reported better-than-expected fourth quarter results and guidance. We maintained the position, believing that the company’s growth potential is still not fully recognized by the market.
Portfolio addition
A new addition to the Fund was Workday. This is an innovative company providing enterprise cloud applications for human resource departments. We have monitored this high-quality company over time and had previously worried about the stock being too expensive. Over the past year the stock remained stagnant and valuations approached levels that we found more compelling from a risk/reward perspective.
Positioned for growth
The rally in global equity markets, and particularly in growth stocks, continued in the first quarter of 2015. We believe equity markets will continue to reward quality, growth-oriented companies that are attractively valued and we are confident that the Fund is well positioned, with major holdings in undervalued stocks trading at attractive multiples. We believe that many of our holdings have ample room for future acceleration of earnings and that this growth will ultimately be recognized in the market.
Upside potential
We try to use our risk/reward framework to invest in companies that are in the lower end of their range of historical valuations relative to the market. Therefore, as companies do better than expected, we might expect to see not only an increase in their earnings estimates but also a re-rating of the stocks towards the higher end of their historical valuation framework. We like to have the potential to win on both fronts.

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.