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Mid Cap Growth Fund —
Equities close out 2011 with a strong finish
4th Quarter, 2011
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"We think valuations are very attractive, as can be seen by the portfolio relative to the index. "
– Michael Carmen

U.S equities finished 2011 on a strong note, with the Russell Midcap® Growth Index recording a return of 11.24% for the quarter ended December 31, 2011. Michael Carmen, Portfolio Manager of the Harbor Mid Cap Growth Fund, comments that 9 of the 10 economic sectors in the index posted gains, with the strongest sectors being Energy, Industrials, and Materials.
The Harbor Mid Cap Growth Fund moved higher in the fourth quarter but trailed the index with a return of 4.26%. The Fund's best performers in the quarter included United Rentals, F5 Networks, and Pharmaceutical Product Development, Carmen says, while the biggest detractors from performance included Green Mountain Coffee Roasters, Diamond Foods, and Shutterfly. From a sector perspective, the Fund's weakest areas included Consumer Staples, Consumer Discretionary, and Information Technology.
Looking ahead, the Fund is positioned to benefit from an improving economic environment, Carmen says. In terms of portfolio positioning, the portfolio had larger-than-index exposures to Technology, Health Care, and Consumer Discretionary names entering 2012, Carmen says. Underweighted positions included Materials, Consumer Staples, and Financials.
Michael Carmen's comments were made in a January 18, 2012, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2011, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2011.

Interview Highlights

Positive outlook
Overall for 2012, we are constructive on the environment. We clearly are seeing improvement in the U.S. economy and that's coupled with central banks globally becoming more accommodative.
Favorable metrics
We think valuations are very attractive, as can be seen by the portfolio relative to the index. In terms of our longer-term earnings outlook, the portfolio is expected to grow at close to 20% a year versus 15% for the Russell Midcap® Growth Index. However, the current P/E of the portfolio at 14.4x is actually below that of the index at 14.8x. From a historical perspective, when you have seen those kinds of metrics, that typically has been a good time to be invested in the portfolio.
Stocks at a discount
The last time I felt this strongly about our style of investing was in late 2002 and early 2003, a time when I felt that the kinds of stocks we like to invest in were selling at a discount, not just on an absolute basis but relative to other areas of the market. We subsequently had a very strong run of performance from 2003 to 2007. When I look at the relative positioning of the portfolio now, it is very much reminiscent of that period. That's why I'm optimistic about the positioning of the portfolio as we enter 2012.
Regional banks
A lot of the regional banks didn't go through quite the pain of the money center banks and now are in a position to be consolidators within their regions. We're not overweight the Financial sector. We're not that bullish on Financials, particularly relative to other opportunities we see in the marketplace. But we do see opportunities to start building positions in some of the better-positioned regional banks.
Improvement in housing
Housing obviously has been a big headwind on the economy the past several years. If it just becomes relatively less of a headwind and perhaps a little bit of a tailwind, that could be a very positive factor in employment growth. We started to see better employment numbers the last couple of months and we think that should help our performance. The portfolio is positioned for a pro-cyclical, pro-growth economy.

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.