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Mid Cap Growth Fund —
Fund’s strong Q4 helped by favorable environment for growth stocks
4th Quarter, 2015
"Despite market concerns regarding the outlook for global growth, the U.S. economy remains on solid footing with healthy consumer confidence, robust employment, and a strong housing market. "
– Wellington Management Company LLP

Growth stocks performed well during the fourth quarter of 2015, with the Russell Midcap® Growth Index experiencing a return of 4.12%. The Harbor Mid Cap Growth Fund return of 4.94% outpaced the benchmark, as did the Fund’s total return of 1.04% for the 2015 calendar year versus -0.20% for the benchmark.
During the quarter, the Fund benefited from its overweight to the Health Care sector, and much more significantly, to its stock selection within this sector. The Fund’s largest contributors to performance were pharmaceutical companies Mylan and ONO Pharmaceutical. On the negative side, the Fund’s overweighting of Energy stocks detracted from relative performance, although the stock selection within this sector did add value.
From a sector positioning perspective, the Fund continues to have a large overweight to Health Care and as of the end of the quarter, now has an overweight to Information Technology, which was driven by newly added cyber security and data storage companies. The Portfolio Manager believes these companies are well positioned to exploit long-term trends in the industry. The Fund’s largest underweight is to Consumer Discretionary, as the Portfolio Manager is finding fewer opportunities there for companies displaying accelerating revenue growth. Of course, the Fund’s sector positioning is a derivative of its bottom-up stock selection process.
Portfolio Manager Steve Mortimer’s comments were made in a January 14, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2015, unless otherwise indicated. All references to the year-to-date are for the period January 1, 2015 through December 31, 2015.

Interview Highlights


Risk of Contagion from China
We think the biggest potential headwind to the U.S. economy that’s on most people’s minds today is contagion from the Chinese economy spreading to the rest of the world. Obviously, their stock market has taken quite a hit recently. And there is always the risk that there could be some crisis brewing underneath in their banking system potentially as a result of such extreme volatility in their markets. That obviously would be a shock to the global financial system if it were to happen.
Diverse Health Care Positioning
We don’t have a lot of biotech exposure, where many companies, even after some periods of underperformance, are still quite expensive. And those that we do have are on the more mature side and less speculative in nature. But we own a lot of companies across the Health Care spectrum, from IT provider Cerner to robotic surgery provider Intuitive Surgical. We have a pretty diverse range of companies in Health Care.
Structural Consumer Changes Impact Portfolio
The biggest reason for the underweight to Consumer Discretionary is the structural way that the consumer is changing. A lot of the constituents of the consumer index in the mid cap space are companies that are being disintermediated by companies like Amazon and other players in e-commerce. That is a big reason why a lot of the traditional brick and mortar stores that you’d find in the index are finding themselves in losing positions. Where we’ve tried to focus some more of our consumer exposure has been on things like restaurants because you can’t buy that online, which is why we have companies like Panera Bread and Jack In The Box in the portfolio.
Chipotle Sold After Continued Health and Safety Concerns
Our position in Chipotle Mexican Grill detracted from relative performance and was a large divestment in the portfolio. The company continues to be linked to health and safety concerns, primarily from a recent E. coli outbreak which caused a sell-off in the stock price. While we still view the business model favorably in the long-term, we eliminated our position, as we anticipate a significant slowdown in near-term revenues and earnings.

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.