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Mid Cap Growth Fund —
U.S. equity markets fall early before rebounding in March
1st Quarter, 2016
"We will continue to identify and invest in what we believe are accelerating growth opportunities while taking into account potential downside scenarios. "
– Wellington Management Company LLP

Amid concerns about China’s slowing growth, as well as fears about a potential U.S. recession, equity markets fell significantly in the first half of the quarter before rebounding to finish the quarter up slightly. During the decline, there was a significant flight to safety that resulted in traditional growth sectors underperforming. During the first quarter of 2016, the Russell Midcap® Growth Index experienced a return of 0.58%. The Harbor Mid Cap Growth Fund underperformed the benchmark with a return of -6.01%.
The Fund’s results were driven by both negative stock selection and active sector exposures. The primary drivers of underperformance were the Health Care and Information Technology sectors. Health Care lagged during the period, making the Fund’s overweight allocation to the sector a significant detractor from relative results.
The largest detractors from the Fund’s relative performance included ServiceNow, a cloud-based solutions provider that structures and manages IT services for corporate enterprises, and Tableau Software, an analytics and data visualization software company. On the positive side, Kate Spade, a designer and marketer of apparel and accessory brands, was a top contributor to results. Fastenal, a distributor of industrial and construction supplies, also contributed.
The Fund’s active sector positioning, which is a result of its bottom-up stock selection process, was relatively consistent in comparison to the prior quarter. Health Care and Information Technology remained the Fund’s two largest sector allocations. The Manager believes the most compelling and sustainable growth trends can be found within these sectors, along with the companies best positioned to exploit them, including various types of cloud computing providers and health care technology manufacturers.
As of quarter end, the Fund’s largest underweights were to the Consumer Discretionary, Industrials, and Financials sectors.
Portfolio Manager Steve Mortimer’s comments were made in an April 13, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2016.

Interview Highlights

Purchases Included Expedia and Dick’s Sporting Goods
Expedia is an online travel company we think has attractive growth prospects in an industry we believe is likely to outperform. The travel industry has been hard hit due to recent concerns related to terrorist attacks and the impact they would have on consumers’ willingness to travel. Despite these concerns, we continue to see healthy demand and strong growth in global consumer travel. Dick’s Sporting Goods offers a broad assortment of brand name sporting goods and apparel. The company’s stock price has been weak due to slowing sales attributable to warm winter weather and sales declines in select sporting goods categories. We believe the company can benefit from what we see as a weaker competitive environment as rivals have been closing stores.
Positioning in Financials
During the quarter, we eliminated our positions in two Financials companies, Northern Trust and Citizens Financial, as it has become clear to us that further rate hikes by the Fed would be slower to materialize than we originally anticipated. In addition, we eliminated our position in Palo Alto Networks, a provider of network security solutions. While we believe the network IT security solutions industry will continue seeing strong product demand, we feel the industry faces long-term structural headwinds as companies continue moving data to the cloud.
We Believe the U.S. Economy is Structurally Sound
Despite the extreme market swings we experienced in the first quarter and continued concerns surrounding global growth, we believe the U.S. economy is structurally sound. During the quarter, we took advantage of opportunities presented to us by the sharp pullbacks in the market, and we added stocks when we had high conviction in our thesis and we thought the companies’ earnings outlooks were ahead of consensus expectations. We believe uncertainties surrounding China’s slowing growth and the effect of negative interest rates in parts of the world will fuel volatility in global markets going forward. We will continue to identify and invest in what we believe are accelerating growth opportunities while taking into account potential downside scenarios.

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.