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Mid Cap Growth Fund —
Mid cap shares stage broad based advance to start 2013
1st Quarter, 2013
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"Looking forward, valuations and fundamentals appear to have improved as compared to this time last year. "
– Michael Carmen

U.S. equities recorded solid gains in the first quarter of 2013, boosted by improved investor sentiment. The Russell Midcap® Growth Index returned 11.51% for the three months ended March 31. The advance was across a broad front, with 9 of the 10 economic sectors in the index gaining ground.
Favorable resolution of the so-called fiscal cliff issue in Washington, upside surprises in corporate earnings, and an improving macroeconomic picture all contributed to the strong first quarter, says Michael Carmen, Portfolio Manager of the Harbor Mid Cap Growth Fund. He sees an improving housing market as a possible catalyst for stronger economic growth in the U.S.
The Harbor Mid Cap Growth Fund recorded a return of 9.95% for the first quarter, trailing the Russell Midcap® Growth benchmark. Sector positioning was the primary detractor from Fund performance relative to the index, Carmen reports, while stock selection in the Information Technology and Energy sectors also hurt relative returns.
Top positions contributing to Fund performance in the first quarter included LinkedIn, Zillow, Spirit Airlines, Pandora Media, and HomeAway, Carmen reports. Detractors included BroadSoft, VeriFone Systems, Polypore International, Akamai Technologies, and Life Time Fitness. BroadSoft was eliminated from the portfolio during the quarter.
Michael Carmen's comments were made in an April 11, 2013, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2013, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2013.

Interview Highlights

Performance factors
Sector selection detracted from relative performance. Stock selection in the Information Technology sector was a primary driver of underperformance, while Energy holdings also had a negative impact on relative results. Overall in the quarter, the market had a bias toward safety, which created a bit of a headwind for our particular investment style.
Improved outlook
Looking forward, valuations and fundamentals appear to have improved as compared to this time last year. In U.S. housing we're starting to see higher construction, building on 2012 orders. Housing is a potential tailwind that could drive GDP going forward.
Competing for market share
Consumer Discretionary is the portfolio's second largest absolute weight. We view this sector as a zero-sum game, meaning there are always companies who are able to take market share and others that are losing market share. We look to position the portfolio in those we believe can gain share through company-specific catalysts or structural changes at the industry level.
Trimming exposure to Industrials
We reduced our exposure to Industrials, which now represents our most significant underweight. Valuations for Industrials companies have increased substantially in recent periods and we are finding fewer opportunities there. Within Industrials we are most underweight capital goods and transportation companies. During the quarter we eliminated Capita and Kennametal in the space.
Health Care strategies
Our Health Care holdings are of basically two types. We are looking for good growth-oriented end markets and we are also looking for interesting drugs in the biotech field. We typically take smaller positions in biotech because it is a higher risk/reward area but we feel that, given Wellington's expertise in the biotech field, we can do a good job of identifying drugs that could be long-term winners. The Health Care sector typically is not a place where we try to play defense; we're looking for companies that are gaining share in various parts of the Health Care market.

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.