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Small Cap Growth Fund —
Small cap growth stocks returns outpace value in Q2
2nd Quarter, 2015
"We believe we've done well over the years picking stocks and we want to make sure we have appropriate weights in our highest conviction names. "
– Westfield Capital Management Company, L.P.

With growth stocks leading the way, shares of smaller U.S. companies advanced modestly in the second quarter of 2015. The Russell 2000® Index, a benchmark for small company stocks, posted a return of 0.42%.
Small cap growth stocks, as measured by the Russell 2000® Growth Index, returned 1.98% for the quarter, while its value counterpart, the Russell 2000® Value Index, returned -1.20%. The Health Care sector, which made up about a fourth of the small cap growth index, had the biggest positive impact on performance.
The Harbor Small Cap Growth Fund returned 1.27% for the second quarter, underperforming its Russell 2000® Growth benchmark. Portfolio Manager, Will Muggia, reports that weakness in Health Care, Energy, and Financials offset strength in Consumer Discretionary and Materials sectors. The strategy has outperformed the benchmark by 0.96% year-to-date.
Top contributors to absolute performance for the Fund included biotech stock, AMAG Pharmaceuticals, global media and entertainment company, Starz, and Taser International, which benefitted from increased demand for body cameras by police departments. Holdings that detracted from returns included Genesee & Wyoming, a short line railroad, and PTC Therapeutics, a biopharmaceutical company.
Will Muggia’s comments were made in a July 14, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2015.

Interview Highlights

Portfolio Changes
During the quarter we had six new buys and 16 sales. The number of holdings is now 74, which is down from 84 the previous quarter. Our bias is to get more concentrated. We believe we’ve done well over the years picking stocks and we want to make sure we have appropriate weights in our highest conviction names. These are bottom-up stock decisions, rather than a top-down view. Due to benchmark sector weight changes during the quarter, we are now less overweight the Health Care sector and more underweight the Consumer Discretionary sector.
Risk Factors for U.S. Growth
The biggest negative continues to be the China hard landing scenario. There has been a lot of discussion about a switch to a consumer based economy from infrastructure building over the last five years. The reality is that we have seen very little of that. Europe exports to China, and other Southeast Asian countries’ dependence on China results in China being the biggest risk now. In terms of Greece, I think there is going to be a compromise in the near-term. However, I think that Greece is ultimately going to end up leaving the Euro at some point. It is not Greece I’m worried about as much as the spillover effect to financials and banks.
Opportunities in Construction
We continue to like residential and non-residential construction. On the residential side, we prefer repair and remodeling versus home builders. In non-residential construction, we continue to like the office furniture sector. We are seeing increased business confidence resulting in office spending growth, as well as a shift in workplace environments, traditionally more open layouts, and a need for modernization.
Volatility in Biotech
While Health Care was the worst performing sector during the quarter, it’s been our best area over the years. It is an inherently volatile space and we have historically done well in biotech. There has been some media panic over a “biotech bubble”. We’ve done a lot of work on this and see very little evidence that there are meaningful changes to the underpinnings of the secular biotech bull market. The industry has been very robust in the M&A environment and there is a healthy stream of new product cycles along with good innovation. In the old days, I felt that there was a lot of hype and promise and we were constantly disappointed by technologies. What’s changing now is trials are better run, compounds are better vetted earlier in the process and either thrown out or continued. We are seeing companies get profitable faster.

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.